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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

Commission File Number: 000-53200

 

 

CB RICHARD ELLIS REALTY TRUST

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   56-2466617

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

47 Hulfish Street, Suite 210, Princeton, New Jersey 08542

(Address of principal executive offices) (Zip Code)

(609) 683-4900

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ¨    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨

  

Accelerated filer  ¨

 

Non-accelerated filer  x

  

Smaller reporting company  ¨

   (Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  ¨    NO  x

The number of shares outstanding of the registrant’s common shares, $0.01 par value, was 178,821,983 of May 6, 2011.

 

 

 


Table of Contents

CB RICHARD ELLIS REALTY TRUST

INDEX

 

         Page  

Part I. FINANCIAL INFORMATION

  

Item 1.

  Condensed Consolidated Financial Statements (unaudited)   
  Condensed Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010      1   
  Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2011 and 2010      2   
  Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010      3   
  Condensed Consolidated Statement of Shareholders’ Equity and Non-Controlling Interest for the Three Months Ended March 31, 2011 and 2010      4   
  Notes to the Condensed Consolidated Financial Statements for the Three Months Ended March 31, 2011 and 2010      5   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      49   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      84   

Item 4.

  Controls and Procedures      84   

Part II. OTHER INFORMATION

  

Item 1.

  Legal Proceedings      85   

Item 1A.

  Risk Factors      85   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      85   

Item 3.

  Defaults Upon Senior Securities      86   

Item 4.

  (Removed and Reserved)      86   

Item 5.

  Other Information      86   

Item 6.

  Exhibits      86   
  Signatures      87   

 

i


Table of Contents

PART I.

FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements (unaudited)

CB RICHARD ELLIS REALTY TRUST

Condensed Consolidated Balance Sheets

as of March 31, 2011 and December 31, 2010 (unaudited)

(In Thousands, Except Share Data)

 

     March 31,
2011
    December 31,
2010
 

ASSETS

    

Investments in Real Estate:

    

Land

   $ 213,909      $ 212,858   

Site Improvements

     98,622        94,545   

Buildings and Improvements

     738,862        744,058   

Tenant Improvements

     57,307        55,834   
                
     1,108,700        1,107,295   

Less: Accumulated Depreciation and Amortization

     (59,317 )     (51,320 )
                

Net Investments in Real Estate

     1,049,383        1,055,975   

Investments in Unconsolidated Entities

     465,371        410,062   

Real Estate and Other Assets Held for Sale

     22,047        22,056   

Cash and Cash Equivalents

     129,174        48,218   

Restricted Cash

     3,618        2,058   

Accounts and Other Receivables, Net of Allowance of $352 and $83, respectively

     5,033        5,677   

Deferred Rent

     11,267        8,605   

Acquired Above-Market Leases, Net of Accumulated Amortization of $10,438 and $9,345, respectively

     21,764        22,867   

Acquired In-Place Lease Value, Net of Accumulated Amortization of $41,432 and $36,931, respectively

     109,555        111,005   

Deferred Financing Costs, Net of Accumulated Amortization of $2,912 and $2,513, respectively

     7,235        6,444   

Lease Commissions, Net of Accumulated Amortization of $606 and $528, respectively

     2,568        1,643   

Other Assets

     14,623        22,110   
                

Total Assets

   $ 1,841,638      $ 1,716,720   
                

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

LIABILITIES

    

Notes Payable, Less Discount of $3,463 and $3,700, Plus Premium of $3,998 and $4,155, respectively

   $ 424,016      $ 356,823   

Note Payable at Fair Value

     9,075        8,769   

Loan Payable

     55,000        60,000   

Liabilities Related to Real Estate and Other Assets Held for Sale

     341        441   

Security Deposits

     903        899   

Accounts Payable and Accrued Expenses

     16,786        15,934   

Accrued Offering Costs Payable to Related Parties

     973        917   

Acquired Below-Market Leases, Net of Accumulated Amortization of $10,542 and $9,626, respectively

     18,232        19,323   

Property Management Fee Payable to Related Party

     267        184   

Investment Management Fee Payable to Related Party

     2,945        1,330   

Distributions Payable

     25,306        24,053   

Interest Rate Swaps at Fair Value—Non-Qualifying Hedges

     1,142        1,349   

Interest Rate Swap at Fair Value—Qualifying Hedges

     1,149        1,932   
                

Total Liabilities

     556,135        491,954   

COMMITMENTS AND CONTINGENCIES (NOTE 18)

    

NON-CONTROLLING INTEREST

    

Operating Partnership Units

     2,464        2,464   

SHAREHOLDERS’ EQUITY

    

Common Shares of Beneficial Interest, $0.01 par value, 990,000,000 shares authorized; 173,811,832 and 164,511,252 issued and outstanding as of March 31, 2011 and December 31, 2010, respectively

     1,738        1,645   

Additional Paid-in-Capital

     1,529,322        1,446,559   

Accumulated Deficit

     (242,131     (214,216 )

Accumulated Other Comprehensive Loss

     (5,890     (11,686 )
                

Total Shareholders’ Equity

     1,283,039        1,222,302   
                

Total Liabilities and Shareholders’ Equity

   $ 1,841,638      $ 1,716,720   
                

See accompanying notes to consolidated financial statements.

 

1


Table of Contents

CB RICHARD ELLIS REALTY TRUST

Condensed Consolidated Statements of Operations

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

(In Thousands, Except Share Data)

 

     Three Months Ended
March 31,
 
     2011     2010  

REVENUES

    

Rental

   $ 24,692      $ 15,002   

Tenant Reimbursements

     5,578        2,918   
                

Total Revenues

     30,270        17,920   

EXPENSES

    

Operating and Maintenance

     3,434        1,575   

Property Taxes

     4,076        2,621   

Interest

     6,011        3,095   

General and Administrative

     1,541        839   

Property Management Fee to Related Party

     388        164   

Investment Management Fee to Related Party

     4,258        2,431   

Acquisition Expenses

     4,646        378   

Depreciation and Amortization

     12,274        7,243   
                

Total Expenses

     36,628        18,346   
                

OTHER INCOME AND EXPENSES

    

Interest and Other Income

     376        598   

Net Settlement Payments on Interest Rate Swaps

     (174     (214

Gain (Loss) on Interest Rate Swaps and Cap

     254        (388

Loss on Note Payable at Fair Value

     (27     (73

Loss on Early Extinguishment of Debt

     —          (73
                

Total Other Income and (Expenses)

     429        (150
                

LOSS FROM CONTINUING OPERATIONS BEFORE PROVISION FOR INCOME TAXES AND EQUITY IN INCOME OF UNCONSOLIDATED ENTITIES

     (5,929     (576

PROVISION FOR INCOME TAXES

     (69     (15

EQUITY IN INCOME OF UNCONSOLIDATED ENTITIES

     3,210        737   
                

NET (LOSS) INCOME FROM CONTINUING OPERATIONS

     (2,788     146   
                

DISCONTINUED OPERATIONS

    

Revenue from Discontinued Operations

     430        —     

Expense from Discontinued Operations

     215        —     

Property Management Fee to Related Party from Discontinued Operations

     22        —     

Provision for Income Taxes—Discontinued Operations

     18        —     
                

INCOME FROM DISCONTINUED OPERATIONS

     175        —     
                

NET (LOSS) INCOME

     (2,613     146   
                

Net Loss (Income) Attributable to Non-Controlling Operating Partnership Units

     4        (1
                

NET (LOSS) INCOME ATTRIBUTABLE TO CB RICHARD ELLIS REALTY TRUST SHAREHOLDERS

   $ (2,609   $ 145   
                

Basic and Diluted Net (Loss) Income Per Share from Continuing Operations Attributable to CB Richard Ellis Realty Trust Shareholders

   $ (0.02   $ 0.00   
                

Basic and Diluted Net Income Per Share from Discontinued Operations Attributable to CB Richard Ellis Realty Trust Shareholders

   $ 0.00      $ 0.00   
                

Weighted Average Common Shares Outstanding—Basic and Diluted

     168,726,195        112,264,838   

See accompanying notes to condensed consolidated financial statements.

 

2


Table of Contents

CB RICHARD ELLIS REALTY TRUST

Condensed Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

(In Thousands)

 

     Three Months Ended
March 31,
 
     2011     2010  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net (Loss) Income

   $ (2,613   $ 146   

Adjustments to Reconcile Net (Loss) Income to Net Cash Flows Provided by Operating Activities:

    

Equity in Income of Unconsolidated Entities

     (3,210     (737

Distributions from Unconsolidated Entities

     5,434        7,168   

(Gain) Loss on Interest Rate Swaps and Cap

     (254     388   

Loss on Note Payable at Fair Value

     27        73   

Loss on Early Extinguishment of Debt

     —          53   

Gain on Transfer of Real Estate

     —          (154

Depreciation and Amortization of Building and Improvements

     7,849        4,413   

Amortization of Deferred Financing Costs

     399        178   

Amortization of Acquired In-Place Lease Value

     4,347        2,780   

Amortization of Above and Below Market Leases

     177        121   

Amortization of Lease Commissions

     78        50   

Amortization of Discount on Notes Payable

     80        235   

Changes in Assets and Liabilities:

    

Accounts and Other Receivables

     644        916   

Deferred Rent

     (2,663     (572

Other Assets

     (4     210   

Accounts Payable and Accrued Expenses

     794        (1,720

Investment and Property Management Fees Payable to Related Party

     1,698        58   
                

Net Cash Flows Provided By Operating Activities

     12,783        13,606   
                

CASH FLOWS FROM INVESTING ACTIVITIES

    

Distributions from Unconsolidated Entities

     —          2,545   

Investments in Unconsolidated Entities

     (46,893     (22,085

Restricted Cash

     (1,559     508   

Lease Commissions

     (1,003     (229

Improvements to Investments in Real Estate

     (1,155     (171
                

Net Cash Flows Used in Investing Activities

     (50,610     (19,432
                

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from Common Shares—Public Offering

     88        138   

Proceeds from Additional Paid-in-Capital—Public Offering

     88,009        135,470   

Redemption of Common Shares

     (5,436     (4,255

Payment of Offering Costs

     (10,017     (11,945

Payment of Distributions

     (13,795     (8,553

Distribution to Non-Controlling Interest

     (37     (37

Borrowing on Loan Payable

     30,000        —     

Principal Payment on Loan Payable

     (35,000     —     

Proceeds from Notes Payable

     70,000        —     

Principal Payments on Notes Payable

     (3,861     (9,483

Deferred Financing Costs

     (1,167     —     

Security Deposits

     3        (2
                

Net Cash Flows Provided by Financing Activities

     118,787        101,333   
                

EFFECT OF FOREIGN CURRENCY TRANSLATION

     (4     (15
                

Net Increase in Cash and Cash Equivalents

     80,956        95,492   

Cash and Cash Equivalents, Beginning of the Period

     48,218        112,631   
                

Cash and Cash Equivalents, End of the Period

   $ 129,174      $ 208,123   
                

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

    

Cash Paid During the Year for Interest

   $ 5,379      $ 2,734   

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

    

Distributions Declared and Payable

   $ 25,306      $ 16,841   

Proceeds from Dividend Reinvestment Program

   $ 10,258      $ 6,197  

Application of Deposit to Investment in Unconsolidated Entities

   $ 7,500      $ —     

Duke joint venture Contribution/Distribution-Anson Expansion

   $ 1,239      $ —     

Deconsolidation of Real Estate transferred to Duke joint venture

   $ —        $ (41,888

Increase in Investment in Duke joint venture from Transfer of Real Estate

   $ —        $ 42,378   

See accompanying notes to condensed consolidated financial statements.

 

3


Table of Contents

CB RICHARD ELLIS REALTY TRUST

Condensed Consolidated Statements of Shareholders Equity and Non-Controlling Interest

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

(In Thousands, Except Share Data)

 

    Common Shares     Additional
Paid-in-

Capital
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
Shareholders’
Equity
    Non-Controlling
Interest Operating
Partnership Units
    Total
Shareholders’
Equity and Non-
Controlling
Interest
 
    Shares     Amount              

Balance at December 31, 2010

    164,511,253      $ 1,645      $ 1,446,559      $ (214,216   $ (11,686   $ 1,222,302      $ 2,464      $ 1,224,766   

Net Loss

    —          —          —          (2,609     —          (2,609     (4     (2,613

Foreign Currency Translation Gains

    —          —          —          —          5,015       5,015        7        5,022   

Swap Fair Value Adjustment

    —          —          —          —          781       781        2        783   
                                                               

Total Comprehensive Income

    —          —          —          (2,609     5,796       3,187        5        3,192   
                                                               

Net Contributions From Public Offering of Common Shares, $0.01 Par Value

    9,891,930        99        98,256        —          —          98,355        —          98,355   

Costs Associated with Public Offering

    —          —          (10,031     —          —          (10,031     —          (10,031

Redemption of Common Shares

    (591,351     (6     (5,430     —          —          (5,436     —          (5,436

Adjustment to Record Non-Controlling Interest at Redemption Value

    —          —          (32     —          —          (32     32        —     

Distributions

    —          —          —          (25,306     —          (25,306     (37     (25,343
                                                               

Balance at March 31, 2011

    173,811,832      $ 1,738      $ 1,529,322      $ (242,131   $ (5,890   $ 1,283,039      $ 2,464      $ 1,285,503   
                                                               
    Common Shares     Additional
Paid-in-
Capital
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
Shareholder’s
Equity
    Non-Controlling
Interest Operating
Partnership Units
    Total
Shareholders’
Equity and Non-
Controlling
Interest
 
    Shares     Amount              

Balance at December 31, 2009

    106,465,683      $ 1,065      $ 933,088      $ (121,832   $ (12,322   $ 799,999      $ 2,464      $ 802,463   

Net Loss

    —          —          —          145        —          145        1        146  

Foreign Currency Translation Loss

    —          —          —          —          (3,405 )     (3,405     (7     (3,412

Swap Fair Value Adjustment

    —          —          —          —          (579 )     (579     (1     (580
                                                               

Total Comprehensive Loss

    —          —          —          145        (3,984 )     (3,839     (7     (3,846
                                                               

Net Contributions From Public Offering of Common Shares, $0.01 Par Value

    14,487,964        145        141,704        —          —          141,849        —          141,849   

Costs Associated with Public Offering

    —          —          (12,074     —          —          (12,074     —          (12,074

Redemption of Common Shares

    (470,187     (5     (4,250     —          —          (4,255     —          (4,255

Adjustment to Record Non-Controlling Interest at Redemption Value

    —          —          (44     —          —          (44     44        —     

Distributions

    —          —          —          (16,841     —          (16,841     (37     (16,878
                                                               

Balance at March 31, 2010

    120,483,460      $ 1,205      $ 1,058,424      $ (138,528   $ (16,306   $ 904,795      $ 2,464      $ 907,259   
                                                               

See accompanying notes to condensed consolidated financial statements.

 

4


Table of Contents

CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

1. Organization and Nature of Business

CB Richard Ellis Realty Trust (the “Company”) was formed on March 30, 2004 under the laws of the state of Maryland. CBRE Operating Partnership, L.P. (“CBRE OP”) was formed in Delaware on March 30, 2004, with the Company as the sole general partner (the “General Partner”). The Company has elected to be taxed as a real estate investment trust (“REIT”) under sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), beginning with its taxable period ended December 31, 2004. The Company was formed to raise capital and acquire ownership interests in high quality real estate properties, including office, retail, industrial, and multi-family residential properties, as well as other real estate-related assets.

On July 1, 2004, the Company commenced operations and issued 6,844,313 common shares of beneficial interest in connection with the initial capitalization of the Company. For each common share the Company issued, one limited partnership unit in CBRE OP was issued to the Company in exchange for the cash proceeds from the issuance of the common shares. In addition, CBRE REIT Holdings, LLC (“REIT Holdings”) an affiliate of CBRE Advisors LLC (the “Investment Advisor”), purchased 29,937 limited partnership units in CBRE OP as a limited partner. During October 2004, the Company issued an additional 123,449 common shares of beneficial interest to an unrelated third-party investor.

On July 2, 2007, in conjunction with the Carolina Portfolio acquisition, the Company formed a taxable REIT subsidiary, CBRE RT Carolina TRS, Inc., (“Carolina TRS”), to hold certain real estate assets designated by management as held for sale which represent non-qualified REIT assets. On September 30, 2008, the real estate assets held by Carolina TRS were reclassified as held for investment and were transferred to CBRE OP. On January 5, 2011 and on February 23, 2011, the Company formed taxable REIT subsidiaries (Rickenbacker II, LLC and Rickenbacker III, LLC, respectively) to hold two real estate assets designated by management as held for sale which represent non-qualified REIT assets.

The registration statement relating to our initial public offering was declared effective by the Securities Exchange Commission (the “SEC”) on October 24, 2006. CNL Securities Corp. (the “Dealer Manager”), a related party, acted as the dealer manager of this offering. The registration statement covered up to $2,000,000,000 in common shares of beneficial interest, 90% of which were offered at a price of $10.00 per share, and 10% of which were offered pursuant to our dividend reinvestment plan at a purchase price equal to the higher of $9.50 per share or 95% of the fair market value of a common share on the reinvestment date, as determined by the Investment Advisor, or another firm we choose for that purpose. During the period October 24, 2006 through January 29, 2009, the Company issued 60,808,967 additional common shares of beneficial interest. We terminated the initial public offering effective as of the close of business on January 29, 2009.

The registration statement relating to our follow-on public offering was declared effective by the SEC on January 30, 2009. CNL Securities Corp. is the dealer manager of this offering. The registration statement covers up to $3,000,000,000 in common shares of beneficial interest, 90% of which will be offered at a price of $10.00 per share, and 10% of which will be offered pursuant to our dividend reinvestment plan at a purchase price equal to the higher of $9.50 per share or 95% of the fair market value of a common share on the reinvestment date, as determined by the Investment Advisor, or another firm we choose for that purpose. We reserve the right to reallocate the shares between the primary offering and our dividend reinvestment plan. From January 30, 2009 (effective date) through March 31, 2011, the Company received gross offering proceeds of approximately $1,108,455,774 from the sale of 111,137,409 shares.

The Company operates in an umbrella partnership REIT structure in which its majority-owned subsidiary, CBRE OP, owns, directly or indirectly, substantially all of the properties acquired on behalf of the Company. The Company, as the sole general partner of CBRE OP, owns approximately 99.86% of the common partnership units therein. REIT Holdings, an affiliate of the Investment Advisor, holds the remaining interest through 246,361 limited partnership units representing approximately a 0.14% ownership interest in the total limited partnership units. In exchange for services provided to the Company relating to its formation and future services, REIT Holdings also owns a Class B limited partnership interest (“Class B interest”). The Investment Advisor is affiliated with the Company in that the two entities have common officers and trustees, some of whom also own equity interests in the Investment Advisor and the Company. All business activities of the Company are managed by the Investment Advisor.

Unless the context otherwise requires or indicates, references to “CBRE REIT,” “we,” “the Company” “our,” and “us” refer to the activities of and the assets and liabilities of the business and operations of CB Richard Ellis Realty Trust and its subsidiaries.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Principles (“U.S. GAAP”) and the rules applicable to Form 10-Q and reflect all adjustments, which are, in our opinion, of a normal recurring nature and necessary for a fair presentation of our financial position, results of operations and cash flows for the interim period. Certain information and footnotes required for annual financial statement presentation have been condensed or excluded pursuant to SEC rules and regulations. Accordingly, our interim financial statements do not include all of the information and disclosures required under U.S. GAAP for complete financial statements. The condensed consolidated financial statements and notes thereto should be read in conjunction with our current Annual Report on Form 10-K, which contains the latest available audited consolidated financial statements and notes thereto, which are as of and for the year ended December 31, 2010.

In the opinion of management, all adjustments of a normal recurring nature considered necessary in all material respects to present fairly our financial position, results of our operations and cash flows as of and for the three months and ended March 31, 2011 have been made. The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the results of operations to be expected for the entire year.

Principles of Consolidation

Because we are the sole general partner and majority owner of CBRE OP and have majority control over their management and major operating decisions, the accounts of CBRE OP are consolidated in our financial statements. The interests of REIT Holdings are reflected in non-controlling interest in the accompanying consolidated financial statements. All significant inter-company accounts and transactions are eliminated in consolidation. CB Richard Ellis Investors, LLC (“CBRE Investors”), an affiliate of the Investment Advisor, also owns an interest in us through its ownership of 243,229 common shares of beneficial interest at March 31, 2011 and December 31, 2010.

Investment in Unconsolidated Entities

Our determination of the appropriate accounting method with respect to our investment in CB Richard Ellis Strategic Partners Asia II-A, L.P. (“CBRE Strategic Partners Asia”), which is not considered a Variable Interest Entity (“VIE”), is partially based on CBRE Strategic Partners Asia’s sufficiency of equity investment at risk which was triggered by a substantial paydown during 2009 of its subscription line of credit backed by investor capital commitments to fund its operations. We account for this investment under the equity method of accounting.

We determine if an entity is a VIE based on several factors, including whether the entity’s total equity investment at risk upon inception is sufficient to finance the entity’s activities without additional subordinated financial support. We make judgments regarding the sufficiency of the equity at risk based first on a qualitative analysis, then a quantitative analysis, if necessary. In a quantitative analysis, we incorporate various estimates, including estimated future cash flows, asset hold periods and discount rates, as well as estimates of the probabilities of various scenarios occurring. If the entity is a VIE, we then determine whether we consolidate the entity as the primary beneficiary. We determine whether an entity is a VIE and, if so, whether it should be consolidated by utilizing judgments and estimates that are inherently subjective. If we made different judgments or utilized different estimates in these evaluations, it could result in differing conclusions as to whether or not an entity is a VIE and whether or not we consolidate such entity.

With respect to our majority limited membership interest in the Duke/Hulfish, LLC joint venture (the “Duke joint venture”), the Afton Ridge Joint Venture, LLC (“Afton Ridge”), the Goodman Princeton Holdings (Jersey) Limited joint venture (the “UK JV”) and the Goodman Princeton Holdings (LUX) SARL joint venture (the “European JV”), we considered the Accounting Standards Codification (“ASC”) Topic “Consolidation” (“FASB ASC 810”) in determining that we did not have control over the financial and operating decisions of such entities due to the existence of substantive participating rights held by the minority limited members who are also the managing members of the Duke joint venture and Afton Ridge, and the investment advisors/managers of the UK JV and the European JV, respectively.

We carry our investments in CBRE Strategic Partners Asia, the Duke joint venture, Afton Ridge, the UK JV and the European JV on the equity method of accounting because we have the ability to exercise significant influence (but not control) over operating and financial policies of each such entity.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

We eliminate transactions with such equity method entities to the extent of our ownership in each such entity. Accordingly, our share of net income (loss) of these equity method entities is included in consolidated net income (loss). CBRE Strategic Partners Asia is a limited partnership that qualifies for specialized industry accounting for investment companies. Specialized industry accounting allows investment companies to carry their investments at fair value, with changes in the fair value of the investments recorded in the statement of operations. On the basis of the guidance in ASC 970-323, the Company accounts for its investment in CBRE Strategic Partners Asia under the equity method. As a result, and in accordance with ASC 810-10-25-15 the specialized accounting treatment, principally the fair value basis applied by CBRE Strategic Partners Asia under the investment company guide, is retained in the recognition of equity method earnings in the statement of operations of the Company. See Note 17 “Fair Value of Financial Instruments and Investments” for further discussion of the application of the fair value accounting to our investment in CBRE Strategic Partners Asia.

Use of Estimates

The preparation of financial statements, in conformity with U.S. GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Segment Information

We currently operate in two geographic areas, the United States and the United Kingdom. We view our consolidated property operations as three reportable segments, a Domestic Industrial segment, a Domestic Office segment and an International Office/Retail segment, which participate in the acquisition, development, ownership, and operation of high quality real estate in their respective segments.

Cash Equivalents

We consider short-term investments with maturities of three months or less when purchased to be cash equivalents. As of March 31, 2011 and December 31, 2010, cash equivalents consisted primarily of investments in money market funds.

Restricted Cash

Restricted cash represents those cash accounts for which the use of funds is restricted by loan covenants. As of March 31, 2011 and December 31, 2010, our restricted cash balance was $3,618,000 and $2,058,000, respectively, which represents amounts set aside as impounds for future property tax payments, property insurance payments and tenant improvement payments as required by our agreements with our lenders.

Discontinued Operations and Real Estate Held for Sale

In a period in which a property has been disposed of or is classified as held for sale, the statements of operations for current and prior periods report the results of operations of the property as discontinued operations.

At such time as a property is deemed held for sale, such property is carried at the lower of: (1) its carrying amount or (2) fair value less costs to sell. In addition, a property being held for sale ceases to be depreciated. We classify operating properties as property held for sale in the period in which all of the following criteria are met:

 

  ¡  

management, having the authority to approve the action, commits to a plan to sell the asset;

 

  ¡  

the asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets;

 

  ¡  

an active program to locate a buyer and other actions required to complete the plan to sell the asset has been initiated;

 

  ¡  

the sale of the asset is probable and the transfer of the asset is expected to qualify for recognition as a completed sale within one year;

 

  ¡  

the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and

 

  ¡  

given the actions required to complete the plan to sell the asset, it is unlikely that significant changes to the plan would be made or that the plan would be withdrawn.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

As of March 31, 2011 and December 31, 2010, we had two properties (Rickenbacker II and Rickenbacker III) held for sale.

Accounting for Derivative Financial Instruments and Hedging Activities

All of our derivative instruments are carried at fair value on the balance sheet. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. We formally document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking each hedge transaction. We periodically review the effectiveness of each hedging transaction, which involves estimating future cash flows. Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the balance sheet as either an asset or liability, with a corresponding amount recorded in other comprehensive income within shareholders’ equity. Calculation of a fair value of derivative instruments also requires management to use estimates. Amounts will be reclassified from other comprehensive income to the income statement in the period or periods the hedged forecasted transaction affects earnings. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written-off.

Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. The changes in fair value hedges are accounted for by recording the fair value of the derivative instruments on the balance sheet as either assets or liabilities, with the corresponding amount recorded in current period earnings. We have certain interest rate swap derivatives that are designated as qualifying cash flow hedges and follow the accounting treatment discussed above. We also have certain interest rate swap derivatives that do not qualify for hedge accounting, and accordingly, changes in fair values are recognized in current earnings.

We disclose the fair values of derivative instruments and their gains and losses in a tabular format. We also provide more information about our liquidity by disclosing derivative features that are credit risk-related. Finally, we cross-reference within these footnotes to enable financial statement users to locate important information about derivative instruments (see Note 15 “Derivative Instruments” and Note 17 “Fair Value of Financial Instruments and Investments” for a further discussion of our derivative financial instruments).

Investments in Real Estate and Related Long Lived Assets (Impairment Evaluation)

Our investments in real estate are stated at depreciated cost. Depreciation and amortization are recorded on a straight-line basis over the estimated useful lives as follows:

 

Buildings and Improvements

   39 years

Site Improvements

   15 and 25 years

Tenant Improvements

   Shorter of the useful lives or the terms of the related leases

Improvements and replacements are capitalized when they extend the useful life, increase capacity, or improve the efficiency of the asset. Repairs and maintenance are charged to expense as incurred. As of March 31, 2011 and December 31, 2010, we owned, on a consolidated basis and exclusive of the two properties held for sale, 71 real estate investments.

We assess whether there has been impairment in the value of our long-lived assets whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount to the future net cash flows, undiscounted and without interest, expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. The estimated fair value of the asset group indentified for step two testing is based on either the income approach with market discount rate, terminal capitalization rate and rental rate assumptions being most critical, or on the sales comparison approach to similar properties. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell. In spite of intensive leasing efforts and preliminary interest exhibited by a variety of tenants, the Kings Mountain III property remained vacant through December 31, 2010; however, we entered into a long term lease with a food services company during February 2011. The tenant will occupy the entire 542,000 square foot building during the second quarter of 2011.

No impairment of consolidated investments was recognized during three months ended March 31, 2011 and 2010.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

Other Assets

Other assets include the following as of March 31, 2011 and December 31, 2010 (in thousands):

 

     March 31,
2011
     December 31,
2010
 

Purchase deposits

   $ 12,505       $ 20,005   

Loan commitment fee

     —           740   

Prepaid insurance

     84         308   

Prepaid real estate taxes

     402         —     

Other

     1,632         1,057   
                 

Total

   $ 14,623       $ 22,110   
                 

Concentration of Credit Risk

Our properties are located throughout the United States and in the United Kingdom. The ability of the tenants to honor the terms of their respective leases is dependent upon the economic, regulatory, and social factors affecting the communities in which the tenants operate. Our credit risk relates primarily to cash, restricted cash, and interest rate swap and cap agreements. Cash accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $250,000 through December 31, 2013.

We have not experienced any losses to date on our invested cash and restricted cash. The interest rate cap and swap agreements create credit risk. Credit risk arises from the potential failure of counterparties to perform in accordance with the terms of their contracts. Our risk management policies define parameters of acceptable market risk and limit exposure to credit risk. Credit exposure resulting from derivative financial instruments is represented by their fair value amounts, increased by an estimate of potential adverse position exposure arising from changes over time in interest rates, maturities, and other relevant factors. We do not anticipate nonperformance by any of our counterparties.

Non-Controlling Interest

We owned a 99.86%, 99.85% and 99.80% partnership interest in CBRE OP as of March 31, 2011, December 31, 2010 and March 31, 2010, respectively. The remaining 0.14%, 0.15% and 0.20% partnership interest as of March 31, 2011, December 31, 2010 and March 31, 2010, respectively, was owned by REIT Holdings in the form of 246,361 non-controlling operating partnership units which were exchangeable on a one for one basis for common shares of CBRE REIT, with an estimated aggregate redemption value of $2,464,000.

With respect to the operating partnership units, FASB ASC 480-10 Distinguishing Liabilities from Equity requires non-controlling interests with redemption provisions that permit the issuer to settle in either cash or common shares at the option of the issuer to be further evaluated under the Codification Sub-Topic “Derivatives and Hedging—Conditions Necessary for Equity Classification” (“FASB ASC 815-40-25-10”) to determine whether permanent equity or temporary equity classification on the balance sheet is appropriate. Since the operating partnership units contain such a provision, we evaluated this guidance and determined that the operating partnership units do not meet the requirements to qualify for equity presentation. As a result, upon the adoption of FASB ASC 810 Consolidation and the related revisions to FASB ASC 480-10 the operating partnership units are presented in the temporary equity section of the consolidated balance sheets and reported at the higher of their proportionate share of the net assets of CBRE OP or fair value, with period to period changes in value reported as an adjustment to shareholder’s equity. Under the terms of the Second Amended and Restated Agreement of Limited Partnership of CBRE OP, the fair value of the operating partnership units is determined as an amount equal to the redemption value as defined therein.

Purchase Accounting for Acquisition of Investments in Real Estate

We apply the acquisition method to all acquired real estate investments. The purchase consideration of the real estate is allocated to the acquired tangible assets, consisting primarily of land, site improvements, building and tenant improvements and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases, value of tenant relationships and acquired ground leases, based in each case on their fair values. Loan premiums, in the case of above-market rate loans, or loan discounts, in the case of below-market loans, will be recorded based on the fair value of any loans assumed in connection with acquiring the real estate.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

The fair value of the tangible assets of an acquired property is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is the basis for the purchase consideration allocated to land (or acquired ground lease if the land is subject to a ground lease), site improvements, building and tenant improvements based on management’s determination of the relative fair values of these assets. Management determines the as-if-vacant fair value of a property using methods similar to those used by independent appraisers. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions, legal and other related costs.

In allocating the purchase consideration of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases; and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases measured over a period equal to the remaining non-cancelable term of the lease and, for below-market leases, over a period equal to the initial term plus any below-market fixed rate renewal periods. The capitalized below-market lease values, also referred to as acquired lease obligations, are amortized as an increase to rental income over the initial terms of the respective leases and any below-market fixed rate renewal periods. The capitalized above-market lease values are amortized as a decrease to rental income over the initial terms of the prospective leases.

The aggregate value of other acquired intangible assets, consisting of in-place leases and tenant relationships, is measured by the estimated cost of operations during a theoretical lease-up period to replace in-place leases, including lost revenues and any unreimbursed operating expenses, plus an estimate of deferred leasing commissions for in-place leases. This aggregate value is allocated between in-place lease value and tenant relationships based on management’s evaluation of the specific characteristics of each tenant’s lease; however, the value of tenant relationships has not been separated from in-place lease value for the real estate acquired as such value and its consequence to amortization expense is immaterial for these particular acquisitions. Should future acquisitions of properties result in allocating material amounts to the value of tenant relationships, an amount would be separately allocated and amortized over the estimated life of the relationship. The value of in-place leases is amortized to expense over the remaining non-cancelable periods of the respective leases. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written-off.

Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). In the accompanying consolidated balance sheets, accumulated other comprehensive income (loss) consists of foreign currency translation adjustments and swap fair value adjustments for qualifying hedges.

Income Taxes

We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code, beginning with our taxable period ended December 31, 2004. To qualify as a REIT, we must distribute annually at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and excluding net capital gains) as defined in the Internal Revenue Code, to our shareholders and satisfy certain other organizational and operating requirements. We generally will not be subject to U.S. federal income taxes if we distribute 100% of our net taxable income each year to our shareholders. If we fail to qualify as a REIT in any taxable year, we will be subject to U.S. federal income taxes (including any applicable alternative minimum tax) on our taxable income at regular corporate rates and may not be able to qualify as a REIT for the four subsequent taxable years. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property, and to U.S. federal income taxes and excise taxes on our undistributed taxable income. Except as discussed below, we believe that we have met all of the REIT distribution and technical requirements for the three months ended March 31, 2011 and the year ended December 31, 2010. We intend to continue to adhere to these requirements and maintain our REIT qualification.

In order for distributions to be deductible for U.S. federal income tax purposes and count towards our distribution requirement, they must not be “preferential dividends.” A distribution will not be treated as preferential if it is pro rata among all outstanding shares of stock within a particular class. IRS guidance, however, allows a REIT to offer shareholders participating in its dividend reinvestment

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

program (“DRIP”) up to a 5% discount on shares purchased through the DRIP without treating such reinvested dividends as preferential. Our DRIP offers a 5% discount. In 2007, 2008 and the first two quarters of 2009, common shares issued pursuant to our DRIP were treated as issued as of the first day following the close of the quarter for which the distributions were declared, and not on the date that the cash distributions were paid to shareholders not participating in our DRIP. Because we declare dividends on a daily basis, including with respect to common shares issued pursuant to our DRIP, the IRS could take the position that distributions paid by us during these periods were preferential on the grounds that the discount provided to DRIP participants effectively exceeded the authorized 5% discount or, alternatively, that the overall distributions were not pro rata among all shareholders. In addition, in the years 2007 through 2009 we paid certain individual retirement account (“IRA”) custodial fees in respect of IRA accounts that invested in our common shares. The payment of certain of such amounts could be treated as dividend distributions to the IRAs, and therefore as preferential dividends as such amounts were not paid in respect of our other outstanding common shares. Although we believe that the effect of the operation of our DRIP and the payment of such fees was immaterial, the REIT rules do not provide an exception for de minimis preferential dividends.

Accordingly, we submitted a request to the IRS for a closing agreement under which the IRS would grant us relief for preferential dividends that may have been paid as a result of the manner in which we operated our DRIP and in respect of our payment of certain of such custodial fees. There can be no assurance that the IRS will accept our proposal for a closing agreement. Even if the IRS accepts the proposal, we may be required to pay a fine if the IRS were to view the prior operation of our DRIP or the payment of such fees as preferential dividends. We cannot predict whether such a penalty would be imposed or, if so, the amount of the penalty. If the IRS does not agree to our proposal for a closing agreement and treats the foregoing amounts as preferential dividends, we may be able to rectify our failure to meet the REIT distribution requirements for a year by paying “deficiency dividends,” which would be paid in respect of all of our common shares pro rata and which would be included in our deduction for dividends paid in the prior years. If required, such deficiency dividends could be as much as approximately $22,000,000. In such a case, we would be able to avoid losing our qualification as a REIT or being taxed on amounts distributed as deficiency dividends. However, we would be required to pay an interest-like penalty based on the amount of our deficiency dividends. Amounts paid as deficiency dividends should generally be treated as taxable income for U.S. federal income tax purposes.

Revenue Recognition and Valuation of Receivables

All leases are classified as operating leases and minimum rents are recognized on a straight-line basis over the terms of the leases. The excess of rents recognized over amounts contractually due pursuant to the underlying leases is recorded as deferred rent. In connection with various leases, we have received irrevocable stand-by letters of credit totaling $6,665,000 and $6,515,000 as security for such leases at March 31, 2011 and December 31, 2010.

Reimbursements from tenants, consisting of amounts due from tenants for common area maintenance, real estate taxes, insurance and other recoverable costs, are recognized as revenue in the period the expenses are incurred. Tenant reimbursements are recognized and presented on a gross basis, when we are the primary obligor with respect to incurring expenses and with respect to having the credit risk.

Tenant receivables and deferred rent receivables are carried net of the allowances for uncollectible current tenant receivables and deferred rent. Management’s determination of the adequacy of these allowances is based primarily upon evaluations of historical loss experience, individual receivables, current economic conditions, and other relevant factors. The allowances are increased or decreased through the provision for bad debts. The allowance for uncollectible rent receivable was $352,000 and $83,000 as of March 31, 2011 and December 31, 2010, respectively.

Offering Costs

Offering costs totaling $10,031,000 and $12,074,000 were incurred during the three months ended March 31, 2011 and 2010, respectively, and are recorded as a reduction of additional paid-in-capital in the consolidated statement of shareholders’ equity. Offering costs incurred through March 31, 2011 totaled $157,369,000. Of the total amount, $142,233,000 was incurred to CNL Securities Corp., as Dealer Manager; $3,969,000 was incurred to CB Richard Ellis Group, Inc., an affiliate of the Investment Advisor; $651,000 was incurred to the Investment Advisor for reimbursable marketing costs and $10,516,000 was incurred to other service providers. Each party will be paid the amount incurred from proceeds of the public offering. As of March 31, 2011 and December 31, 2010, the accrued offering costs payable to related parties included in our consolidated balance sheets were $973,000 and $917,000,

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

respectively. Offering costs payable to unrelated parties of $45,000 and $115,000 at March 31, 2011 and December 31, 2010, respectively, were included in accounts payable and accrued expenses.

Deferred Financing Costs and Discounts or Premiums on Notes Payable

Direct costs incurred in connection with obtaining financing are amortized over the respective term of the loan on a straight-line basis, which approximates the effective interest method.

Discounts or premiums on notes payable are amortized to interest expense based on the effective interest method.

Translation of Non-U.S. Currency Amounts

The financial statements and transactions of our United Kingdom real estate operation are recorded in their functional currency, namely the Great Britain Pound (“GBP”) and are then translated into U.S. dollars (“USD”).

Assets and liabilities of this operation are denominated in the functional currency and are then translated at exchange rates in effect at the balance sheet date. Revenues and expenses are translated at the average exchange rate for the reporting period. Translation adjustments are reported in “Accumulated Other Comprehensive Loss,” a component of Shareholders’ Equity.

The carrying value of our United Kingdom assets and liabilities fluctuate due to changes in the exchange rate between the USD and the GBP. The exchange rate of the USD to the GBP was $1.6067 and $1.5570 at March 31, 2011 and December 31, 2010, respectively. The profit and loss weighted average exchange rate of the USD to the GBP was approximately $1.5939 and $1.5800 for the three months ended March 31, 2011 and 2010, respectively.

The carrying value of our European assets and liabilities fluctuate due to changes in the exchange rate between the USD and the EUR. The exchange rate of the USD to the EUR was $1.4196 and $1.3338 at March 31, 2011 and December 31, 2010. We acquired our first property in Europe on June 10, 2010. The profit and loss weighted average exchange rate of the USD to the EUR was approximately $1.3602 for the three months ended March 31, 2011.

Class B Interest—Related Party

Effective July 1, 2004, REIT Holdings, an affiliate of the Investment Advisor, was granted a Class B interest in CBRE OP. The Class B interest is an equity instrument issued to non-employees in exchange for services. As modified by the second amended and restated agreement of limited partnership of CBRE OP entered into on January 30, 2009 (the “Second Amended Partnership Agreement”), the holder is entitled to receive distributions made by CBRE OP in an amount equal to 15% of all net sales proceeds on dispositions of properties or other assets (including by liquidation, merger or otherwise) after the other partners including us, have received in the aggregate, cumulative distributions from property income, sales proceeds or other services equal to (i) the total capital contributions made to CBRE OP and (ii) a 7% annual, uncompounded return on such capital contributions. The terms of the termination provision relating to the Class B interest requires its forfeiture in the event the Advisor unilaterally terminates the agreement between the Company, CBRE OP and the Investment Advisor (the “Advisory Agreement”). As a result future changes in the fair value of the Class B interest will be deferred from recognition in the financial statements until a listing of the common shares on a national securities exchange or a change in control transaction takes place.

Earnings Per Share Attributable to CB Richard Ellis Realty Trust Shareholders

Basic net income (loss) per share is computed by dividing income (loss) by the weighted average number of common shares outstanding during each period. The computation of diluted net income (loss) further assumes the dilutive effect of stock options, stock warrants and contingently issuable shares, if any. We have recorded a net loss for the three months ended March 31, 2011 and a net income for the three months ended March 31, 2010, the effect of stock options, stock warrants and contingently issuable shares, if any, would be anti–dilutive for the three months ended March 31, 2011, and accordingly, if there were any of these instruments outstanding, they would be excluded from the earnings per share computation. In addition, no stock options, stock warrants or contingently issuable shares had ever been issued prior to the three months ended March 31, 2010. As a result, there is no difference in basic and diluted shares in either period presented.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

Fair Value of Financial Instruments and Investments

We elected to apply the fair value option for one of our eligible mortgage notes payable that was newly issued debt during the year ended December 31, 2008. The measurement of the elected mortgage note payable at its fair value and its impact on the statement of operations is described in Note 16 “Fair Value Option-Note Payable” and Note 17 “Fair Value of Financial Instruments and Investments.”

We generally determine or calculate the fair value of financial instruments using appropriate present value or other valuation techniques, such as discounted cash flow analyses, incorporating available market discount rate information for similar types of instruments and our estimates for non-performance and liquidity risk. These techniques are significantly affected by the assumptions used, including the discount rate, credit spreads, and estimates of future cash flow. The Investment Manager of CBRE Strategic Partners Asia applies valuation techniques for our investment carried at fair value based upon the application of the income approach, the direct market comparison approach, the replacement cost approach or third party appraisals to the underlying assets held in the unconsolidated entity in determining the net asset value attributable to our ownership interest therein. The financial assets and liabilities recorded at fair value in our consolidated financial statements are the two interest rate swaps, one interest rate cap, our investment in CBRE Strategic Partners Asia (a real estate entity which qualifies as an investment company under the Investment Company Act), and one mortgage note payable that is economically hedged by one of the interest rate swaps.

The remaining financial assets and liabilities which are only disclosed at fair value are comprised of all other notes payable, the unsecured line of credit and other debt instruments. We determined the fair value of our secured notes payable and other debt instruments by performing discounted cash flow analyses using an appropriate market discount rate. We calculate the market discount rate by obtaining period-end treasury rates for fixed-rate debt, or London Inter-Bank Offering Rate (“LIBOR”) rates for variable-rate debt, for maturities that correspond to the maturities of our debt and then adding an appropriate credit spread derived from information obtained from third-party financial institutions. These credit spreads take into account factors such as our credit standing, the maturity of the debt, whether the debt is secured or unsecured, and the loan-to-value ratios of the debt.

The carrying amounts of our cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value due to their short-term maturities.

We adopted the fair value measurement criteria described herein for our non-financial assets and non-financial liabilities on January 1, 2009. The adoption of the fair value measurement criteria to our non-financial assets and liabilities did not have a material impact to our consolidated financial statements. Assets and liabilities typically recorded at fair value on a non-recurring basis include:

 

  ¡  

Non-financial assets and liabilities initially measured at fair value in an acquisition or business combination;

 

  ¡  

Long-lived assets measured at fair value due to an impairment assessment; and

 

  ¡  

Asset retirement obligations initially measured under the ASC Topic “Asset Retirement and Environmental Obligations“ (“FASB ASC 410”).

Accounting Pronouncement Affecting Operating Property Acquisitions

Effective January 1, 2009, we adopted the provisions of FASB ASC 805 which requires an acquiring entity to recognize acquired assets and assumed liabilities in a transaction at fair value as of the acquisition date and changes the accounting treatment for certain items, including acquisition costs, which is required to be expensed as incurred. The provision of “Business Combinations” is required to be applied on a prospective basis. The adoption of the provisions of the new accounting standard FASB ASC 805 had an effect on our consolidated financial statements, results of operations and cash flows for the three months ended March 31, 2011 and 2010. We expensed $4,646,000 and $378,000 of acquisition costs during the three months ended March 31, 2011 and 2010.

Subsequent Events

In preparing our accompanying financial statements, management has evaluated subsequent events through the financial statement issuance date. We believe that the disclosures contained herein are adequate to prevent the information presented from being misleading.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

Adoption of Accounting Standards

Consolidations

In December 2009, FASB issued Accounting Standards Update (“ASU”) 2009-17, “Consolidations” (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities“ which incorporates Statement of Financial Accounting Standards (SFAS) No. 167, “Amendments to FASB Interpretation No. 46(R),” issued by the FASB in June 2009. The amendments in ASU 2009–17 replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a VIE with an approach focused on identifying which reporting entity has the power to direct the activities of a VIE that most significantly impact such entity’s economic performance and (i) the obligation to absorb losses of such entity or (ii) the right to receive benefits from such entity. ASU 2009-17 also requires additional disclosures about a reporting entity’s involvement in VIEs, which enhances the information provided to users of financial statements. We adopted ASU 2009-17 effective January 1, 2010. As a result of the fact that we have no variable interests in VIEs, the adoption of ASU 2009-17 did not have a material impact on our consolidated financial statements.

Fair Value Measurements and Disclosures

In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and Disclosures.” ASU 2010-06 clarifies disclosure requirements relating to the level of disaggregation of disclosures relating to classes of assets and liabilities and disclosures about inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value estimates for Level 2 or Level 3 assets and liabilities. These requirements of ASU 2010-06 are effective for interim and annual disclosures for interim and annual reporting periods beginning after December 15, 2009. The adoption of these requirements of the ASU did not have a material impact on our consolidated financial statements.

New Accounting Standards

ASU 2010-06 also requires additional disclosures regarding the transfers of classifications among the fair value classification levels as well as the reasons for those changes and a separate presentation of purchases, sales, issuances and settlements in the presentation of the roll-forward of Level 3 assets and liabilities. Those disclosures are effective for interim and annual reporting periods for fiscal years beginning after December 15, 2010. The adoption of this portion of ASU 2010-06 did not have a material impact on our consolidated financial statements.

Other Accounting Standards Updates not effective until after March 31, 2011 are not expected to have a material impact on our consolidated financial statements.

3. Acquisition and Transfer of Real Estate

The fair value of the real estate acquired is allocated to the acquired tangible assets, consisting of land, site improvements, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above and below-market leases and the value of in-place leases and tenant relationships, if any, based in each case on their respective fair values. Loan premiums, in the case of above-market rate loans, or loan discounts, in the case of below-market loans, will be recorded based on the fair value of any loans assumed in connection with acquiring the real estate. Acquisition costs are expensed as incurred.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

The purchase price allocation to the assets and liabilities acquired during the three months ended December 31, 2010 and appearing in the table are final. There were no acquisitions of consolidated real estate during the three months ended March 31, 2011.

 

Property

  Land     Site
Improvements
    Building
Improve-
ments
    Tenant
Improve-
ments
    Acquired In-
Place Lease
Value
    Above
Market
Lease
Value
    Below
Market
Lease
Value
    (Premium)
Discount
on Notes
    Purchase
Price
    Notes
Payable
Assumed
    Net
Assets
Acquired
 

4701 Gold Spike Drive

  $ 3,500      $ 384      $ 14,057      $ 95      $ 1,948      $ 316      $ —        $ —        $ 20,300      $ —        $ 20,300   

1985 International Way

    2,200        395        10,544        33        1,429        199        —          —          14,800        —          14,800   

Summit Distribution Center

    2,300        548        9,122        67        1,219        157        (13     —          13,400        —          13,400   

3660 Deerpark Blvd

    2,400        439        10,036        67        1,439        919        —          —          15,300        —          15,300   

Tolleson Commerce Park II

    2,200        567        4,753        62        1,072        546        —          —          9,200        —          9,200   

Pacific Corporate Park

    21,128        47,023        46,993        14,810        18,908        851        (5,213     —          144,500        —          144,500   

100 Kimball Drive

    8,800        1,270        39,401        2,946        7,526        307        —          —          60,250        —          60,250   
                                                                                       
  $ 42,528      $ 50,626      $ 134,906      $ 18,080      $ 33,541      $ 3,295      $ (5,226 )   $ —        $ 277,750      $ —        $ 277,750   
                                                                                       

Building Improvements are depreciated over 39 years; Site Improvements are depreciated over 15 and 25 years; Tenant Improvements, Acquired In-Place Lease Value, Above Market Lease Value and Below Market Lease Value are amortized over the remaining lease terms at the time of acquisition.

4. Real Estate and Other Assets Held for Sale and Related Liabilities

Real estate and other assets held for sale include real estate for sale in their present condition that have met all of the “held for sale” criteria of ASC 360 “Accounting for the Impairment or Disposal of Long-Lived Assets,” and other assets directly related to such projects. Liabilities related to real estate and other assets held for sale have been included as a single line item in the accompanying consolidated balance sheets.

Real estate and other assets held for sale and related liabilities as of March 31, 2011 and December 31, 2010 (in thousands):

 

     March 31,
2011
     December 31,
2010
 

Assets

     

Real estate held for sale

   $ 22,000       $ 22,000   

Other assets

     47         56   
                 

Total real estate and other assets held for sale

     22,047         22,056   

Liabilities

     

Accounts payable and accrued expenses

     341         441   
                 

Total liabilities related to real estate and other assets held for sale

     341         441   
                 

Net real estate and other assets held for sale

   $ 21,706       $ 21,615   
                 

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

In accordance with ASC 205-20 Presentation of Financial Statement-Discontinued Operation, the income and the net gain on dispositions of operating properties are reflected in the consolidated statements of operations as discontinued operations for all periods presented.

Revenues and expenses from discontinued operations for the three months ended March 31, 2011 represent the activities of the held for sale portfolio of warehouse distribution buildings acquired during the year ended December 31, 2010 for $22,000,000. The Rickenbacker II and Rickenbacker III properties as acquired during the three months ended December 31, 2010 are currently being marketed for sale. There were no discontinued operations during the three months ended March 31, 2010.

 

     Three Months Ended
March 31, 2011
 

Revenues:

  

Rental

   $ 342   

Tenant Reimbursement

     88   
        

Total Revenues.

     430   

Expenses:

  

Operating and Maintenance

     123   

Property Taxes

     36   

General and Administrative

     13   

Investment Management Fee to Related Party

     39   

Property Management Fee to Related Party

     22   

Acquisition Expenses

     4   
        

Total Expenses

     237   
        

Provision for Income Taxes in Discontinued Operations

     18   
        

Total Income from Discontinued Operations

   $ 175   
        

5. Investments in Unconsolidated Entities

Investments in unconsolidated entities at March 31, 2011 and December 31, 2010 consist of the following (in thousands):

 

     March 31,
2011
     December 31,
2010
 

CBRE Strategic Partners Asia

   $ 9,399       $ 9,471   

Duke Joint Venture

     358,681         306,264   

Afton Ridge Joint Venture

     19,266         19,167   

UK JV

     29,092         27,822   

European JV

     48,933         47,338   
                 
   $ 465,371       $ 410,062   
                 

The following is a summary of the investments in unconsolidated entities for the three months ended March 31, 2011 and the year ended December 31, 2010 (in thousands):

 

     March 31,
2011
    December 31,
2010
 

Investment Balance, January 1

   $ 410,062      $ 214,097   

Contributions

     54,389        278,079   

Company Basis Adjustments

     4        (617

Other Comprehensive Income (Loss) of Unconsolidated Entities

     3,207        4,271   

Company’s Equity in Net Income (including adjustments for basis differences)

     3,142        8,838   

Distributions

     (5,433     (94,606 )
                

Investment Balance, End of Period

   $ 465,371      $ 410,062   
                

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

CBRE Strategic Partners Asia

We have agreed to a capital commitment of $20,000,000 in CBRE Strategic Partners Asia, which extends for 48 months (to January 31, 2012) after the close of the final capital commitment. As of March 31, 2011, we have contributed $15,040,000 of our capital commitment which was funded using net proceeds from our public offerings. CBRE Investors, our sponsor, formed CBRE Strategic Partners Asia to purchase, reposition, develop, hold for investment and sell institutional quality real estate and related assets in targeted markets in Asia, including China, Japan, India, South Korea, Hong Kong, Singapore and other Asia Pacific markets. The initial closing date of CBRE Strategic Partners Asia was in July 2007, with additional commitments being accepted through January 2008. CBRE Strategic Partners Asia closed on January 31, 2008, with aggregate capital commitments of $394,203,000. CBRE Strategic Partners Asia has an eight year term, which may be extended for up to two one-year periods with the approval of two-thirds of the limited partners.

As of March 31, 2011, CBRE Strategic Partners Asia, with its parallel fund, CB Richard Ellis Strategic Asia II, L.P., had aggregate investor commitments of $394,203,000 from institutional investors including CBRE Investors. We own an ownership interest of approximately 5.07% in CBRE Strategic Partners Asia. As of March 31, 2011, CBRE Strategic Partners Asia had acquired ownership interests in ten properties, five in China and five in Japan. Two of the five ownership interests in China were sold in 2010. Our capital commitment was pledged as collateral for borrowings of CBRE Strategic Partners Asia of which our pro-rata portion of such borrowing was approximately, $218,000 based on our 5.07% ownership interest at December 31, 2010. All outstanding borrowings were repaid to the lender in March 2011.

On March 4, 2010, we received a distribution of net sales proceeds from CBRE Strategic Partners Asia totaling $2,435,000 from the February 23, 2010 sale of a residential property located in Beijing, China. Approximately $2,000,000 of the cash distributions in connection with the Beijing residential property sale are subject to recall and reinvestment into appropriate investments until the expiration of the CBRE Strategic Partners Asia commitment period on January 31, 2012.

On May 26, 2010, we received a distribution of net sales proceeds from CBRE Strategic Partners Asia totaling $3,146,000 from the sale of a joint venture interest in a mixed use project located in Tianjin, China. The cash distributions from this transaction are not subject to recall.

We carry our investment in CBRE Strategic Partners Asia on the equity method of accounting. Those investments where we have the ability to exercise significant influence (but not control) over operating and financial policies of such entities (including certain entities where we have less than 20% ownership) are accounted for using the equity method. Accordingly, our share of the earnings or losses of these equity method entities is included in consolidated net loss.

CBRE Strategic Partners Asia is a limited partnership that qualifies for specialized industry accounting for investment companies. Specialized industry accounting allows investment companies to carry their investments at fair value, with changes in the fair value of the investments recorded in the statement of operations. On the basis of the guidance in ASC 970-323, the Company accounts for its investment in CBRE Strategic Partners Asia under the equity method. As a result, and in accordance with ASC 810-10-25-15 the specialized accounting treatment, principally the fair value basis, applied by CBRE Strategic Partners Asia under the investment company guide is retained in the recognition of equity method earnings in the statement of operations of the Company. See Note 17 “Fair Value of Financial Instruments and Investments” for further discussion of the application of the fair value accounting to our investment in CBRE Strategic Partners Asia.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

Consolidated Balance Sheets of CBRE Strategic Partners Asia as of March 31, 2011 and December 31, 2010 (in thousands):

 

     March 31,
2011
     December 31,
2010
 

Assets

     

Real Estate

   $ 237,027       $ 237,645   

Other Assets

     10,014         16,354   
                 

Total Assets

   $ 247,041       $ 253,999   
                 

Liabilities and Equity

     

Notes Payable

   $ 41,801       $ 43,019   

Loan Payable

     —           4,307   

Other Liabilities

     17,452         17,630   
                 

Total Liabilities

     59,253         64,956   
                 

Company’s Equity

     9,399         9,471   

Other Investors’ Equity

     178,389         179,572   
                 

Total Liabilities and Equity

   $ 247,041       $ 253,999   
                 

Consolidated Statements of Operations of CBRE Strategic Partners Asia for the three months ended March 31, 2011 and 2010, (in thousands):

 

     Three Months Ended
March 31,
 
     2011     2010  

Total Revenues and Appreciation (Depreciation)

   $ 768      $ (614

Total Expenses

     2,023        2,666   
                

Net Income (Loss)

     (1,255     (3,280
                

Company’s Equity in Net Income (Loss)

   $ (72 )   $ (176
                

Duke Joint Venture

On May 5, 2008, we entered into a contribution agreement with Duke Realty Limited Partnership (“Duke”), a subsidiary of Duke Realty Corporation (NYSE: DRE), to form the Duke joint venture to acquire $248,900,500 in industrial real property assets (the “Industrial Portfolio”). The Industrial Portfolio consists of six bulk industrial built-to-suit, fully leased properties. On September 12, 2008, we entered into a first amendment to the contribution agreement to acquire a fully leased office building for $37,111,000 and to increase and revise the total purchase commitment to $282,400,000. We own an 80% interest and Duke owns a 20% interest in the Duke joint venture.

On June 12, 2008, September 30, 2008 and December 10, 2008, the Duke joint venture acquired fee interests in seven properties pursuant to the contribution agreement. All of the properties acquired are new built-to-suit, 100% leased, single-tenant buildings that did not have an operating history at the time of acquisition. The Duke joint venture obtained financing from 40/86 Mortgage Capital, Inc. for each of the seven properties. The financings, totaling $150,000,000, carry an interest rate of 5.58%, a term of five years and are cross-collateralized among the properties. The seven buildings were completed in 2008.

On May 13, 2009, the Duke joint venture acquired each of (i) 22535 Colonial Pkwy., located at 22535 Colonial Pkwy., Katy, TX, a suburb of Houston, (ii) Celebration Office Center III, located at 1390 Celebration Blvd., Celebration, FL, a suburb of Orlando, and (iii) Fairfield Distribution Ctr. IX located at 4543-4561 Oak Fair Blvd., Tampa FL. The Duke joint venture acquired 22535 Colonial Pkwy. for approximately $14,700,000, Celebration Office Center III for approximately $17,050,000 and Fairfield Distribution Ctr. IX for approximately $9,300,000, exclusive of customary closing costs which were both expensed as incurred. We own an 80% interest in the Duke joint venture, and we made cash contributions totaling approximately $32,840,000 to the Duke joint venture in connection with these acquisitions, using the net proceeds from our current public offering.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

On October 15, 2009, the Duke joint venture acquired Northpoint III, located at 3300 Exchange Place, Lake Mary, FL, a suburb of Orlando, for approximately $18,240,000, exclusive of customary closing costs and acquisition fees which were both expensed as incurred. We own an 80% interest in the Duke joint venture, and we made cash contributions totaling approximately $14,592,000 to the Duke joint venture in connection with the acquisition.

On December 7, 2009, the Duke joint venture acquired Goodyear Crossing Ind. Park II, located at 16920 W. Commerce Drive, Goodyear, AZ, a suburb of Phoenix, for approximately $45,645,000, exclusive of customary closing costs and acquisition fees which were both expensed as incurred. We own an 80% interest in the Duke joint venture, and we made cash contributions of approximately $36,516,000 to the Duke joint venture in connection with the acquisition.

On March 31, 2010, the Duke joint venture acquired 3900 North Paramount Parkway, 3900 South Paramount Parkway and 1400 Perimeter Park Drive in Morrisville, NC, a suburb of Raleigh, for approximately $35,250,000, exclusive of customary closing costs and acquisition fees which are both expensed as incurred. We made contributions of approximately $28,125,000 ($19,649,000 was made in cash and $8,476,000 in-kind as discussed below) to the Duke joint venture in connection with the acquisition.

On March 31, 2010, we contributed our Miramar I and Miramar II properties, located at 2300 and 2200 SW 145th Avenue in Miramar, FL, a suburb of Miami, to the Duke joint venture for approximately our cost of $42,650,000. Our cost of $42,650,000, of which $8,476,000 was considered an in-kind contribution by us to the Duke joint venture representing our 20% divestiture of the Miramar I and Miramar II properties, was part of a structured transaction as an offset to the $28,125,000 owed by us for our 80% share of the Duke joint venture’s purchase of 3900 North Paramount Parkway, 3900 South Paramount Parkway and 1400 Perimeter Park Drive.

On August 24, 2010, the Duke joint venture closed on the acquisition of additional land and entered into a construction agreement and lease amendments (collectively, the “Expansion Agreements”) to expand the AllPoints at Anson Bldg. 1 property, a warehouse/distribution center located in Whitestown, IN, a suburb of Indianapolis. The existing property is 100% leased to a subsidiary of Amazon.com through July 2018. Pursuant to the Expansion Agreements, AllPoints at Anson Bldg. 1 (i) will be expanded from the current 630,573 square feet to approximately 1,036,573 square feet and (ii) will remain 100% leased to a subsidiary of Amazon.com, which lease will be extended through April 2021. The total cost of the expansion is anticipated to be approximately $16,900,000 to the Duke joint venture. As of March 31, 2011, the Duke joint venture had incurred land acquisition and construction costs totaling approximately $14,192,000. We own an 80% interest in the Duke joint venture and we expect to make cash contributions of approximately $13,541,000 to the Duke joint venture over the construction period in connection with the Expansion Agreements.

On November 24, 2010, the Duke joint venture, through certain of its subsidiaries, entered into a $92,000,000 mortgage loan with Metropolitan Life Insurance Company. Our pro rata share of this mortgage is $73,600,000 based on our 80% ownership of the Duke joint venture. This mortgage carries a fixed interest rate of 4.25%, a term of five years, is secured on a cross-collateralized basis by nine of the Duke joint venture’s properties (22535 Colonial Pkwy, Celebration Office Center, Northpoint III, Goodyear Crossing Ind. Park II, 3900 North Paramount Parkway, 3900 South Paramount Parkway, 1400 Perimeter Park Drive, Miramar I and Miramar II) and may be prepaid subject to the satisfaction of certain conditions.

On December 17, 2010, the Duke joint venture entered into a purchase and sale agreement (the “Purchase Agreement”) with Duke, Duke Secured Financing 2009-1PAC, LLC and Duke Realty Ohio, affiliates of Duke, for the acquisition of up to $516,650,000 in office real property assets (the “Office Portfolio”). The Office Portfolio consists of 20 office properties that were contributed to the Duke Joint Venture in three separate tranches.

On December 21, 2010, the Duke joint venture acquired fee interests in the first tranche of the Office Portfolio by acquiring seven properties for $173,850,000, exclusive of closing costs and acquisition fees which were both expensed as incurred. We made a cash contribution of approximately $139,080,000 to the Duke joint venture in connection with the closing of the first tranche.

On March 24, 2011, in connection with the acquisition of 13 properties (the second and third tranches of the Office Portfolio) for $342,800,000 of which our share was $274,240,000, exclusive of closing costs and acquisition fees which were both expensed as incurred, the Duke joint venture entered into a $275,000,000 unsecured term loan, (the “Term Loan”), with Wells Fargo Bank, National Association. While the Term Loan is non-recourse to us, the pro rata share of the Term Loan obligation attributable to us is $220,000,000 in accordance with our ownership interest in the Duke joint venture. The Term Loan has a six-month term and two six-month extension options. The Term Loan has an interest rate of LIBOR plus 2.50% and is fully pre-payable at any time, subject to

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

any customary costs. An origination fee of $1,650,000 was paid to Wells Fargo Bank, National Association at the closing of the term loan. The Term Loan Agreement contains customary representations and warrants and covenants. During the term of the loan, the Duke joint venture has agreed to comply with certain financial covenants related to its leverage ratio, net asset value, unencumbered leverage ratio and the inability to enter into certain types of investments.

The following table provides further detailed information concerning the properties held in the Duke joint venture at March 31, 2011:

 

Property and Market

 

Property

Type

  Net
Rentable
Square
Feet
    Tenant   Lease
Expiration
    Approximate
Purchase
Price(1)
    Pro Rata
Share of
Approximate
Purchase
Price(2)
    Approximate
Debt
Financing
    Acquisition
Fee(3)
 

Buckeye Logistics Center/ Phoenix, AZ

  Warehouse/Distribution     604,678      Amazon.com(5)     06/2018      $ 43,601,000      $ 34,880,800      $ 20,000,000      $ 349,000   

201 Sunridge Blvd./Dallas, TX

  Warehouse/Distribution     822,550      Unilever(4)     09/2018        31,626,000        25,300,800        19,400,000        253,000   

12200 President’s Court/ Jacksonville, FL

  Warehouse/Distribution     772,210      Unilever(4)     09/2018        36,956,000        29,564,800        21,600,000        296,000   

AllPoints at Anson Bldg. 1/ Indianapolis, IN

  Warehouse/Distribution     630,573      Amazon.com(4)     07/2018        33,401,000        26,720,800        17,000,000        267,000   

Aspen Corporate Center 500/
Nashville, TN

  Office     180,147      Verizon

Wireless(6)

    10/2018        37,111,000        29,688,800        21,200,000        297,000   

125 Enterprise Parkway /
Columbus, OH

  Warehouse/Distribution     1,142,400      Kellogg’s     03/2019        47,905,000        38,324,000        26,800,000        383,000   

AllPoints Midwest Bldg. 1/ Indianapolis, IN

  Warehouse/Distribution     1,200,420      Prime

Distribution

    05/2019        51,800,000        41,440,000        24,000,000        414,000   

22535 Colonial Pkwy./Houston, TX

  Office     89,750      Det Norske Veritas     06/2019        14,700,000        11,760,000        8,500,000        176,000   

Celebration Office Center III/
Orlando, FL

  Office     100,924      Disney Vacation
Development
    04/2016        17,050,000        13,640,000        9,500,000        205,000   

Fairfield Distribution
Ctr. IX/ Tampa, FL

  Warehouse/Distribution     136,212      Iron Mountain     08/2025        9,300,000        7,440,000        —          112,000   

Northpoint III/
Orlando, FL

  Office     108,499      Florida Power
Corporation
    10/2021        18,240,000        14,592,000        11,000,000        219,000   

Goodyear Crossing Ind. Park II/ Phoenix, AZ

  Warehouse/Distribution     820,384      Amazon.com(5)     09/2019        45,645,000        36,516,000        21,000,000        548,000   

3900 N. Paramount Pkwy. / Raleigh, NC

  Office     100,987      PPD Development     11/2023        13,969,000        11,176,000        8,250,000        168,000   

3900 S. Paramount Pkwy. / Raleigh, NC

  Office     119,170      PPD Development/

LSSI

    11/2023        16,319,000        13,055,000       8,250,000        196,000   

1400 Perimeter Park Drive / Raleigh, NC

  Office     44,916      PPD Development     11/2023        4,962,000        3,969,600        2,500,000        60,000   

Miramar I/ Miami, FL(7)

  Office     94,060      DeVry     11/2017        17,056,000        13,644,800       9,800,000        —     

Miramar II/ Miami, FL(7)

  Office     128,540      Royal Caribbean     05/2016        26,124,000        20,899,200       13,200,000        —     

McAuley Place / Cincinnati, OH

  Office     190,733      Mercy Health(9)(10)
Partners of South
West Ohio
    08/2023        35,000,000        28,000,000        —          420,000   

Easton III / Columbus, OH

  Office     135,485      Lane Bryant(9)(11)     01/2019        18,000,000        14,400,000        —          216,000   

Point West I / Dallas, TX

  Office     182,700      American Home(9)(12)
Mortgage Services,
Inc.
    12/2016        29,500,000        23,600,000        —          354,000   

Sam Houston Crossing I / Houston, TX

  Office     159,175      AMEC Paragon,
Inc.(9)(13)
    05/2018        25,500,000        20,400,000        —          306,000   

Regency Creek I / Raleigh, NC

  Office     122,087      ABB, Inc.(9)(14)     08/2017        22,500,000        18,000,000        —          270,000   

533 Maryville Centre / St. Louis, MO

  Office     125,296      Eveready Battery
Company, Inc.(9)(15)
    04/2021        23,878,000        19,102,400        —          287,000   

555 Maryville Centre /
St. Louis, MO

  Office     127,082      Eveready Battery
Company, Inc.(9)(15)
    04/2021        19,472,000        15,577,600        —          234,000   

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

Property and Market

 

Property

Type

  Net
Rentable
Square
Feet
    Tenant   Lease
Expiration
    Approximate
Purchase
Price(1)
    Pro Rata
Share of
Approximate
Purchase
Price(2)
    Approximate
Debt
Financing
    Acquisition
Fee(3)
 

Norman Pointe I/ Minneapolis, MN

  Office     212,722      NCS Pearson,
Inc(9)(16)
    02/2017        42,600,000        34,080,000        —          511,200   

Norman Pointe II/ Minneapolis MN

  Office     324,296      General Services
Administration(9)(17)
    02/2016        46,900,000        37,520,000        —          562,800   
      Hartford Fire
Insurance Co(9)(18)
    06/2013           

The Landings I/ Cincinnati, OH

  Office     175,695      Citicorp North
America(9)(19)
    01/2022        29,659,500        23,727,600        —          355,914   

The Landings II/ Cincinnati, OH

  Office     175,076      —       —          26,160,500        20,928,400          313,926   

One Easton Oval / Columbus, OH

  Office     125,031      —       —          11,911,000        9,528,800        —          142,932   

Two Easton Oval / Columbus, OH

  Office     128,674      —       —          12,744,000        10,195,200        —          152,928   

Weston Pointe I/ Ft. Lauderdale, FL

  Office     97,579      —       —          19,384,250        15,507,400        —          232,611   

Weston Pointe II/ Ft. Lauderdale, FL

  Office     97,180      —       —          23,375,950        18,700,760        —          280,511   

Weston Pointe III/ Ft, Lauderdale, FL

  Office     97,178      American
Intercontinental
University(9)(20)
    09/2015        23,583,550        18,866,840        —          283,002   

Weston Pointe IV/ Ft. Lauderdale, FL

  Office     96,175      General Services
Administration(9)(17)
    04/2019        28,256,250        22,605,000        —          339,075   

One Conway Park Chicago, IL

  Office     105,000      —       —          15,400,000        12,320,000        —          184,800   

West Lake at Conway/ Chicago, IL

  Office     99,538      —       —          17,575,000        14,060,000        —          210,900   

Atrium I/ Columbus, OH

  Office     315,102      Nationwide Mutual
Insurance Co(9)(21)(22)
   

 

05/2018

05/2019

  

  

    45,250,000        36,200,000        —          543,000   
                                       
          $ 982,415,000      $ 785,932,600      $ 242,000,000      $ 10,143,599   
                                       

 

(1)

Approximate total purchase price, exclusive of closing costs, paid by the Duke joint venture for each of these properties.

 

(2)

Pro rata share of approximate purchase price is at our pro rata share of effective ownership for each of these properties, which was funded using net proceeds of our public offerings.

 

(3)

Acquisition fees paid to our Investment Advisor are included in the total acquisition cost for the properties acquired prior to January 1, 2009, but are included as acquisition expenses for properties acquired subsequent to December 31, 2008.

 

(4)

Our tenant CONOPCO, Inc. is a wholly-owned subsidiary of Unilever United States, Inc., which is wholly-owned by Unilever N.V. and Unilever PLC, together Unilever.

 

(5)

Our tenants Amazon.com.indc, LLC, Amazon.com.axdc, Inc. and Amazon.com.azdc, Inc. are wholly-owned subsidiaries of Amazon.com. AllPoints at Anson Bldg. 1, Buckeye Logistics Center and Goodyear Crossing Ind. Park II are three of Amazon’s largest fulfillment centers in North America.

 

(6) 

Our tenant Cellco Partnership does business as Verizon Wireless.

 

(7) 

Consolidated properties acquired on December 31, 2009 and contributed to the Duke joint venture on March 31, 2010.

 

(8) 

Excludes costs associated with the Expansion Agreements.

 

(9) 

This tenant is the tenant that currently occupies more than 50,000 of net rentable square feet.

 

(10)

Mercy Health Partners of South West Ohio is a healthcare system comprised of five hospitals and 38 physician practices serving the greater Cincinnati, Ohio area.

 

(11) 

Lane Bryant, a division of Charming Shoppes, Inc. (NASDAQ:CHRS), is a chain of women’s retail clothing stores with over 850 stores in 48 states.

 

(12) 

American Home Mortgage Services, Inc. is one of the country’s largest servicers of Alt-A and subprime loans on behalf of banks and other investors.

 

(13) 

AMEC Paragon, Inc. is a provider of project management and engineering services to the oil and gas industry.

 

(14) 

ABB, Inc. is a leader in power and automation technologies for utility and industrial customers.

 

(15) 

Eveready Battery Company, Inc., is a division of Energizer Holdings, Inc. (NYSE:ENR), which manufactures batteries and lighting products.

 

(16) 

NCS Pearson, Inc. provides services, software, systems, and Internet-based technologies for the collection management, and interpretation of data.

 

(17) 

The General Services Administration is an independent agency of the Federal Government of the United States of America, which supplies products and communications for U.S. government offices, provides transportation and office space to federal employees and develops government-wide cost-minimizing policies and other management tasks.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

(18) 

Hartford Fire Insurance Company is a subsidiary of the Hartford Financial Services Group and one on the world’s leading providers of fire, marine and casualty insurance.

 

(19) 

Citicorp North America, Inc., provides regional banking services and is a subsidiary of Citigroup, Inc. (NYSE: C).

 

(20) 

American Intercontinental University is an international for profit university with both physical and online campuses.

 

(21) 

Nationwide Mutual Insurance Company is one of the nation’s largest insurance and financial services companies.

 

(22) 

This tenant has two separate leases within this property, as they rent two separate spaces.

As of March 31, 2011, the Duke joint venture has purchased approximately $982,415,000 of assets, since inception, exclusive of acquisition fees and closing costs, and holds interests in 37 properties, 10 located in Florida, eight located in Ohio, four each located in North Carolina and Texas, two each located in Arizona, Illinois, Indiana, Minnesota and Missouri and one in Tennessee.

We entered into an operating agreement for the Duke joint venture with Duke on June 12, 2008. Duke acts as the managing member of the Duke joint venture and is entitled to receive fees in connection with the services it provides to the Duke joint venture, including asset management, construction, development, leasing and property management services. Duke is also entitled to a promoted interest in the Duke joint venture. We have joint approval rights over all major policy decisions.

On December 17, 2010, in connection with the entry into of the Purchase Agreement for the Office Portfolio, we entered into an amended and restated operating agreement for the Duke joint venture. The amended and restated operating agreement generally contains the same terms and conditions as the operating agreement dated June 12, 2008 described above, except for the following material changes: (i) Duke has been granted us a call option to acquire Duke’s entire interest in the Duke joint venture which such interest shall be valued based on the opinions of qualified appraisers and which we can elect to exercise anytime after June 30, 2012 upon the occurrence and adoption by resolution of certain triggering events and (ii) the Duke joint venture has certain rights to participate in the development of certain adjacent and nearby parcels of land currently owned by Duke.

For a period of three years from the date of the initial operating agreement, the Duke joint venture will have the right to acquire additional newly developed bulk industrial built-to-suit properties from Duke if such properties satisfy certain specified conditions. We will retain the right to approve the acquisition and purchase price of each such property.

We carry our investment in the Duke joint venture on the equity method of accounting because it is an entity under common control with Duke. Those investments where we have the ability to exercise significant influence (but not control) over operating and financial policies of such entities are accounted for using the equity method. We eliminate transactions with such equity method subsidiaries to the extent of our ownership in such entities.

Consolidated Balance Sheet of the Duke joint venture as of March 31, 2011 (in thousands):

 

     March 31,
2011
     REIT  Basis
Adjustments(1)
     Total  

Assets

        

Real Estate Net

   $ 877,019       $ 2,143       $ 879,162   

Other Assets

     101,160         —           101,160   
                          

Total Assets

   $ 978,179       $ 2,143       $ 980,322   
                          

Liabilities and Equity

        

Notes Payable

   $ 241,618         —         $ 241,618   

Other Liabilities

     290,888         —           290,888   
                          

Total Liabilities

     532,506         —           532,506   
                          

Company’s Equity

     356,538         2,143         358,681   

Other Investor’s Equity

     89,135         —           89,135   
                          

Total Liabilities and Equity

   $ 978,179       $ 2,143       $ 980,322   
                          

 

(1) 

REIT Basis Adjustments include those costs incurred by the Company outside of the Duke joint venture that are directly capitalizable to its investment in real estate assets acquired within the Duke joint venture including acquisition costs paid to our Investment Advisor prior to January 1, 2009. Thereafter such acquisition fees were expensed as incurred.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

Consolidated Balance Sheet of the Duke joint venture as of December 31, 2010 (in thousands):

 

     December 31,
2010
     REIT  Basis
Adjustments(1)
     Total  

Assets

        

Real Estate Net

   $ 535,992       $ 2,171       $ 538,163   

Other Assets

     96,820         —           96,820   
                          

Total Assets

   $ 632,812       $ 2,171       $ 634,983   
                          

Liabilities and Equity

        

Notes Payable

   $ 242,000         —         $ 242,000   

Other Liabilities

     10,696         —           10,696   
                          

Total Liabilities

     252,696         —           252,696   
                          

Company’s Equity

     304,093         2,171         306,264   

Other Investor’s Equity

     76,023         —           76,023   
                          

Total Liabilities and Equity

   $ 632,812       $ 2,171       $ 634,983   
                          

 

(1) 

REIT Basis Adjustments include those costs incurred by the Company outside of the Duke joint venture that are directly capitalizable to its investment in real estate assets acquired within the Duke joint venture including acquisition costs paid to our Investment Advisor prior to January 1, 2009. Thereafter such acquisition fees were expensed as incurred.

Consolidated Statement of Operations of the Duke joint venture for the three months ended March 31, 2011 and 2010 (in thousands):

 

     Three Months Ended
March 31,
 
     2011     2010  

Total Revenues

   $ 19,585      $ 9,960   

Operating Expenses

     5,646        2,378   

Interest

     3,249        2,144   

Depreciation and Amortization

     7,621        4,086   
                

Net Income

   $ 3,069      $ 1,352   
                

Company’s Share in Net Income

   $ 2,456      $ 844   

Adjustments for Company Basis

     (29 )     (32 )
                

Company’s Equity in Net Income

   $ 2,427      $ 812   
                

Afton Ridge Joint Venture

On September 18, 2008, we acquired a 90% ownership interest in Afton Ridge, the owner of Afton Ridge Shopping Center, from unrelated third parties. CK Afton Ridge Shopping Center, LLC, a subsidiary of Childress Klein Properties, Inc. (“CK Afton Ridge”), retained a 10% ownership interest in Afton Ridge and continues to manage Afton Ridge Shopping Center. CK Afton Ridge acts as the managing member of Afton Ridge and is entitled to receive fees, including management, construction management and property management fees. We have joint approval rights over all major operating and policy decisions.

Afton Ridge Shopping Center is located at the intersection of I-85 and Kannapolis Parkway, in Kannapolis, North Carolina. We acquired our ownership interest in Afton Ridge for approximately $45,000,000, exclusive of customary closing costs, which was funded using net proceeds from our initial public offering. Upon closing, we paid our Investment Advisor an acquisition fee of approximately $450,000. This acquisition fee is not included in the $45,000,000 total acquisition cost of Afton Ridge, but is included as additional cost basis at our wholly-owned investment subsidiary.

The purchase agreement with the seller contained a two year master lease agreement whereby rental revenues were guaranteed by the seller on the 9% unoccupied space at the date of the acquisition up to a maximum of $1,102,000. In addition, leasing commissions and

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

tenant improvement allowances were to be reimbursed under the purchase agreement up to $934,000 over the same two year period for leasing activities incurred by Afton Ridge to lease this unoccupied space. During the quarter ended December 31, 2010, we reached agreement with CK Afton Ridge as to the final payout under the master lease agreement. As of December 31, 2010, $842,000 in rental revenue guarantee payments and $923,000 in leasing commission and tenant reimbursement payments, respectively, have been received by Afton Ridge and treated as purchase price adjustments in the period when the contingency was resolved on the Afton Ridge standalone financial statements. Our pro rata share of such purchase price adjustments have been treated as a reduction of our investment in Afton Ridge.

Afton Ridge Shopping Center is a 470,288 square foot regional shopping center, completed in 2006, in which Afton Ridge owns 296,388 rentable square feet that is currently 96% leased. One of the shopping center’s anchors, a 173,900 square foot SuperTarget, is not owned by us. Additional anchor tenants in Afton Ridge Shopping Center are Best Buy, Marshalls, PetSmart, Dick’s Sporting Goods, Stein Mart and Ashley Furniture. Afton Ridge Shopping Center is the retail component of a 260 acre master planned mixed-use development.

On October 15, 2008, Afton Ridge obtained a $25,500,000 loan from the Metropolitan Life Insurance Company, secured by the Afton Ridge Shopping Center originally acquired on September 18, 2008. The loan is for a term of five years, plus a 12 month extension option, and bears interest at a fixed rate of 5.70%. Interest payments only are due monthly for the term of the loan with principal due at maturity.

We carry our investment in Afton Ridge on the equity method of accounting because it is an entity under common control with CK Afton Ridge. Those investments where we have the ability to exercise significant influence (but not control) over operating and financial policies of such entities are accounted for using the equity method. We eliminate transactions with such equity investees to the extent of our ownership in such entities.

Consolidated Balance Sheet of Afton Ridge as of March 31, 2011 (in thousands):

 

     March 31,
2011
     REIT  Basis
Adjustments(1)
     Total  

Assets

        

Real Estate Net

   $ 45,698       $ 599       $ 46,297   

Other Assets

     3,935         —           3,935   
                          

Total Assets

   $ 49,633       $ 599       $ 50,232   
                          

Liabilities and Equity

        

Note Payable

   $ 25,500       $ —         $ 25,500   

Other Liabilities

     3,392         —           3,392   
                          

Total Liabilities

     28,892         —           28,892   
                          

Company’s Equity

     18,667         599         19,266   

Other Investor’s Equity

     2,074         —           2,074   
                          

Total Liabilities and Equity

   $ 49,633       $ 599       $ 50,232   
                          

 

(1)

REIT Basis Adjustments include those costs incurred outside of Afton Ridge that are directly capitalizable to its investment in real estate assets acquired within Afton Ridge including acquisition costs paid to our Investment Advisor prior to January 1, 2009. Thereafter such acquisitions fees were expensed as incurred.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

Consolidated Balance Sheet of Afton Ridge as of December 31, 2010 (in thousands):

 

     December 31,
2010
     REIT  Basis
Adjustments(1)
     Total  

Assets

        

Real Estate Net

   $ 45,943       $ 603       $ 46,546   

Other Assets

     3,458         —           3,458   
                          

Total Assets

   $ 49,401       $ 603       $ 50,004   
                          

Liabilities and Equity

        

Note Payable

   $ 25,500       $ —         $ 25,500   

Other Liabilities

     3,274         —           3,274   
                          

Total Liabilities

     28,774         —           28,774   
                          

Company’s Equity

     18,564         603         19,167   

Other Investor’s Equity

     2,063         —           2,063   
                          

Total Liabilities and Equity

   $ 49,401       $ 603       $ 50,004   
                          

 

(1)

REIT Basis Adjustments include those costs incurred by the Company outside of Afton Ridge that are directly capitalizable to its investment in real estate assets acquired within Afton Ridge including acquisition costs paid to our Investment Advisor prior to January 1, 2009. Thereafter such acquisitions fees were expensed as incurred.

Consolidated Statements of Operations of Afton Ridge for the three months ended March 31, 2011 and 2010. (in thousands);

 

     Three Months Ended
March 31,
 
     2011     2010  

Total Revenues

   $ 1,332      $ 1,300   

Operating Expenses

     350        351   

Interest

     376        376   

Depreciation and Amortization

     456        452   
                

Net Income

   $ 150      $ 121   
                

Company’s Share in Net Income

   $ 135      $ 109   

Adjustments for REIT Basis

     (5 )     (7 )
                

Company’s Equity in Net Income

   $ 130      $ 102   
                

UK JV and European JV

On June 10, 2010, we entered into two joint ventures with subsidiaries of the Goodman Group (ASX: GMG), or Goodman, one of which will seek to invest in logistics focused warehouse/distribution properties in the United Kingdom, or the UK JV, and the other which will seek to invest in logistics focused warehouse/distribution properties in France, Belgium, the Netherlands, Luxembourg and Germany, or the European JV. We own an 80% interest in each joint venture and Goodman owns a 20% interest in each joint venture. The terms of each joint venture are described in more detail below.

UK JV

The shareholders’ agreement pertaining to the UK JV is by and among RT Princeton UK Holdings, LLC (our wholly-owned subsidiary), Goodman Jersey Holding Trust and Goodman Princeton Holdings (Jersey) Limited, the UK JV, for the purpose of acquiring and holding, either directly or indirectly, up to £400,000,000 in logistics focused warehouse/distribution properties. On June 10, 2010, we initially funded the UK JV with capital contributions of $26,180,000. The UK JV has acquired an initial portfolio of two properties, as described further in the table below, which were previously owned by a subsidiary of Goodman and which were purchased by the UK JV simultaneously with the closing of the UK JV.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

Property and Market

  Year
Built
   

Property Type

 

Tenant

  Net Rentable
Sq. Feet
    Percentage
Leased
    Lease
Expiration
    Approximate
Total
Acquisition Cost
(in thousands)
 

Amber Park, Nothingham, UK

    1997      Warehouse/Distribution   UniDrug Distribution Group     208,423        100 %     3/2017      $ 15,642   

Brackmills, Northampton, UK

    1984      Warehouse/Distribution   GE Lighting Operations Limited     186,618        100 %     3/2017      $ 16,759   

A board of directors, comprised of members representing us and Goodman, in each case with an equal number of votes, has the responsibility for the supervision, management and major operating decisions of the UK JV and its business, except with respect to certain reserved matters which will require the unanimous approval of us and Goodman.

During the initial three year investment period, the UK JV has a right of first offer, with respect to certain logistics development or logistics investment assets considered for investment in the UK by Goodman or us. If a deadlock has arisen pertaining to a major decision regarding a specific property, either shareholder may exercise a buy-sell option in relation to the relevant property. After the initial investment period, either shareholder wishing to exit the UK JV may exercise a buy-sell option with respect to their entire interest in the UK JV.

The UK JV will pay certain fees to certain Goodman subsidiaries in connection with the services they provide to the UK JV, including but not limited to investment advisory, development management and property management services. Goodman may also be entitled to a promoted interest in the UK JV.

Consolidated Balance Sheet of UK JV as of March 31, 2011 and December 31, 2010 (in thousands):

 

     March 31,
2011
     December 31,
2010
 

Assets

     

Real Estate Net

   $ 35,275       $ 34,092   

Other Assets

     1,735         1,623   
                 

Total Assets

   $ 37,010       $ 35,715   
                 

Liabilities and Equity

     

Other Liabilities

   $ 1,015       $ 938   
                 

Total Liabilities

     1,015         938   
                 

Company’s Equity

     29,092         27,822   

Other Investor’s Equity

     6,903         6,955   
                 

Total Liabilities and Equity

   $ 37,010       $ 35,715   
                 

Consolidated Statements of Operations of UK JV for the three months ended March 31, 2011 (in thousands); there were no activities during the three months ended March 31, 2010.

 

     Three Months Ended
March 31, 2011
 

Total Revenues

   $ 816   

Operating Expenses

     67   

Depreciation and Amortization

     353   
        

Net Income

   $ 396   
        

Company’s Equity in Net Income

   $ 317   
        

European JV

The shareholders’ agreement pertaining to the European JV is by and among RT Princeton CE Holdings, LLC (our wholly-owned subsidiary), Goodman Europe Development Trust acting by its trustee Goodman Europe Development Pty Ltd. and Goodman Princeton Holdings (LUX) S.À.R.L., the European JV, for the purpose of acquiring and holding, either directly or indirectly, up to 400,000,000 in

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

logistics focused warehouse/ distribution properties. On June 10, 2010, we initially funded the European JV with capital contributions of $26,802,000. The European JV acquired an initial portfolio of two properties, Duren and Schonberg, which were previously owned by a subsidiary of Goodman and which were purchased by the European JV simultaneously with the closing of the European JV.

On October 28, 2010, we contributed an additional capital contribution of $18,672,000 to the European JV to acquire Langenbach which was also previously owned by a subsidiary of Goodman.

 

Property and Market

  Year
Built
   

Property Type

  Tenant   Net Rentable
Sq. Feet
    Percentage
Leased
    Lease
Expiration
    Approximate
Total
Acquisition Cost
(in thousands)
 

Düren, Rhine-Ruhr
Germany

    2008      Warehouse/Distribution   Metsä Tissue GmbH     391,494        100 %     01/2013      $ 16,435   

Schönberg, Hamburg, Germany

    2009      Warehouse/Distribution   LK Logistik GmbH     453,979        100 %     05/2017      $ 17,274   

Langenbach, Munich, Germany

    2010      Warehouse/Distribution   DSV Stuttgart GmbH & Co. KG     225,106        100 %     07/2015      $ 23,216   

A board of directors, comprised of members representing us and Goodman, in each case with an equal number of votes, has the responsibility for the supervision, management and major operating decisions of the European JV and its business, except with respect to certain reserved matters which will require the unanimous approval of us and Goodman.

During the initial three year investment period, the European JV has a right of second offer (after another investment vehicle managed by Goodman) with respect to certain logistics development or logistics investment assets considered for investment by Goodman, and has a right of first offer with respect to certain logistics development or logistics investment assets considered for investment by us. If a deadlock has arisen pertaining to a major decision regarding a specific property, either shareholder may exercise a buy-sell option in relation to the relevant property. After the initial investment period, either shareholder wishing to exit the European JV may exercise a buy-sell option with respect to their entire interest in the European JV.

The European JV will pay certain fees to certain Goodman subsidiaries in connection with the services they provide to the European JV, including but not limited to investment advisory, development management and property management services. Certain Goodman subsidiaries may also be entitled to a promoted interest in the European JV.

Consolidated Balance Sheet of European JV as of March 31, 2011 and December 31, 2010 (in thousands):

 

     March 31,
2011
     December 31,
2010
 

Assets

     

Real Estate Net

   $ 59,949       $ 58,614   

Other Assets

     4,048         4,355   
                 

Total Assets

   $ 63,997       $ 62,969   
                 

Liabilities and Equity

     

Other Liabilities

   $ 2,831       $ 3,797   
                 

Total Liabilities

     2,831         3,797   
                 

Company’s Equity

     48,933         47,338   

Other Investor’s Equity

     12,233         11,834   
                 

Total Liabilities and Equity

   $ 63,997       $ 62,969   
                 

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

Consolidated Statements of Operations of European JV for the three months ended March 31, 2011 (in thousands); there were no activities during the three months ended March 31, 2010.

 

     Three Months Ended
March 31, 2011
 

Total Revenues

   $ 1,489   

Operating Expenses

     224   

Depreciation and Amortization

     754   
        

Net Income

   $ 511   
        

Company’s Equity in Net Income

   $ 409   
        

6. Acquisition Related Intangible Assets

Our acquisition related intangible assets are included in the consolidated balance sheets as acquired in-place lease value, acquired above market lease value and acquired below market lease value.

The following is a schedule of future amortization of acquisition related intangible assets as of March 31, 2011 (in thousands):

 

     Above Market
Lease Value
     Acquired
In-Place Lease Value
     Below Market
Lease Value
 

2011 (Nine months ending December 31, 2011)

   $ 3,249       $ 12,953       $ 2,693   

2012

     4,226         15,330         2,854   

2013

     3,400         13,716         2,073   

2014

     1,910         11,472         1,974   

2015

     1,598         10,690         1,937   

2016

     1,504         10,202         1,575   

Thereafter

     5,877         35,192         5,126   
                          
   $ 21,764       $ 109,555       $ 18,232   
                          

The amortization of the above and below-market lease values included in rental revenue were ($1,093,000) and $916,000, respectively, for the three months ended March 31, 2011, ($818,000) and $697,000, respectively, for the three months ended March 31, 2010. The amortization of in-place lease value included in amortization expense was $4,347,000 and $2,780,000 for the three months ended March 31, 2011 and 2010, respectively.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

7. Debt

Notes Payable secured by real property are summarized as follows (in thousands):

 

     Interest Rate as of    

Maturity Date

   Notes Payable as of  

Property

   March 31,
2011
    December 31,
2010
       March 31,
2011
    December 31,
2010
 

REMEC

     4.79 %     4.79 %   November 1, 2011    $ 13,250      $ 13,250   

300 Constitution

     4.84        4.84      April 1, 2012      12,000        12,000   

Deerfield Commons I.(1)

     5.23        5.23      December 1, 2015      9,691        9,725   

Bolingbrook Point III

     5.26        5.26      January 1, 2015      7,900        9,000   

Fairforest Bldg. 5(2)

     6.33        6.33      February 1, 2024      9,743        9,864   

Fairforest Bldg. 6(2)

     5.42        5.42      June 1, 2019      2,918        2,987   

HJ Park—Bldg. 1(2)

     4.98        4.98      March 1, 2013      580        648   

North Rhett I(2)

     5.65        5.65      August 1, 2019      3,818        3,906   

North Rhett II(2)

     5.20        5.20      October 1, 2020      2,137        2,180   

North Rhett III(2)

     5.75        5.75      February 1, 2020      1,710        1,759   

North Rhett IV(2)

     5.80        5.80      February 1, 2025      9,777        9,892   

Mt Holly Bldg.(2)

     5.20        5.20      October 1, 2020      2,137        2,180   

Orangeburg Park Bldg.(2)

     5.20        5.20      October 1, 2020      2,173        2,217   

Kings Mountain I(2)

     5.27        5.27      October 1, 2020      1,850        1,887   

Kings Mountain II(2)

     5.47        5.47      January 1, 2020      5,475        5,594   

Union Cross Bldg. I(2)

     5.50        5.50      July 1, 2021      2,701        2,749   

Union Cross Bldg. II(2)

     5.53        5.53      June 1, 2021      8,249        8,398   

Thames Valley Five(3)(4)

     6.42        6.42      May 30, 2013      9,062        8,781   

Lakeside Office Center(5)

     6.03        6.03      September 1, 2015      9,000        9,000   

Enclave on the Lake(6)

     5.45        5.45      May 1, 2011      17,810        17,906   

Albion Mills Retail Park(3)(7)(8)

     5.25        5.25      October 10, 2013      9,272        8,985   

Avion Midrise III & IV(9)

     5.52        5.52      April 1, 2014      21,244        21,354   

12650 Ingenuity Drive(10)

     5.62        5.62      October 1, 2014      12,964        13,061   

Maskew Retail Park(3)(11)

     5.68        5.68      August 10, 2014      22,453        21,759   

One Wayside Road(12)

     5.66        5.66      August 1, 2015      14,380        14,465   

One Wayside Road(12)

     5.92        5.92      August 1, 2015      11,942        12,006   

100 Tice Blvd(13)

     5.97        5.97      September 15, 2017      20,981        21,100   

100 Tice Blvd(13)

     5.97        5.97      September 15, 2017      20,980        21,100   

Ten Parkway North

     4.75        4.75      January 1, 2021      12,556        12,600   

Pacific Corporate Park(14)

     4.89        4.89      December 7, 2017      84,000        85,000   

4701 Gold Spike Drive(15)

     4.45        —        March 1, 2018      10,650        —     

1985 International Way(15)

     4.45        —        March 1, 2018      7,400        —     

Summit Distribution Center(15)

     4.45        —        March 1, 2018      6,700        —     

3660 Deerpark Boulevard(15)

     4.45        —        March 1, 2018      7,650        —     

Tolleson Commerce Park II(15)

     4.45        —        March 1, 2018      4,600        —     

100 Kimball Drive(16)

     5.25        —        March 1, 2021      33,000        —     
                       

Notes Payable

            432,753        365,353   

Plus Premium

            3,998        4,155   

Less Discount

            (3,463     (3,700 )

Less Albion Mills Retail Park Fair Value Adjustment

            (197     (216
                       

Notes Payable Net of Premium/Discount and Fair Value Adjustment

          $ 433,091      $ 365,592   
                       

 

(1) 

Effective January 1, 2011, principal and interest payments are due monthly for the remaining 60 months of the loan term.

 

(2)

These notes payable were assumed from the seller of the Carolina Portfolio on August 30, 2007 as part of the property acquisitions and were recorded at estimated fair value which includes the discount.

 

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For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

(3) 

These loans are subject to certain financial covenants (interest coverage and loan to value).

 

(4) 

We entered into the interest rate swap agreement that fixed the GBP-based LIBOR rate at 5.41% plus 1.01%, or 6.42% per annum as of March 31, 2011, which expires on May 30, 2013. The stated rates on the mortgage note payable were 1.78% and 1.74% at March 31, 2011 and December 31, 2010, respectively, and were based on GBP-based LIBOR plus a spread of 1.01%.

 

(5) 

Interest only payments are due monthly for the first 36 months of the loan term. Principal and interest payments are due monthly for the remaining 48 months of the loan term.

 

(6) 

The loan was assumed from the seller of Enclave on the Lake on July 1, 2008 and was recorded at estimated fair value which includes the discount.

 

(7) 

The Albion Mills Retail Park notes payable balance is presented at cost basis. This loan is carried on our balance sheet at fair value (see Note 17).

 

(8) 

We entered into the interest rate swap agreement that fixed the GBP-based LIBOR rate at 3.94% plus 1.31%, or 5.25% per annum as of March 31, 2011, which expires on October 10, 2013. The stated rates on the mortgage note payable were 2.08% and 2.04% at March 31, 2011 and December 31, 2010, respectively, and were based on GBP-based LIBOR plus a spread of 1.31%.

 

(9) 

The loan was assumed from the seller of Avion Midrise III & IV on November 18, 2008 and was recorded at estimated fair value which includes the discount.

 

(10) 

The loan was assumed from the seller of 12650 Ingenuity Drive on August 5, 2009 and was recorded at estimated fair value which includes the discount.

 

(11) 

We entered into the interest rate swap agreement that fixed the GBP-based LIBOR rate at 3.42% plus 2.26, or 5.68% per annum as of March 31, 2011, which expires on August 10, 2014. The stated rates on the mortgage note payable was 3.03% and 2.99% at March 31, 2011 and December 31, 2010, respectively, and were based on GBP-based LIBOR plus a spread of 2.26%.

 

(12) 

The two loans were assumed from the seller of One Wayside road on June 24, 2010 and were recorded at estimated fair value which include the premiums.

 

(13) 

The two loans were assumed from the seller of 100 Tice Blvd. on September 28, 2010 and were recorded at estimated fair value which include the premiums.

 

(14) 

We entered into an interest rate swap agreement that fixed the LIBOR rate at 2.69% plus 2.20%, or 4.89% per annum as of March 31, 2011 which expires on December 7, 2017. The stated rates on the mortgage note payable were 2.52% at March 31, 2011 and December 31, 2010, and were based on LIBOR plus a spread of 2.20%.

 

(15) 

We entered into five loans totaling $37,000,000 on February 8, 2011 that are cross-collateralized by these properties.

 

(16) 

We entered into an interest rate swap agreement that fixed the LIBOR rate at 3.50%, plus 1.75%, or 5.25% per annum as of March 31, 2011 which expires on March 1, 2021. The stated rate on the mortgage note payable was 2.01% at March 31, 2011 and was based on LIBOR plus a spread of 1.75%.

Notes Payable

In connection with our acquisition of the Carolina Portfolio on August 30, 2007, we assumed 13 loans with principal balances totaling $66,110,000 ($62,944,000 at estimated fair value including the discount of $3,166,000) from various lenders that are secured by first deeds of trust on the properties and the assignment of related rents and leases. Assumption fees and other loan closing costs totaling $765,500 were capitalized as incurred. The loans bear interest at rates ranging from 4.98% to 6.33% per annum and mature between March 1, 2013 and February 1, 2025. The loans require monthly payments of interest and principal, fully amortized over the lives of the loans. Principal payments totaling $993,000 were made during the three months ended March 31, 2011. We indemnify the lenders against environmental costs and expenses and guarantee the loans under certain conditions.

On December 27, 2007, we entered into a $9,000,000 financing agreement secured by the Bolingbrook Point III property with the Northwestern Mutual Life Insurance Company. The loan is for a term of seven years and bears a fixed interest rate of 5.26% per annum with principal due at maturity. In addition, we incurred financing costs of approximately $91,000 associated with obtaining this loan. On January 14, 2011, we paid down $1,100,000 of principal in connection with the lease termination settlement with one of the tenants.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

On May 30, 2008, we entered into a £7,500,000 financing arrangement with the Royal Bank of Scotland plc secured by the Thames Valley Five property. On July 27, 2010 we paid down the loan by £1,860,000 leaving a loan balance of £5,640,000 ($9,062,000 at March 31, 2011). The loan is for a term of five years (with a two year extension option) and bears interest at a variable rate adjusted quarterly, based on nine month GBP-based LIBOR plus 1.01%. In addition, we incurred financing costs of approximately £67,000 ($108,000 at March 31, 2011) associated with obtaining this loan. On August 14, 2008, we entered into the interest rate swap agreement that fixed the GBP-based LIBOR rate at 5.41% plus 1.01% or 6.42% per annum as of March 31, 2011, and expires on May 30, 2013. In conjunction with the loan paydown, we incurred a cost of £227,000 ($361,000 at August 3, 2010) to reduce the notional amount of the interest rate swap from £7,500,000 to £5,640,000. Interest only payments are due quarterly for the term of the loan with principal due at maturity.

On July 1, 2008, in connection with the acquisition of Enclave on the Lake, we assumed an $18,281,000 ($18,790,000 face value less discount of $509,000) loan from NorthMarq Capital, Inc. that bears interest at a fixed rate of 5.45% per annum and matures on May 1, 2011. Principal and interest payments are due monthly for the remaining loan term and principal payments totaling $95,000 were made during the three months ended March 31, 2011. In addition, we incurred financing costs totaling $241,000 in conjunction with the assumption of the loan.

On October 10, 2008, we entered into a £5,771,000 ($9,272,000 at March 31, 2011) financing agreement with the Royal Bank of Scotland plc secured by Albion Mills Retail Park property. The loan is for a term of five years and bears interest at a variable rate adjusted quarterly, based on three month GBP-based LIBOR plus 1.31%. In addition, we incurred financing costs of approximately £75,000 ($121,000 at March 31, 2011) associated with obtaining this loan. On November 25, 2008, we entered into the interest rate swap agreement that fixed the GBP-based LIBOR rate at 3.94% plus 1.31% or 5.25% per annum as of March 31, 2011 and expires on October 10, 2013. Interest only payments are due quarterly for the term of the loan with principal due at maturity.

On November 18, 2008, in connection with the acquisition of Avion Midrise III & IV, we assumed $20,851,000 ($22,186,000 face value less discount of $1,335,000) fixed rate mortgage loan from Capmark Finance, Inc. that bears interest at a rate of 5.52% per annum and matures on April 1, 2014. Principal and interest payments are due monthly for the remaining loan term and principal payments totaling $110,000 were made during the three months ended March 31, 2011. In addition, we incurred financing costs totaling $344,000 in conjunction with the assumption of the loan.

On August 5, 2009, in connection with the acquisition of 12650 Ingenuity Drive, we assumed a $12,572,000 ($13,539,000 face value less a discount of $967,000) fixed rate mortgage loan from PNC Bank, National Association that bears interest at a rate of 5.62% and matures on October 1, 2014. Principal and interest payments are due monthly for the remaining loan term and principal payments totaling $96,000 were made during the three months ended March 31, 2011. In addition, we incurred financing costs totaling $284,000 in conjunction with the assumption of the loan.

On August 10, 2009, we entered into a £13,975,000 ($22,453,000 at March 31, 2011) financing agreement with the Abbey National Treasury Services plc secured by the Maskew Retail Park property. On September 24, 2009, we drew the full amount of the loan and concurrently entered into an interest rate swap agreement that fixed the GBP-based LIBOR rate at 3.42% plus 2.26% or 5.68% per annum for the five-year term of the loan. Interest only payments are due quarterly for the term of the loan with principal due at maturity. In addition, we incurred financing costs of approximately £268,000 ($431,000 at March 31, 2011) associated with obtaining this loan.

On June 24, 2010, we assumed two loans in connection with the acquisition of One Wayside Road: (i) a $14,888,000 ($14,633,000 at face value plus a premium of $255,000) fixed rate mortgage loan from State Farm Life Insurance Company that bears interest at a rate of 5.66% and matures on August 1, 2015; and (ii) a $12,479,000 ($12,132,000 at face value plus a premium of $347,000) fixed rate mortgage loan from State Farm Life Insurance Company that bears interest at a rate of 5.92% and matures on August 1, 2015. Principal and interest payments are due monthly for the remaining loan terms and principal payments totaling $150,000 were made during the three months ended March 31, 2011 on the two loans. In addition, we incurred financing costs totaling $342,000 in conjunction with the assumption of the loans.

On September 28, 2010, we assumed two loans in connection with the acquisition of 100 Tice Blvd.: (i) a $23,136,000 ($21,218,000 at face value plus a premium of $1,918,000) fixed rate loan from Principal Life Insurance Company that bears interest at a rate of 5.97%, matures on September 15, 2022 and the lender has the right to call the loan due and payable on September 15, 2017;

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

(ii) a $23,136,000 ($21,217,000 at a face value plus a premium of $1,919,000) fixed rate mortgage from Hartford Life and Accidental Insurance Company that bears interest at a rate of 5.97%, matures on September 15, 2022 and the lender has the right to call the loan due and payable on September 15, 2017. Principal and interest payments are due monthly for the remaining loan terms and principal payments totaling $239,000 were made during the three months ended March 31, 2011 on the two loans. In addition, we incurred financing costs totaling $476,000 in conjunction with the assumption of the loans.

On December 7, 2010, we entered into a $85,000,000 secured term loan through a subsidiary with Wells Fargo Bank, National Association, or the Pacific Corporate Park Loan. The Pacific Corporate Park Loan has a seven-year term, monthly amortization of $250,000 and is secured by Pacific Corporate Park. Upon closing of the Pacific Corporate Park Loan on December 7, 2010, we entered into an interest rate swap agreement with Wells Fargo Bank, National Association to effectively fix the interest rate on the entire outstanding Pacific Corporate Park Loan amount at 4.89% for its seven-year term. Principal and interest payments are due monthly and principal payments totaling $1,000,000 were made during the three months ended March 31, 2011. In addition, we incurred financing costs of approximately $1,512,000 in conjunction with obtaining the loan.

On December 29, 2010, we entered into a $12,600,000 secured term loan through Woodmen of The World Life Insurance Society secured by the Ten Parkway North property. The Ten Parkway North loan bears interest at a fixed rate of 4.75% per annum and matures on January 1, 2021. Principal and interest payments are due monthly and principal payments totaling $44,000 were made during the three months ended March 31, 2011. In addition, we incurred financing costs of approximately $160,000 in conjunction with obtaining the loan.

On February 8, 2011, we entered into five cross-collateralized secured term loans totaling $37,000,000 with ING USA Annuity and Life Insurance Company secured by the following properties: 4701 Gold Spike Road, $10,650,000, Summit Distribution Center, $6,700,000, Tolleson Commerce Park II, $4,600,000, 3660 Deerpark Blvd., $7,650,000 and 1985 International Way, $7,400,000. The loans bear interest at a fixed rate of 4.45% and mature on March 1, 2018. There were no principal payments made during the period ended March 31, 2011. In addition, we incurred financing costs of approximately $702,000 in conjunction with obtaining the five loans.

On February 28, 2011, we entered into a $33,000,000 secured term loan with TD Bank secured by the 100 Kimball Drive property. Upon closing the 100 Kimball Drive loan, we simultaneously entered into an interest rate swap agreement with TD Bank to effectively fix the interest rate on the entire outstanding loan amount to 5.25% for its 10 year term. Principal and interest payments are due monthly. There were no principal payments made during the period ended March 31, 2011. In addition, we incurred financing costs of approximately $463,000 in conjunction with obtaining the loan.

The minimum principal payments due for the notes payable and our loan payable are as follows as of March 31, 2011 (in thousands):

 

2011 (Nine months ending December 31, 2011)

   $ 38,905   

2012

     23,613   

2013

     30,211   

2014

     120,608   

2015

     60,156   

2016

     11,161   

Thereafter

     203,099   
        
   $ 487,753   
        

Loan Payable

On May 26, 2010, we entered into a $70,000,000 revolving credit facility with Wells Fargo Bank, N.A., or the Wells Fargo Credit Facility. The initial maturity date of the Wells Fargo Credit Facility is May 26, 2014, however we may extend the maturity date to May 26, 2015, subject to certain conditions. $15,000,000 of the Wells Fargo Credit Facility was initially drawn upon closing on May 26, 2010, with $55,000,000 initially remaining available for disbursement during the term of the facility. We have the right to prepay any outstanding amount of the Wells Fargo Credit Facility, in whole or in part, without premium or penalty at any time during the term of this Wells Fargo Credit Facility, however, we initially could not reduce the outstanding principal balance below a minimum outstanding amount of $15,000,000, without reducing the total $70,000,000 Wells Fargo Credit Facility capacity. Initially, the Wells Fargo Credit

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

Facility had a floating interest rate of 300 basis points over the LIBOR, however this interest rate would be at least 4.00% for any of the outstanding balance that was not subject to an interest rate swap with an initial term of at least two years. Upon closing on May 26, 2010, we entered into an interest rate swap agreement with Wells Fargo Bank, N.A. to effectively fix the interest rate on the initial $15,000,000 outstanding loan amount at 5.10% for the four-year term of the facility. The interest rate swap was designated as a qualifying cash flow hedge at the start date of the hedge relationship as described in Note 16 “Derivative Instruments.” The Wells Fargo Credit Facility was initially secured by our 13201 Wilfred, 3011, 3055 & 3077 Comcast Place, 140 Depot Street, Crest Ridge Corporate Center I and West Point Trade Center properties. In addition, CBRE OP provides a limited guarantee for the Wells Fargo Credit Facility. The Wells Fargo Credit Facility is subject to certain customary financial covenants, including certain negative financial covenants, which we believe we were in compliance with as of March 31, 2011. A commitment fee of $1,050,000 was paid to Wells Fargo Bank, N.A. at the initial closing.

On August 31, 2010, we entered into an amended and restated credit agreement with Wells Fargo Bank, N.A. to expand the Wells Fargo Credit Facility from its initial capacity of $70,000,000 to an amended capacity of $125,000,000 (the “Amended Wells Fargo Credit Facility”). In connection with the Amended Wells Fargo Credit Facility, the minimum outstanding amount was increased to $25,000,000 and as such an additional $10,000,000 was drawn (in addition to the $15,000,000 initially drawn on May 26, 2010) with the remaining $100,000,000 available for disbursement during the term of the facility. The Amended Wells Fargo Credit Facility is secured by an additional three of our properties, for a total of eight properties in all: 13201 Wilfred Lane, 3011, 3055 & 3077 Comcast Place, 140 Depot Street, Crest Ridge Corporate Center, West Point Trade Center, 5160 Hacienda Drive, 10450 Pacific Center Court and 225 Summit Avenue. The interest rate was reduced by 25 basis points to 275 basis points over LIBOR (which rate will apply to all withdrawals from the Amended Wells Fargo Credit Facility other than the initial $15,000,000 that was drawn on May 26, 2010) and the initial interest rate floor of 4.00% was eliminated. The initial maturity date remains May 26, 2014, however we may extend the maturity date to May 26, 2015, subject to certain conditions. The Amended Wells Fargo Credit Facility is subject to certain representations and warranties and customary financial covenants (including certain negative financial covenants) with which we believe we were in compliance as of March 31, 2011. A commitment fee of $632,500 was paid to Wells Fargo Bank, N.A. at closing of the Amended Wells Fargo Credit Facility.

On March 30, 2011, an additional $30,000,000 was drawn (in addition to the $15,000,000 initially drawn on May 26, 2010 and $10,000,000 second draw on August 31, 2010) in connection with the Amended Wells Fargo Credit Facility, with the remaining $70,000,000 available for disbursement during the term of the facility. The $55,000,000 is included in Loan Payable on our condensed consolidated balance sheet.

Our organizational documents contain a limitation on the amount of indebtedness that we may incur, so that unless our shares are listed on a national securities exchange, our aggregate borrowing may not exceed 300% of our net assets unless any excess borrowing is approved by a majority of our independent trustees and is disclosed to shareholders in our next quarterly report.

8. Minimum Future Rents Receivable

The following is a schedule of minimum future rentals to be received on non-cancelable operating leases from consolidated properties as of March 31, 2011 (in thousands):

 

2011 (Nine months ending December 31, 2011)

   $ 71,900   

2012

     91,129   

2013

     84,797   

2014

     80,536   

2015

     77,274   

2016

     73,858   

Thereafter

     312,058   
        
   $ 791,552   
        

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

9. Concentrations

Tenant Revenue Concentrations

For the three months ended March 31, 2011, a tenant in Pacific Corporate Park accounted for approximately $3,602,000 or approximately 12% of total revenues from consolidated properties. The leases under which the tenant occupies our Pacific Corporate Park property expire in February 2021.

For the three months ended March 31, 2010, there were no significant revenue concentrations.

Geographic Concentrations

As of March 31, 2011, we owned 71 consolidated properties, excluding two properties held for sale, located 14 states (Arizona, California, Georgia, Florida, Illinois, Kentucky, Massachusetts, Minnesota, New Jersey, North Carolina, South Carolina, Texas, Utah, and Virginia) and in the United Kingdom.

As of March 31, 2010, we owned 58 consolidated properties located in ten states (California, Florida, Georgia, Illinois, Massachusetts, Minnesota, North Carolina, South Carolina, Texas and Virginia) and in the United Kingdom.

Our geographic revenue concentrations from consolidated properties for the three months ended March 31, 2011, and 2010 are as follows:

 

     Three Months Ended
March 31,
 
         2011             2010      

Domestic

    

Virginia

     16.25     6.39

New Jersey

     15.73        —     

California

     13.25        12.17   

South Carolina

     10.48        19.78   

Texas

     9.61        13.03   

Massachusetts

     7.55        5.63   

Florida

     5.95        15.86   

Minnesota

     5.38        7.83   

Illinois

     3.28        1.22   

North Carolina

     2.06        3.07   

Georgia

     1.81        3.72   

Kentucky

     1.20        —     

Utah

     1.09        —     

Arizona

     0.94        —     
                

Total Domestic

     94.58        88.70   

International

    

United Kingdom

     5.42        11.30   
                

Total

     100.00     100.00
                

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

Our geographic long-lived asset concentrations from consolidated properties as of March 31, 2011 and December 31, 2010 are as follows:

 

     March 31,
2011
    December 31,
2010
 

Domestic

    

Virginia

     15.59     15.71

New Jersey

     14.47        14.49   

South Carolina

     13.79        13.86   

California

     11.56        11.59   

Massachusetts

     7.70        7.72   

Texas

     7.11        7.14   

Florida

     5.54        5.55   

North Carolina

     4.38        4.30   

Minnesota

     3.54        3.55   

Illinois

     3.41        3.42   

Kentucky

     1.22        1.23   

Utah

     1.11        1.12   

Georgia

     1.10        1.10   

Arizona

     0.74        0.76   
                

Total Domestic

     91.26        91.54   

International

    

United Kingdom

     8.74        8.46   
                

Total

     100.00     100.00
                

10. Segment Disclosure

Our reportable segments consist of three types of commercial real estate properties, namely, Domestic Industrial Properties, Domestic Office Properties and International Office/Retail Properties. Management internally evaluates the operating performance and financial results of our segments based on net operating income. We also have certain general and administrative level activities including legal, accounting, tax preparation and shareholder servicing costs that are not considered separate operating segments. Our reportable segments are on the same basis of accounting as described in Note 2—“Basis of Presentation and Summary of Significant Accounting Policies.”

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

We evaluate the performance of our segments based on net operating income, defined as: rental income and tenant reimbursements less property and related expenses (operating and maintenance, property management fees, property level general and administrative expenses and real estate taxes) and excludes other non-property income and expenses, interest expense, depreciation and amortization, and our general and administrative expenses. The following table compares the net operating income for the three months ended March 31, 2011 and 2010 (in thousands):

 

     Three Months Ended
March 31,
 
     2011      2010  

Domestic Industrial Properties

     

Revenues:

     

Rental

   $ 6,928       $ 5,813   

Tenant Reimbursements

     1,664         1,258   
                 

Total Revenues

     8,592         7,071   
                 

Property and Related Expenses:

     

Operating and Maintenance

     448         338   

General and Administrative

     121         46   

Property Management Fee to Related Party

     83         61   

Property Taxes

     1,629         1,431   
                 

Total Expenses

     2,281         1,876   
                 

Net Operating Income

     6,311         5,195   
                 

Domestic Office Properties

     

Revenues:

     

Rental

     16,166         7,249   

Tenant Reimbursements

     3,871         1,579   
                 

Total Revenues

     20,037         8,828   
                 

Property and Related Expenses:

     

Operating and Maintenance

     2,747         1,157   

General and Administrative

     129         87   

Property Management Fee to Related Party

     234         33   

Property Taxes

     2,447         1,190   
                 

Total Expenses

     5,557         2,467   
                 

Net Operating Income

     14,480         6,361   
                 

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

     Three Months Ended
March 31,
 
     2011     2010  

International Office/Retail Properties

    

Revenues:

    

Rental

     1,598        1,940   

Tenant Reimbursements

     43        81   
                

Total Revenues

     1,641        2,021   
                

Property and Related Expenses:

    

Operating and Maintenance

     239        80   

General and Administrative

     151        35   

Property Management Fee to Related Party

     71        70   
                

Total Expenses

     461        185   
                

Net Operating Income

     1,180        1,836   
                

Reconciliation to Consolidated Net Income (Loss)

    

Total Segment Net Operating Income

     21,971        13,392   

Interest Expense

     6,011        3,095   

General and Administrative

     1,140        671   

Investment Management Fee to Related Party

     4,258        2,431   

Acquisition Expenses

     4,646        378   

Depreciation and Amortization

     12,274        7,243   
                
     (6,358     (426
                

Other Income and Expenses

    

Interest and Other Income

     376        598   

Net Settlement Payments on Interest Rate Swaps

     (174     (214

Loss on Interest Rate Swaps and Cap

     254        (388

Loss on Note Payable at Fair Value

     (27     (73

Loss on Early Extinguishment of Debt

     —          (73
                

Loss from Continuing Operations Before Provision for Income Taxes and Equity in Income of Unconsolidated Entities

     (5,929     (576
                

Provision for Income Taxes

     (69     (15

Equity in Income of Unconsolidated Entities

     3,210        737   
                

Net (Loss) Income from Continuing Operations

     (2,788     146   
                

Income from Discontinued Operations

     175        —     
                

Net (Loss) Income

     (2,613     146   
                

Net Loss (Income) Attributable to Non-Controlling Operating Partnership Units

     4        (1
                

Net (Loss) Income Attributable to CB Richard Ellis Realty Trust Shareholders

   $ (2,609   $ 145   
                

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

     March 31,
2011
     December 31,
2010
 

Condensed Assets

     

Domestic Industrial Properties

   $ 413,554       $ 412,093   

Domestic Office Properties

     709,924         711,084   

Domestic Industrial Properties-Discontinued Operations

     22,047         22,056   

International Office/Retail Properties

     106,685         104,076   

Non-Segment Assets

     589,428         467,411   
                 

Total Assets

   $ 1,841,638       $ 1,716,720   
                 
     Three Months Ended
March 31,
 

Capital Expenditures

   2011      2010  

Domestic Industrial Properties

   $ 1,098       $ 113   

Domestic Office Properties

     57         58   
                 

Total Capital Expenditures

   $ 1,155       $ 171   
                 

11. Investment Management and Other Fees to Related Parties

Pursuant to the agreement between our company, CBRE OP and the Investment Advisor (the “Advisory Agreement”), the Investment Advisor and its affiliates perform services relating to our ongoing public offering and the management of our assets. Items of compensation and equity participation are as follows:

Offering Costs Relating to Public Offerings

Offering costs totaling $10,031,000 and $12,074,000 were incurred during the three months ended March 31, 2011 and 2010, respectively, and are recorded as a reduction of additional paid-in-capital in the consolidated statement of shareholders’ equity. Of the total amounts, $9,059,000 and $11,369,000 was incurred to CNL Securities Corp., as dealer manager and $92,000 and $45,000 was incurred to the Investment Advisor for reimbursable marketing for the three months ended March 31, 2011 and 2010, respectively. Each party will be paid the amount incurred from proceeds of the public offering. As of March 31, 2011 and December 2010 the accrued offering costs payable to related parties included in our consolidated balance sheets were $973,000 and $917,000.

Investment Management Fee to Related Party

Prior to October 24, 2006, the Investment Advisor received an annual fee equal to 0.75% of the book value of the total assets, as defined in the Advisory Agreement, based on the assets of CBRE OP. The investment management fee was calculated monthly based on the average of total assets, as defined, during such period. On October 24, 2006, the Board of Trustees, including our independent trustees, approved and the Company entered into the Amended and Restated Agreement of Limited Partnership of CBRE OP (the “Amended Partnership Agreement”) and the Amended and Restated Advisory Agreement (the “Amended Advisory Agreement” and, together with the Amended Partnership Agreement, the “Amended Agreements”). The Amended Advisory Agreement provides an investment management fee of (i) a monthly fee equal to one twelfth of 0.6% of the aggregate cost (before non-cash reserves and depreciation) of all real estate investments within our portfolio and (ii) a monthly fee equal to 7.0% of the aggregate monthly net operating income derived from all real estate investments within our portfolio. On January 30, 2009, we entered into that certain second amended and restated advisory agreement (the “Second Amended Advisory Agreement”) with CBRE OP and the Investment Advisor. The Second Amended Advisory Agreement modified, among other things, the investment management fee to consist of (a) a monthly fee equal to one twelfth of 0.5% of the aggregate costs (before non-cash reserves and depreciation) of all real estate investment in our portfolio and (b) a monthly fee equal to 5.0% of the aggregate monthly net operating income derived from all real estate investments in our portfolio. All or any portion of the investment management fee not taken as to any fiscal year may be deferred or waived without interest at the option of the Investment Advisor.

The Investment Advisor earned investment management fees of $4,297,000 and $2,431,000 for the three months ended March 31, 2011 and 2010, respectively. As of March 31, 2011 and December 31, 2010, the investment management fees payable to related party

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

in our consolidated balance sheets were $2,970,000 and $1,330,000, respectively. In connection with services provided to the Investment Advisor, CNL Fund Management Company, the Sub-Advisor and affiliate of the Dealer Manager pursuant to a sub-advisory agreement dated August 21, 2006, was paid by the Investment Advisor $593,000 and $336,000 for the three months ended March 31, 2011 and 2010, respectively.

Acquisition Fee and Expenses to Related Party

On January 30, 2009, we entered into that certain Second Amendment Advisory Agreement that permits the Investment Advisor to earn an acquisition fee of up to 1.5% of (i) the purchase price of real estate investments acquired by us, including any debt attributable to such investments, or (ii) when we make an investment indirectly through another entity, such investment’s pro rata share of the gross asset value of real estate investments held by that entity. The Investment Advisor earned acquisition fees of $4,114,000 and $296,000 for the three months ended March 31, 2011 and 2010, respectively. In connection with services provided to the Investment Advisor, the Sub Advisor, pursuant to a sub advisory agreement, was paid by the Investment Advisor acquisition fees of $769,000 and $55,000 for the three months ended March 31, 2011 and 2010, respectively. The Investment Advisor earned $274,000 and $42,000 in acquisition related expenses during the three months ended March 31, 2011 and 2010. Prior to the adoption of “Business Combinations” on January 1, 2009, these acquisitions fees and expenses were capitalized to investments in real estate and related intangibles.

Management Services to Related Party

Affiliates of the Investment Advisor may also provide leasing, brokerage, property management, construction management or mortgage banking services for us. CB Richard Ellis Group, Inc., an affiliate of the Investment Advisor, received property management fees of approximately $410,000 and $164,000 for the three months ended March 31, 2011 and 2010, respectively. As of March 31, 2011 and December 31, 2010 the property management fees payable to related party included in our consolidated balance sheets were $296,000 and $191,000, respectively. No brokerage fees were paid to affiliates of the Investment Advisor for the three months ended March 31, 2011 and 2010. Mortgage banking fees of $613,000 and $0 were paid to CBRE Capital Markets, as affiliate of the Investment Advisor, for three months ended March 31, 2011 and 2010, respectively.

Affiliates of the Investment Advisor received leasing fees of $319,000 and $95,000 and construction management fees of $12,000 and $0 for the three months ended March 31, 2011 and 2010, respectively.

12. Equity Incentive Plan and Performance Bonus Plan

Equity Incentive Plan

We have adopted a 2004 equity incentive plan. The purpose of the 2004 equity incentive plan is to provide us with the flexibility to use share options and other awards to provide a means of performance-based compensation. Our key employees, directors, trustees, officers, advisors, consultants or other personnel and our subsidiaries or other persons expected to provide significant services or our subsidiaries, including employees of the Investment Advisor, would be eligible to be granted share options, restricted shares, phantom shares, distribution equivalent rights and other share-based awards under the 2004 equity incentive plan. On April 20, 2010, our Board’s independent trustees, Messrs. Black, Reid and Orphanides, were awarded equity grants under our 2004 equity incentive plan on the following terms: (i) each award was for $80,000 in restricted common shares of the Trust (or 8,000 shares at $10.00 per share) for a total of $240,000; (ii) each award vested in its entirety, upon issuance; and (iii) the independent trustee would not be able to redeem any of the restricted common shares prior to the third anniversary of date of issuance, but retains the rights to dividends declared and paid during such restriction period. We recognized a stock based compensation expense of $240,000 during the year ended December 31, 2010 as a result of granting these awards to our independent trustees. No awards of any kind were made under this plan during the three months ended March 31, 2011.

Performance Bonus Plan

We have adopted a 2004 performance bonus plan. Annual bonuses under our 2004 performance bonus plan are awarded by our Compensation Committee to selected key employees, including employees of the Investment Advisor, based on corporate factors or individual factors (or a combination of both). Subject to the provisions of the 2004 performance bonus plan, the Compensation Committee will (i) determine and designate those key employees to whom bonuses are to be granted; (ii) determine, consistently with

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

the 2004 performance bonus plan, the amount of the bonus to be granted to any key employee for any performance period; and (iii) determine, consistently with the 2004 performance bonus plan, the terms and conditions of each bonus. Bonuses may be so awarded by the Compensation Committee prior to the commencement of any performance period, during or after any performance period. No bonus shall exceed 200% of the key employee’s aggregate salary for the year. The Compensation Committee may provide for partial bonus payments at target and other levels. Corporate performance hurdles for bonuses may be adjusted by the Compensation Committee in its discretion to reflect (i) dilution from corporate acquisitions and share offerings, and (ii) changes in applicable accounting rules and standards. The Compensation Committee may determine that bonuses shall be paid in cash or shares or other equity-based grants, or a combination thereof. The Compensation Committee may also provide that any such share grants be made under our 2004 equity incentive plan or any other equity-based plan or program we may establish. The Compensation Committee may provide for programs under which the payment of bonuses may be deferred at the election of the employee. No bonuses were awarded and no bonus related expenses were incurred by us during the three months ended March 31, 2011 and 2010, respectively.

13. Shareholders’ Equity

Under our declaration of trust, we have the authority to issue a total of 1,000,000,000 shares of beneficial interest. Of the total shares authorized, 990,000,000 shares are designated as common shares with a par value of $0.01 per share and 10,000,000 shares are designated as preferred shares.

The registration statement relating to our initial public offering was declared effective by the SEC on October 24, 2006. CNL Securities Corp. acted as the dealer manager of this offering. The registration statement covered up to $2,000,000,000 in common shares of beneficial interest, 90% of which were offered at a price of $10.00 per share, and 10% of which were offered pursuant to our dividend reinvestment plan at a purchase price equal to the higher of $9.50 per share or 95% of the fair market value of a common share on the reinvestment date, as determined by the Investment Advisor, or another firm we choose for that purpose. As of January 29, 2009, we had issued 60,808,967 common shares in our initial public offering. We terminated the initial public offering effective as of the close of business on January 29, 2009. The registration statement relating to our follow-on public offering was declared effective by the SEC on January 30, 2009. CNL Securities Corp. is the dealer manager of this offering. The registration statement covers up to $3,000,000,000 in common shares of beneficial interest, 90% of which will be offered at a price of $10.00 per share, and 10% of which will be offered pursuant to our dividend reinvestment plan at a purchase price equal to the higher of $9.50 per share or 95% of the fair market value of a common share on the reinvestment date, as determined by the Investment Advisor, or another firm we choose for that purpose. We reserve the right to reallocate the shares between the primary offering and our dividend reinvestment plan. From January 30, 2009 (effective date) through March 31, 2011, we received gross offering proceeds of approximately $1,108,455,774 from the sale of 111,137,409 shares.

During the three months ended March 31, 2011 and 2010, we repurchased 591,351 common shares, and 470,187 common shares, respectively, under our Share Redemption Program for $5,436,000 and $4,253,000, respectively.

14. Distributions

Earnings and profits, which determine the taxability of distributions to shareholders, will differ from income reported for financial reporting purposes due to the differences for federal income tax purposes including the treatment of loss on extinguishment of debt, revenue recognition, compensation expense and in the basis of depreciable assets and estimated useful lives used to compute depreciation.

The following table reconciles the distributions declared per common share to the distributions paid per common share during the three months ended March 31, 2011 and 2010:

 

     Three Months Ended
March 31,
 
     2011     2010  

Distributions declared per common share

   $ 0.150      $ 0.150   

Less: Distributions declared in the current period, and paid in the subsequent period

     (0.150     (0.150

Add: Distributions declared in the prior year, and paid in the current year

     0.150        0.150   
                

Distributions paid per common share

   $ 0.150      $ 0.150   
                

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

Distributions to shareholders during the three months ended March 31, 2011 and 2010 totaled $24,053,000 and $14,750,000, respectively.

We issued 1,079,740 common shares and 652,363 common shares pursuant to our dividend reinvestment plan for the three months ended March 31, 2011 and 2010, respectively.

15. Derivative Instruments

The following table sets forth the terms of our interest rate swap derivative instruments at March 31, 2011 (amounts in thousands):

 

Type of Instrument

   Notional Amount      Fair Value     Pay Fixed Rate     Receive Variable
Rate
    Maturity Date  

Non-qualifying Interest Rate Swap on Thames Valley Five debt(1 )

   $ 9,062       $ (688 )     5.41 %     0.80 %     May 30, 2013   

Non-qualifying Interest Rate Swap on Albion Mills Retail Park debt(1)

   $ 9,181       $ (454 )     3.94 %     0.77 %     October 10, 2013   

Qualifying Interest Rate Swap on Maskew Retail Park debt(1)

   $ 22,453       $ (840 )     3.42 %     0.78 %     August 10, 2014   

Qualifying Interest Rate Swap on Wells Fargo Credit Facility loan

   $ 15,000       $ (279     2.10     0.26     May 26, 2014   

Qualifying Interest Rate Swap on Pacific Corporate Park debt

   $ 85,000       $ 408        2.69     0.32     December 7, 2017   

Qualifying Interest Rate Swap on 100 Kimball debt

   $ 33,000       $ (439     3.50     0.26     March 1, 2021   

 

(1) 

Based on three month GBP-based LIBOR BBA Index with variable rate reset dates every 90 days during the term of the swaps.

The following table sets forth the terms of our interest rate swap derivative instruments at December 31, 2010 (amounts in thousands):

 

Type of Instrument

   Notional Amount      Fair Value     Pay Fixed Rate     Receive Variable
Rate
    Maturity Date  

Non-qualifying Interest Rate Swap on Thames Valley Five debt(1)

   $ 8,781       $ (802 )     5.41 %     0.74 %     May 30, 2013   

Non-qualifying Interest Rate Swap on Albion Mills Retail Park debt(1)

   $ 8,897       $ (547 )     3.94 %     0.74 %     October 10, 2013   

Qualifying Interest Rate Swap on Maskew Retail Park debt(1)

   $ 21,759       $ (1,090 )     3.42 %     0.74 %     August 10, 2014   

Qualifying Interest Rate Swap on Wells Fargo Credit Facility loan

   $ 15,000       $ (371     2.10     0.26     May 26, 2014   

Qualifying Interest Rate Swap on Pacific Corporate Park debt

   $ 85,000       $ (471     2.69     0.32     December 7, 2017   

 

(1) 

Based on three month GBP-based LIBOR BBA Index with variable rate reset dates every 90 days during the term of the swaps.

We marked our two non-qualifying economic hedge interest rate swap instruments to their estimated fair value of ($1,142,000) and ($1,349,000) on the consolidated balance sheet at March 31, 2011 and December 31, 2010 included in Liabilities as Interest Rate Swaps at Fair Value. We recognized a gain on interest rate swaps of $254,000 and a loss of ($388,000) for the three months ended March 31, 2011 and 2010, respectively, included in Gain (Loss) on Interest Rate Swaps and Cap on the Consolidated Statement of Operations.

Our $22,453,000 notional amount interest rate swap has been designated as a qualifying cash flow hedge of the LIBOR base payments due under our Maskew Retail Park variable rate note payable from its inception on September 24, 2009. The estimated fair value of the interest rate swap value of ($840,000) and ($1,090,000) as of March 31, 2011 and December 31, 2010, respectively, has resulted in a

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

swap fair value adjustment being recorded to other comprehensive loss totaling $250,000 and $580,000 for the three months ended March 31, 2011 and 2010, respectively.

Our $15,000,000 notional amount interest rate swap has been designated as a qualifying cash flow hedge of the LIBOR base payments due under our Wells Fargo Credit Facility variable rate loan payable from its inception on May 26, 2010. The estimated fair value of the interest rate swap value of ($279,000) and ($371,000) as of March 31, 2011 and December 31, 2010, has resulted in a swap fair value adjustment being recorded to other comprehensive loss totaling $93,000 for the three months ended March 31, 2011. There was no measured ineffectiveness for the qualifying hedge during the three months ended March 31, 2010.

Our $85,000,000 notional amount interest rate swap has been designated as a qualifying cash flow hedge of the LIBOR base payments due under our Pacific Corporate Park variable rate loan payable from its inception on December 7, 2010. The estimated fair value of the interest rate swap value of $408,000 and ($471,000) as of March 31, 2011 and December 31, 2010, has resulted in a swap fair value adjustment being recorded to other comprehensive gain totaling $879,000 for the three months ended March 31, 2011. There was no measured ineffectiveness for the qualifying hedge during the three months ended March 31, 2010.

Our $33,000,000 notional amount interest rate swap has been designated as a qualifying cash flow hedge of the LIBOR base payments due under our 100 Kimball variable rate loan payable from its inception on March 1, 2011. The estimated fair value of the interest rate swap value of ($439,000) as of March 31, 2011, has resulted in a swap fair value adjustment being recorded to other comprehensive loss totaling $439,000 for the three months ended March 31, 2011. There was no measured ineffectiveness for the qualifying hedge during the three months ended March 31, 2011.

16. Fair Value Option—Note Payable

During the fourth quarter of 2008 we elected to apply the fair value option on a note payable which bears interest at a variable rate and is currently subject to an economic hedge by an interest rate swap with similar terms and the same notional amount. We have elected to apply the fair value option on the Albion Mills Retail Park variable rate note payable to match the fair value treatment of interest rate swap derivative on the same note payable thereby achieving a reduction in the artificial volatility in net income or loss that occurs when related financial assets and liabilities are measured and reported on a different basis in the consolidated financial statements.

We applied the fair value option for the Albion Mills Retail Park note payable at each reporting period. Included in loss on notes payable at fair value in the statement of operations were ($27,000) and ($73,000) for the three months ended March 31, 2011 and 2010, respectively. In addition, there were $113,000 and $87,000 translation losses recorded to Other Comprehensive Loss at March 31, 2011 and 2010, respectively.

17. Fair Value of Financial Instruments and Investments

We apply the three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices for identical financial instruments in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as instruments that have little to no pricing observability as of the reported date. These financial instruments do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. We have classified the Albion Mills Retail Park notes payable as Level 3 as of March 31, 2011 and December 31, 2010 due to the lack of current market activity and our reliance on unobservable inputs to estimate the fair value of the mortgage note payable.

As of March 31, 2011 and December 31, 2010, we held certain items that are required to be measured at fair value on a recurring basis. These included cash equivalents, an interest rate cap, interest rate swap derivative contracts and our equity method investment in CBRE Strategic Partners Asia. Cash equivalents consist of short-term, highly liquid, income-producing investments, all of which have maturities of 90 days or less, including money market funds and U.S. Government obligations. Derivative instruments are related to our economic hedging activities with respect to interest rates.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

The fair values of the interest rate cap and swap derivative agreements are determined using the market standard methodology of discounting the future expected cash receipts that would occur if variable interest rates fell above the strike rate of the interest rate cap agreement, and by discounting the future expected cash payments and receipts on the pay and receive legs of the interest rate swap agreements that swap the estimated variable rate mortgage note payment stream for a fixed rate receive payment stream over the period of the loan. The variable interest rates used in the calculation of projected receipts on the interest rate cap agreement and on the interest rate swap agreements are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements (where appropriate). Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. However, as of March 31, 2011 and December 31, 2010, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. We have consistently applied these valuation techniques in all periods presented and believe we have obtained the most accurate information available for the types of derivative contracts we hold.

Our investment in CBRE Strategic Partners Asia is based on the Level 3 valuation inputs applied by the Investment Manager of this investment company utilizing the following approaches for valuing the underlying real estate related investments within the investment company:

 

  ¡  

The income approach is generally based on a discounted cash flow analysis. Such an analysis for a real property includes projecting net cash flows from the property from a buyer’s perspective and computing the present value of the cash flows using a market discount rate. The cash flows include a projection of the net sales proceeds at the end of our estimate of a market participant holding period, computed using market reversionary capitalization rates and projected cash flows from the property for the year following the holding period.

 

  ¡  

The direct market comparison approach to property valuation is primarily based on the principle of substitution, which holds that the value of a property tends to be set by the price that would be paid to acquire a substitute property of similar utility and desirability within a reasonable amount of time. Transactions of similar properties are analyzed and compared to the subject property. Factors affecting value include differences in the location, size, quality of construction and other physical features, property rights appraised, timing of sale, and economic and market conditions.

 

  ¡  

The replacement cost approach to property valuation is a theoretical breakdown of the property into land and building components. The theory is that the value of a property can be estimated by summing the land value and the depreciated value of any improvements. While the replacement cost of the improvements can be determined by adding the labor, material, and other costs, land values must be derived from an analysis of comparable data. The cost approach is considered reliable when used on newer structures, but the method tends to become less reliable for older properties.

 

  ¡  

For investments owned more than one year, except for investments under construction or incurring significant renovation, it is CBRE Strategic Partners Asia’s policy to obtain a third-party appraisal. For investments in real estate under construction or incurring significant renovation, the valuation analysis is prepared by the Investment Manager.

 

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

The following items are measured at fair value on a recurring basis at March 31, 2011 and December 31, 2010 (in thousands):

 

     As of March 31, 2011  
     Total
Fair Value
    Fair Value Measurements Using:  
       Quoted
Markets
Prices
(Level 1)
    Significant
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs

(Level  3)
 

Financial Assets (Liabilities)

        

Cash and Cash Equivalents

   $ 15,154      $ (15,154 )   $ —        $ —     

Interest Rate Swaps at Fair Value—Non Qualifying Hedges

   $ (1,142 )   $ —        $ (1,142   $ —     

Interest Rate Swaps at Fair Value—Qualifying Hedges

   $ (1,149 )   $ —        $ (1,149   $ —     

Investment in CBRE Strategic Partners Asia

   $ 9,399      $ —        $ —          9,399   

Note Payable at Fair Value

   $ (9,075 )   $ —        $ —        $ (9,075 )
     As of December 31, 2010  
     Total
Fair Value
    Fair Value Measurements Using:  
       Quoted
Markets
Prices
(Level 1)
    Significant
Observable
Inputs
(Level 2)
    Significant
Unobservable
Inputs
(Level 3)
 

Financial Assets (Liabilities)

        

Cash and Cash Equivalents

   $ 998      $ 998      $ —        $ —     

Interest Rate Swaps at Fair Value—Non Qualifying Hedges

   $ (1,349 )   $ —        $ (1,349 )   $ —     

Interest Rate Swaps at Fair Value—Qualifying Hedges

   $ (1,932 )   $ —        $ (1,932 )   $ —     

Investment in CBRE Strategic Partners Asia

   $ 9,471      $ —        $ —        $ 9,471   

Note Payable at Fair Value

   $ (8,769 )   $ —        $ —        $ (8,769 )

The following table presents our activity for the variable rate note payable and our investment in CBRE Strategic Partners Asia measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2011 (in thousands):

 

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

   Investment in
CBRE Strategic
Partners Asia
    Note Payable  

Balance at January 1, 2011

   $ 9,471      $ (8,769

Contributions

     (72     —     

Distributions

     —          —     

Total Loss on Fair Value Adjustment

     —          (27 )

Translation Adjustment in Other Comprehensive Income

     —          (279
                

Balance at March 31, 2011

   $ 9,399      $ (9,075 )
                

The Amount of Total Income (Loss) for the Period Included in Equity in Loss Payable at Fair Value and Equity in Income of Unconsolidated Entities to Note Payable and Investment in Unconsolidated Entities Held at March 31, 2011

   $ —        $ (27 )
                

Gains and losses (realized and unrealized) included in earnings related to the interest rate cap and swaps, as well as for the elected fair value note payable for the three months ended March 31, 2011 and March 31, 2010 are reported as components of “Other Income and Expense” on the consolidated statements of operations.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

Disclosure of Fair Value Financial Instruments

For disclosure purposes only, the following table summarizes our notes payable and their estimated fair value at March 31, 2011 and December 31, 2010 (in thousands):

 

     Book Value      Fair Value  

Financial Instrument

   March 31,
2011
     December 31,
2010
     March 31,
2011
     December 31,
2010
 

Notes Payable

   $ 424,016       $ 356,823       $ 420,444       $ 361,418   

Note Payable at Fair Value

   $ 9,075       $ 8,769       $ 9,075       $ 8,769   
                                   
   $ 433,091       $ 365,592       $ 429,519       $ 370,187   
                                   

For purposes of this fair value disclosure, we based our fair value estimate for notes payable on our internal valuation that includes a representative sample of our lenders’ market interest rate quotes as of March 31, 2011 and December 31, 2010 for debt with similar risk characteristics and maturities. We based the Note Payable carried at fair value on a third party appraiser’s valuation, which used similar techniques as our internal valuation model as of March 31, 2011 and December 31, 2010.

18. Commitments and Contingencies

We have agreed to a capital commitment of up to $20,000,000 in CBRE Strategic Partners Asia, which extends to January 31, 2012. As of March 31, 2011, we funded $15,040,000 of our capital commitment. CBRE Investors, our sponsor, formed CBRE Strategic Partners Asia, to purchase, reposition, develop, hold for investment and sell institutional quality real estate and related assets in targeted markets in China, Japan, India, South Korea, Hong Kong, Singapore and other Asia Pacific markets. If we and all other currently committed capital investors had funded our entire commitments in CBRE Strategic Partners Asia as of March 31, 2011, we would have owned an ownership interest of approximately 5.07% in CBRE Strategic Partners Asia. A majority of our trustees (including a majority of our independent trustees) not otherwise interested in this transaction approved the transaction as being fair, competitive and commercially reasonable. CBRE Strategic Partners Asia is managed by CB Richard Ellis Investors SP Asia II, LLC or the Fund Manager, a subsidiary of CBRE Investors.

On June 23, 2010, we entered into a purchase and sale agreement to acquire, subject to customary closing conditions, Millers Ferry Road, located at Millers Ferry Road and Mars Road in Wilmer, TX, a suburb of Dallas. We will acquire Millers Ferry Road for approximately $44,000,000, exclusive of customary closing costs. We anticipate that the acquisition will be funded using the net proceeds from our current public offering. Millers Ferry Road, scheduled to be completed in the second quarter of 2011, will be a 1,020,000 square foot, warehouse/distribution center with no operating history. We expect that the property will be 100% leased to Whirlpool Corporation to be utilized as a regional distribution center through December 2020. Whirlpool Corporation is a leading global manufacturer and marketer of major home appliances. While we anticipate this acquisition will close during the second quarter of 2011, the agreement to acquire the property is subject to a number of contingencies, including, but not limited to, substantial completion of the construction of the property and acceptance by the tenant of the space and therefore there can be no assurances that this acquisition will occur. As of March 31, 2011, we have provided deposits of $1,500,000 in connection with the execution of the agreement that is refundable in the event that certain closing conditions are not met.

On August 24, 2010, the Duke joint venture closed on the acquisition of additional land and entered into a construction agreement, and lease amendments (collectively, the “Expansion Agreements”) to expand the AllPoints at Anson Bldg. 1 property, a warehouse/distribution center located in Whitestown, IN, a suburb of Indianapolis. The existing property is 100% leased to a subsidiary of Amazon.com through July 2018. Pursuant to the Expansion Agreements, AllPoints at Anson Bldg. 1 (i) will be expanded from the current 630,573 square feet to approximately 1,036,573 square feet and (ii) will remain 100% leased to a subsidiary of Amazon.com, which lease will be extended through April 2021. The total cost of the expansion is anticipated to be approximately $16,900,000 to the Duke joint venture. As of March 31, 2011, the Duke joint venture had incurred land acquisition and construction costs totaling approximately $14,192,000. We own an 80% interest in the Duke joint venture and we expect to make cash contributions of approximately $13,541,000 to the Duke joint venture over the construction period in connection with the Expansion Agreements. We will pay a construction supervision fee of $203,000 to our Investment Advisor in connection with the Expansion Agreements.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

On October 15, 2010, we entered into two agreements of sale, one with 70 Hudson Street, L.L.C. and 70 Hudson Street Urban Renewal Associates, L.L.C. and the other with 90 Hudson Street, L.L.C. and 90 Hudson Street Urban Renewal Associates, L.L.C., all unrelated third parties, to acquire, subject to customary closing conditions, two office buildings located at 70 Hudson Street, or 70 Hudson, and 90 Hudson Street, or 90 Hudson, in Jersey City, New Jersey (collectively, “70 & 90 Hudson”). The total of the two purchase prices for 70 & 90 Hudson is $310,000,000, exclusive of customary closing costs and the assumption of approximately $240,000,000 in two existing mortgage loans. 70 Hudson is a 409,272 square foot, 12-story office building constructed in 2000 that is 100% net-leased through January 2016 to Long Island Holding, LLC, a wholly-owned subsidiary of Barclays Capital, Inc., a leading global investment bank based in the United Kingdom. Barclay’s Capital Inc. is the investment banking division of Barclay’s Bank PLC (NYSE: BCS), a global bank. 90 Hudson is a 418,046 square foot, 12-story office building constructed in 1999 that is 100% leased with approximately 59% of the building leased through December 2024 to Lord Abbett & Co., LLC, an employee owned investment manager. As of March 31, 2011, we had provided deposits of $9,000,000 in connection with the execution of the agreement that is refundable in the event that certain closing conditions are not met. We acquired 70 & 90 Hudson on April 11, 2011.

On November 5, 2010, we entered into a purchase and sale agreement to acquire, subject to customary closing conditions, Sky Harbor Operations Center located at 1820 E. Sky Harbor Circle South, Phoenix, Arizona. The total purchase price for Sky Harbor Operations Center is $53,500,000, exclusive of customary closing costs. We anticipate that the acquisition will be funded using the net proceeds from our current public offering. We deposited $1,000,000 into an escrow account upon the execution of the agreement that is refundable in the event certain closing conditions are not met. Sky Harbor Operations Center is a two-story, 396,179 square foot office building constructed in 2003. Sky Harbor Operations Center is currently 100% net-leased to JPMorgan Chase Bank, National Association (“JPMorgan”) through September 2027. JPMorgan is a subsidiary of JP Morgan Chase & Co. and provides commercial banking and retail financial services. While we anticipate that this acquisition will close during the second quarter of 2011, the agreement to acquire Sky Harbor Operations Center is subject to a number of contingencies and therefore there can be no assurances that this acquisition will occur. As of March 31, 2011, we had provided deposits of $2,000,000 in connection with the execution of the agreement that is refundable in the event that certain closing conditions are not met.

Litigation—From time to time, we and our properties may be subject to legal proceedings, which arise in the ordinary course of our business. Currently, neither our company nor any of our properties are subject to, or threatened with, any legal proceedings for which the outcome is reasonably likely to have a material adverse effect on our results of operations or financial condition.

Environmental Matters—We are not aware of any environmental liability or any unasserted claim or assessment with respect to an environmental liability that we believe would require additional disclosure or the recording of a loss contingency.

19. Comprehensive Loss

U.S. GAAP requires that the effect of foreign currency translation adjustments be classified as comprehensive income (loss). The following table sets forth our comprehensive loss for the three months ended March 31, 2011 and 2011, (in thousands):

 

     Three Months Ended
March 31,
 
         2011             2010      

Net (Loss) Income

   $ (2,613   $ 146   

Foreign Currency Translation Gain (Loss)

     5,022        (3,412

Swap Fair Value Adjustment

     783        (580
                

Total Comprehensive Income (Loss)

     3,192        (3,846

Comprehensive Income (Loss) Attributable to Non-Controlling Interest

     (7     7   
                

Comprehensive Income (Loss) Attributable to CB Richard Ellis Realty Trust Shareholders

   $ 3,185      $ (3,839
                

20. Income Taxes

We elected to be taxed as a REIT under the Internal Revenue Code commencing with our taxable year ended December 31, 2004. To qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we generally distribute at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and excluding net

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

capital gain). It is our current intention to adhere to these requirements and maintain our REIT qualification. As a REIT, we generally will not be subject to corporate level U.S. federal income tax on net income we distribute currently to our shareholders. If we fail to qualify as a REIT in any taxable year, then we will be subject to U.S. federal income taxes at regular corporate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for four subsequent taxable years. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property and to U.S. federal income and excise taxes on our undistributed taxable income, if any.

We have made taxable REIT subsidiary (“TRS”) elections for all of our held for sale property subsidiaries. The elections, effective for the tax year beginning January 1, 2010 and future years, were made pursuant to section 856(i) of the Internal Revenue Code. Our TRS’s are subject to corporate level income taxes which are recorded in our consolidated financial statements.

The following table reconciles net income available to common shareholders to taxable loss available to common shareholders for the three months ended March 31, 2011 (in thousands):

 

     Three Months
Ended
March 31,
2011
 

Net Income Available from TRS(1)

   $ 203   

Less: Tax Depreciation and Amortization

     (125

Deduct: Receipts of Prepaid Rent – Previously Recognized

     (163

Deduct: Capitalized Acquisition Expense for Tax – Previously Recognized

     (5
        

Taxable Loss for TRS

   $ (90
        

 

(1)

Net income available from the TRS is comprised of income from discontinued operations of $203,000 (before a tax provision of $18,000).

The following table summarizes the provision for income taxes of the TRS for the three months ended March 31, 2011 (in thousands):

 

     Three Months
Ended
March 31,
2011
 

Current

   $ 18  

Deferred

     —     
        

Total Provision for Income Taxes

   $ 18   
        

There was no provision for income taxes of the TRS for the three months ended March 31, 2010.

The following table reconciles the provision for U.S. Federal income taxes of the TRS for the three months ended March 31, 2011 to the amount computed by applying the U.S. Federal Corporate tax rate (in thousands):

 

     Three Months
Ended
March 31,
2011
 

U.S. Federal Income Tax Provision Statutory U.S. Federal Rate for Taxable REIT Subsidiary

   $ 18   

State Income Tax Provision

     —     

Loss (Income) not subject to Federal Tax Benefit/Provision

     —     
        

Total Provision for Income Taxes

   $ 18   
        

ASC 740-10 Income Taxes requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The deferred liabilities of the TRS relate primarily to differences in the book and tax depreciation method of property for U.S. Federal and state income tax purpose.

 

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CB RICHARD ELLIS REALTY TRUST

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

For the Three Months Ended March 31, 2011 and 2010 (unaudited)

 

The following table summarizes the tax effects of temporary differences of the TRS included in the net deferred tax liabilities for the three months ended March 31, 2011 and for the year ended December 31, 2010 (in thousands):

 

     March 31,
2011
     December 31,
2010
 

Net Deferred Tax Liability, resulting primarily from differences in depreciation and amortization in real estate

     —         $ (61
                 

Included as a component of our tax provision, we have incurred income and other taxes (franchise, local and state government and international) related to our continuing operations in the amount of $69,000 and $15,000, for California, Georgia, Massachusetts, Minnesota, Texas and North Carolina impacting our operations during the three months ended March 31, 2011 and 2010, respectively. The United Kingdom taxes real property operating results at a statutory rate of 22%. The United Kingdom taxable losses to date have generated a deferred tax asset of approximately $739,000 consisting of these net operating loss carryforwards. We have provided for a full valuation allowance of ($739,000) as of three months ended March 31, 2011 on deferred tax assets because it is not likely that future operating profits in the United Kingdom would be sufficient to absorb the net operating losses.

21. Subsequent Events

From April 1, 2011 through May 6, 2011, we received gross proceeds from our current public offering of approximately $61,522,537 from the sale of 6,209,414 common shares.

On April 4, 2011, we paid the fixed rate mortgage loan that we assumed with our purchase of the Enclave on the Lake property off and extended the lease expiration to June 2022.

On April 11, 2011, we acquired a fee interest in two office buildings located at 70 Hudson Street, or 70 Hudson, and 90 Hudson Street, or 90 Hudson, in Jersey City, New Jersey, (collectively “70 & 90 Hudson”). We acquired 70 & 90 Hudson for an aggregate purchase price of approximately $310,000,000, exclusive of customary closing costs and the assumption of approximately $238,419,000 in two existing mortgage loans, or collectively the Assumed Loans. The 70 Hudson mortgage loan has a current balance of approximately $120,857,000 and bears interest at a rate of 5.64% annually, matures on April 11, 2016, has a 30-year amortization schedule, may be defeased at any time subject to posting adequate defeasance collateral and related conditions and is pre-payable in whole, without penalty or premium, during the three month period immediately preceding the maturity date. The balance due at maturity is approximately $111,449,000. The 90 Hudson mortgage loan has a current balance of approximately $117,562,000 and bears interest at a rate of 5.66% annually, matures on May 1, 2016, has a 30-year amortization schedule and is pre-payable at any time subject to a prepayment premium of the greater of 1% of the then outstanding principal balance and yield maintenance, except during the three month period immediately preceding the maturity date, when no such premium or other penalty shall apply. The balance due at maturity is approximately $106,953,000. A $50,000 fee was paid to CBRE Capital Markets, an affiliate of the Investment Advisor, in connection with the assumption of the 90 Hudson mortgage loan. In addition, we have provided a guaranty of certain recourse obligations and an environmental indemnity for each of the Assumed Loans. The agreements pertaining to the Assumed Loans contain customary provisions, including representations, warranties, covenants and indemnifications. We funded the approximately $71,581,000 balance of the aggregate purchase price, exclusive of closing costs, using the net proceeds from our current public offering. Upon closing, we paid the Investment Advisor a $4,650,000 acquisition fee.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Explanatory Note

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements, the notes thereto, and the other financial data included elsewhere in this Form 10-Q.

Cautionary Note Regarding Forward-Looking Statements

This document contains various “forward-looking statements.” You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “would,” “could,” “should,” “seeks,” “approximately,” “intends,” “plans,” “projects,” “estimates” or “anticipates” or the negative of these words and phrases or similar words or phrases. You can also identify forward-looking statements by discussions of strategy, plans or intentions. Statements regarding the following subjects may be impacted by a number of risks and uncertainties:

 

  ¡  

our business strategy;

 

  ¡  

our ability to obtain future financing arrangements;

 

  ¡  

estimates relating to our future distributions;

 

  ¡  

our understanding of our competition;

 

  ¡  

market trends;

 

  ¡  

projected capital expenditures;

 

  ¡  

the impact of technology on our products, operations and business; and

 

  ¡  

the use of the proceeds of our current offering and subsequent offerings.

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider these risks before you make an investment decision with respect to our common shares, along with the following factors that could cause actual results to vary from our forward-looking statements:

 

  ¡  

national, regional and local economic climates;

 

  ¡  

the continued volatility and disruption of capital and credit markets;

 

  ¡  

changes in supply and demand for office, retail, industrial, and multi-family residential properties;

 

  ¡  

adverse changes in the real estate markets, including increasing vacancy, decreasing rental revenue and increasing insurance costs;

 

  ¡  

availability and credit worthiness of prospective tenants;

 

  ¡  

our ability to maintain rental rates and maximize occupancy;

 

  ¡  

our ability to identify acquisitions;

 

  ¡  

our pace of acquisitions and/or dispositions of properties;

 

  ¡  

our corporate debt ratings and changes in the general interest rate environment;

 

  ¡  

availability of capital (debt and equity);

 

  ¡  

our ability to refinance existing indebtedness or incur additional indebtedness;

 

  ¡  

unanticipated increases in financing and other costs, including a rise in interest rates;

 

  ¡  

the actual outcome of the resolution of any conflict;

 

  ¡  

our ability to successfully operate acquired properties;

 

  ¡  

availability of and ability to retain qualified personnel;

 

  ¡  

CBRE Advisors LLC remaining as our Investment Advisor;

 

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  ¡  

future terrorist attacks in the United States or abroad;

 

  ¡  

our ability to qualify as a partnership for U.S. federal income tax purposes;

 

  ¡  

foreign currency fluctuations;

 

  ¡  

accounting principles and policies and guidelines applicable to REITs;

 

  ¡  

legislative or regulatory changes adversely affecting REITs and the real estate business;

 

  ¡  

environmental, regulatory and/or safety requirements; and

 

  ¡  

other factors discussed under Item 1A Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2010 and those factors that may be contained in any filing we make with the SEC, including Part II, Item 1A of Form 10-Q.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of future events, new information or otherwise.

Overview

We are a Maryland real estate investment trust that invests in real estate properties, focusing on office, retail, industrial (primarily warehouse/distribution) and potentially multi-family residential properties, as well as other real estate-related assets. We may also utilize our expertise and resources to capitalize on unique opportunities that may exist elsewhere in the marketplace, in which we might also acquire interests in mortgages or other investments where we could seek to acquire the underlying property. We will not invest more than 20% of our total assets in any single investment. We intend to invest primarily in properties located in geographically-diverse major metropolitan areas in the United States. In addition, we currently intend to invest up to 30% of our total assets in properties outside of the United States. Our international investments may be in markets in which CBRE Investors has existing operations or previous investment experience, or may be in partnership with other entities that have significant local-market expertise. We expect that our international investments will focus on properties typically located in significant business districts and suburban markets.

As of March 31, 2011, we owned, on a consolidated basis, 73 office, retail, and industrial (primarily warehouse/distribution) properties located in 15 states (Arizona, California, Florida, Georgia, Illinois, Massachusetts, Minnesota, New Jersey, North Carolina, Ohio, South Carolina, Texas, Utah and Virginia) and in the United Kingdom encompassing approximately 12,800,000 rentable square feet in the aggregate. In addition, we have ownership interests in five unconsolidated entities that, as of March 31, 2011, owned interests in 51 properties. Excluding those properties owned through our investment in CB Richard Ellis Strategic Partners Asia II, L.P. (“CBRE Strategic Partners Asia”), we owned, on an unconsolidated basis, 43 industrial, office and retail properties located in 10 states (Arizona, Florida, Illinois, Indiana, Minnesota, Missouri, North Carolina, Ohio, Tennessee and Texas) and in the United Kingdom and Europe encompassing approximately 11,950,000 rentable square feet in the aggregate.

As of March 31, 2011, our portfolio was 93.36% leased. The average effective annual rents for our industrial properties, office properties and retail properties were approximately $56,464,000, $110,488,000, and $8,463,000, as of March 31, 2011, respectively (net of any rent concessions). The average effective annual rent per square foot for our industrial properties, office properties and retail properties was approximately $3.66, $17.38 and $17.75 as of March 31, 2011, respectively (net of any rent concessions).

We commenced operations in July 2004, following an initial private placement of our common shares of beneficial interest. We raised aggregate net proceeds (after commissions and expenses) of approximately $55,500,000 from July 2004 to October 2004 in private placements of our common shares. On October 24, 2006, we commenced an initial public offering of up to $2,000,000,000 in our common shares.

Our initial public offering was terminated effective as of the close of business on January 29, 2009. As of the close of business on January 29, 2009, we had sold a total of 60,808,967 common shares in the initial public offering, including 1,487,943 common shares which were issued pursuant to our dividend reinvestment plan, and received $607,345,702 in gross proceeds. We withdrew from registration a total of 140,243,665 common shares that were registered but not sold in connection with the initial public offering.

The registration statement relating to our follow-on public offering was declared effective by the Securities and Exchange Commission (the “SEC”) on January 30, 2009. CNL Securities Corp. is the dealer manager of our offering. The registration statement covers up to $3,000,000,000 in common shares of beneficial interest, 90% of which will be offered at a price of $10.00 per share, and 10% of which will be offered pursuant to our dividend reinvestment plan at a purchase price equal to the higher of $9.50 per share or 95% of the fair market value of a common share on the reinvestment date, as determined by the Investment Advisor, or another firm we choose for that purpose. We reserve the right to reallocate the shares between the primary offering and our dividend reinvestment plan. From January 30, 2009 (effective date) through March 31, 2011, we received gross offering proceeds of approximately $1,108,455,774 from the sale of 111,137,409 shares.

 

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Table of Contents

We are externally managed by CBRE Advisors LLC (the “Investment Advisor”) and all of our real estate investments are held directly by, or indirectly through wholly owned subsidiaries of, CBRE Operating Partnership, L.P., (“CBRE OP”). Generally, we contribute the proceeds we receive from the issuance of common shares for cash to CBRE OP and CBRE OP, in turn, issues units of limited partnership to us, which entitle us to receive our share of CBRE OP’s earnings or losses and net cash flow. Provided we have sufficient available cash flow, we intend to pay our shareholders quarterly cash dividends. We are structured in a manner that allows CBRE OP to issue limited partnership interests from time to time in exchange for real estate properties. By structuring our acquisitions in this manner, the contributors of real estate to CBRE OP are generally able to defer gain recognition for U.S. federal income tax purposes. We have elected to be taxed as a real estate investment trust, (“REIT”), for U.S. federal income tax purposes. As a REIT, we generally will not be subject to U.S. federal income tax on that portion of our income that is distributed to our shareholders if at least 90% of our net taxable income is distributed to our shareholders.

Our business objective is to maximize shareholder value through: (1) maintaining an experienced management team of investment professionals; (2) investing in properties in certain markets where property fundamentals will support stable income returns and where capital appreciation is expected to be above average; (3) acquiring properties at a discount to replacement cost and where there is expected positive rent growth; and (4) repositioning properties to increase their value in the market place. Operating results at our individual properties are impacted by the supply and demand for office, retail, industrial and multifamily space, trends of the national regional economies, the financial health of current and prospective tenants and their customers, capital and credit market trends, construction costs, and interest rate movements. Individual operating property performance is monitored and calculated using certain non-GAAP financial measures such as an analysis of net operating income. An analysis of net operating income as compared to local regional and national statistics may provide insight into short or longer term trends exclusive of capital markets or capital structuring issues. Interest rates are a critical factor in our results of operations. Our properties may be financed with significant amounts of debt, so changes in interest rates may affect both net income and the health of capital markets. For investments outside of the United States, in addition to monitoring local property market fundamentals and capital and credit market trends, we evaluate currency hedging strategies, taxes, the stability of the local government and economy and the experience of our management team in the region.

Beginning in the second half of 2007, U.S. economic activity weakened due initially to stresses in the residential housing and financial sectors. The weak economic environment continued through 2008 and 2009, but strengthened somewhat in 2010, yet the timing of a full economic recovery remains uncertain at this time. A weakened economic environment may result in declining demand for office, industrial and retail space, increasing tenant bankruptcies, lower average occupancy rates and effective rents, including potentially in our real estate portfolio, which may impact our net income, funds from operations and cash flow.

Additionally, during the first half of 2009, the capital markets experienced significant distress during which many financial industry participants, including commercial real estate owners, operators, investors and lenders found it challenging to obtain cost-effective debt capital to finance new investment activity or to refinance maturing debt. During the later part of 2009 the capital market environment improved such that it appeared to show signs of stabilizing over this period. Further, during 2010, the capital market environment continued to improve, building upon the stabilization that occurred during the end of 2009. During 2010, we experienced indications of that stabilization and have had improved access to debt financing on attractive terms. Also, during 2010 we have noted a strengthening of the commercial real estate market, especially for high-quality stabilized properties leased to credit worthy tenants on a long-tern basis. Nonetheless, we expect that certain highly-levered real estate investors may continue to face significantly reduced, or even eliminated, availability of funding sources, or at significantly-increased cost. As such, with our modest levels of leverage, we expect we will continue to benefit from improved access to attractive investment opportunities and reduced competition to acquire real estate assets.

The table below provides information relating to our properties, excluding those owned through our investment in CBRE Strategic Partners Asia, as of March 31, 2011. We purchased all of these properties from unaffiliated third parties. These properties are subject to competition from similar properties within their market areas and their economic performance could be affected by changes in local economic conditions. In evaluating these properties for acquisition, we considered a variety of factors including location, functionality and design, price per square foot, the credit worthiness of tenants, length of lease terms, market fundamentals and the in-place rental rates compared to market rates.

 

Property and Market

  Date
Acquired
    Year
Built
   

Property Type

  Our
Effective
Ownership
    Net Rentable
Square Feet
(in thousands)
    Percentage
Leased
    Approximate
Total
Acquisition  Cost(1)
(in thousands)
 

Domestic Consolidated Properties:

             

REMEC Corporate Campus 1
San Diego, CA

    9/15/2004        1983      Office     100.00     34        100.00   $ 6,833   

REMEC Corporate Campus 2
San Diego, CA

    9/15/2004        1983      Office     100.00     30        100.00     6,125   

 

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Property and Market

  Date
Acquired
    Year
Built
 

Property Type

  Our
Effective
Ownership
    Net Rentable
Square Feet
(in thousands)
    Percentage
Leased
    Approximate
Total
Acquisition  Cost(1)
(in thousands)
 

REMEC Corporate Campus 3
San Diego, CA

    9/15/2004      1983   Office     100.00     37        100.00     7,523   

REMEC Corporate Campus 4
San Diego, CA

    9/15/2004      1983   Office     100.00     31        100.00     6,186   

300 Constitution Drive
Boston, MA

    11/3/2004      1998   Warehouse/Distribution     100.00     330        100.00     19,805   

Deerfield Commons(2)
Atlanta, GA

    6/21/2005      2000   Office     100.00     122        100.00     21,834   

505 Century(3)
Dallas, TX

    1/9/2006      1997   Warehouse/Distribution     100.00     100        100.00     6,095   

631 International(3)
Dallas, TX

    1/9/2006      1998   Warehouse/Distribution     100.00     73        100.00     5,407   

660 North Dorothy(3)
Dallas, TX

    1/9/2006      1997   Warehouse/Distribution     100.00     120        87.50     6,836   

Bolingbrook Point III
Chicago, IL

    8/29/2007      2006   Warehouse/Distribution     100.00     185        53.18     18,170   

Cherokee Corporate Park(3)
Spartanburg, SC

    8/30/2007      2000   Warehouse/Distribution     100.00     60        0.00     3,775   

Community Cash Complex 1(3)
Spartanburg, SC

    8/30/2007      1960   Warehouse/Distribution     100.00     205        34.79     2,690   

Community Cash Complex 2(3)
Spartanburg, SC

    8/30/2007      1978   Warehouse/Distribution     100.00     145        83.50     2,225   

Community Cash Complex 3(3)
Spartanburg, SC

    8/30/2007      1981   Warehouse/Distribution     100.00     116        100.00     1,701   

Community Cash Complex 4(3)
Spartanburg, SC

    8/30/2007      1984   Warehouse/Distribution     100.00     33        100.00     547   

Community Cash Complex 5(3)
Spartanburg, SC

    8/30/2007      1984   Warehouse/Distribution     100.00     53        100.00     824   

Fairforest Building 1(3)
Spartanburg, SC

    8/30/2007      2000   Warehouse/Distribution     100.00     51        100.00     2,974   

Fairforest Building 2(3)
Spartanburg, SC

    8/30/2007      1999   Warehouse/Distribution     100.00     104        100.00     5,379   

Fairforest Building 3(3)
Spartanburg, SC

    8/30/2007      2000   Warehouse/Distribution     100.00     100        100.00     5,760   

Fairforest Building 4(3)
Spartanburg, SC

    8/30/2007      2001   Warehouse/Distribution     100.00     101        100.00     5,640   

Fairforest Building 5
Spartanburg, SC

    8/30/2007      2006   Warehouse/Distribution     100.00     316        100.00     16,968   

Fairforest Building 6
Spartanburg, SC

    8/30/2007      2005   Warehouse/Distribution     100.00     101        100.00     7,469   

Fairforest Building 7(3)
Spartanburg, SC

    8/30/2007      2006   Warehouse/Distribution     100.00     101        83.78     5,626   

Greenville/Spartanburg Industrial Park(3)
Spartanburg, SC

    8/30/2007      1990   Warehouse/Distribution     100.00     67        100.00     3,388   

Highway 290 Commerce Park Building 1(3)
Spartanburg, SC

    8/30/2007      1995   Warehouse/Distribution     100.00     150        100.00     5,388   

Highway 290 Commerce Park Building 5(3)
Spartanburg, SC

    8/30/2007      1993   Warehouse/Distribution     100.00     30        100.00     1,420   

Highway 290 Commerce Park Building 7(3)
Spartanburg, SC

    8/30/2007      1994   Warehouse/Distribution     100.00     88        0.00     4,889   

HJ Park Building 1
Spartanburg, SC

    8/30/2007      2003   Warehouse/Distribution     100.00     70        100.00     4,216   

Jedburg Commerce Park(3)
Charleston, SC

    8/30/2007      2007   Warehouse/Distribution     100.00     513        100.00     41,991   

Kings Mountain I
Charlotte, NC

    8/30/2007      1998   Warehouse/Distribution     100.00     100        100.00     5,497   

Kings Mountain II
Charlotte, NC

    8/30/2007      2002   Warehouse/Distribution     100.00     301        100.00     11,311   

 

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Table of Contents

Property and Market

  Date
Acquired
    Year
Built
 

Property Type

  Our
Effective
Ownership
    Net Rentable
Square Feet
(in thousands)
    Percentage
Leased
    Approximate
Total
Acquisition  Cost(1)
(in thousands)
 

Mount Holly Building
Charleston, SC

    8/30/2007      2003   Warehouse/Distribution     100.00     101        100.00     6,208   

North Rhett I
Charleston, SC

    8/30/2007      1973   Warehouse/Distribution     100.00     285        100.00     10,302   

North Rhett II
Charleston, SC

    8/30/2007      2001   Warehouse/Distribution     100.00     102        0.00     7,073   

North Rhett III
Charleston, SC

    8/30/2007      2002   Warehouse/Distribution     100.00     80        100.00     4,812   

North Rhett IV
Charleston, SC

    8/30/2007      2005   Warehouse/Distribution     100.00     316        100.00     17,060   

Orangeburg Park Building
Charleston, SC

    8/30/2007      2003   Warehouse/Distribution     100.00     101        100.00     5,474   

Orchard Business Park 2(3)
Spartanburg, SC

    8/30/2007      1993   Warehouse/Distribution     100.00     18        100.00     761   

Union Cross Building I
Winston-Salem, NC

    8/30/2007      2005   Warehouse/Distribution     100.00     101        100.00     6,585   

Union Cross Building II
Winston-Salem, NC

    8/30/2007      2005   Warehouse/Distribution     100.00     316        0.00     17,216   

Highway 290 Commerce Park Building 2(3)
Spartanburg, SC

    9/24/2007      1995   Warehouse/Distribution     100.00     100        100.00     4,626   

Highway 290 Commerce Park Building 6(3)
Spartanburg, SC

    11/1/2007      1996   Warehouse/Distribution     100.00     105        42.86     3,760   

Orchard Business Park 1(3)
Spartanburg, SC

    11/1/2007      1994   Warehouse/Distribution     100.00     33        0.00     1,378   

Lakeside Office Center
Dallas, TX

    3/5/2008      2006   Office     100.00     99        92.23     17,994   

Kings Mountain III(3)
Charlotte, NC

    3/14/2008      2007   Warehouse/Distribution     100.00     542        100.00     25,728   

Enclave on the Lake
Houston, TX

    7/1/2008      1999   Office     100.00     171        100.00     37,827   

Avion Midrise III
Washington, DC

    11/18/2008      2002   Office     100.00     71        100.00     21,111   

Avion Midrise IV
Washington, DC

    11/18/2008      2002   Office     100.00     72        100.00     21,112   

13201 Wilfred Lane
Minneapolis, MN

    6/29/2009      1999   Warehouse/Distribution     100.00     335        100.00     15,340   

3011, 3055 & 3077 Comcast Place
East Bay, CA

    7/1/2009      1988   Office     100.00     220        100.00     49,000   

140 Depot Street
Boston, MA

    7/31/2009      2007   Warehouse/Distribution     100.00     238        100.00     18,950   

12650 Ingenuity Drive
Orlando, FL

    8/5/2009      1999   Office     100.00     125        100.00     25,350   

Crest Ridge Corporate Center 1
Minneapolis, MN

    8/17/2009      2009   Office     100.00     116        100.00     28,419   

West Point Trade Center
Jacksonville, FL

    12/30/2009      2009   Warehouse/Distribution     100.00     602       100.00     29,000   

5160 Hacienda Drive
East Bay, CA

    4/08/2010      1988   Office     100.00     202        100.00     38,500   

10450 Pacific Center Court
San Diego, CA

    5/07/2010      1985   Office     100.00     134        100.00     32,750   

225 Summit Ave
Northern, NJ

    6/21/2010      1966   Office     100.00     143        100.00     40,600   

One Wayside Road
Boston, MA

    6/24/2010      1998   Office     100.00     200        100.00     55,525   

100 Tice Blvd.
Northern, NJ

    9/28/2010      2007   Office     100.00     209        100.00     67,600   

Ten Parkway North
Chicago, IL

    10/12/2010      1999   Office     100.00     100        100.00     25,000   

 

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Table of Contents

Property and Market

  Date
Acquired
    Year
Built
   

Property Type

  Our
Effective
Ownership
    Net Rentable
Square Feet
(in thousands)
    Percentage
Leased
    Approximate
Total
Acquisition  Cost(1)
(in thousands)
 

4701 Gold Spike Drive
Dallas, TX

    10/27/2010        2002      Warehouse/Distribution     100.00     420        100.00     20,300   

1985 International Way
Cincinnati, OH

    10/27/2010        1998      Warehouse/Distribution     100.00     189        100.00     14,800   

Rickenbacker II(3)(10)
Columbus, OH

    10/27/2010        1999      Warehouse/Distribution     100.00     434        100.00     8,600   

Summit Distribution Center
Salt Lake City, UT

    10/27/2010        2001      Warehouse/Distribution     100.00     275        42.86     13,400   

3660 Deerpark Boulevard
Jacksonville, FL

    10/27/2010        2002      Warehouse/Distribution     100.00     322        0.00     15,300   

Tolleson Commerce Park II
Phoenix, AZ

    10/27/2010        1999      Warehouse/Distribution     100.00     217        92.23     9,200   

Pacific Corporate Park(9)
Washington, DC

    11/15/2010        2002      Office     100.00     696        100.00     144,500   

100 Kimball Drive
Northern, NJ

    12/10/2010        2006      Office     100.00     175        100.00     60,250   

Rickenbacker III(3)(10)
Columbus, OH

    12/17/2010        2001      Warehouse/Distribution     100.00     676        60.71     13,400   
                               

Total Domestic Consolidated Properties

  

    12,510        88.53     1,179,303   
                               

International Consolidated Properties:

  

           

602 Central Blvd.(3)
Coventry, UK

    4/27/2007        2001      Office     100.00 %     50        0.00     23,847   

Thames Valley Five
Reading, UK

    3/20/2008        1998      Office     100.00 %     40        100.00     29,572   

Albion Mills Retail Park
Wakefield, UK

    7/11/2008        2000      Retail     100.00 %     55        100.00     22,098   

Maskew Retail Park
Peterborough, UK

    10/23/2008        2007      Retail     100.00 %     145        100.00     53,740   
                               

Total International Consolidated Properties

  

    290        82.77     129,257   
                               

Total Consolidated Properties

  

    12,800        88.39     1,308,560   
                               

Domestic Unconsolidated Properties(4):

  

           

Buckeye Logistics Center(5)
Phoenix, AZ

    6/12/2008        2008      Warehouse/Distribution     80.00     605        100.00     35,573   

Afton Ridge Shopping Center(6)
Charlotte, NC

    9/18/2008        2007      Retail     90.00     296        95.96     44,530   

AllPoints at Anson Bldg. 1(5)
Indianapolis, IN

    9/30/2008        2008      Warehouse/Distribution     80.00     631        100.00     27,150   

12200 President’s Court(5)
Jacksonville, FL

    9/30/2008        2008      Warehouse/Distribution     80.00     772        100.00     29,995   

201 Sunridge Blvd.(5)
Dallas, TX

    9/30/2008        2008      Warehouse/Distribution     80.00     823        100.00     25,690   

Aspen Corporate Center 500(5)
Nashville, TN

    9/30/2008        2008      Office     80.00     180        100.00     30,033   

125 Enterprise Parkway(5)
Columbus, OH

    12/10/2008        2008      Warehouse/Distribution     80.00     1,142        100.00     38,088   

AllPoints Midwest Bldg. I(5)
Indianapolis, IN

    12/10/2008        2008      Warehouse/Distribution     80.00     1,200        100.00     41,428   

Celebration Office Center(5)
Orlando, FL

    5/13/2009        2009      Office     80.00     101        100.00     13,640   

22535 Colonial Pkwy(3)(5)
Houston, TX

    5/13/2009        2009      Office     80.00     90        100.00     11,596   

Fairfield Distribution Ctr. IX(5)
Tampa, FL

    5/13/2009        2008      Warehouse/Distribution     80.00     136        100.00     7,151   

Northpoint III(5)
Orlando, FL

    10/15/2009        2001      Office     80.00     108        100.00     14,592   

Goodyear Crossing Ind. Park II(5)
Phoenix, AZ

    12/07/2009        2009      Warehouse/Distribution     80.00     820        100.00     36,516   

 

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Table of Contents

Property and Market

  Date
Acquired
    Year
Built
   

Property Type

  Our
Effective
Ownership
    Net Rentable
Square Feet
(in thousands)
    Percentage
Leased
    Approximate
Total
Acquisition  Cost(1)
(in thousands)
 

3900 North Paramount Parkway (5)
Raleigh, NC

    3/31/2010        1999      Office     80.00     101        100.00     11,176   

3900 South Paramount Parkway (5)
Raleigh, NC

    3/31/2010        1999      Office     80.00     119        100.00     13,055   

1400 Perimeter Park Drive(5)
Raleigh, NC

    3/31/2010        1991      Office     80.00     45        100.00     3,970   

Miramar I(5)(7)
Fort Lauderdale, FL

    3/31/2010        2001      Office     80.00     94        100.00     13,645   

Miramar II(5)(7)
Fort Lauderdale, FL

    3/31/2010        2001      Office     80.00     129        100.00     20,899   

McAuley Place(3)(5)
Cincinnati, OH

    12/21/2010        2001      Office     80.00     191        97.60     28,000   

Point West I(3)(5)
Dallas, TX

    12/21/2010        2008      Office     80.00     183        100.00     23,600   

Sam Houston Crossing I(3)(5)
Houston, TX

    12/21/2010        2007      Office     80.00     160        100.00     20,400   

Regency Creek(3)(5)
Raleigh, NC

    12/21/2010        2008      Office     80.00     122        100.00     18,000   

Easton(3)(5)
Columbus, OH

    12/21/2010        1999      Office     80.00     135        100.00     14,400   

533 Maryville Centre(3)(5)
St. Louis, MD

    12/21/2010        2000      Office     80.00     125        100.00     19,102   

555 Maryville Centre(3)(5)
St. Louis, MD

    12/21/2010        1999      Office     80.00     127        67.84     15,578   

Norman Point I(3)(5)
Minneapolis, MN

    3/24/2011        2000      Office     80.00     213        100.00     34,080   

Norman Point II(3)(5)
Minneapolis, MN

    3/24/2011        2007      Office     80.00     324        100.00     37,520   

One Conway Park(3)(5)
Chicago, IL

    3/24/2011        1989      Office     80.00     105        84.43     12,320   

West Lake at Conway(3)(5)
Chicago, IL

    3/24/2011        2008      Office     80.00     99        90.09     14,060   

The Landings I(3)(5)
Cincinnati, OH

    3/24/2011        2006      Office     80.00     176        100.00     23,728   

The Landings II(3)(5)
Cincinnati, OH

    3/24/2011        2007      Office     80.00     175        96.00     20,928   

One Easton Oval(3)(5)
Columbus, OH

    3/24/2011        1997      Office     80.00     125        89.38     9,529   

Two Easton Oval(3)(5)
Columbus, OH

    3/24/2011        1995      Office     80.00     129        74.57     10,195   

Atrium I(3)(5)
Columbus, OH

    3/24/2011        1996      Office     80.00     315        100.00     36,200   

Weston Pointe I(3)(5)
Ft Lauderdale, FL

    3/24/2011        1999      Office     80.00     98        82.08     15,507   

Weston Pointe II(3)(5)
Ft Lauderdale, FL

    3/24/2011        2000      Office     80.00     97        96.29     18,701   

Weston Pointe III(3)(5)
Ft Lauderdale, FL

    3/24/2011        2003      Office     80.00     97        100.00     18,867   

Weston Pointe IV(3)(5)
Ft Lauderdale, FL

    3/24/2011        2006      Office     80.00     96        100.00     22,605   
                               

Total Domestic Unconsolidated Properties

  

    10,484        98.50     832,047   
                               

International Unconsolidated Properties

  

           

Amber Park(3)(8)
Nottingham, UK

    6/10/2010        1997      Warehouse/Distribution     80.00     208        100.00     12,514   

Brackmills(3)(8)
Northampton, UK

    6/10/2010        1984      Warehouse/Distribution     80.00     187        100.00     13,407   

Düren(3)(9)
Rhine-Ruhr, Germany

    6/10/2010        2008      Warehouse/Distribution     80.00     392        100.00     13,148   

 

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Table of Contents

Property and Market

  Date
Acquired
    Year
Built
 

Property Type

  Our
Effective
Ownership
    Net Rentable
Square Feet
(in thousands)
    Percentage
Leased
    Approximate
Total
Acquisition  Cost(1)
(in thousands)
 

Schönberg(3)(9)
Hamburg, Germany

    6/10/2010      2009   Warehouse/Distribution     80.00     454        100.00     13,819   

Langenbach(3)(9)
Munich, Germany

    10/28/2010      2010   Warehouse/Distribution     80.00     225        100.00     18,573   
                               

Total International Unconsolidated Properties

  

    1,466        100.00 %     71,461   
                               

Total Unconsolidated Properties(4)

  

    11,950        98.68     903,508   
                               

Total Properties(4)

  

    24,750        93.36   $ 2,212,068   
                               

 

(1) 

Approximate total acquisition cost represents the pro rata purchase price inclusive of customary closing costs and acquisition fees/acquisition expenses.

 

(2)

Includes undeveloped land zoned for future use.

 

(3)

This property is unencumbered and not secured by mortgage debt.

 

(4)

Does not include CBRE Strategic Partners Asia properties.

 

(5)

This property is held through the Duke joint venture.

 

(6)

This property is held through the Afton Ridge joint venture.

 

(7)

Consolidated properties acquired on December 31, 2009 and contributed to the Duke joint venture during March 2010.

 

(8)

This property is held through the UK JV.

 

(9) 

This property is held through the European JV.

 

(10) 

Real estate held for sale as of March 31, 2011.

Property Type Concentration

Our property type concentrations as of March 31, 2011 are as follows (Net Rentable Square Feet and Approximate Total Acquisition Cost in thousands):

 

    Consolidated
Properties
    Unconsolidated
Properties(1)
    Consolidated & Unconsolidated
Properties(1)
 

Property Type

  Properties     Net Rentable
Square Feet
    Approximate
Total
Acquisition
Cost
    Properties     Net Rentable
Square Feet
    Approximate
Total
Acquisition
Cost
    Properties     Net Rentable
Square Feet
    Approximate
Total
Acquisition
Cost
 

Office

    22        3,076      $ 767,458        29        4,059      $ 545,926        51        7,135      $ 1,313,384   

Warehouse/Distribution

    49        9,523        465,264        13        7,595        313,052        62        17,118        778,316   

Retail

    2        201        75,838        1        296        44,530        3        497        120,368   
                                                                       

Total

    73        12,800      $ 1,308,560        43        11,950      $ 903,508        116        24,750      $ 2,212,068   
                                                                       

 

(1) 

Number of Properties and Net Rentable Square Feet for Unconsolidated Properties are at 100%. Approximate Total Acquisition Cost for Unconsolidated Properties is at our pro rata share of effective ownership. Does not include our investment in CBRE Strategic Partners Asia which is not material.

 

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Table of Contents

Geographic Concentration

Our geographic concentrations as of March 31, 2011 are as follows (Net Rentable Square Feet and Approximate Total Acquisition Cost in thousands):

 

    Consolidated Properties     Unconsolidated Properties(1)     Consolidated & Unconsolidated
Properties(1)
 

Domestic

  Properties     Net Rentable
Square Feet
    Approximate
Total
Acquisition
Cost
    Properties     Net Rentable
Square Feet
    Approximate
Total
Acquisition
Cost
    Properties     Net Rentable
Square Feet
    Approximate
Total
Acquisition
Cost
 

Florida

    3        1,048      $ 69,650        10        1,728      $ 175,602        13        2,776      $ 245,252   

Ohio

    2        1,110        22,000        8        2,388        181,068        10        3,498        203,068   

Virginia

    3        839        186,723        —          —          —          3        839        186,723   

South Carolina

    29        3,647        184,324        —          —          —          29        3,647        184,324   

Texas

    6        983        94,459        4        1,256        81,286        10        2,239        175,745   

New Jersey

    3        526        168,450        —          —          —          3        526        168,450   

North Carolina

    5        1,360        66,337        5        683        90,731        10        2,043        157,068   

California

    7        688        146,917        —          —          —          7        688        146,917   

Minnesota

    2        452        43,759        2        537        71,600        4        989        115,359   

Massachusetts

    3        769        94,280        —          —          —          3        769        94,280   

Arizona

    1        217       9,200        2        1,425        72,089        3        1,642        81,289   

Illinois

    2        285        43,170        2        204        26,380        4        489        69,550   

Indiana

    —          —          —          2        1,831        68,578        2        1,831        68.578   

Missouri

    —          —          —          2        252        34,680        2        252        34,680   

Tennessee

    —          —          —          1        180        30,033        1        180        30,033   

Georgia

    1        122        21,834        —          —          —          1        122        21,834   

Kentucky

    1        189        14,800        —          —          —          1        189        14,800   

Utah

    1        275        13,400        —          —          —          1        275        13,400   
                                                                       

Total Domestic

    69        12,510        1,179,303        38        10,484        832,047        107        22,994        2,011,350   

International

                                                     

United Kingdom

    4        290       129,257        2        395       25,921        6        685        155,178   

Germany

    —          —          —          3        1,071        45,540        3        1,071        45,540   
                                                                       

Total International

    4        290       129,257        5        1,466        71,461        9        1,756        200,718   
                                                                       

Total

    73        12,800      $ 1,308,560        43        11,950      $ 903,508        116        24,750      $ 2,212,068   
                                                                       

 

(1)

Number of Properties and Net Rentable Square Feet for Unconsolidated Properties are at 100%. Approximate Total Acquisition Cost for Unconsolidated Properties is at our pro rata share of effective ownership. Does not include our investment in CBRE Strategic Partners Asia which is not material.

 

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Table of Contents

Significant Tenants

The following table details our largest tenants as of March 31, 2011 (in thousands):

 

   

Tenant

  

Primary Industry

  Consolidated Properties     Unconsolidated
Properties(1)
    Consolidated &
Unconsolidated
Properties(1)
 
         Net Rentable
Square Feet
    Annualized
Base Rent
    Net Rentable
Square Feet
    Annualized
Base Rent
    Net Rentable
Square Feet
    Annualized
Base Rent
 

1

 

Raytheon Company

  

Defense and Aerospace

    666      $ 9,494        —        $ —          666      $ 9,494   

2

 

US General Services Administration

  

Government

    71        2,263        378        6,576        449        8,839   

3

 

Amazon.com, Inc(2)

  

Internet Retail

    —          —          2,056        7,811        2,056        7,811   

4

 

Nuance Communications

  

Software

    200        5,263        —          —          200        5,263   

5

 

Eisai

  

Pharmaceutical and Health Care Related

    209        4,772        —          —          209        4,772   

6

 

Comcast

  

Telecommunications

    220        4,697        —          —          220        4,697   

7

 

Deloitte

  

Professional Service

    175        4,390        —          —          175        4,390   

8

 

Barr Laboratories

  

Pharmaceutical and Health Care Related

    142        4,061        —          —          142        4,061   

9

 

Eveready Battery Company

  

Consumer Products

    —          —          168       4,016        168        4,016   

10

 

Unilever(4)

  

Consumer Products

    —          —          1,595        3,864        1,595        3,864   

11

 

PPD Development

  

Pharmaceutical and Health Care Related

    —          —          251        3,688        251        3,688   

12

 

Carl Zeiss

  

Pharmaceutical and Health Care Related

    201        3,337        —          —          201        3,337   

13

 

ConAgra Foods

  

Food Service and Retail

    742        3,028        —          —          742        3,028   

14

 

American LaFrance

  

Vehicle Related Manufacturing

    513        2,979        —          —          513        2,979   

15

 

Prime Distribution Services

  

Logistics and Distribution

    —          —          1,200       2,958        1,200        2,958   

16

 

Nationwide Mutual Insurance Co

  

Financial Services

    —          —          315        2,838        315        2,838   

17

 

Kellogg’s

  

Consumer Products

    —          —          1,142        2,817        1,142        2,817   

18

 

Time Warner

  

Telecommunications

    134        2,814        —          —          134        2,814   

19

 

B&Q

  

Home Furnishings/Home Improvement

    104        2,684        —          —          104        2,684   

20

 

Syngenta Seed’s

  

Agriculture

    116        2,472        —          —          116        2,472   

21

 

REMEC

  

Defense and Aerospace

    133        2,431        —          —          133        2,431   

22

 

Dr. Pepper Snapple

  

Food Service and Retail

    602        2,388        —          —          602        2,388   

23

 

Verizon Wireless(5)

  

Telecommunications

    —          —          180       2,246        180        2,246   

24

 

Royal Caribbean Cruises

  

Travel/Leisure

    —          —          129       2,139        129        2,139   

25

 

Iowa College Acquisition Corp(6)

  

Education

    125        2,117        —          —          125        2,117   

26

 

Citicorp North America, Inc.

  

Financial Service

    —          —          194        2,081        194        2,081   

27

 

American Home Mortgage

  

Financial Service

    —          —          183       2,024        183        2,024   

28

 

Best Buy

  

Specialty Retail

    238        1,657        30        317        268        1,974   

29

 

NCS Pearson, Inc.

  

Education

    —          —          153        1,963        153        1,963   

30

 

Markel Midwest, Inc.

  

Financial Service

    100        1,892        —          —          100        1,892   

31

 

Lockheed Martin

  

Defense and Aerospace

    72        1,847        —          —          72        1,847   

32

 

Disney

  

Travel/Leisure

    —          —          101        1,800        101        1,800   

33

 

Mercy Health Partners of SW Ohio

  

Pharmaceutical and Health Care Related

    —          —          111        1,795        111        1,795   

34

 

ABB, Inc.

  

Other Manufacturing

    —          —          91        1,641        91        1,641   

35

 

DeVry University

  

Education

    —          —          94        1,548        94        1,548   

36

 

Regus

  

Executive Office Suites

    86        1,525        —          —          86        1,525   

37

 

DSV Stuttgart Gmbh & Co KG

  

Logistics and Distribution

    —          —          225        1,523        225        1,523   

38

 

American Intercontinental University

  

Education

    —          —          97        1,477        97        1,477   

39

 

Women’s Apparel Group, LLC

  

Internet Retail

    330        1,426        —          —          330        1,426   

40

 

LK Logistik Gmbh

  

Logistics and Distribution

    —          —          454        1,421        454        1,421   
 

Other (218 tenants)

    6,135        25,770        2,646        25,565        8,781        51,335   
                                                    
         11,314      $ 93,307        11,793      $ 82,108        23,107      $ 175,415   
                                                    

 

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Table of Contents

 

(1)

Net Rentable Square Feet for Unconsolidated Properties is at 100%. Annualized Base Rent for Unconsolidated Properties is at our pro rata share of effective ownership. Does not include our investment in CBRE Strategic Partners Asia which is not material.

 

(2)

Our tenants are Amazon.com.azdc, Inc., in our Buckeye Logistics Center and Goodyear Crossing Park II properties, and Amazon.com.indc, LLC, in our AllPoints at Anson Bldg. 1 property, which are all wholly-owned subsidiaries of Amazon.com.

 

(3)

Our tenant is Atlantic Offshore Ltd., a wholly-owned subsidiary of SBM Offshore.

 

(4)

Our tenant is CONOPCO, Inc., a wholly-owned subsidiary of Unilever.

 

(5)

Verizon Wireless is the d/b/a for Cellco Partnership.

 

(6)

Our tenant is Iowa College Acquisitions Corp., an operating subsidiary of Kaplan, Inc. The lease is guaranteed by Kaplan Inc.

Tenant Industries

Our tenants operate across a wide range of industries. The following table details our tenant-industry concentrations as of March 31, 2011( in thousands):

 

     Consolidated Properties      Unconsolidated
Properties(1)
     Consolidated &
Unconsolidated
Properties(1)
 

Primary Tenant Industry Category

   Net Rentable
Square Feet
     Annualized
Base Rent
     Net Rentable
Square Feet
     Annualized
Base Rent
     Net Rentable
Square Feet
     Annualized
Base Rent
 

Pharmaceutical and Health Care Related

     905       $ 13,769         700       $ 8,171         1,605       $ 21,940   

Defense and Aerospace

     900         14,504         10         182         910         14,686   

Financial Services

     281         3,473         940         10,483         1,221         13,956   

Logistics and Distribution

     1,671         5,882         2,023         6,650         3,694         12,532   

Telecommunications

     673         8,800         195         2,444         868         11,244   

Consumer Products

     164         927         3,338         9,726         3,502         10,653   

Other Manufacturing

     909         3,158         319         6,212         1,228         9,370   

Internet Retailer

     330         1,426         2,056         7,811         2,386         9,237   

Government

     72         2,263         378         6,576         450         8,839   

Food Service and Retail

     2,017         7,283         36         456         2,053         7,739   

Professional Services

     240         5,059         175         2,308         415         7,367   

Education

     125         2,117         365         5,215         490         7,332   

Business Services

     750         2,924         350         4,176         1,100         7,100   

Home Furnishings/Home Improvement

     462         4,593         70         1,139         532         5,732   

Software

     201         5,263         22         357         223         5,620   

Vehicle Related Manufacturing

     828         4,537         —           —           828         4,537   

Specialty Retail

     391         3,191         111         1,178         502         4,369   

Travel and Leisure

     —           —           240         4,120         240         4,120   

Agriculture

     116         2,472         9         95         125         2,567   

Apparel Retail

     —           —           227         1,987         227         1,987   

Executive Office Suites

     86         1,525         —           —           86         1,525   

Utilities

     —           —           127         1,516         127         1,516   

Other Retail

     22         123         47         660         69         783   

Petroleum and Mining

     171         18         55         646         226         664   
                                                     

Total

     11,314       $ 93,307         11,793       $ 82,108         23,107       $ 175,415   
                                                     

 

(1)

Net Rentable Square Feet for Unconsolidated Properties is at 100%. Annualized Base Rent for Unconsolidated Properties is at our pro rata share of effective ownership. Does not include our investment in CBRE Strategic Partners Asia which is not material.

 

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Table of Contents

Tenant Lease Expirations

The following table sets forth a schedule of expiring leases for our consolidated and unconsolidated properties as of March 31, 2011 (Expiring Net Rentable Square Feet and Expiring Base Rent in thousands):

 

    Consolidated Properties     Unconsolidated
Properties(1)
    Consolidated & Unconsolidated Properties(1)  
    Expiring
Net Rentable
Square Feet
    Expiring
Base Rent
    Expiring
Net Rentable
Square Feet
    Expiring
Base Rent
    Number of
Expiring
Leases
    Expiring
Net Rentable
Square Feet
    Expiring
Base Rent
    Percentage
of Expiring
Base Rent
 

2011 (Nine months ending December 31, 2011)

    555        1,806        126        1,667        26        681        3,473        1.74

2012

    652        6,251        188        2,667        36        840        8,918        4.46

2013

    1,603        8,551        641        5,420        41        2,244        13,971        6.99

2014

    595        3,743        147        1,993        25        742        5,736        2.87

2015

    1,400        4,867        389        4,016        29        1,789        8,883        4.44

2016

    308        1,764        750        11,702        18        1,058        13,466        6.74

2017

    267        3,832        1,369        12,016        20        1,636        15,848        7.93

2018

    743        8,510        3,413        16,982        19        4,156        25,492        12.75

2019

    1,697        13,239        3,723        18,300        15        5,420        31,539        15.78

2020

    600        12,961        16        162        7        616        13,123        6.57

Thereafter

    2,894        42,463        1,031        16,964        22        3,925        59,427        29.73
                                                               

Total

    11,314      $ 107,987        11,793      $ 91,889        258        23,107      $ 199,876        100.00
                                                               

Weighted Average Expiration (years)

      8.59          7.53              8.10   

 

(1)

Expiring Net Rentable Square Feet for Unconsolidated Properties is at 100%. Expiring Base Rent for Unconsolidated Properties is at our pro rata share of effective ownership. Does not include our investment in CBRE Strategic Partners Asia which is not material.

Property Portfolio Size

Our portfolio size at the end of each quarter since commencement of our initial public offering through March 31, 2011 is as follows (Net Rentable Square Feet and Approximate Total Acquisition Cost in thousands):

 

    Consolidated Properties     Unconsolidated Properties(1)     Consolidated &
Unconsolidated
Properties(1)
 

Cumulative

Property

Portfolio as of:

  Properties     Net Rentable
Square Feet
    Approximate
Total
Acquisition
Cost
    Properties     Net Rentable
Square Feet
    Approximate
Total
Acquisition
Cost
    Properties     Net Rentable
Square Feet
    Approximate
Total
Acquisition
Cost
 

9/30/2006

    9        878      $ 86,644        —          —        $ —          9        878      $ 86,644   

12/31/2006

    9        878        86,644        —          —          —          9        878        86,644   

3/31/2007

    9        878        86,644        —          —          —          9        878        86,644   

6/30/2007

    10        928        110,491        —          —          —          10        928        110,491   

9/30/2007

    42        5,439        348,456        —          —          —          42        5,439        348,456   

12/31/2007

    44        5,576        353,594        —          —          —          44        5,576        353,594   

3/31/2008

    47        6,257        426,856        —          —          —          47        6,257        426,856   

6/30/2008

    47        6,257        426,856        1        605        35,636        48        6,862        462,492   

9/30/2008

    49        6,483        486,777        6        3,307        193,773        55        9,790        680,550   

12/31/2008

    52        6,771        582,682        8        5,649        273,205        60        12,420        855,887   

3/31/2009

    52        6,771        582,717        8        5,649        273,130        60        12,420        855,847   

6/30/2009

    53        7,106        598,103        11        5,976        305,308        64        13,082        903,411   

9/30/2009

    57        7,805        719,822        11        5,976        305,202        68        13,781        1,025,024   

12/31/2009

    60        8,630        791,314        13        6,904        356,158        73        15,534        1,147,472   

3/31/2010

    58        8,407        748,835        18        7,392        418,818        76        15,799        1,167,653   

6/30/2010

    62        9,086        916,210        22        8,633        471,615        84        17,719        1,387,825   

9/30/2010

    63        9,295        983,810        22        8,633        471,615        85        17,928        1,455,425   

12/31/2010

    73        12,800        1,308,560        30        9,901        629,268        103        22,701        1,937,828   

3/31/2011

    73        12,800        1,308,560        43        11,950        903,508        116        24,750        2,212,068   

 

(1)

Net Rentable Square Feet for unconsolidated properties is at 100%. Approximate Total Acquisition Cost is at our pro rata share of effective ownership and does not include our investment in CBRE Strategic Partners Asia which is not material.

 

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Critical Accounting Policies

Management believes our most critical accounting policies are accounting for lease revenues (including straight-line rent), regular evaluation of whether the value of a real estate asset has been impaired, real estate purchase price allocations and accounting for our derivatives and hedging activities, fair value of financial instruments and investments, investments in unconsolidated entities, use of estimates, and income taxes. Each of these items involves estimates that require management to make judgments that are subjective in nature. Management relies on its experience, collects historical data and current market data, and analyzes these assumptions in order to arrive at what it believes to be reasonable estimates. Under different conditions or assumptions, materially different amounts could be reported related to the accounting policies described below. In addition, application of these accounting policies involves the exercise of judgments on the use of assumptions as to future uncertainties and, as a result, actual results could materially differ from these estimates.

Revenue Recognition and Valuation of Receivables

All leases are classified as operating leases and minimum rents are recognized on a straight-line basis over the terms of the leases. The excess of rents recognized over amounts contractually due pursuant to the underlying leases is recorded as deferred rent. In connection with various leases, we have received irrevocable stand-by letters of credit totaling $6,665,000 and $6,515,000 as security for such leases at March 31, 2011 and December 31, 2010.

Reimbursements from tenants, consisting of amounts due from tenants for common area maintenance, real estate taxes, insurance and other recoverable costs, are recognized as revenue in the period the expenses are incurred. Tenant reimbursements are recognized and presented on a gross basis, when we are the primary obligor with respect to incurring expenses and with respect to having the credit risk.

Tenant receivables and deferred rent receivables are carried net of the allowances for uncollectible current tenant receivables and deferred rent. Management’s determination of the adequacy of these allowances is based primarily upon evaluations of historical loss experience, individual receivables, current economic conditions, and other relevant factors. The allowances are increased or decreased through the provision for bad debts. The allowance for uncollectible rent receivable was $352,000 and $83,000 as of March 31, 2011 and December 31, 2010, respectively.

Investments in Real Estate and Related Long-Lived Assets (Impairment Evaluation)

We record investments in real estate at cost (including third-party acquisition expenses) and we capitalize improvements and replacements when they extend the useful life or improve the efficiency of the asset. We expense costs of repairs and maintenance as incurred. We compute depreciation using the straight-line method over the estimated useful lives of our real estate assets, which we expect to be approximately 39 years for buildings and improvements, three to five years for equipment and fixtures and the shorter of the useful life or the remaining lease term for tenant improvements and leasehold interests.

We are required to make subjective assessments as to the useful lives of our properties for purposes of determining the amount of depreciation to record on an annual basis with respect to our investments in real estate. These assessments have a direct impact on our net income because, if we were to shorten the expected useful lives of our investments in real estate, we would depreciate these investments over fewer years, resulting in more depreciation expense and lower net income on an annual basis throughout the expected useful lives of the related assets.

We have adopted, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“FASB ASC 360-10”), which establishes a single accounting model for the impairment or disposal of long-lived assets including discontinued operations. This accounting provision requires that the operations related to properties that have been sold or that we intend to sell be presented as discontinued operations in the statement of operations for all periods presented, and properties we intend to sell be designated as “held for sale” on our balance sheet.

When circumstances such as adverse market conditions indicate a possible impairment of the value of a property, we review the recoverability of the property’s carrying value. The review of recoverability is based on our estimate of the future undiscounted cash flows, excluding interest charges, expected to result from the property’s use and eventual disposition. Our forecast of these cash flows considers factors such as expected future operating income, market and other applicable trends and residual value, as well as the effects of leasing demand, competition and other factors. These factors contain subjectivity and thus are not able to be precisely estimated. If impairment exists due to the inability to recover the carrying value of a property, an impairment loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property. We are required to make subjective assessments as to whether there are impairments in the values of our investments in real estate.

 

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We assess whether there has been impairment in the value of our long-lived assets whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount to the future net cash flows, undiscounted and without interest, expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. The estimated fair value of the asset group identified for step two testing is based on either the income approach with market discount rate, terminal capitalization rate and rental rate assumptions being most critical, or on the sales comparison approach to similar properties. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs to sell.

Purchase Accounting for Acquisition of Investments in Real Estate

We apply the acquisition method to all acquired real estate investments. The purchase consideration of the real estate is allocated to the acquired tangible assets, consisting primarily of land, site improvements, building and tenant improvements and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases, value of tenant relationships and acquired ground leases, based in each case on their fair values. Loan premiums, in the case of above-market rate loans, or loan discounts, in the case of below-market loans, will be recorded based on the fair value of any loans assumed in connection with acquiring the real estate.

The fair value of the tangible assets of an acquired property is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is the basis for the purchase consideration allocated to land (or acquired ground lease if the land is subject to a ground lease), site improvements, building and tenant improvements based on management’s determination of the relative fair values of these assets. Management determines the as-if-vacant fair value of a property using methods similar to those used by independent appraisers. Factors considered by management in performing these analyses include an estimate of carrying costs during the expected lease-up periods considering current market conditions and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and other operating expenses and estimates of lost rental revenue during the expected lease-up periods based on current market demand. Management also estimates costs to execute similar leases including leasing commissions, legal and other related costs.

In allocating the purchase consideration of the identified intangible assets and liabilities of an acquired property, above-market and below-market in-place lease values are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases; and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases measured over a period equal to the remaining non-cancelable term of the lease and, for below-market leases, over a period equal to the initial term plus any below-market fixed rate renewal periods. The capitalized below-market lease values, also referred to as acquired lease obligations, are amortized as an increase to rental income over the initial terms of the respective leases and any below-market fixed rate renewal periods. The capitalized above-market lease values are amortized as a decrease to rental income over the initial terms of the prospective leases.

The aggregate value of other acquired intangible assets, consisting of in-place leases and tenant relationships, is measured by the estimated cost of operations during a theoretical lease-up period to replace in-place leases, including lost revenues and any unreimbursed operating expenses, plus an estimate of deferred leasing commissions for in-place leases. This aggregate value is allocated between in-place lease value and tenant relationships based on management’s evaluation of the specific characteristics of each tenant’s lease; however, the value of tenant relationships has not been separated from in-place lease value for the real estate acquired as such value and its consequence to amortization expense is immaterial for these particular acquisitions. Should future acquisitions of properties result in allocating material amounts to the value of tenant relationships, an amount would be separately allocated and amortized over the estimated life of the relationship. The value of in-place leases is amortized to expense over the remaining non-cancelable periods of the respective leases

Accounting for Derivative Financial Investments and Hedging Activities

All of our derivative instruments are carried at fair value on the balance sheet. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. We formally document all relationships between hedging instruments and hedged items, as well as our risk-management objective and strategy for undertaking each hedge transaction. We periodically review the effectiveness of each hedging transaction, which involves estimating future cash flows. Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the balance sheet as either an asset or liability, with a corresponding amount recorded in other comprehensive income within shareholders’ equity. Calculation of a fair value of derivative instruments also requires management to use estimates. Amounts will be reclassified from other comprehensive income to the income statement in the period or periods the hedged forecasted transaction affects earnings. If a lease were to be terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written-off.

 

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Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. The changes in fair value hedges are accounted for by recording the fair value of the derivative instruments on the balance sheet as either assets or liabilities, with the corresponding amount recorded in current period earnings. We have certain interest rate swap derivatives that are designated as qualifying cash flow hedges and follow the accounting treatment discussed above. We also have certain interest rate swap derivatives that do not qualify for hedge accounting, and accordingly, changes in fair values are recognized in current earnings.

We disclose the fair values of derivative instruments and their gains and losses in a tabular format. We also provide more information about our liquidity by disclosing derivative features that are credit risk-related. Finally, we cross-reference within footnotes to enable financial statement users to locate important information about derivative instruments; See Note 16 “Derivative Instruments” and Note 18 “Fair Value of Financial Instruments and Investments” for a further discussion of our derivative financial instruments.

Fair Value of Financial Instruments and Investments

We elected to apply the fair value option for one of our eligible mortgage notes payable that was newly issued debt during the year ended December 31, 2008. The measurement of the elected mortgage note payable at its fair value and its impact on the statement of operations is described in Note 16 to the consolidated financial statements “Fair Value Option—Note Payable” and Note 17 to the consolidated financial statements “Fair Value of Financial Instruments and Investments”

We generally determine or calculate the fair value of financial instruments using the appropriate present value or other valuation techniques, such as discounted cash flow analyses, incorporating available market discount rate information for similar types of instruments and our estimates for non-performance and liquidity risk. These techniques are significantly affected by the assumptions used, including the discount rate, credit spreads, and estimates of future cash flow. The Investment Manager of CBRE Strategic Partners Asia applies valuation techniques for our investment carried at fair value based upon the application of the income approach, the direct market comparison approach, the replacement cost approach or third party appraisals to the underlying assets held in the unconsolidated entity in determining the net asset value attributable to our ownership interest therein. The financial assets and liabilities recorded at fair value in our consolidated financial statements are the two interest rate swaps, one interest rate cap, our investment in CBRE Strategic Partners Asia (a real estate entity which qualifies as an investment company under the Investment Company Act) and one mortgage note payable that is economically hedged by one of the interest rate swaps.

The remaining financial assets and liabilities which are only disclosed at fair value are comprised of all other notes payable, the unsecured line of credit and other debt instruments. We determined the fair value of our secured notes payable and other debt instruments by performing discounted cash flow analyses using an appropriate market discount rate. We calculate the market discount rate by obtaining period-end treasury rates for fixed-rate debt, or London Inter-Bank Offering Rate (“LIBOR”) rates for variable-rate debt, for maturities that correspond to the maturities of our debt and then adding an appropriate credit spread derived from information obtained from third-party financial institutions. These credit spreads take into account factors such as our credit standing, the maturity of the debt, whether the debt is secured or unsecured, and the loan-to-value ratios of the debt.

The carrying amounts of our cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate fair value due to their short-term maturities.

We adopted the fair value measurement criteria described herein for our non-financial assets and non-financial liabilities on January 1, 2009. The adoption of the fair value measurement criteria to our non-financial assets and liabilities did not have a material impact on our consolidated financial statements. Assets and liabilities typically recorded at fair value on a non-recurring basis include:

 

  ¡  

Non-financial assets and liabilities initially measured at fair value in an acquisition or business combination;

 

  ¡  

Long-lived assets measured at fair value due to an impairment assessment and

 

  ¡  

Asset retirement obligations initially measured under the Codification Topic “Asset Retirement and Environmental Obligations“ (“FASB ASC 410”).

Investments in Unconsolidated Entities

Our determination of the appropriate accounting method with respect to our investment in CB Richard Ellis Strategic Partners Asia II-A, L.P. (“CBRE Strategic Partners Asia”), which is not considered a Variable Interest Entity (“VIE”), is partially based on CBRE Strategic Partners Asia’s sufficiency of equity investment at risk which was triggered by a substantial paydown during 2009 and 2010 of its subscription line of credit backed by investor capital commitments to fund its operations. We account for this investment under the equity method of accounting.

 

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We determine if an entity is a VIE based on several factors, including whether the entity’s total equity investment at risk upon inception is sufficient to finance the entity’s activities without additional subordinated financial support. We make judgments regarding the sufficiency of the equity at risk based first on a qualitative analysis, then a quantitative analysis, if necessary. In a quantitative analysis, we incorporate various estimates, including estimated future cash flows, asset hold periods and discount rates, as well as estimates of the probabilities of various scenarios occurring. If the entity is a VIE, we then determine whether we consolidate the entity as the primary beneficiary. We determine whether an entity is a VIE and, if so, whether it should be consolidated by utilizing judgments and estimates that are inherently subjective. If we made different judgments or utilized different estimates in these evaluations, it could result in differing conclusions as to whether or not an entity is a VIE and whether or not we consolidate such entity.

With respect to our majority limited membership interest in the Duke/Hulfish, LLC joint venture (the “Duke joint venture”), the Afton Ridge Joint Venture, LLC (“Afton Ridge”), the Goodman Princeton Holdings (Jersey) Limited joint venture (the “UK JV”) and the Goodman Princeton Holdings (LUX) SARL joint venture (the “European JV”), we considered FASB ASC Topic “Consolidation“ (“FASB ASC 810”) in determining that we did not have control over the financial and operating decisions of such entities due to the existence of substantive participating rights held by the minority limited members who are also the managing members of the Duke joint venture and Afton Ridge, and the investment advisors/managers of the UK JV and the European JV, respectively.

We carry our investments in CBRE Strategic Partners Asia, the Duke joint venture, Afton Ridge, the UK JV and the European JV on the equity method of accounting because we have the ability to exercise significant influence (but not control) over operating and financial policies of each such entity.

We eliminate transactions with such equity method entities to the extent of our ownership in each such entity. Accordingly, our share of net income (loss) of these equity method entities is included in consolidated net income (loss). CBRE Strategic Partners Asia is a limited partnership that qualifies for specialized industry accounting for investment companies. Specialized industry accounting allows investment companies to carry their investments at fair value, with changes in the fair value of the investments recorded in the statement of operations. On the basis of the guidance in ASC 970-323, the Company accounts for its investment in CBRE Strategic Partners Asia under the equity method. As a result, and in accordance with FASB ASC 810 the specialized accounting treatment, principally the fair value basis applied by CBRE Strategic Partners Asia under the investment company guide, is retained in the recognition of equity method earnings in the statement of operations of the Company. See Note 17 to the consolidated financial statements “Fair Value of Financial Instruments and Investments” for further discussion of the application of the fair value accounting to our investment in CBRE Strategic Partners Asia.

Use of Estimates

The preparation of financial statements, in conformity with U.S. GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Income Taxes

We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code, beginning with our taxable period ended December 31, 2004. To qualify as a REIT, we must distribute annually at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and excluding net capital gains) as defined in the Internal Revenue Code, to our shareholders and satisfy certain other organizational and operating requirements. We generally will not be subject to U.S. federal income taxes if we distribute 100% of our net taxable income each year to our shareholders. If we fail to qualify as a REIT in any taxable year, we will be subject to U.S. federal income taxes (including any applicable alternative minimum tax) on our taxable income at regular corporate rates and may not be able to qualify as a REIT for the four subsequent taxable years. Even if we qualify for taxation as a REIT, we may be subject to certain state and local taxes on our income and property, and to U.S. federal income taxes and excise taxes on our undistributed taxable income. Except as discussed below, we believe that we have met all of the REIT distribution and technical requirements for the three months ended March 31, 2011 and the year ended December 31, 2010. We intend to continue to adhere to these requirements and maintain our REIT qualification.

In order for distributions to be deductible for U.S. federal income tax purposes and count towards our distribution requirement, they must not be “preferential dividends.” A distribution will not be treated as preferential if it is pro rata among all outstanding shares of stock within a particular class. IRS guidance, however, allows a REIT to offer shareholders participating in its dividend reinvestment program (“DRIP”) up to a 5% discount on shares purchased through the DRIP without treating such reinvested dividends as preferential. Our DRIP offers a 5% discount. In 2007, 2008 and the first two quarters of 2009, common shares issued pursuant to our DRIP were treated as issued as of the first day following the close of the quarter for which the distributions were declared, and not on the date that the cash distributions were paid to shareholders not participating in our DRIP. Because we declare dividends on a daily

 

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basis, including with respect to common shares issued pursuant to our DRIP, the IRS could take the position that distributions paid by us during these periods were preferential on the grounds that the discount provided to DRIP participants effectively exceeded the authorized 5% discount or, alternatively, that the overall distributions were not pro rata among all shareholders. In addition, in the years 2007 through 2009 we paid certain individual retirement account (“IRA”) custodial fees in respect of IRA accounts that invested in our common shares. The payment of certain of such amounts could be treated as dividend distributions to the IRAs, and therefore as preferential dividends as such amounts were not paid in respect of our other outstanding common shares. Although we believe that the effect of the operation of our DRIP and the payment of such fees was immaterial, the REIT rules do not provide an exception for de minimis preferential dividends.

Accordingly, we submitted a request to the IRS for a closing agreement under which the IRS would grant us relief for preferential dividends that may have been paid as a result of the manner in which we operated our DRIP and in respect of our payment of certain of such custodial fees. There can be no assurance that the IRS will accept our proposal for a closing agreement. Even if the IRS accepts the proposal, we may be required to pay a fine if the IRS were to view the prior operation of our DRIP or the payment of such fees as preferential dividends. We cannot predict whether such a penalty would be imposed or, if so, the amount of the penalty. If the IRS does not agree to our proposal for a closing agreement and treats the foregoing amounts as preferential dividends, we may be able to rectify our failure to meet the REIT distribution requirements for a year by paying “deficiency dividends,” which would be paid in respect of all of our common shares pro rata and which would be included in our deduction for dividends paid in the prior years. If required, such deficiency dividends could be as much as approximately $22,000,000. In such a case, we would be able to avoid losing our qualification as a REIT or being taxed on amounts distributed as deficiency dividends. However, we would be required to pay an interest-like penalty based on the amount of our deficiency dividends. Amounts paid as deficiency dividends should generally be treated as taxable income for U.S. federal income tax purposes.

Subsequent Events

In preparing our accompanying financial statements, management has evaluated subsequent events through the financial statement issuance date. We believe that the disclosures contained herein are adequate to prevent the information presented from being misleading.

Adoption of Accounting Standards

Fair Value Measurements and Disclosures

In January 2010, the FASB issued ASU 2010-06 Fair Value Measurements and Disclosures. ASU 2010-06 clarifies disclosure requirements relating to the level of disaggregation of disclosures relating to classes of assets and liabilities and disclosures about inputs and valuation techniques used to measure fair value for both recurring and nonrecurring fair value estimates for Level 2 or Level 3 assets and liabilities. These requirements of ASU 2010-06 are effective for interim and annual disclosures for interim and annual reporting periods beginning after December 15, 2009. The adoption of these requirements of the ASU did not have a material impact on our consolidated financial statements.

New Accounting Standards

ASU 2010-06 also requires additional disclosures regarding the transfers of classifications among the fair value classification levels as well as the reasons for those changes and a separate presentation of purchases, sales, issuances and settlements in the presentation of the roll-forward of Level 3 assets and liabilities. Those disclosures are effective for interim and annual reporting periods for fiscal years beginning after December 15, 2010. The adoption of this portion of ASU 2010-06 did not have a material impact on our consolidated financial statements.

Other Accounting Standards Updates not effective until after March 31, 2011 are not expected to have a material impact on our consolidated financial statements.

Treatment of Management Compensation, Expense Reimbursements

Management of our operations is conducted by the Investment Advisor. Fees related to services provided by our Investment Advisor are accounted for based on the nature of such service and the relevant accounting literature. Fees for services performed that represent our period costs, such as cash payments for investment management fees paid to the Investment Advisor, are expensed as incurred. In addition, an affiliate of the Investment Advisor owns a partnership interest which represents a profits interest in CBRE OP related to these services.

 

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Subject to certain limitations, we are obligated to reimburse the Investment Advisor for the organizational and offering costs incurred on our behalf. This treatment is consistent with Staff Accounting Bulletin, (“SAB”), Topic 1.B.1, which requires that we include all of the costs associated with our operations and formation in our financial statements. These costs will then be analyzed and segregated between those which are organizational in nature, those which are offering-related salaries and other general and administrative expenses of the Investment Advisor and its affiliates, and those which qualify as offering expenses in accordance with SAB Topic 5.A. Organizational costs are expensed as incurred in accordance with AICPA Statement of Position 98-5, “Reporting on the Costs of Start-Up Activities” Offering-related salaries and other general and administrative costs of the Investment Advisor and its affiliates will be expensed as incurred and third-party offering expenses will be taken as a reduction against the net proceeds of the offering within additional paid-in capital (“APIC”), in accordance with SAB Topic 5.A. Offering costs totaling $10,031,000 and $12,074,000 were incurred during the three months ended March 31, 2011 and 2010, respectively, and are recorded as a reduction of additional paid-in-capital in the consolidated statement of shareholders’ equity. Of the total amounts, $9,059,000 and $11,369,000 was incurred to CNL Securities Corp., as dealer manager and $92,000 and $45,000 was incurred to the Investment Advisor for reimbursable marketing for the three months ended March 31, 2011 and 2010, respectively. Each party will be paid the amount incurred from proceeds of the public offering. As of March 31, 2011 and December 2010, the accrued offering costs payable to related parties included in our consolidated balance sheets were $973,000 and $917,000.

The Investment Advisor earned investment management fees of $4,297,000 and $2,431,000 for the three months ended March 31, 2011 and 2010, respectively. As of March 31, 2011 and December 31, 2010, the investment management fees payable to related party in our consolidated balance sheets were $2,970,000 and $1,330,000, respectively. In connection with services provided to the Investment Advisor, CNL Fund Management Company, the Sub-Advisor and affiliate of the Dealer Manager pursuant to a sub-advisory agreement dated August 21, 2006, was paid by the Investment Advisor $593,000 and $336,000 for the three months ended March 31, 2011 and 2010, respectively.

On January 30, 2009, we entered into that certain Second Amendment Advisory Agreement that permits the Investment Advisor to earn an acquisition fee of up to 1.5% of (i) the purchase price of real estate investments acquired by us, including any debt attributable to such investments, or (ii) when we make an investment indirectly through another entity, such investment’s pro rata share of the gross asset value of real estate investments held by that entity. The Investment Advisor earned acquisition fees of $4,114,000 and $296,000 for the three months ended March 31, 2011 and 2010, respectively. In connection with services provided to the Investment Advisor, the Sub Advisor, pursuant to a sub advisory agreement, was paid by the Investment Advisor acquisition fees of $769,000 and $55,000 for the three months ended March 31, 2011 and 2010, respectively. The Investment Advisor earned $274,000 and $42,000 in acquisition related expenses during the three months ended March 31, 2011 and 2010. Prior to the adoption of “Business Combinations” on January 1, 2009, these acquisitions fees and expenses were capitalized to investments in real estate and related intangibles.

 

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Rental Operations

Our reportable segments consist of three types of commercial real estate properties for which our management internally evaluates operating performance and financial results: the Domestic Industrial Properties, Domestic Office Properties and International Office/Retail Properties. We evaluate the performance of our segments based on net operating income, defined as: rental income and tenant reimbursements less property and related expenses (operating and maintenance, management fees and real estate taxes) and excludes other non-property income and expenses, interest expense, depreciation and amortization, and our company-level general and administrative expenses. The following tables compare the net operating income for the three months ended March 31, 2011 and 2010 (in thousands):

 

     Three Months Ended
March 31,
 
         2011              2010      

Domestic Industrial Properties

     

Revenues:

     

Rental

   $ 6,928       $ 5,813   

Tenant Reimbursements

     1,664         1,258   
                 

Total Revenues

     8,592         7,071   
                 

Property and Related Expenses:

     

Operating and Maintenance

     448         338   

General and Administrative

     121         46   

Property Management Fee to Related Party

     83         61   

Property Taxes

     1,629         1,431   
                 

Total Expenses

     2,281         1,876   
                 

Net Operating Income

     6,311         5,195   
                 

Domestic Office Properties

     

Revenues:

     

Rental

     16,166         7,249   

Tenant Reimbursements

     3,871         1,579   
                 

Total Revenues

     20,037         8,828   
                 

Property and Related Expenses:

     

Operating and Maintenance

     2,747         1,157   

General and Administrative

     129         87   

Property Management Fee to Related Party

     234         33   

Property Taxes

     2,447         1,190   
                 

Total Expenses

     5,557         2,467   
                 

Net Operating Income

     14,480         6,361   
                 

 

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     Three Months Ended
March 31,
 
         2011             2010      

International Office/Retail Properties

    

Revenues:

    

Rental

     1,598        1,940   

Tenant Reimbursements

     43        81   
                

Total Revenues

     1,641        2,021   
                

Property and Related Expenses:

    

Operating and Maintenance

     239        80   

General and Administrative

     151        35   

Property Management Fee to Related Party

     71        70   
                

Total Expenses

     461        185   
                

Net Operating Income

     1,180        1,836   
                

Reconciliation to Consolidated Net Income (Loss)

    

Total Segment Net Operating Income

     21,971        13,392   

Interest Expense

     6,011        3,095   

General and Administrative

     1,140        671   

Investment Management Fee to Related Party

     4,258        2,431   

Acquisition Expenses

     4,646        378   

Depreciation and Amortization

     12,274        7,243   
                
     (6,358     (426
                

Other Income and Expenses

    

Interest and Other Income

     376        598   

Net Settlement Payments on Interest Rate Swaps

     (174     (214

Loss on Interest Rate Swaps and Cap

     254        (388

Loss on Note Payable at Fair Value

     (27     (73

Loss on Early Extinguishment of Debt

     —          (73
                

Loss from Continuing Operations Before Provision for Income Taxes and Equity in Income of Unconsolidated Entities

     (5,929     (576
                

Provision for Income Taxes

     (69     (15

Equity in Income of Unconsolidated Entities

     3,210        737   
                

Net (Loss) Income from Continuing Operations

     (2,788     146   
                

Income from Discontinued Operations

     175        —     
                

Net (Loss) Income

     (2,613     146   
                

Net Loss (Income) Attributable to Non-Controlling Operating Partnership Units

     4        (1
                

Net (Loss) Income Attributable to CB Richard Ellis Realty Trust Shareholders

   $ (2,609   $ 145   
                

 

(1) 

Total Segment Net Operating Income is a Non-GAAP financial measure which may be useful as a supplemental measure for evaluating the relationship of each reporting segment to the combined total. This measure should not be viewed as an alternative measure of operating performance to our U.S. GAAP presentations provided. Segment “Net Operating Income” is defined as operating revenues (rental income, tenant reimbursements and other property income) less property and related expenses (property expenses, including real estate taxes) before depreciation and amortization expense. The Net Operating Income segment information presented consists of the same Net Operating Income segment information disclosed in Note 10 to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q.

 

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Consolidated Results of Operations

Comparison of Three Months Ended March 31, 2011 to Three Months Ended March 31, 2010

Revenues

Rental

Rental revenue increased $9,690,000, or 65%, to $24,692,000 during the three months ended March 31, 2011 compared to $15,002,000 for the three months ended March 31, 2010. The increase was due to the acquisitions of 5160 Hacienda Drive, 10450 Pacific Center Court, 225 Summit Avenue, One Wayside Road, 100 Tice Blvd., Ten Parkway North, Pacific Corporate Park, 100 Kimball Drive, 4701 Gold Spike Drive, 1985 International Way, Rickenbacker II, Rickenbacker III, Summit Distribution Center, 3660 Deerpark Boulevard, and Tolleson Commerce Park II (the “2010 Acquisitions”) during the year ended December 31, 2010.

Tenant Reimbursements

Tenant reimbursements increased $2,660,000, or 91%, to $5,578,000 for the three months ended March 31, 2011 compared to $2,918,000 for the three months ended March 31, 2010, due to tenant reimbursement revenue from the 2010 Acquisitions.

Expenses

Operating and Maintenance

Property operating and maintenance expenses increased $1,859,000, or 118%, to $3,434,000 for the three months ended March 31, 2011 compared to $1,575,000 for the three months ended March 31, 2010. The increase was due to the 2010 Acquisitions and increased operating and maintenance expenses associated with our vacant properties.

Property Taxes

Property tax expense increased $1,455,000, or 56%, to $4,076,000 for the three months ended March 31, 2011 compared to $2,621,000 for the three months ended March 31, 2010. The increase in property taxes was due to the 2010 Acquisitions.

Interest

Interest expense increased $2,916,000, or 94%, to $6,011,000 for the three months ended March 31, 2011 compared to $3,095,000 for the three months ended March 31, 2010 as a result of assumption of debt related to the 2010 acquisition of One Wayside Road and 100 Tice Blvd., placing debt on 2010 acquisitions Pacific Corporate Park, Ten Parkway North and 100 Kimball Drive and interest related to the revolving credit facility with Wells Fargo Bank, N.A., (the “Wells Fargo Credit Facility”).

General and Administrative

General and administrative expense increased $702,000, or 84%, to $1,541,000 for the three months ended March 31, 2011 compared to $839,000 for the three months ended March 31, 2010. Of the total increase, $309,000 was due to the increase in professional fees; $264,000 was due to the increase in general audit fees and Sarbanes-Oxley assistance; $73,000 was due to the increase in non-recoverable operating and maintenance expenses; $36,000 was due to the increase in legal expenses; $13,000 was due to the increase in shareholders servicing fees and report production costs; and $7,000 was due to the increase in directors’ and officers’ insurance and expenses.

Property Management Fee and Investment Management Fee to Related Party

Property management fee and investment management fee to related party increased $2,051,000, or 79%, to $4,646,000 for three months ended March 31, 2011 compared to $2,595,000 for the three months ended March 31, 2010. The increase was due to an increase in assets under management.

Acquisition Expenses

Acquisition expenses increased $4,268,000, or 1,129%, to $4,646,000 for the three months ended March 31, 2011 compared to $378,000 for the three months ended March 31, 2011. The increase was related to the 2010 Acquisitions and the acquisitions by the UK JV, European JV and the acquisition by the Duke joint venture of McAuley Place, Easton III, Point West I, Sam Houston Crossing I, Regency Creek, 533 Maryville Center, 555 Maryville Center (the “Duke Office Portfolio Tranche I”) in 2010 and of the Office Portfolio, which consists of 20 office properties, in March 2011.

 

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Depreciation and Amortization

Depreciation and amortization expense increased $5,031,000, or 69%, to $12,274,000 for the three months ended March 31, 2011 as compared to $7,243,000 for the three months ended March 31, 2010. The net increase was related to the acquisitions of consolidated properties during 2010.

Interest and Other Income

Interest and other income decreased $222,000, or 37%, to $376,000 for the three months ended March 31, 2011 compared to $598,000 for the three months ended March 31, 2010. The decrease was primarily due to the recognition of $400,000 of revenue for the disposal of equipment at Kings Mountain I and $154,000 recognized profit on the transfer of the Miramar I and Miramar II properties to the Duke joint venture in 2010.

Net Settlement Payments on Interest Rate Swaps

During the three months ended March 31, 2011, we made net payments on interest rate swaps of $174,000 compared to $214,000 during the three months ended March 31, 2010. The decrease is a result of higher variable interest rates for the three months ended March 31, 2011 as compared to the three months ended March 2010.

Gain (Loss) on Interest Rate Swaps and Cap

During the three months ended March 31, 2011, our derivative instruments generated income of $254,000 as compared to a loss of $388,000 for the three months ended March 31, 2010 or a year to year increase of $642,000.

Loss on Note Payable on Fair Value

Loss on notes payables decreased by $46,000, or 63%, to $27,000 for the three months ended March 31, 2011 compared to $73,000 for the three months ended March 31, 2010. The year to year change is attributable to a stabilization of UK interest rate spreads and base rates used to value the loan.

Loss on Early Extinguishment of Debt

During the three months ended March 31, 2010, we repaid in full the existing loan at 602 Central Blvd. and incurred expense of $73,000. There was no extinguishment of debt activity during the three months ended March 31, 2011.

Provision for Income Taxes

Provision for income taxes increased $54,000, or 360%, to $69,000 for the three months ended March 31, 2011 compared to $15,000 for the three months ended March 31, 2010 resulting primarily from increased tax liabilities in a number of states in which we hold properties.

Equity in Income of Unconsolidated Entity

Equity in income of unconsolidated entity increased $2,473,000, or 336%, to $3,210,000 for the three months ended March 31, 2011 compared to a loss of $737,000 for the three months ended March 31, 2010. The increase was primarily due to the acquisition of additional properties by the Duke joint venture and improved CBRE Strategic Partners Asia performance during the three months ended March 31, 2011.

Discontinued Operations

Income from discontinued operations for the three months ended March 31, 2011 was $175,000. Revenues and expenses from discontinued operations represent the activities of the held for sale portfolio of light industrial and warehouse distribution buildings acquired during the three months ended December 31, 2010. The properties are currently held for sale. There were no discontinued operations in the three months ended March 31, 2010.

Net (Loss) Income Attributable to Non-Controlling Operating Partnership Units

During the three months ended March 31, 2011, net loss attributable to non-controlling interest was ($4,000) compared to net income attributable to non-controlling interest of $1,000 for the three months ended March 31, 2010, or a year to year decrease of $5,000.

 

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Financial Condition, Liquidity and Capital Resources

Overview

Liquidity is a measurement of the ability to meet cash requirements, including funding investments and ongoing commitments, to repay borrowings as well as paying dividends, fees and other costs associated with our public offerings and other general business needs. Our sources of funds will primarily be the net proceeds of our initial public and follow-on offerings, operating cash flows and borrowings. We believe that these cash resources will be sufficient to satisfy our cash requirements and we do not anticipate a need to raise funds from other than these sources within the next twelve months. Cash flow from operations is primarily dependent upon the occupancy level of our portfolio, the net effective rental rates achieved on our leases, the collectability of rent and operating escalations and recoveries from our tenants and the level of operating and other costs. Depending on market conditions, we expect that once the net proceeds of our initial public and follow-on offerings are fully invested, our debt financing will be approximately 65% of the value of the cost of our assets before non-cash reserves and depreciation. The amount of debt we place on an individual property, or the amount of debt incurred by an individual entity in which we invest, may be more or less than 65% of the value of such property or the value of the assets owned by such entity, depending on market conditions and other factors. In fact, depending on market conditions and other factors, we may choose not to place debt on our portfolio or our assets and may choose not to borrow to finance our operations or to acquire properties. Our declaration of trust limits our borrowing to 300% of our net assets unless any excess borrowing is approved by a majority of our independent trustees and is disclosed to our shareholders in our next quarterly report. Our declaration of trust defines “net assets” as our total assets (other than intangibles) at cost, before deducting depreciation, reserves for bad debts or other non-cash reserves, less total liabilities, calculated at least quarterly by us on a basis consistently applied; provided, however, that during such periods in which we are obtaining regular independent valuations of the current value of its net assets for purposes of enabling fiduciaries of employee benefit plan shareholders to comply with applicable Department of Labor reporting requirements, “net assets” means the greater of (i) the amount determined pursuant to the foregoing and (ii) the assets’ aggregate valuation established by the most recent such valuation report without reduction for depreciation, bad debts or other non-cash reserves. Any indebtedness we do incur will likely be subject to continuing covenants, and we will likely be required to make continuing representations and warranties in connection with such debt. Moreover, some or all of our debt may be secured by some or all of our assets. If we default in the payment of interest or principal on any such debt, breach any representation or warranty in connection with any borrowing or violate any covenant in any loan document, our lender may accelerate the maturity of such debt requiring us to immediately repay all outstanding principal. If we are unable to make such payment, our lender could foreclose on our assets that are pledged as collateral to such lender. The lender could also sue us or force us into bankruptcy. Any such event would have a material adverse effect on the value of our common shares. We believe that, even without any proceeds raised from our public offering, we have sufficient cash flow from operations to continue as a going concern for the next twelve months and into the foreseeable future.

In addition to making investments in accordance with our investment objectives, we expect to use our capital resources to make certain payments to the Investment Advisor and the Dealer Manager. During the offering stage, assuming all of the shares in our primary offering are sold, these payments will include payments of up to $189,000,000 for selling commissions, up to $54,000,000 for the dealer manager fee, up to $27,000,000 for the marketing support fee and up to $20,750,000 for organizational and offering expenses. During the acquisition and operational stages, certain services related to the acquisition and management of our investments and our operations will be provided to us by the Investment Advisor pursuant to an advisory agreement entered into in July 2004 which was amended and restated in October 2006 and again in January 2009. Pursuant to that agreement, we expect to make various payments to the Investment Advisor, including acquisition fees, investment management fees and payments for reimbursements of certain costs incurred by the Investment Advisor in providing related services to us. As the actual amounts to be paid are dependent upon the total equity and debt capital we raise and our results of operations, we cannot determine these amounts at this time.

In order to avoid corporate-level tax on our net taxable income, we are required to pay distributions to our shareholders equal to our net taxable income. In addition, to qualify as a REIT, we generally are required to pay annual distributions to our shareholders equal to at least 90% of our net ordinary taxable income. Therefore, once the net proceeds we receive from our public offerings are substantially fully invested, we will need to raise additional capital in order to grow our business and acquire additional real estate investments. We anticipate borrowing funds to obtain additional capital, but there can be no assurance that we will be able to do so on terms acceptable to us, if at all.

Historical Cash Flows

Our net cash provided by operating activities decreased by $823,000 to $12,783,000 for the three months ended March 31, 2011, compared to $13,606,000 for the three months ended March 31, 2010. The decrease was due to an increase in acquisition costs of $4,264,000 related to Duke Joint Venture and a decrease in operating distributions from the Duke Joint Venture of $1,734,000.

 

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Net cash used in investing activities increased by $31,178,000 to $50,610,000 for the three months ended March 31, 2011, compared to $19,432,000 for the three months ended March 31, 2010. The increase was due to investments in Duke Joint Venture during the three months ended March 31, 2011.

Net cash provided by financing activities increased by $17,454,000 to $118,787,000 for the three months ended March 31, 2011, compared to $101,333,000 for the three months ended March 31, 2010. The increase was due to an increase in proceeds from notes payable of $70,000,000, borrowing on loan payable of $30,000,000, a decrease in principal payments on notes payable of $5,622,000, a decrease in payment of offering costs of $1,928,000 and an increase in security deposit of $5,000 offset by a decrease in proceeds from the public offering of $47,511,000, payment on loan payable of $35,000,000, an increase in distributions to shareholders of $5,242,000, an increase in shareholder redemptions of $1,181,000 and an increase in deferred financing costs of $1,167,000.

Non-GAAP Supplemental Financial Measure: Funds from Operations

Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many industry analysts and investors consider presentations of operating results for REITs that use historical cost accounting to be insufficient by themselves. Consequently, the National Association of Real Estate Investment Trusts, or NAREIT, created Funds from Operations, or FFO, as a supplemental measure of REIT operating performance.

FFO is a non-GAAP measure that is commonly used in the real estate industry. The most directly comparable GAAP measure to FFO is net income. FFO, as we define it, is presented as a supplemental financial measure. Management believes that FFO is a useful supplemental measure of REIT performance. FFO does not present, nor do we intend for it to present, a complete picture of our financial condition and/or operating performance. We believe that net income, as computed under GAAP, appropriately remains the primary measure of our performance and that FFO, when considered in conjunction with net income, improves the investing public’s understanding of the operating results of REITs and makes comparisons of REIT operating results more meaningful.

We compute FFO in accordance with standards established by NAREIT. Modifications to the NAREIT calculation of FFO are common among REITs, as companies seek to provide financial measures that meaningfully reflect their business and provide greater transparency to the investing public as to how our management team considers our results of operations. As a result, our FFO may not be comparable to FFO as reported by other REITs that do not compute FFO in accordance with the NAREIT definition, or that interpret the NAREIT definition differently than we do. The revised NAREIT White Paper on FFO defines FFO as net income or loss computed in accordance with GAAP, excluding extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs and depreciation of non-real estate assets), and after adjustment for unconsolidated partnerships and joint ventures.

Management believes that NAREIT’s definition of FFO reflects the fact that real estate, as an asset class, generally appreciates over time, and that depreciation charges required by GAAP do not always reflect the underlying economic realities. Likewise, the exclusion from NAREIT’s definition of FFO of gains and losses from the sales of previously depreciated operating real estate assets allows investors and analysts to readily identify the operating results of the long-term assets that form the core of a REIT’s activity and assists in comparing those operating results between periods. Thus, FFO provides a performance measure that, when compared year over year, reflects the impact on our operations from trends in occupancy rates, rental rates and operating costs. Management also believes that FFO provides useful information to the investment community about our financial performance when compared to other REITs, since FFO is generally recognized as the industry standard for reporting the operations of REITs.

However, changes in the accounting and reporting rules under GAAP (for acquisition fees and expenses from a capitalization/ depreciation model to an expensed-as-incurred model) that have been put into effect since the establishment of NAREIT’s definition of FFO have prompted an increase in the non-cash and non-operating items included in FFO. In addition, we view impairment charges as an item which is typically adjusted when assessing operating performance. Furthermore, publicly registered, non-traded REITs typically have a significant amount of acquisition activity during their initial years of investment and operation and therefore we believe require additional adjustments to FFO in evaluating performance. As a result, in addition to presenting FFO in accordance with the NAREIT definition, we also disclose FFO, as adjusted, which excludes the effects of acquisition costs and non-cash impairment charges.

FFO, as adjusted, is a useful measure to management’s decision-making process. As discussed below, period to period fluctuations in the excluded items can be driven by short-term factors that are not particularly relevant to our long-term investment decisions, long-term capital structures or long-term tax planning and tax structuring decisions. We believe that adjusting FFO to exclude these acquisition costs and impairment charges more appropriately presents our results of operations on a comparative basis. The items that we exclude from net income are subject to significant fluctuations from period to period that cause both positive and negative effects

 

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on our results of operations, often in inconsistent and unpredictable directions. For example, our acquisition costs are primarily the result of the volume of our acquisitions completed during each period, and therefore we believe such acquisition costs are not reflective of our operating results during each period. Similarly, unrealized gains or non-cash impairment charges that we have recognized during a given period are based primarily upon changes in the estimated fair market value of certain of our investments due to deterioration in market conditions and do not necessarily reflect the operating performance of these properties during the corresponding period.

We believe that FFO, as adjusted, is useful to investors as a supplemental measure of operating performance. We believe that adjusting FFO to exclude acquisition costs provides investors a view of the performance of our portfolio over time, including after we cease to acquire properties on a frequent and regular basis and allows for a comparison of the performance of our portfolio with other REITs that are not currently engaging in acquisitions. In addition, as many other non-traded REITs adjust FFO to exclude acquisition costs and impairment charges, we believe that our calculation and reporting of FFO, as adjusted, will assist investors and analysts in comparing our performance with that of other non-traded REITs. We also believe that FFO, as adjusted, may provide investors with a useful indication of our future performance, particularly after our acquisition stage, and of the sustainability of our current distribution policy. However, because FFO, as adjusted, excludes acquisition costs, which are an important component in an analysis of our historical performance, such supplemental measure should not be construed as a historical performance measure and may not be as useful a measure for estimating the value of our common shares. In addition, the impairment charges that we exclude from FFO, as adjusted, may be realized as a loss in the future upon the ultimate disposition of the related properties or other assets through the form of lower cash proceeds.

Not all REITs calculate FFO and FFO, as adjusted (or an equivalent measure), in the same manner and therefore comparisons with other REITs may not be meaningful. Neither FFO, nor FFO as adjusted, represents cash generated from operating activities in accordance with GAAP and should not be considered as alternatives to (i) net income (determined in accordance with GAAP), as indications of our financial performance, or (ii) to cash flow from operating activities (determined in accordance with GAAP) as measures of our liquidity, nor are they indicative of funds available to fund our cash needs, including our ability to make cash distributions. We believe that to further understand our performance, each of FFO and FFO, as adjusted, should be compared with our reported net income and considered in addition to cash flows in accordance with GAAP, as presented in our Consolidated Financial Statements.

The following table presents our FFO and FFO, as adjusted for the three months ended March 31, 2011 and 2010 (in thousands):

 

     Three Months Ended
March 31,
 
     2011     2010  

Reconciliation of net (loss) income to funds from operations

    

Net (Loss) Income Attributable to CB Richard Ellis Realty Trust Shareholders

   $ (2,609   $ 145   

Adjustments:

    

Non-controlling interest

     (4     1   

Real estate depreciation and amortization

     12,274        7,243   

Realized gain from transfer of real estate to unconsolidated entities

     —          (154

Net effect of FFO adjustment from unconsolidated entities(1)

     7,564        3,715   
                

FFO

   $ 17,225      $ 10,950   

Other Adjustments:

    

Acquisition expenses

     4,642        382   

Unrealized gain/impairment loss in unconsolidated entity

     35        24  
                

FFO, as adjusted

   $ 21,902      $ 11,356   
                

 

(1) 

Represents our share of the FFO adjustments allowable under the NAREIT definition (primarily depreciation) for each of our unconsolidated entities.

Notes Payable

In connection with our acquisition of the Carolina Portfolio on August 30, 2007, we assumed 13 loans with principal balances totaling $66,110,000 ($62,944,000 at estimated fair value including the discount of $3,166,000) from various lenders that are secured by first deeds of trust on the properties and the assignment of related rents and leases. Assumption fees and other loan closing costs totaling $765,500 were capitalized as incurred. The loans bear interest at rates ranging from 4.98% to 6.33% per annum and mature between March 1, 2013 and February 1, 2025. The loans require monthly payments of interest and principal, fully amortized over the lives of the loans. Principal payments totaling $993,000 were made during the three months ended March 31, 2011. We indemnify the lenders against environmental costs and expenses and guarantee the loans under certain conditions.

 

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On December 27, 2007, we entered into a $9,000,000 financing agreement secured by the Bolingbrook Point III property with the Northwestern Mutual Life Insurance Company. The loan is for a term of seven years and bears a fixed interest rate of 5.26% per annum with principal due at maturity. In addition, we incurred financing costs of approximately $91,000 associated with obtaining this loan. On January 14, 2011, we paid down $1,100,000 of principal in connection with the lease termination settlement with one of the tenants.

On May 30, 2008, we entered into a £7,500,000 financing arrangement with the Royal Bank of Scotland plc secured by the Thames Valley Five property. On July 27, 2010 we paid down the loan by £1,860,000 leaving a loan balance of £5,640,000 ($9,062,000 at March 31, 2011). The loan is for a term of five years (with a two year extension option) and bears interest at a variable rate adjusted quarterly, based on nine month GBP-based LIBOR plus 1.01%. In addition, we incurred financing costs of approximately £67,000 ($108,000 at March 31, 2011) associated with obtaining this loan. On August 14, 2008, we entered into the interest rate swap agreement that fixed the GBP-based LIBOR rate at 5.41% plus 1.01% or 6.42% per annum as of March 31, 2011, and expires on May 30, 2013. In conjunction with the loan paydown, we incurred a cost of £227,000 ($361,000 at August 3, 2010) to reduce the notional amount of the interest rate swap from £7,500,000 to £5,640,000. Interest only payments are due quarterly for the term of the loan with principal due at maturity

On July 1, 2008, in connection with the acquisition of Enclave on the Lake, we assumed an $18,281,000 ($18,790,000 face value less discount of $509,000) loan from NorthMarq Capital, Inc. that bears interest at a fixed rate of 5.45% per annum and matures on May 1, 2011. Principal and interest payments are due monthly for the remaining loan term and principal payments totaling $95,000 were made during the three months ended March 31, 2011. In addition, we incurred financing costs totaling $241,000 in conjunction with the assumption of the loan.

On October 10, 2008, we entered into a £5,771,000 ($9,272,000 at March 31, 2011) financing agreement with the Royal Bank of Scotland plc secured by Albion Mills Retail Park property. The loan is for a term of five years and bears interest at a variable rate adjusted quarterly, based on three month GBP-based LIBOR plus 1.31%. In addition, we incurred financing costs of approximately £75,000 ($121,000 at March 31, 2011) associated with obtaining this loan. On November 25, 2008, we entered into the interest rate swap agreement that fixed the GBP-based LIBOR rate at 3.94% plus 1.31% or 5.25% per annum as of March 31, 2011 and expires on October 10, 2013. Interest only payments are due quarterly for the term of the loan with principal due at maturity.

On November 18, 2008, in connection with the acquisition of Avion Midrise III & IV, we assumed $20,851,000 ($22,186,000 face value less discount of $1,335,000) fixed rate mortgage loan from Capmark Finance, Inc. that bears interest at a rate of 5.52% per annum and matures on April 1, 2014. Principal and interest payments are due monthly for the remaining loan term and principal payments totaling $110,000 were made during the three months ended March 31, 2011. In addition, we incurred financing costs totaling $344,000 in conjunction with the assumption of the loan.

On August 5, 2009, in connection with the acquisition of 12650 Ingenuity Drive, we assumed a $12,572,000 ($13,539,000 face value less a discount of $967,000) fixed rate mortgage loan from PNC Bank, National Association that bears interest at a rate of 5.62% and matures on October 1, 2014. Principal and interest payments are due monthly for the remaining loan term and principal payments totaling $96,000 were made during the three months ended March 31, 2011. In addition, we incurred financing costs totaling $284,000 in conjunction with the assumption of the loan.

On August 10, 2009, we entered into a £13,975,000 ($22,453,000 at March 31, 2011) financing agreement with the Abbey National Treasury Services plc secured by the Maskew Retail Park property. On September 24, 2009, we drew the full amount of the loan and concurrently entered into an interest rate swap agreement that fixed the GBP-based LIBOR rate at 3.42% plus 2.26% or 5.68% per annum for the five-year term of the loan. Interest only payments are due quarterly for the term of the loan with principal due at maturity. In addition, we incurred financing costs of approximately £268,000 ($431,000 at March 31, 2011) associated with obtaining this loan.

On June 24, 2010, we assumed two loans in connection with the acquisition of One Wayside Road: (i) a $14,888,000 ($14,633,000 at face value plus a premium of $255,000) fixed rate mortgage loan from State Farm Life Insurance Company that bears interest at a rate of 5.66% and matures on August 1, 2015; and (ii) a $12,479,000 ($12,132,000 at face value plus a premium of $347,000) fixed rate mortgage loan from State Farm Life Insurance Company that bears interest at a rate of 5.92% and matures on August 1, 2015. Principal and interest payments are due monthly for the remaining loan terms and principal payments totaling $150,000 were made during the three months ended March 31, 2011 on the two loans. In addition, we incurred financing costs totaling $342,000 in conjunction with the assumption of the loans.

 

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On September 28, 2010, we assumed two loans in connection with the acquisition of 100 Tice Blvd.: (i) a $23,136,000 ($21,218,000 at face value plus a premium of $1,918,000) fixed rate loan from Principal Life Insurance Company that bears interest at a rate of 5.97%, matures on September 15, 2022 and the lender has the right to call the loan due and payable on September 15, 2017; (ii) a $23,136,000 ($21,217,000 at a face value plus a premium of $1,919,000) fixed rate mortgage from Hartford Life and Accidental Insurance Company that bears interest at a rate of 5.97%, matures on September 15, 2022 and the lender has the right to call the loan due and payable on September 15, 2017. Principal and interest payments are due monthly for the remaining loan terms and principal payments totaling $239,000 were made during the three months ended March 31, 2011 on the two loans. In addition, we incurred financing costs totaling $476,000 in conjunction with the assumption of the loans.

On December 7, 2010, we entered into a $85,000,000 secured term loan through a subsidiary with Wells Fargo Bank, National Association, or the Pacific Corporate Park Loan. The Pacific Corporate Park Loan has a seven-year term, monthly amortization of $250,000 and is secured by Pacific Corporate Park. Upon closing of the Pacific Corporate Park Loan on December 7, 2010, we entered into an interest rate swap agreement with Wells Fargo Bank, National Association to effectively fix the interest rate on the entire outstanding Pacific Corporate Park Loan amount at 4.89% for its seven-year term. Principal and interest payments are due monthly and principal payments totaling $1,000,000 were made during the three months ended March 31, 2011. In addition, we incurred financing costs of approximately $1,512,000 in conjunction with obtaining the loan.

On December 29, 2010, we entered into a $12,600,000 secured term loan through Woodmen of The World Life Insurance Society secured by the Ten Parkway North property. The Ten Parkway North loan bears interest at a fixed rate of 4.75% per annum and matures on January 1, 2021. Principal and interest payments are due monthly and principal payments totaling $44,000 were made during the three months ended March 31, 2011. In addition, we incurred financing costs of approximately $160,000 in conjunction with obtaining the loan.

On February 8, 2011, we entered into five secured term loans totaling $37,000,000 with ING USA Annuity and Life Insurance Company secured by the following properties: 4701 Gold Spike Road, $10,650,000, Summit Distribution Center, $6,700,000, Tolleson Commerce Park II, $4,600,000, 3660 Deerpark Blvd., $7,650,000 and 1985 International Way, $7,400,000. The loans bear interest at a fixed rate of 4.45% and mature on March 1, 2018. There were no principal payments made during the period ended March 31, 2011. In addition, we incurred financing costs of approximately $702,000 in conjunction with obtaining the five loans.

On February 28, 2011, we entered into a $33,000,000 secured term loan with TD Bank secured by the 100 Kimball Drive property. Upon closing the 100 Kimball Drive loan, we simultaneously entered into an interest rate swap agreement with TD Bank to effectively fix the interest rate on the entire outstanding loan amount to 5.25% for its 10 year term. Principal and interest payments are due monthly. There were no principal payments made during the period ended March 31, 2011. In addition, we incurred financing costs of approximately $463,000 in conjunction with obtaining the loan.

Loan Payable

On May 26, 2010, we entered into a $70,000,000 revolving credit facility with Wells Fargo Bank, N.A., or the Wells Fargo Credit Facility. The initial maturity date of the Wells Fargo Credit Facility is May 26, 2014, however we may extend the maturity date to May 26, 2015, subject to certain conditions. $15,000,000 of the Wells Fargo Credit Facility was initially drawn upon closing on May 26, 2010, with $55,000,000 initially remaining available for disbursement during the term of the facility. We have the right to prepay any outstanding amount of the Wells Fargo Credit Facility, in whole or in part, without premium or penalty at any time during the term of this Wells Fargo Credit Facility, however, we initially could not reduce the outstanding principal balance below a minimum outstanding amount of $15,000,000, without reducing the total $70,000,000 Wells Fargo Credit Facility capacity. Initially, the Wells Fargo Credit Facility had a floating interest rate of 300 basis points over the LIBOR, however this interest rate would be at least 4.00% for any of the outstanding balance that was not subject to an interest rate swap with an initial term of at least two years. Upon closing on May 26, 2010, we entered into an interest rate swap agreement with Wells Fargo Bank, N.A. to effectively fix the interest rate on the initial $15,000,000 outstanding loan amount at 5.10% for the four-year term of the facility. The interest rate swap was designated as a qualifying cash flow hedge at the start date of the hedge relationship as described in Note 16 “Derivative Instruments.” The Wells Fargo Credit Facility was initially secured by our 13201 Wilfred, 3011, 3055 & 3077 Comcast Place, 140 Depot Street, Crest Ridge Corporate Center I and West Point Trade Center properties. In addition, CBRE OP provides a limited guarantee for the Wells Fargo Credit Facility. The Wells Fargo Credit Facility is subject to certain customary financial covenants, including certain negative financial covenants, which we believe we were in compliance with as of March 31, 2011. A commitment fee of $1,050,000 was paid to Wells Fargo Bank, N.A. at the initial closing.

On August 31, 2010, we entered into an amended and restated credit agreement with Wells Fargo Bank, N.A. to expand the Wells Fargo Credit Facility from its initial capacity of $70,000,000 to an amended capacity of $125,000,000 (the “Amended Wells Fargo Credit Facility”). In connection with the Amended Wells Fargo Credit Facility, the minimum outstanding amount was increased to

 

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$25,000,000 and as such an additional $10,000,000 was drawn (in addition to the $15,000,000 initially drawn on May 26, 2010) with the remaining $100,000,000 available for disbursement during the term of the facility. The Amended Wells Fargo Credit Facility is secured by an additional three of our properties, for a total of eight properties in all: 13201 Wilfred Lane, 3011, 3055 & 3077 Comcast Place, 140 Depot Street, Crest Ridge Corporate Center, West Point Trade Center, 5160 Hacienda Drive, 10450 Pacific Center Court and 225 Summit Avenue. The interest rate was reduced by 25 basis points to 275 basis points over LIBOR (which rate will apply to all withdrawals from the Amended Wells Fargo Credit Facility other than the initial $15,000,000 that was drawn on May 26, 2010) and the initial interest rate floor of 4.00% was eliminated. The initial maturity date remains May 26, 2014, however we may extend the maturity date to May 26, 2015, subject to certain conditions. The Amended Wells Fargo Credit Facility is subject to certain representations and warranties and customary financial covenants (including certain negative financial covenants) with which we believe we were in compliance as of March 31, 2011. A commitment fee of $632,500 was paid to Wells Fargo Bank, N.A. at closing of the Amended Wells Fargo Credit Facility.

On March 30, 2011, an additional $30,000,000 was drawn (in addition to the $15,000,000 initially drawn on May 26, 2010 and $10,000,000 second draw on August 31, 2010) in connection with the Amended Wells Fargo Credit Facility, with the remaining $70,000,000 available for disbursement during the term of the facility. The $55,000,000 is included in Loan Payable on our condensed consolidated balance sheet.

Our organizational documents contain a limitation on the amount of indebtedness that we may incur, so that unless our shares are listed on a national securities exchange, our aggregate borrowing may not exceed 300% of our net assets unless any excess borrowing is approved by a majority of our independent trustees and is disclosed to shareholders in our next quarterly report.

Distribution Policy

In order to qualify as a REIT under the Internal Revenue Code, we generally must make distributions to our shareholders each year in an amount at least equal to 90% of our REIT taxable income (as determined without regard to the dividends paid deduction and excluding net capital gain).

It is anticipated that distributions generally will be taxable as ordinary income to our shareholders, although a portion of such distributions may be designated by us as a return of capital or as capital gain. We will furnish annually to each of our shareholders a statement setting forth distributions paid during the preceding year and their characterization as ordinary income, return of capital or capital gains.

 

2011 Quarter

                        First  

Total distributions declared and paid

  

   $ 25,306,000   

Distributions per share

  

   $ 0.15   

Amount of distributions per share funded by cash flows provided by operating entities

  

   $ 0.0758   

Amount of distributions per share funded by uninvested proceeds from financings of our properties

 

   $ 0.0742   

2010 Quarters

   First      Second      Third      Fourth  

Total distributions declared and paid

   $ 16,841,000       $ 19,266,000       $ 21,623,000       $ 24,053,000   

Distributions per share

   $ 0.15       $ 0.15       $ 0.15       $ 0.15   

Amount of distributions per share funded by cash flows provided by operating entities

   $ 0.1212       $ 0.0540       $ 0.0826       $ 0.0444   

Amount of distributions per share funded by uninvested proceeds from financings of our properties

   $ 0.0288       $ 0.0960       $ 0.0674       $ 0.1056   

For the quarter ended March 31, 2011, distributions were funded 50.22% by cash flows provided by operating activities and 49.78% from uninvested proceeds from financings of our properties. In addition, distributions totaling $10,861,000 were reinvested in our common shares pursuant to our dividend reinvestment plan during the quarter ended March 31, 2011.

Our 2010 distributions were funded 48.38% by cash flows provided by operating activities and 51.62% from uninvested proceeds from financings of our properties. In addition, 2010 distributions totaling $35,317,000 were reinvested in our common shares pursuant to our dividend reinvestment plan during 2010.

Total distributions declared and paid for the period from inception (July 1, 2004) through March 31, 2011 were $200,350,000 and total Funds from Operations for the period from inception (July 1, 2004) through March 31, 2011 were $107,773,000. For a discussion of our supplemental financial measures, see “—Non-GAAP Supplemental Financial Measure: Funds from Operations.”

 

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To the extent that our cash available for distribution is less than the amount we are required to distribute to qualify as a REIT, we may consider various funding sources to cover any shortfall, including borrowing funds on a short-term, or possibly long-term, basis or selling properties. In addition, we may utilize these funding sources to make distributions that exceed the amount we are required to distribute to qualify as a REIT.

Off-Balance Sheet Arrangements

As of March 31, 2011, we had five Investments in Unconsolidated Entities: (i) a 5.07% ownership interest in CBRE Strategic Partners Asia; (ii) an 80% ownership interest in the Duke joint venture; (iii) a 90% ownership interest in Afton Ridge; (iv) an 80% ownership interest in the UK JV; and (v) an 80% ownership interest in the European JV. Our investments are discussed in Item 2, “Properties,” and Note 5, “Investments in Unconsolidated Entities” in the accompanying consolidated financial statements.

 

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Contractual Obligations and Commitments

The following table provides information with respect to our consolidated property contractual obligations at March 31, 2011 (in thousands):

 

Contractual Obligations

   Total     Less than
One Year
    One to Three
Years
    Three to Five
Years
    More than
Five Years
 

Note Payable (and interest payments) Collateralized by REMEC Corporate Campus

   $ (13,673 )   $ (13,673 )   $ —        $ —        $ —     

Note Payable (and interest payments) Collateralized by 300 Constitution Drive

     (12,581 )     (581 )     (12,000 )     —          —     

Note Payable (and interest payments) Collateralized by Deerfield Commons I

     (12,013 )     (643 )     (1,286 )     (10,084 )     —     

Note Payable (and interest payments) Collateralized by Bolingbrook Point III

     (9,493 )     (416 )     (831 )     (8,246 )     —     

Notes Payable (and interest payments) Collateralized by the Carolina Portfolio

     (71,666 )     (6,980 )     (13,656 )     (13,351 )     (37,679 )

Note Payable (and interest payments) Collateralized by Lakeside Office Center

     (11,342 )     (605 )     (1,299 )     (9,438 )     —     

Note Payable (and interest payments) Collateralized by Thames Valley Five(1)

     (9,465 )     (161 )     (9,304 )     —          —     

Note Payable (and interest payments) Collateralized by Enclave on the Lake

     (17,972 )     (17,972 )     —          —          —     

Note Payable (and interest payments) Collateralized by Albion Mills Retail Park(1)

     (9,802 )     (193 )     (9,609 )     —          —     

Note Payable (and interest payments) Collateralized by Avion Midrise III & IV

     (24,799 )     (1,618 )     (3,237 )     (19,944 )     —     

Note Payable (and interest payments) Collateralized by 12650 Ingenuity Drive

     (15,471 )     (1,118 )     (2,237 )     (12,116 )     —     

Note Payable (and interest payments) Collateralized by Maskew Retail Park(1)

     (25,005 )     (680 )     (1,361 )     (22,964 )     —     

Loan Payable (and interest payments) Wells Fargo Credit Facility(1)(2)

     (29,023     (1,275     (2,550     (25,198     —     

Loan Payable Wells Fargo Credit Facility(2)( 3)

     (30,000     —          —          (30,000     —     

Note Payable (and interest payments) Collateralized by One Wayside Road

     (32,676     (2,127     (4,254     (26,295     —     

Note Payable (and interest payments) Collateralized by 100 Tice Blvd.

     (56,878     (3,469     (6,939     (6,939     (39,531

Note Payable (and interest payments) Collateralized by Ten Parkway North

     (17,712     (862     (1,724     (1,724     (13,402

Note Payable (and interest payments) Collateralized by Pacific Corporate Park

     (108,476     (7,053     (13,665     (13,078     (74,680

Note Payable (and interest payments) Collateralized by 4701 Gold Spike Drive

     (13,765     (644     (1,288     (1,288     (10,545

Note Payable (and interest payments) Collateralized by 1985 International Way

     (9,564     (447     (895     (895     (7,327

Note Payable (and interest payments) Collateralized by Summit Distribution Center

     (8,659     (405     (810     (810     (6,634

Note Payable (and interest payments) Collateralized by 3660 Deerpark Boulevard

     (9,887     (462     (925     (925     (7,575

Note Payable (and interest payments) Collateralized by Tolleson Commerce Park II

     (5,945     (278     (556     (556     (4,555

Note Payable (and interest payments) Collateralized by 100 Kimball Drive

     (48,578     (2,391     (4,783     (4,783     (36,621
                                        

Total

   $ (604,445 )   $ (64,053 )   $ (93,209 )   $ (208,634 )   $ (238,549 )
                                        

 

(1) 

These contractual obligations included the expected net payments due under interest rate swap agreements where in each case we have swapped our variable interest rate payments due under the debt agreements for fixed rates of interest payments.

 

(2) 

Includes the eight properties (see Note 7 “Debt”) that secure the Wells Fargo Credit Facility.

 

(3) 

Excludes interest for this presentation because of the short-term nature of the revolving portion of this credit facility which is available through May 2014.

 

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The following table provides information with respect to our unconsolidated property contractual obligations at March 31, 2011 (in thousands):

 

Contractual Obligations

  Total     Less than
One Year
    One to Three
Years
    Three to Five
Years
    More than
Five Years
 

Note Payable (and interest payments) Collateralized by Duke joint venture

  $ (224,779 )   $ (11,041 )   $ (139,300 )   $ (74,438 )   $ —     

Note Payable (and interest payments) Collateralized by Afton Ridge

    (26,329 )     (1,308 )     (25,021 )     —          —     

Duke joint venture Unsecured Debt Borrowings(2)

  $ (220,000     (220,000      
                                       

Total Notes Payable Collateralized by Unconsolidated Properties(1)

  $ (471,108   $ (232,349   $ (164,321   $ (74,438   $ —     
                                       

 

(1) 

Unconsolidated payment amounts are at our pro rata share of effective ownership and exclude our investment in CBRE Strategic Partners Asia.

 

(2) 

Excludes interest for this presentation and assumes a six month extension option with maturity in March 2012. We anticipate that the unsecured debt borrowings will be paid off as permanent debt is obtained on the unencumbered Duke joint venture properties.

As of March 31, 2011, we were committed to pay $1,018,000 in accrued offering costs. The timing of future payments is uncertain.

As of March 31, 2011, we had an unfunded investment commitment in CBRE Strategic Partners Asia totaling $4,960,000. The timing of future payments is uncertain.

Income Taxes

We have elected to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended December 31, 2004. As a REIT, we generally will not be subject to U.S. federal income tax on income that we distribute currently to our shareholders. Under the Internal Revenue Code, REITs are subject to numerous organizational and operational requirements, including a requirement that they generally distribute at least 90% of their annual net taxable income (excluding net capital gains) to their shareholders. If we fail to qualify for taxation as a REIT in any year, our income will be taxed at regular corporate rates, and we may be precluded from qualifying for treatment as a REIT for the four-year period following our failure to qualify. Even if we qualify as a REIT for U.S. federal income tax purposes, we may still be subject to state, local and foreign taxes on our income and property and to U.S. federal income and excise taxes on our undistributed gross income. Our properties located in Texas are subject to a Texas Gross Margin Tax, Deerfield Commons I is subject to a Georgia Corporation Income Tax and properties located in North Carolina are subject to a North Carolina Franchise Tax under which we incurred a total of approximately $69,000 and $15,000 of taxes for the three months ended March 31, 2011 and 2010.

Inflation

The real estate market has not been affected significantly by inflation in the past several years due to the relatively low inflation rate. With the exception of leases with tenants in multifamily properties, we expect to include provisions in the majority of our tenant leases designed to protect us from the impact of inflation. These provisions will include reimbursement billings for operating expense pass-through charges, real estate tax and insurance reimbursements, or in some cases, annual reimbursement of operating expenses above a certain allowance. Due to the generally long-term nature of these leases, annual rent increases may not be sufficient to cover inflation and rent may be below market. Leases in multifamily properties generally turn over on an annual basis and do not typically present the same issue regarding inflation protection due to their short-term nature.

Quantitative and Qualitative Disclosures About Market Risk

Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. In pursuing our business plan, we expect that the primary market risk to which we will be exposed is interest rate risk.

We may be exposed to the effects of interest rate changes primarily as a result of long-term debt used to maintain liquidity and fund expansion of our real estate investment portfolio and operations. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve our objectives, we will borrow primarily at fixed rates or variable rates and, in some cases, with the ability to convert variable rates to fixed rates. We may also enter into derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on a related financial instrument. We will not enter into derivative or interest rate transactions for speculative purposes.

 

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Notes Payable secured by real property are summarized as follows (in thousands):

 

Property

   Interest Rate as of    

Maturity Date

   Notes Payable as of  
   March 31,
2011
    December 31,
2010
       March 31,
2011
    December 31,
2010
 

REMEC

     4.79 %     4.79 %   November 1, 2011    $ 13,250      $ 13,250   

300 Constitution

     4.84        4.84      April 1, 2012      12,000        12,000   

Deerfield Commons I.(1)

     5.23        5.23      December 1, 2015      9,691        9,725   

Bolingbrook Point III

     5.26        5.26      January 1, 2015      7,900        9,000   

Fairforest Bldg. 5(2)

     6.33        6.33      February 1, 2024      9,743        9,864   

Fairforest Bldg. 6(2)

     5.42        5.42      June 1, 2019      2,918        2,987   

HJ Park—Bldg. 1(2)

     4.98        4.98      March 1, 2013      580        648   

North Rhett I(2)

     5.65        5.65      August 1, 2019      3,818        3,906   

North Rhett II(2)

     5.20        5.20      October 1, 2020      2,137        2,180   

North Rhett III(2)

     5.75        5.75      February 1, 2020      1,710        1,759   

North Rhett IV(2)

     5.80        5.80      February 1, 2025      9,777        9,892   

Mt Holly Bldg.(2)

     5.20        5.20      October 1, 2020      2,137        2,180   

Orangeburg Park Bldg.(2)

     5.20        5.20      October 1, 2020      2,173        2,217   

Kings Mountain I(2)

     5.27        5.27      October 1, 2020      1,850        1,887   

Kings Mountain II(2)

     5.47        5.47      January 1, 2020      5,475        5,594   

Union Cross Bldg. I(2)

     5.50        5.50      July 1, 2021      2,701        2,749   

Union Cross Bldg. II(2)

     5.53        5.53      June 1, 2021      8,249        8,398   

Thames Valley Five(3)(4)

     6.42        6.42      May 30, 2013      9,062        8,781   

Lakeside Office Center(5)

     6.03        6.03      September 1, 2015      9,000        9,000   

Enclave on the Lake(6)

     5.45        5.45      May 1, 2011      17,810        17,906   

Albion Mills Retail Park(3)(7)(8)

     5.25        5.25      October 10, 2013      9,272        8,985   

Avion Midrise III & IV(9)

     5.52        5.52      April 1, 2014      21,244        21,354   

12650 Ingenuity Drive(10)

     5.62        5.62      October 1, 2014      12,964        13,061   

Maskew Retail Park(3)(11)

     5.68        5.68      August 10, 2014      22,453        21,759   

One Wayside Road(12)

     5.66        5.66      August 1, 2015      14,380        14,465   

One Wayside Road(12)

     5.92        5.92      August 1, 2015      11,942        12,006   

100 Tice Blvd(13)

     5.97        5.97      September 15, 2017      20,981        21,100   

100 Tice Blvd(13)

     5.97        5.97      September 15, 2017      20,980        21,100   

Ten Parkway North

     4.75        4.75      January 1, 2021      12,556        12,600   

Pacific Corporate Park(14)

     4.89        4.89      December 7, 2017      84,000        85,000   

4701 Gold Spike Drive(15)

     4.45        —        March 1, 2018      10,650        —     

1985 International Way(15)

     4.45        —        March 1, 2018      7,400        —     

Summit Distribution Center(15)

     4.45        —        March 1, 2018      6,700        —     

3660 Deerpark Boulevard(15)

     4.45        —        March 1, 2018      7,650        —     

Tolleson Commerce Park II(15)

     4.45        —        March 1, 2018      4,600        —     

100 Kimball Drive(16)

     5.25        —        March 1, 2021      33,000        —     
                       

Notes Payable

            432,753        365,353   

Plus Premium

            3,998        4,155   

Less Discount

            (3,463     (3,700 )

Less Albion Mills Retail Park Fair Value Adjustment

            (197     (216
                       

Notes Payable Net of Premium/Discount and Fair Value Adjustment

          $ 433,091      $ 365,592   
                       

 

(1) 

Effective January 1, 2011, principal and interest payments are due monthly for the remaining 60 months of the loan term.

 

(2)

These notes payable were assumed from the seller of the Carolina Portfolio on August 30, 2007 as part of the property acquisitions and were recorded at estimated fair value which includes the discount.

 

(3) 

These loans are subject to certain financial covenants (interest coverage and loan to value).

 

(4) 

We entered into the interest rate swap agreement that fixed the GBP-based LIBOR rate at 5.41% plus 1.01%, or 6.42% per annum as of March 31, 2011, which expires on May 30, 2013. The stated rates on the mortgage note payable were 1.78% and 1.74% at March 31, 2011 and December 31, 2010, respectively, and were based on GBP-based LIBOR plus a spread of 1.01%.

 

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(5) 

Interest only payments are due monthly for the first 36 months of the loan term. Principal and interest payments are due monthly for the remaining 48 months of the loan term.

 

(6) 

The loan was assumed from the seller of Enclave on the Lake on July 1, 2008 and was recorded at estimated fair value which includes the discount.

 

(7) 

The Albion Mills Retail Park notes payable balance is presented at cost basis. This loan is carried on our balance sheet at fair value (see Note 17).

 

(8) 

We entered into the interest rate swap agreement that fixed the GBP-based LIBOR rate at 3.94% plus 1.31%, or 5.25% per annum as of March 31, 2011, which expires on October 10, 2013. The stated rates on the mortgage note payable were 2.08% and 2.04% at March 31, 2011 and December 31, 2010, respectively, and were based on GBP-based LIBOR plus a spread of 1.31%.

 

(9) 

The loan was assumed from the seller of Avion Midrise III & IV on November 18, 2008 and was recorded at estimated fair value which includes the discount.

 

(10) 

The loan was assumed from the seller of 12650 Ingenuity Drive on August 5, 2009 and was recorded at estimated fair value which includes the discount.

 

(11) 

We entered into the interest rate swap agreement that fixed the GBP-based LIBOR rate at 3.42% plus 2.26, or 5.68% per annum as of March 31, 2011, which expires on August 10, 2014. The stated rates on the mortgage note payable was 3.03% and 2.99% at March 31, 2011 and December 31, 2010, respectively, and were based on GBP-based LIBOR plus a spread of 2.26%.

 

(12) 

The two loans were assumed from the seller of One Wayside road on June 24, 2010 and were recorded at estimated fair value which include the premiums.

 

(13) 

The two loans were assumed from the seller of 100 Tice Blvd. on September 28, 2010 and were recorded at estimated fair value which include the premiums.

 

(14) 

We entered into an interest rate swap agreement that fixed the LIBOR rate at 2.69% plus 2.20%, or 4.89% per annum as of March 31, 2011 which expires on December 7, 2017. The stated rates on the mortgage note payable were 2.52% at March 31, 2011 and December 31, 2010, and were based on LIBOR plus a spread of 2.20%.

 

(15) 

We entered into five loans totaling $37,000,000 on February 8, 2011 that are cross-collateralized by these properties.

 

(16) 

We entered into an interest rate swap agreement that fixed the LIBOR rate at 3.50%, plus 1.75%, or 5.25% per annum as of March 31, 2011 which expires on March 1, 2021. The stated rate on the mortgage note payable was 2.01% at March 31, 2011 and was based on LIBOR plus a spread of 1.75%.

Upon the maturity of our debt, there is a market risk as to the prevailing rates at the time of refinancing. Changes in market rates on our fixed-rate debt affect the fair market value of our debt but it has no impact on interest expense or cash flow. A 100 basis point increase or decrease in interest rates on our fixed rate debt would not increase or decrease our annual interest expense on our fixed rate debt.

The fair value of long-term debt was estimated based on current interest rates available to us for debt instruments with similar terms. The following table summarizes our financial instruments and their calculated fair value at March 31, 2011 and December 31, 2010 (in thousands):

 

     As of March 31, 2011  
     Carrying
Value
    Total Fair
Value
 

Financial Assets (Liabilities):

    

Interest Rate Swaps—Non Qualifying

   $ (1,142   $ (1,142

Interest Rate Swaps—Qualifying

     (1,149     1,149

Notes Payable

     (433,091     (429,519

Loan Payable

     (55,000     (55,000

A 100 basis point increase or decrease in interest rates would increase or decrease the fair market value of our notes payable by $17,564,000 at March 31, 2010. In addition, a 100 basis point increase or decrease in interest rates would either increase or decrease annual variable interest expense as follows; approximately $91,000 on the Thames Valley Five property, approximately $93,000 on the Albion Mills Retail Park property and approximately $225,000 on the Maskew Retail Park property.

 

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     As of December 31, 2010  
     Carrying
Value
    Total Fair
Value
 

Financial Assets (Liabilities):

    

Interest Rate Swaps—Non Qualifying

   $ (1,349   $ (1,349

Interest Rate Swaps—Qualifying

     (1,932     (1,932

Notes Payable

     (365,592     (370,187

Loan Payable

     (60,000     (60,000

In addition to changes in interest rates, the value of our real estate is subject to fluctuations based on changes in local and regional economic conditions and changes in the creditworthiness of lessees, which may affect our ability to refinance our debt if necessary.

Debt Maturities

The following table details our consolidated and unconsolidated debt maturities as of March 31, 2011 (in thousands):

 

    Consolidated Debt     Unconsolidated Debt(1)     Consolidated &
Unconsolidated Debt(1)
 
    Scheduled
Amortization
    Term
Maturities
    Total     Scheduled
Amortization
    Term
Maturities
    Total     Scheduled
Amortization
    Term
Maturities
    Total  

2011 (Nine months Ending December 31, 2011)

  $ 7,876      $ 31,029      $ 38,905      $ 936      $ —        $ 936      $ 8,812      $ 31,029      $ 39,841   

2012

    11,613        12,000        23,613        1,295        220,000        221,295        12,908        232,000        244,908   

2013(2)

    11,878        18,333        30,211        1,351        102,310        103,661        13,229        120,643        133,872   

2014

    11,842        108,766        120,608        1,409        40,640        42,049        13,251        149,406        162,657   

2015

    11,418        48,738        60,156        1,345        66,959        68,304        12,763        115,697        128,460   

2016

    11,161        —          11,161        —          —          —          11,161        —          11,161   

2017

    11,520        98,326        109,846        —          —          —          11,520        98,326        109,846   

2018

    7,019        32,165        39,184        —          —          —          7,019        32,165        39,184   

2019

    6,793        —          6,793        —          —          —          6,793        —          6,793   

2020

    5,400        —          5,400        —          —          —          5,400        —          5,400   

2021

    2,650        34,032        36,682        —          —          —          2,650        34,032        36,682   

Thereafter

    5,194        —          5,194        —          —          —          5,194        —          5,194   
                                                                       

Total

  $ 104,364      $ 383,389      $ 487,753      $ 6,336      $ 429,909      $ 436,245      $ 110,700      $ 813,298      $ 923,998   
                                                                       

Weighted Average Maturity (years)

        5.28            2.65            4.04   

Weighted Average Interest Rate

        5.12         4.69         4.92

 

(1) 

Unconsolidated debt amounts are at our pro rata share of effective ownership and assumes that the Duke joint venture unsecured term loan option to extend is exercised and the loan matures in March 2012

 

(2) 

The Thames Valley Five consolidated debt ($9,062,000 at March 31, 2011) maturity date may be extended for an additional two years from May, 2013 to May, 2015. In addition, Afton Ridge has the option to extend the maturity date of the unconsolidated debt ($22,950,000 at March 31, 2011 – our share) for one additional year from October, 2013 to October, 2014.

Encumbered and Unencumbered Properties

The following table details our Encumbered and Unencumbered properties as of March 31, 2011 (Approximate Acquisition Cost and Debt Balance in thousands):

 

    Consolidated Properties     Unconsolidated Properties(1)     Consolidated &
Unconsolidated  Properties(1)
 
    Properties     Approximate
Acquisition Cost
    Debt
Balance
    Properties     Approximate
Acquisition Cost
    Debt
Balance
    Properties     Approximate
Acquisition Cost
    Debt
Balance
 

Encumbered Properties(2)

    46      $ 1,113,905      $ 487,753        17      $ 411,576      $ 216,245        63      $ 1,525,481      $ 703,998   

Unencumbered Properties

    27        194,655        —          26        491,932        —          53        686,587        —     

Unsecured Debt Borrowing(3)

    —          —          —          —          —          220,000       —          —          220,000  
                                                                       

Total Properties

    73      $ 1,308,560      $ 487,753        43      $ 903,508      $ 436,245        116      $ 2,212,068      $ 923,998   
                                                                       

 

(1) 

Number of Properties at 100%. Approximate Acquisition Cost and Debt Balance for Unconsolidated Properties is at our pro rata share of effective ownership. Does not include our investment in CBRE Strategic Partners Asia.

 

(2) 

Includes eight properties secured by the Wells Fargo Credit Facility.

 

(3) 

Duke joint venture unsecured term loan maturing in March 2012.

 

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Subsequent Events

From April 1, 2011 through May 6, 2011, we received gross proceeds from our current public offering of approximately $61,522,537 from the sale of 6,209,414 common shares.

On April 4, 2011, we paid the fixed rate mortgage loan that we assumed with our purchase of the Enclave on the Lake property off and extended the lease expiration to June 2022.

On April 11, 2011, we acquired a fee interest in two office buildings located at 70 Hudson Street, or 70 Hudson, and 90 Hudson Street, or 90 Hudson, in Jersey City, New Jersey (collectively, “70 & 90 Hudson”). We acquired 70 & 90 Hudson for an aggregate purchase price of approximately $310,000,000, exclusive of customary closing costs and the assumption of approximately $238,419,000 in two existing mortgage loans, or collectively the Assumed Loans. The 70 Hudson mortgage loan has a current balance of approximately $120,857,000 and bears interest at a rate of 5.64% annually, matures on April 11, 2016, has a 30-year amortization schedule, may be defeased at any time subject to posting adequate defeasance collateral and related conditions and is pre-payable in whole, without penalty or premium, during the three month period immediately preceding the maturity date. The balance due at maturity is approximately $111,449,000. The 90 Hudson mortgage loan has a current balance of approximately $117,562,000 and bears interest at a rate of 5.66% annually, matures on May 1, 2016, has a 30-year amortization schedule and is pre-payable at any time subject to a prepayment premium of the greater of 1% of the then outstanding principal balance and yield maintenance, except during the three month period immediately preceding the maturity date, when no such premium or other penalty shall apply. The balance due at maturity is approximately $106,953,000. A $50,000 fee was paid to CBRE Capital Markets, an affiliate of the Investment Advisor, in connection with the assumption of the 90 Hudson mortgage loan. In addition, we have provided a guaranty of certain recourse obligations and an environmental indemnity for each of the Assumed Loans. The agreements pertaining to the Assumed Loans contain customary provisions, including representations, warranties, covenants and indemnifications. We funded the approximately $71,581,000 balance of the aggregate purchase price, exclusive of closing costs, using the net proceeds from our current public offering. Upon closing, we paid the Investment Advisor a $4,650,000 acquisition fee.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For a discussion of quantitative and qualitative disclosures about market risk, see the “Quantitative and Qualitative Disclosures About Market Risk” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations above.

 

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We have formally adopted a policy for disclosure controls and procedures that provides guidance on the evaluation of disclosure controls and procedures and is designed to ensure that all corporate disclosure is complete and accurate in all material respects and that all information required to be disclosed in the periodic reports submitted by us under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods and in the manner specified in the Securities and Exchange Commission’s rules and forms and that disclosure controls and procedures were effective to ensure that the information required to be disclosed by us is accumulated and communicated to our management, including our chief executive officer and chief financial offer, as appropriate to allow timely decisions regarding required disclosure. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within our company to disclose material information otherwise required to be set forth in our periodic reports. Also, we have an investment in three unconsolidated entities. As we do not control these entities, our disclosure controls and procedures with respect to these entities are necessarily substantially more limited than those we maintain with respect to our consolidated subsidiaries.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of our disclosure controls and procedures. Based upon that evaluation, as required by the Securities Exchange Act Rule 13(a)-15(e), our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Controls Over Financial Reporting

No changes in internal control over financial reporting occurred during the fiscal quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II.

OTHER INFORMATION

 

Item 1. Legal Proceedings

We are not party to any material legal proceedings as of March 31, 2011.

 

Item 1A. Risk Factors

There have been no material changes to the risk factors set forth in Item 1.A. to Part I of our Annual Report on Form 10-K for the year ended December 31, 2010.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Securities and Repurchases of Securities

During the three months ended March 31, 2011, we did not sell any equity securities that are not registered under the Securities Act of 1933, as amended.

The following table provides information with respect to our Share Redemption Program for the three months ended March 31, 2011:

 

Period

   Total Number of
Shares  Purchased
     Average Price
Paid Per
Share
     Total Number of Shares
Purchased as Part of
Publicly Announced Plans
or Programs
     Maximum Number (or
approximate dollar  value) of
Shares that May Yet Be Purchased
Under the Plans or Programs
 

January

     591,351.42       $ 9.19         N/A         N/A   

February

     —           —           N/A         N/A   

March

     —           —           N/A         N/A   

Total

     591,351.42       $ 9.19         N/A         N/A   

Use of Proceeds from Sale of Registered Securities

The registration statement relating to our initial public offering (No. 333-127405) was declared effective on October 24, 2006. CNL Securities Corp. is the Dealer Manager of our offering. The registration statement covered up to $2,000,000,000 in common shares of beneficial interest, 90% of which were offered at a price of $10.00 per share, and 10% of which were offered pursuant to our dividend reinvestment plan at a purchase price equal to the higher of $9.50 per share or 95% of the fair market value of a common share on the reinvestment date, as determined by the Investment Advisor or another firm we choose for that purpose. Our initial public offering was terminated effective as of the close of business on January 29, 2009. As of the close of business on January 29, 2009, we had sold a total of 60,808,967 common shares in the initial public offering, including 1,487,943 common shares which were issued pursuant to our dividend reinvestment plan. We withdrew from registration a total of 140,243,665 common shares that were registered but not sold in connection with the initial public offering. From October 24, 2006 (effective date) through January 29, 2009 (termination date), we had accepted subscriptions from 13,270 investors, issued 60,808,967 common shares and received $607,345,702 in gross offering proceeds pursuant to our initial public offering. After payment of approximately $8,290,000 in acquisition fees and related expenses, payment of approximately $26,335,000 in selling commission, $8,898,000 in dealer manager fees, $4,008,000 in marketing support fees and payment of approximately $12,147,000 in organization and offering expenses, as of January 29, 2009, we had raised aggregate net offering proceeds of approximately $548,000,000.

The registration statement relating to our follow-on public offering (No. 333-152653) was declared effective on January 30, 2009. CNL Securities Corp. is the Dealer Manager of our follow-on offering. The registration statement covers up to $3,000,000,000 in common shares of beneficial interest, 90% of which will be offered at a price of $10.00 per share, and 10% of which will be offered pursuant to our dividend reinvestment plan at a purchase price equal to the higher of $9.50 per share or 95% of the fair market value of a common share on the reinvestment date, as determined by the Investment Advisor or another firm we choose for that purpose. We reserve the right to reallocate the shares between the primary offering and our dividend reinvestment plan. From January 30, 2009 (effective date) through March 31, 2011, we had accepted subscriptions from 28,954 investors, issued 111,137,409 common shares and received $1,108,455,774 in gross offering proceeds pursuant to our public offering after payment of $28,485,128 in acquisition fees and related expenses, payment of approximately $57,288,000 in selling commissions, $22,934,000 in dealer manager fees, $8,649,000 in marketing support fees and payment of approximately $17,109,000 in organization and offering expenses, as of March 31, 2011, we had raised aggregate net offering proceeds of approximately $973,981,000.

 

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Item 3 Defaults Upon Senior Securities

None.

 

Item 4. (Removed and Reserved)

 

Item 5. Other Information

None.

 

Item 6. Exhibits

 

10.1    Loan Agreement dated March 24, 2011, between Duke/Hulfish, LLC and Wells Fargo Bank, National Association (Previously filed as Exhibit 10.1 to the Current Report on Form 8-K/A (File 000-53200) filed March 29, 2011 and incorporated herein by reference).
31.1    Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
31.2    Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
32.1    Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
32.2    Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    CB RICHARD ELLIS REALTY TRUST
Date: May 16, 2011       /s/    JACK A. CUNEO        
      Jack A. Cuneo
      President and Chief Executive Officer
   
Date: May 16, 2011       /s/    LAURIE E. ROMANAK        
      Laurie E. Romanak
      Chief Financial Officer