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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 June 30, 2011

OR

 

¨ 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: 0-51948

 

 

Excelsior LaSalle Property Fund, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   20-1432284

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

225 High Ridge Road, Stamford, CT, 06905-3039

(Address of principal executive offices, including Zip Code)

(203) 352-4400

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

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  x    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.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    Smaller reporting company   ¨

The registrant has determined that it is a Non-accelerated filer because no public trading market exists for its common stock.

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 of the registrant’s Class A Common Stock, $.01 par value, outstanding on August 4, 2011 was 4,135,635.

 

 

 


Table of Contents

Excelsior LaSalle Property Fund, Inc.

INDEX

 

     PAGE
NUMBER
 

Part I - FINANCIAL INFORMATION

  

Item 1. Financial Statements (unaudited)

  

Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010

     3   

Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June  30, 2011 and 2010

     4   

Consolidated Statements of Equity for the six months ended June 30, 2011 and 2010

     5   

Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010

     6   

Notes to Consolidated Financial Statements

     7   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     14   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     29   

Item 4. Controls and Procedures

     29   

Part II - OTHER INFORMATION

  

Item 1. Legal Proceedings

     31   

Item 1A. Risk Factors

     31   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     31   

Item 3. Defaults Upon Senior Securities

     31   

Item 4. (Removed and Reserved)

     31   

Item 5. Other Information

     31   

Item 6. Exhibits

     31   

SIGNATURES

     32   

 

2


Table of Contents

PART I

FINANCIAL INFORMATION

 

Item 1. Financial Statements.

EXCELSIOR LASALLE PROPERTY FUND, INC.

CONSOLIDATED BALANCE SHEETS

$ in thousands, except per share amounts

(Unaudited)

 

     June 30,
2011
    December 31,
2010
 

ASSETS

    

Investments in Real Estate:

    

Land (including from VIEs of $32,593 and $32,593, respectively)

   $ 107,490      $ 110,332   

Buildings and equipment (including from VIEs of $232,426 and $238,500, respectively)

     693,599        709,408   

Less accumulated depreciation (including from VIEs of $(21,892) and $(24,846), respectively)

     (78,027     (76,028
  

 

 

   

 

 

 

Net Property and Equipment

     723,062        743,712   

Investments in unconsolidated real estate affiliates

     26,439        27,675   
  

 

 

   

 

 

 

Net Investments in Real Estate

     749,501        771,387   

Cash and cash equivalents (including from VIEs of $2,733 and $2,637, respectively)

     36,885        33,431   

Restricted cash (including from VIEs of $3,432 and $1,454, respectively)

     10,106        11,751   

Tenant accounts receivable, net (including from VIEs of $899 and $1,164, respectively)

     1,841        2,254   

Deferred expenses, net (including from VIEs of $1,017 and $1,113, respectively)

     4,191        4,137   

Acquired intangible assets, net (including from VIEs of $5,313 and $5,568, respectively)

     37,877        42,097   

Deferred rent receivable, net (including from VIEs of $905 and $711, respectively)

     4,794        4,816   

Prepaid expenses and other assets (including from VIEs of $423 and $442, respectively)

     1,252        816   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 846,447      $ 870,689   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Mortgage notes payable, net (including from VIEs $190,525 and $191,288, respectively)

   $ 586,888      $ 592,804   

Accounts payable and other accrued expenses (including from VIEs of $2,233 and $2,536, respectively)

     8,515        10,377   

Accrued interest (including from VIEs of $901 and $928, respectively)

     2,604        2,541   

Accrued real estate taxes (including from VIEs of $1,715 and $477, respectively)

     3,119        2,162   

Manager and advisor fees payable

     772        777   

Acquired intangible liabilities, net

     7,890        9,319   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     609,788        617,980   

Commitments and contingencies

     —          —     

Equity:

    

Common stock: $0.01 par value; 100,000,000 shares authorized; 4,135,635 shares issued and outstanding at June 30, 2011 and December 31, 2010

     41        41   

Additional paid-in capital

     453,244        453,244   

Accumulated other comprehensive income

     877        462   

Distributions to stockholders

     (78,361     (78,361

Accumulated deficit

     (150,318     (133,939
  

 

 

   

 

 

 

Total Excelsior LaSalle Property Fund, Inc. stockholders’ equity

     225,483        241,447   
  

 

 

   

 

 

 

Noncontrolling interests

     11,176        11,262   
  

 

 

   

 

 

 

Total Equity

     236,659        252,709   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND EQUITY

   $ 846,447      $ 870,689   
  

 

 

   

 

 

 

The abbreviation “VIEs” above means Variable Interest Entities.

See notes to consolidated financial statements.

 

3


Table of Contents

EXCELSIOR LASALLE PROPERTY FUND, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

$ in thousands, except per share amounts

(Unaudited)

 

     Three Months
Ended
June  30,

2011
    Three Months
Ended
June  30,

2010
    Six Months
Ended
June 30,

2011
    Six Months
Ended
June 30,

2010
 

Revenues:

        

Minimum rents

   $ 20,259      $ 19,222      $ 39,982      $ 38,585   

Tenant recoveries and other rental income

     4,447        4,753        8,807        9,231   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenues

     24,706        23,975        48,789        47,816   

Operating Expenses:

        

Real estate taxes

     2,708        2,958        5,226        5,262   

Property operating

     5,722        5,601        11,326        11,277   

Manager and advisor fees

     760        857        1,548        1,851   

Fund level expenses

     347        523        734        1,013   

Provision for (net recovery of) doubtful accounts

     (21     176        293        410   

General and administrative

     39        279        255        489   

Provision for (net recovery of) impairment of real estate

     14,934        (1,039     14,934        (1,580

Depreciation and amortization

     6,422        7,353        12,859        14,520   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Operating Expenses

     30,911        16,708        47,175        33,242   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating (Loss) Income

     (6,205     7,267        1,614        14,574   

Other Income and (Expenses):

        

Interest expense

     (8,404     (8,793     (16,722     (17,525

Loss on extinguishment of debt

     —          (73     —          (73

Equity in loss of unconsolidated affiliates

     (596     (190     (1,236     (590
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Income and (Expenses)

     (9,000     (9,056     (17,958     (18,188
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from Continuing Operations

     (15,205     (1,789     (16,344     (3,614

Discontinued Operations:

        

(Loss) income from Discontinued Operations

     —          (501     —          1,511   

Gain on sale of discontinued operations, net

     —          822        —          822   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Income from Discontinued Operations

     —          321        —          2,333   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Loss

     (15,205     (1,468     (16,344     (1,281
  

 

 

   

 

 

   

 

 

   

 

 

 

Plus: Net (income) loss attributable to the noncontrolling interests

     (39     272        (35     523   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Excelsior LaSalle Property Fund, Inc.

     (15,244     (1,196     (16,379     (758

Other Comprehensive Income (Loss):

        

Foreign currency translation adjustment

     81        (505     415        (154
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Comprehensive Income (Loss)

     81        (505     415        (154
  

 

 

   

 

 

   

 

 

   

 

 

 

Net Comprehensive Loss

   $ (15,163   $ (1,701   $ (15,964   $ (912
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss from continuing operations attributable to Excelsior LaSalle Property Fund, Inc. per share-basic and diluted

   $ (3.69   $ (0.37   $ (3.96   $ (0.75

Total income from discontinued operations per share-basic and diluted

   $ —        $ 0.08      $ —        $ 0.56   

Net loss attributable to Excelsior LaSalle Property Fund, Inc. per share-basic and diluted

   $ (3.69   $ (0.29   $ (3.96   $ (0.19
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average common stock outstanding-basic and diluted

     4,135,635        4,135,635        4,135,635        4,135,635   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

4


Table of Contents

EXCELSIOR LASALLE PROPERTY FUND, INC.

CONSOLIDATED STATEMENTS OF EQUITY

$ in thousands, except per share amounts

(Unaudited)

 

                   Additional
Paid in
Capital
     Other
Comprehensive
Income
     Distributions
to Stockholders
    (Accumulated
Deficit)
    Noncontrolling
Interests
    Total
Equity
 
     Common Stock                 
     Shares      Amount                 

Balance, January 1, 2011

     4,135,635       $ 41       $ 453,244       $ 462       $ (78,361   $ (133,939   $ 11,262      $ 252,709   

Net (loss) income

     —           —           —           —           —          (16,379     35        (16,344

Other comprehensive income

     —           —           —           415         —          —          —          415   

Cash contributed from noncontrolling interests

     —           —           —           —           —          —          481        481   

Cash distributed to noncontrolling interests

     —           —           —           —           —          —          (602     (602
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2011

     4,135,635       $ 41       $ 453,244       $ 877       $ (78,361   $ (150,318   $ 11,176      $ 236,659   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

                   Additional
Paid In
Capital
     Other
Comprehensive
(Loss)
    Distributions
to Stockholders
   
(Accumulated
Deficit)
    Noncontrolling
Interests
    Total
Equity
 
     Common Stock                
     Shares      Amount                

Balance, January 1, 2010 (previously reported)

     4,135,635       $ 41       $ 453,244       $ (39   $ (78,361   $ (98,246   $ 12,684      $ 289,323   

Cumulative effect of change in accounting principle

     —           —           —           —          —          (53     (104     (157
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, January 1, 2010

     4,135,635       $ 41       $ 453,244       $ (39   $ (78,361   $ (98,299   $ 12,580      $ 289,166   

Net loss

     —           —           —           —          —          (758     (523     (1,281

Other comprehensive income

     —           —           —           (154     —          —          —          (154

Cash contributed from noncontrolling interests

     —           —           —           —          —          —          231        231   

Cash distributed to noncontrolling interests

     —           —           —           —          —          —          (374     (374
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2010

     4,135,635       $ 41       $ 453,244       $ (193   $ (78,361   $ (99,057   $ 11,914      $ 287,588   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

5


Table of Contents

EXCELSIOR LASALLE PROPERTY FUND, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

$ in thousands, except per share amounts

(Unaudited)

 

     Six Months Ended
June 30,

2011
    Six Months Ended
June 30,

2010
 

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net loss

   $ (16,344   $ (1,281

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Depreciation (including discontinued operations)

     8,645        9,734   

Amortization of in-place lease intangible assets (including discontinued operations)

     3,867        4,564   

Amortization of net above- and below-market in-place leases (including discontinued operations)

     (1,001     (839

Amortization of financing fees (including discontinued operations)

     330        370   

Amortization of debt premium and discount (including discontinued operations)

     (107     (107

Amortization of lease commissions (including discontinued operations)

     347        340   

Gain on sale of discontinued operations

     —          (822

Loss on extinguishment of debt

     —          242   

Provision for doubtful accounts

     293        410   

Deferred rent (including discontinued operations)

     27        433   

Impairment (net recovery) of real estate (including discontinued operations)

     14,934        (3,142

Equity in loss of unconsolidated affiliates

     1,236        590   

Net changes in assets and liabilities:

    

Tenant accounts receivable

     120        561   

Prepaid expenses and other assets

     (436     (131

Manager and advisor fees payable

     (5     (490

Accounts payable and accrued expenses

     (753     (2,109
  

 

 

   

 

 

 

Net cash provided by operating activities

     11,153        8,323   

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Proceeds from sale of real estate investments

     —          53,382   

Capital improvements and lease commissions

     (2,197     (1,189

Loan escrows

     1,645        (5,467

Effect of change in accounting principle to beginning cash

     —          (1,913
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (552     44,813   

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Distributions paid to noncontrolling interests

     (602     (374

Contributions received from noncontrolling interests

     481        231   

Payments on credit facility

     —          (6,525

Debt issuance costs

     (89     (200

Principal payments on mortgage notes and other debt payable

     (6,933     (50,257
  

 

 

   

 

 

 

Net cash used in financing activities

     (7,143     (57,125
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     3,458        (3,989

Effect of exchange rates

     (4     (7

Cash and cash equivalents at the beginning of the period

     33,431        44,258   
  

 

 

   

 

 

 

Cash and cash equivalents at the end of the period

   $ 36,885      $ 40,262   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Interest paid (including discontinued operations)

   $ 16,448      $ 18,401   
  

 

 

   

 

 

 

Non-cash activities:

    

Write-offs of receivables

   $ 113      $ 331   

Write-offs of retired assets

     7,042        1,907   

Change in liability for capital expenditures

     106        46   

See notes to consolidated financial statements.

 

6


Table of Contents

EXCELSIOR LASALLE PROPERTY FUND, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

$ in thousands, except per share amounts

(Unaudited)

NOTE 1—ORGANIZATION

General

Except where the context suggests otherwise, the terms “we,” “us,” “our” and the “Fund” refer to Excelsior LaSalle Property Fund, Inc.

The Fund is a Maryland corporation and was incorporated on May 28, 2004 (“Inception”). The Fund was created to provide accredited investors within the meaning of Regulation D promulgated under the Securities Act of 1933 (the “Securities Act”) with an opportunity to participate in a private real estate investment fund that has elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes. We are authorized to issue up to 100,000,000 of our Class A common stock, $0.01 par value per share (our “Common Stock” or “Shares”). Please note that while we use the term “Fund,” the Fund is not a mutual fund or any other type of “investment company” as that term is defined by the Investment Company Act of 1940, as amended (the “Investment Company Act”), and will not be registered under the Investment Company Act.

The Fund is managed by Bank of America Capital Advisors LLC (the “Manager”). The Manager is registered as an investment advisor with the Securities and Exchange Commission (the “SEC”). The Manager has the day-to-day responsibility for our management and administration pursuant to a management agreement between the Fund and the Manager (the “Management Agreement”).

LaSalle Investment Management, Inc. (“LaSalle”) acts as our investment advisor (the “Advisor”), pursuant to the advisory agreement between the Fund, LaSalle and the Manager (the “Advisory Agreement”). The Advisor is registered as an investment advisor with the SEC. The Advisor has broad discretion with respect to our investment decisions and is responsible for selecting our investments and for managing our investment portfolio pursuant to the terms of the Advisory Agreement. LaSalle is a wholly-owned but operationally independent subsidiary of Jones Lang LaSalle Incorporated, a New York Stock Exchange-listed real estate services and money management firm. We have no employees as all operations are overseen and undertaken by the Manager and Advisor. In accordance with Maryland law, the Fund does have certain officers who administer the Fund’s operations. These officers are employees of, and are compensated by, the Manager.

The Manager has retained The Townsend Group, at the expense of the Manager, to assist the Manager in reviewing the investment activities of the Advisor and the investment performance of the Fund’s assets and monitoring compliance with the Fund’s investment guidelines. The Townsend Group is a consulting firm whose exclusive focus is the asset class of real estate. Founded in 1983, and with offices in Cleveland, Denver, San Francisco and London, The Townsend Group is a provider of real estate consulting services to institutional investors in the United States.

Our primary business is the ownership and management of a diversified portfolio of retail, office, industrial and apartment properties primarily located in the United States. As of June 30, 2011, we wholly or majority owned and controlled 34 consolidated properties. As of June 30, 2011, we owned interests in two unconsolidated properties.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Principles of Consolidation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and include the accounts of our wholly-owned subsidiaries, consolidated variable interest entities and the unconsolidated investments in real estate affiliates accounted for under the equity method of accounting. We consider the authoritative guidance of accounting for investments in common stock, investments in real estate ventures, investors accounting for an investee when the investor has the majority of the voting interest but the minority partners have certain approval or veto rights, determining whether a general partner or general partners as a group controls a limited partnership or similar entity when the limited partners have certain rights, and the consolidation of variable interest entities in which we own less than a 100% interest. On January 1, 2010, the Fund adopted revised guidance regarding the consolidation of variable interest entities. As of June 30, 2011, there were six consolidated variable interest entities of which the Fund is the primary beneficiary with the power to direct the activities that most significantly impact the variable interest entities’ performance and two unconsolidated real estate affiliates. With respect to our 80% interest in 111 Sutter Street, we have concluded that we do not control the entity, despite having an ownership interest of 50% or greater, because the entity is not considered a variable interest entity and the approval of all of the members is contractually required with respect to major decisions, such as operating and capital budgets, the sale, exchange or other disposition of real property, the commencement, compromise or settlement

 

7


Table of Contents

of any lawsuit, legal proceeding or arbitration or the placement of new or additional financing collateralized by assets of the venture. All significant intercompany balances and transactions have been eliminated in consolidation.

Parenthetical disclosures are shown on our Consolidated Balance Sheets regarding the amounts of variable interest entities’ assets and liabilities that are consolidated.

Noncontrolling interests represent the minority members’ proportionate share of the equity in The District at Howell Mill, Cabana Beach San Marcos, Cabana Beach Gainesville, Campus Lodge Athens, Campus Lodge Columbia, The Edge at Lafayette and Campus Lodge Tampa. At acquisition, we measured and recorded the assets, liabilities and non-controlling interests at the implied fair value, based on the purchase price. Noncontrolling interests will increase for the minority members’ share of net income of these entities and contributions and decrease for the minority members’ share of net loss and distributions.

Certain reclassifications of prior period amounts have been made to the consolidated balance sheets. These reclassifications have been made to conform to the 2011 presentation. These reclassifications have not changed the Fund’s financial position as of June 30, 2011 and December 31, 2010, or consolidated results of operations or cash flows for six months ended June 30, 2011 and the year ending December 31, 2010.

The accompanying unaudited interim financial statements have been prepared in accordance with the accounting policies described in the financial statements and related notes included in the Fund’s Form 10-K filed with the SEC on March 3, 2011 (our “2010 Form 10-K”) and should be read in conjunction with such financial statements and related notes. The following notes to these interim financial statements highlight significant changes to the notes included in the December 31, 2010 audited financial statements within in our 2010 Form 10-K and present interim disclosures as required by the SEC.

The interim financial data as of June 30, 2011 and for the three and six months ended June 30, 2011 and 2010 is unaudited; however, in the opinion of the Fund, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. All significant intercompany balances and transactions have been eliminated in consolidation.

Allowance for Doubtful Accounts

We provide an allowance for doubtful accounts against the portion of accounts receivable and deferred rent receivable that is estimated to be uncollectible. Such allowance is reviewed periodically based upon our recovery experience. At June 30, 2011 and December 31, 2010, our allowance for doubtful accounts was $999 and $819, respectively.

Deferred Expenses

Deferred expenses consist of debt issuance costs and lease commissions. Debt issuance costs are capitalized and amortized over the terms of the respective agreements as a component of interest expense. Lease commissions are capitalized and are amortized over the term of the related lease as a component of depreciation and amortization expense. Deferred expenses accumulated amortization at June 30, 2011 and December 31, 2010 was $3,769 and $3,384, respectively.

Acquisitions

We have allocated purchase price to acquired intangible assets, which include acquired in-place lease intangibles, acquired above-market in-place lease intangibles and acquired ground lease intangibles, and tenant improvements and lease commissions, which are reported net of accumulated amortization of $45,947 and $41,737 at June 30, 2011 and December 31, 2010, respectively, on the accompanying Consolidated Balance Sheets. The acquired intangible liabilities represent acquired below-market in-place leases, which are reported net of accumulated amortization of $14,430 and $13,158 at June 30, 2011 and December 31, 2010, respectively, on the accompanying Consolidated Balance Sheets.

Assets and Liabilities Measured at Fair Value

The authoritative guidance requires the disclosure of the fair value of our financial instruments for which it is practicable to estimate that value. The guidance does not apply to all balance sheet items. We have utilized market information as available or present value techniques to estimate the amounts required to be disclosed. Since such amounts are estimates, there can be no assurance that the disclosed value of any financial instrument could be realized by immediate settlement of the instrument. We consider the carrying value of our cash and cash equivalents to approximate their fair value due to the short maturity of these investments. We have estimated the fair value of our mortgage notes payable, reflected in the accompanying Consolidated Balance Sheets, at amounts that are based upon an interpretation of available market information and valuation methodologies (including discounted cash flow analyses with regard to fixed rate debt) for similar loans made to borrowers with similar credit ratings and for the same maturities. The fair value of our mortgage notes payable were approximately $9,813 and $27,860 lower than the aggregate carrying amounts at June

 

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30, 2011 and December 31, 2010, respectively. Such fair value estimates are not necessarily indicative of the amounts that would be realized upon disposition of our mortgage notes payable.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the 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. For example, significant estimates and assumptions have been made with respect to useful lives of assets, recoverable amounts of receivables, initial valuations and related amortization periods of deferred costs and intangibles, particularly with respect to property acquisitions. Actual results could differ from those estimates.

NOTE 3—PROPERTY

Discontinued Operations

On April 15, 2010, we sold Havertys Furniture, an 808,000 square foot industrial center located in Braselton, GA for $35,000 resulting in a gain of $113. On the same day, we also sold 25850 S. Ridgeland, a 719,000 square foot industrial center located in Monee, IL for $19,060 resulting in a gain of $709. The results of operations and gain on sale of the properties are reported as discontinued operations for all periods presented.

During the second quarter of 2010, the Advisor determined that the conditions in the capital markets were not opportune to dispose of Georgia Door Sales Distribution Center, 105 Kendall Park Lane and 4001 North Norfleet Road, which as of December 15, 2009 were classified as held for sale. The properties were returned to continuing operations for all periods presented.

The following table summarizes income (loss) from discontinued operations for the three and six months ended June 30, 2010 resulting from the disposition of Havertys Furniture and 25850 S. Ridgeland:

 

     Three months
ended
June 30,
2010
    Six months
ended
June 30,
2010
 

Total revenues

   $ 330      $ 1,647   

Real estate taxes

     (72     (290

Property operating

     (13     (45

General and administrative

     —          (7

Net recovery of provision for impairment of real estate

     —          1,562   

Depreciation and amortization

     (19     (118

Loss on extinguishment of debt

     (638     (638

Interest expense

     (89     (600
  

 

 

   

 

 

 

(Loss) income from discontinued operations

   $ (501   $ 1,511   
  

 

 

   

 

 

 

Impairment/ Recovery of impairment of Investments in Real Estate held for use

During the second quarter of 2011, we determined that Marketplace at Northglenn was impaired. In accordance with the authoritative guidance for impairment of long-lived assets held for use, we determined the carrying value of this investment exceeded the undiscounted cash flows over our expected hold period. As such, we recognized an impairment charge of $14,934 on Marketplace at Northglenn, which represents the difference between the fair value and the carrying value of the property. The impairment stemmed from the Fund decreasing its hold period of the property due to the property’s cash flows being forecasted to no longer cover debt service as a result of Border’s bankruptcy and lower rental rates on a newly signed lease renewal that occurred during the three months ending June 30, 2011.

For the six months ended June 30, 2010, net recovery of provision for impairment of real estate of $1,580 was recorded related to a reevaluation of Georgia Door Distribution Center, 105 Kendall Park Lane and 4001 Norfleet Road, all of which were previously classified as held for sale as of December 15, 2009 and recorded at their fair values less cost to sell. The authoritative guidance states that impairment charges for previously-impaired assets classified as held for sale may be recovered at subsequent measurement dates, not to be written above carrying cost.

 

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NOTE 4—UNCONSOLIDATED REAL ESTATE AFFILIATES

We own a 46.5% interest in Legacy Village and an 80% interest in 111 Sutter Street. As a result of the adoption of revised accounting standards related to variable interest entities, 9800 South Meridian and 18922 Forge Drive became unconsolidated affiliates as of January 1, 2010. Through September 30, 2010, the Fund owned 90% interests in the 9800 South Meridian and 18922 Forge Drive investments, at which time we assigned our interests to our operating partner and received a distribution of $1,000 from property cash reserves.

The following is summarized financial information for our unconsolidated real estate affiliates:

SUMMARIZED COMBINED BALANCE SHEETS—UNCONSOLIDATED REAL ESTATE AFFILIATES

 

     June 30,
2011
     December 31,
2010
 

ASSETS

     

Investments in real estate, net

   $ 155,185       $ 157,509   

Cash and cash equivalents

     3,785         3,609   

Other assets, net

     13,568         16,567   
  

 

 

    

 

 

 

TOTAL ASSETS

   $ 172,538       $ 177,685   
  

 

 

    

 

 

 

LIABILITIES AND MEMBERS’ EQUITY

     

Mortgage notes payable

   $ 145,350       $ 147,197   

Other liabilities

     7,579         9,496   
  

 

 

    

 

 

 

TOTAL LIABILITIES

     152,929         156,693   

Members’ Equity

     19,609         20,992   
  

 

 

    

 

 

 

TOTAL LIABILITIES AND MEMBERS’ EQUITY

   $ 172,538       $ 177,685   
  

 

 

    

 

 

 

FUND INVESTMENTS IN UNCONSOLIDATED REAL ESTATE AFFILIATES

 

     June 30,
2011
    December 31,
2010
 

Members’ equity

   $ 19,609      $ 20,992   

Less: other members’ equity

     (8,098     (8,217

Basis differential in investment in unconsolidated real estate affiliates, net (a)

     14,928        14,900   
  

 

 

   

 

 

 

Investments in unconsolidated real estate affiliates

   $ 26,439      $ 27,675   
  

 

 

   

 

 

 

 

(a) The basis differential in investment in the equity of the unconsolidated real estate affiliates is attributable to a difference in the fair value of Legacy Village over its historical cost at acquisition plus the Fund’s own acquisition costs for Legacy Village and 111 Sutter Street. The Fund amortizes the basis differential over the lives of the related assets and liabilities that make up the fair value difference, primarily buildings and improvements. In some instances, the useful lives of these assets and liabilities differ from the useful lives being used to amortize the assets and liabilities by the other members. The basis differential allocated to land is not subject to amortization.

SUMMARIZED COMBINED STATEMENTS OF OPERATIONS—UNCONSOLIDATED REAL ESTATE AFFILIATES

 

     Three Months
Ended
June 30,
2011
    Three Months
Ended
June 30,
2010
    Six Months
Ended
June 30,
2011
    Six Months
Ended
June 30,
2010
 

Total revenues

   $ 6,538      $ 8,062      $ 13,173      $ 16,203   

Total operating expenses

     5,100        5,744        10,405        11,983   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     1,438        2,318        2,768        4,220   

Total other expenses

     2,081        2,576        4,175        5,187   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (643   $ (258   $ (1,407   $ (967
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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FUND EQUITY IN LOSS OF UNCONSOLIDATED REAL ESTATE AFFILIATES

 

     Three Months
Ended
June 30,
2011
    Three Months
Ended
June 30,
2010
    Six Months
Ended
June 30,
2011
    Six Months
Ended
June 30,
2010
 

Net loss of unconsolidated real estate affiliates

   $ (643   $ (258   $ (1,407   $ (967

Other members’ share of net loss

     28        41        131        390   

Adjustment for basis differential in investment in unconsolidated real estate affiliates

     19        27        40        (12

Other expense from unconsolidated real estate affiliates

     —          —          —          (1
  

 

 

   

 

 

   

 

 

   

 

 

 

Fund equity in loss of unconsolidated real estate affiliates

   $ (596   $ (190   $ (1,236   $ (590
  

 

 

   

 

 

   

 

 

   

 

 

 

NOTE 5—MORTGAGE NOTES PAYABLE

Mortgage notes payable have various maturities through 2027 and consist of the following:

 

               Amount payable as of  

Property

  

Maturity Date

  

Rate

   June 30,
2011
    December 31,
2010
 

Total mortgage notes

   September 1, 2011  - March 1, 2027    5.15% - 6.14%    $ 588,531      $ 594,340   

Net discount on assumed debt

           (1,643     (1,536
        

 

 

   

 

 

 

Mortgage notes payable, net

         $ 586,888      $ 592,804   
        

 

 

   

 

 

 

Aggregate principal payments of mortgage notes payable as of June 30, 2011 are as follows:

 

Year

   Amount  

2011

   $ 38,143   

2012

     19,934   

2013

     140,391   

2014

     140,033   

2015

     25,695   

Thereafter

     224,335   
  

 

 

 

Total

   $ 588,531   
  

 

 

 

At June 30, 2011, we were in compliance with all our debt covenants.

NOTE 6—COMMON STOCK

Stock Subscriptions

We have historically and may in the future sell additional Shares through private placements to accredited investors when and if market conditions permit. All subscriptions are subject to the receipt of cleared funds from the investor prior to the applicable subscription date in the full amount of the subscription. The subscription amount paid by each prospective investor for Shares in the Fund will initially be held in an escrow account at an independent financial institution outside the Fund, for the benefit of the investors until such time as the funds are drawn into the Fund to purchase Shares at the Current Share Price (as defined under the heading “Current Share Price” in Item 2 of this Form 10-Q). Subscription funds will be held in the escrow account for no more than 100 days before we are required to issue the subscribed Shares. At June 30, 2011 and December 31, 2010, no subscription commitments were held in escrow. At June 30, 2011 and for the year ended December 31, 2010, we sold no Shares. Subscription commitments for the issuance of new Shares held in escrow are not included in our balance sheets.

 

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Tender Offers

Pursuant to our Share Repurchase Program, we may provide limited liquidity to our stockholders by conducting tender offers pursuant to which we would offer to repurchase a specific percentage, number or dollar amount of outstanding Shares (“Tender Offer Amount”). The Tender Offer Amount for each tender offer, if any, will depend on a variety of factors, including our available liquidity, available borrowing capacity and the amount of proceeds from our most recent offering of Shares, if any. Such determinations will be made by our board of directors prior to each tender offer and will be communicated to stockholders. We do not guarantee, however, that sufficient cash will be available at any particular time to fund repurchases of our Shares, and we will be under no obligation to conduct such tender offers or to make such cash available. We did not conduct any tender offers during the six months ended June 30, 2011, and, in order to preserve cash given the current market environment, the Fund does not intend to repurchase Shares for the immediate future.

Dividend Reinvestment Plan

Stockholders may participate in a dividend reinvestment plan under which all dividends will automatically be reinvested in additional Shares. The number of Shares issued under the dividend reinvestment plan will be determined based on the Current Share Price as of the reinvestment date. For the six months ended June 30, 2011 and for the year ended December 31, 2010, we did not issue Shares under the dividend reinvestment plan.

Earnings Per Share (“EPS”)

Basic per Share amounts are based on the weighted average of Shares outstanding of 4,135,635 for the three and six months ended June 30, 2011 and 2010. We have no dilutive or potentially dilutive securities.

NOTE 7—RELATED PARTY TRANSACTIONS

Under the terms of the Management and Advisory Agreements, we paid each the Manager and Advisor an annual fixed fee equal to 0.75%, respectively, of the Fund’s net asset value (“NAV”), calculated quarterly. Effective January 1, 2010, the Manager’s fixed fee was reduced from 0.75% of NAV to 0.10% of NAV. The fixed portions of the management and advisory fees for the three and six months ended June 30, 2011 were $439 and $858, respectively. The fixed portions of the management and advisory fees for the three and six months ended June 30, 2010 were $485 and $973, respectively. Included in Manager and Advisor fees payable at June 30, 2011 and December 31, 2010 were $439 and $468, respectively, of fixed fee expense.

Under the terms of the Management and Advisory Agreements, we pay the Manager and Advisor an aggregate annual variable fee equal to 7.50% of the Variable Fee Base Amount, as defined in the Advisory Agreement, calculated quarterly. The Manager will be allocated an increasing proportion of the variable fee to the extent the Fund’s NAV increases, up to a maximum of 1.87% of the 7.50% fee paid to the Manager and the Advisor if the Fund’s NAV is $850,000 or more. Effective January 1, 2010, the Manager waived its participation in the variable fee. The total variable fees for the three and six months ended June 30, 2011 were $321 and $690, respectively. The total variable fees for the three and six months ended June 30, 2010 were $372 and $878, respectively. Included in Manager and Advisor fees payable at June 30, 2011 and December 31, 2010 were $333 and $309, respectively, of variable fee expense.

The Advisor receives an acquisition fee of 0.50% of the acquisition cost of each property acquired for us. There were no acquisition fees for the three and six months ended June 30, 2011 and 2010. There were no acquisition fees included in Manager and Advisor fees payable at June 30, 2011 or December 31, 2010. The Advisor may pay certain third-party due diligence costs related to acquisitions or unsuccessful acquisitions, which are reimbursable by us. There were no reimbursed due diligence costs for the three and six months ended June 30, 2011 and 2010. Beginning January 1, 2009, acquisition fees and due diligence costs for acquisitions were expensed as incurred. The Advisor does not receive a disposition fee for selling real estate investments.

On December 23, 2004, we entered into an expense limitation agreement (the “Expense Limitation Agreement”), which limited certain Fund expenses to 0.75% of NAV annually. The expenses subject to the limitation included fees paid to the various professional service providers, auditors, stockholder administrator, legal counsel related to the organization of the Fund or Share offering, printing costs, mailing costs, fees associated with our board of directors, cost of maintaining directors and officers insurance, blue sky fees and all Fund-level organizational costs. The Expense Limitation Agreement expired on December 31, 2010, going forward, the Fund will be responsible for all expenses as incurred. Expenses subject to the Expense Limitation Agreement are included in the Fund level expenses line on the consolidated statements of operations along with certain other Fund level expenses not subject to the Expense Limitation Agreement, such as expenses related to unsuccessful acquisitions and filing fees. As of December 31, 2010, Fund level expenses exceeded the limitation by $136 and will be carried forward for up to three years. Expenses being carried forward will only be reimbursed in a year that Fund level expenses are less than 0.75% of NAV for that calendar year.

Jones Lang LaSalle Americas, Inc. (“JLL”), an affiliate of LaSalle, is paid for property management services performed at Monument IV at Worldgate, The District at Howell Mill, 4 Research Park Drive and 36 Research Park Drive. For the three and six

 

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months ended June 30, 2011, JLL was paid $40 and $76, respectively, for property management services performed. For the three and six months ended June 30, 2010, JLL was paid $51 and $86, respectively, for property management services performed. JLL has been hired to perform leasing services for Canyon Plaza and 111 Sutter on a contingent fee basis. JLL was paid $101 and $166 for leasing services for the three and six months ended June 30, 2011, respectively. For the three and six months ended June 30, 2010, JLL was paid $135 and $167, respectively for leasing services.

Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S”), an affiliate of the Manager, is the placement agent for the Fund. The placement agent receives no compensation from us for its services, but may receive compensation in the form of a placement fee from the purchasing shareholders. MLPF&S’s primary business address is: 4 World Financial Center, 250 Vesey Street, New York, NY 10080-6186. MLPF&S is an indirect, wholly-owned subsidiary of Bank of America Corporation (“BAC”).

The Fund has mortgage notes payable to BAC, an affiliate of the Manager, collateralized by Monument IV at Worldgate and Station Nine Apartments. Bank of America, N.A. (“BANA”) was the lender on up to $7,143 of the Fund’s old line of credit, which expired in February 2010. Interest and fees paid to BAC and BANA related to the loans were $968 and $1,943, for the three and six months ended June 30, 2011, respectively. Included in mortgage notes payable, is debt payable to BAC, at June 30, 2011 and December 31, 2010 of approximately $72,235 and $72,501, respectively.

NOTE 8—COMMITMENTS AND CONTINGENCIES

The CHW Medical Office Portfolio mortgage debt requires that we deposit an annual amount of $855, up to a cumulative maximum of $1,900, into an escrow account to fund future tenant improvements and leasing commissions. The amount of the escrow funded by each of the fifteen buildings in the portfolio is capped individually pursuant to each loan agreement. At June 30, 2011, we had approximately $1,046 deposited in this escrow, and we expect to fund a net of approximately $428 during the remainder of 2011. Additionally, we are required to deposit approximately $151 per year into an escrow account to fund capital expenditures. At June 30, 2011, our capital escrow account balance was $334. These escrow accounts allow us to withdraw funds as we incur costs related to tenant improvements, leasing commissions and capital expenditures. Additionally, monthly, we are required to fund an escrow account for the future payment of insurance costs and real estate taxes in an amount equal to 1/12th of the estimated insurance premium and real estate taxes. At June 30, 2011, our insurance and real estate tax escrow balance was $625. We expect to fund the escrow requirements with operating cash flows generated by the portfolio.

The mortgage loan collateralized by Metropolitan Park North required that we post a $3,900 reserve in escrow to cover costs of certain tenant improvements, leasing commissions, rent concessions, and lost rental income in connection with re-leasing the space currently occupied by Nordstrom, a major anchor tenant of the building. Since Nordstrom has determined it will not renew its lease at Metropolitan Park North, we were obligated to post an additional $2,800 reserve into the escrow on September 30, 2010. We did not post the $2,800 reserve. On February 9, 2011, we amended the mortgage loan collateralized by Metropolitan Park North. The terms of the modification include an agreement to sweep all future cash flow to the lender and to use the $3,900 reserve to pay down the principal balance of the loan. Additionally, the borrower, a wholly owned entity of ours, was released from its obligation to post an additional $2,800 reserve. Other amendments include changing the loan to interest only until February 1, 2012, and granting the lender certain approval rights over various operating decisions.

The mortgage loan collateralized by Monument IV at Worldgate requires that, should Fannie Mae, the sole tenant at this property, not renew its lease or the space not be leased to a new tenant(s), the Fund must reserve all rental payments received from the tenant beginning on September 1, 2010. As of June 30, 2011, Fannie Mae still has not elected to renew its lease and cash totaling $2,005 had been reserved. We expect to fund approximately $386 through the mortgage loan maturity on September 1, 2011. The lender will return the reserve to the Fund if the following conditions are met: (1) no default has occurred and remains outstanding and either the tenant renewed its lease or the space has been re-leased to a new tenant(s); or (2) the mortgage loan is paid in full. If this loan is not extended and we do not sell the property, we will be obligated to pay the outstanding loan balance of $35,245 at maturity on September 1, 2011 using the Fund’s available cash.

The debt associated with six of the Fund’s student-oriented apartment communities requires that we deposit a total of $224 per year into a replacement reserve to fund future furniture replacement costs. As of June 30, 2011, we had approximately $233 deposited into this escrow. We expect to fund the loan escrows from property operations. These reserve accounts allow us to withdraw funds as we incur costs related to furniture replacement.

As part of the lease with our single tenant at the 4001 North Norfleet Road property, we provided the tenant a right to expand the current building by up to 286,000 square feet of space. If the tenant exercises this right, we will be obligated to construct this expansion space. The tenant has the right to notify us of its desire to expand at any time prior to February 28, 2016, (the end of the ninth year of the lease), or if the lease is extended, until any time prior to the end of the fourth year of any extension. As of the filing of this Form 10-Q, we had not received an expansion notice from the tenant.

* * * * * *

 

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

$ in thousands, except per share amounts

Cautionary Note Regarding Forward-Looking Statements

This Quarterly report on Form 10-Q may contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 27A of the Securities Act of 1933, as amended, regarding, among other things, our plans, strategies and prospects, both business and financial. Forward-looking statements include, but are not limited to, statements that represent our beliefs concerning future operations, strategies, financial results or other developments. Forward-looking statements can be identified by the use of forward-looking terminology such as, but not limited to, “may,” “should,” “expect,” “anticipate,” “estimate,” “would be,” “believe,” or “continue” or the negative or other variations of comparable terminology. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations. Factors that could cause us not to realize our plans, intentions or expectations include, but are not limited to, those discussed under the headings “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” contained in the Fund’s 2010 Form 10-K and our periodic reports filed with the SEC, including risks related to: (i) the current global financial crisis; (ii) student-oriented apartment communities; (iii) commercial real estate ownership; (iv) competition for attractive investments; (v) performance of the Manager and the Advisor; (vi) our ability to use leverage; (vii) the loss of key personnel by the Manager or the Advisor; (viii) compliance with the Exchange Act; (ix) our failure to achieve our return objectives; (x) the impact of co-tenancy provisions; (xi) defaults by significant tenants; (xii) compliance with environmental laws; (xiii) the possible development of harmful mold at our properties; (xiv) dilution to our current stockholders as a result of the sale of additional shares; (xv) our ability to sell Shares and the illiquidity of our Shares (xvi) ownership limitations in our charter; (xvii) limited recourse by stockholders against our board of directors; (xviii) terrorist attacks; (xix) the adequacy of our insurance; (xx) the extent to which our investments are diversified; (xxi) our joint investments with third parties; (xxii) the structure of the fees payable to the Manager and the Advisor; (xxiii) our qualification as a “venture capital operating company” under ERISA; (xxiv) our ability to remain exempt from the registration requirements of the Investment Company Act; (xxv) our ability to qualify as a REIT. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this Form 10-Q is filed with the SEC. Except as required by law, we do not undertake any obligation to update or revise any forward-looking statements contained in this Form 10-Q.

Management Overview

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our results of operations and financial condition. This MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes to the consolidated financial statements appearing elsewhere in this Form 10-Q. All references to numbered Notes are to specific notes to our Consolidated Financial Statements beginning on page 7 of this Form 10-Q, and the descriptions referred to are incorporated into the applicable portion of this section by reference. References to “base rent” in this Form 10-Q refer to cash payments made under the relevant lease(s), excluding real estate taxes and certain property operating expenses that are paid by us and are recoverable under the relevant lease(s) and exclude adjustments for straight-line rent revenue and above- and below-market lease amortization.

The discussions surrounding our Consolidated Properties refer to our wholly or majority owned and controlled properties, which as of June 30, 2011, were comprised of:

 

   

Monument IV at Worldgate,

 

   

Georgia Door Sales Distribution Center,

 

   

105 Kendall Park Lane,

 

   

Marketplace at Northglenn,

 

   

the CHW Medical Office Portfolio,

 

   

Metropolitan Park North,

 

   

Stirling Slidell Shopping Centre,

 

   

4001 North Norfleet Road,

 

   

Station Nine Apartments,

 

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4 Research Park Drive,

 

   

36 Research Park Drive,

 

   

The District at Howell Mill,

 

   

Canyon Plaza,

 

   

Railway Street Corporate Centre,

 

   

Cabana Beach San Marcos,

 

   

Cabana Beach Gainesville,

 

   

Campus Lodge Athens,

 

   

Campus Lodge Columbia,

 

   

The Edge at Lafayette and

 

   

Campus Lodge Tampa.

Our Unconsolidated Properties, which are owned through joint venture arrangements, consist of Legacy Village and 111 Sutter Street as of June 30, 2011. From January 1, 2010 through September 30, 2010, our Unconsolidated Properties were also comprised of 9800 South Meridian and 18922 Forge Drive. Because management’s operating strategies are generally the same whether the properties are consolidated or unconsolidated, we believe that financial information and operating statistics with respect to all properties, both consolidated and unconsolidated, provide important insights into our operating results, including the relative size and significance of these elements to our overall operations. Collectively, we refer to our Consolidated and Unconsolidated Properties as our “Fund Portfolio.”

Our primary business is the ownership and management of a diversified portfolio of retail, office, industrial and apartment properties primarily located in the United States. We hire property management companies to provide the on-site, day-to-day management services for our properties. When selecting a property management company for one of our properties, we look for service providers that have a strong local market or industry presence, create portfolio efficiencies, have the ability to develop new business for us and will provide a strong internal control environment that will comply with our Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) internal control requirements. We currently use a mix of property management service providers that include large national real estate service firms, including an affiliate of the Advisor, and smaller local firms. Our property management service providers are generally hired to perform both property management and leasing services for our properties.

We seek to minimize risk and maintain stability of income and principal value through broad diversification across property sectors and geographic markets and by balancing tenant lease expirations and debt maturities across the Fund Portfolio. Our diversification goals also take into account investing in sectors or regions we believe will create returns consistent with our investment objective. Under normal conditions, we intend to pursue investments principally in well-located, well-leased assets within the office, retail, industrial and apartment sectors, which we refer to as the “Primary Sectors”. We will also pursue investments in certain sub-sectors of the Primary Sectors, for example the medical office sub-sector of the office sector or the student-oriented housing sub-sector of the apartment sector. We expect to actively manage the mix of properties and markets over time in response to changing operating fundamentals within each property sector and to changing economies and real estate markets in the geographic areas considered for investment. When consistent with our investment objectives, we will also seek to maximize the tax efficiency of our investments through like-kind exchanges and other tax planning strategies.

A key ratio reviewed by management in our investment decision process is the cash flow generated by the proposed investment, from all sources, compared to the amount of cash investment required (the “Cash on Cash Return”). Generally, we look at the Cash on Cash Returns over the one, five and ten-year time horizons and select investments that we believe meet our objectives. Certain GAAP concepts such as straight-line rent and depreciation and amortization, are not factored into our Cash on Cash Returns.

The following tables summarize our diversification by property sector and geographic region based upon the fair value of our Consolidated and Unconsolidated Properties. These tables provide examples of how the Advisor evaluates the Fund Portfolio when making investment decisions.

 

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Property Sector Diversification

Consolidated Properties

 

     Estimated
Percent of
Fair Value
June 30,
2011
 

Office

  

Commercial Office

     28

Medical Office

     18

Retail

     19

Industrial

     8

Apartment

     27

Unconsolidated Properties

 

     Estimated
Percent of
Fair Value
June 30,
2011
 

Office

  

Commercial Office

     47

Medical Office

     —     

Retail

     53

Industrial

     —     

Apartment

     —     

Geographic Region Diversification

Consolidated Properties

 

     Estimated
Percent of
Fair Value
June 30,
2011
 

East

     14

West

     44

Midwest

     11

South

     26

International

     5

Unconsolidated Properties

 

     Estimated
Percent of
Fair Value
June 30,
2011
 

East

     —     

West

     47

Midwest

     53

South

     —     

International

     —     

 

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Seasonality

With the exception of our student-oriented apartment communities, our investments are not materially impacted by seasonality, despite certain of our retail tenants being impacted by seasonality. Percentage rents (rents computed as a percentage of tenant sales) that we earn from investments in retail and office properties may, in the future, be impacted by seasonality.

For our six student-oriented apartment communities, the majority of our leases commence mid-August and terminate the last day of July. These dates generally coincide with the commencement of the universities’ fall academic term and the completion of the subsequent summer school session. In certain cases we enter into leases for less than the full academic year, including nine-month or shorter-term semester leases. As a result, we may experience significantly reduced cash flows during the summer months at properties leased under leases having terms shorter than 12 months. We are required to re-lease each property in its entirety each year, resulting in significant turnover in our tenant population from year to year. We have found certain property revenues and operating expenses to be cyclical in nature, and therefore not incurred ratably over the course of the year. Prior to the commencement of each new lease period, mostly during the first two weeks of August, we prepare the units for new incoming tenants. Other than revenue generated by in-place leases for returning tenants, we do not generally recognize lease revenue during this period referred to as “Turn” as we have no leases in place. In addition, during Turn we incur significant expenses making our units ready for occupancy, which we recognize immediately. This lease Turn period results in seasonality in our operating results during the second and third quarter of each year.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the 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. For example, significant estimates and assumptions have been made with respect to the useful lives of assets, recoverable amounts of receivables, and initial valuations and related amortization periods of deferred costs and intangibles, particularly with respect to property acquisitions. Actual results could differ from those estimates.

Critical Accounting Policies

The MD&A is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Management bases its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe there have been no significant changes during the three and six months ended June 30, 2011 to the items that we disclosed as our critical accounting policies and estimates under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our 2010 Form 10-K.

 

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Consolidated Properties

Consolidated Properties owned at June 30, 2011 are as follows:

 

Property Name

   Type    Location    Acquisition Date    Ownership
%
    Net Rentable
Square Feet
     Percentage
Leased As of
June 30,
2011
 

Monument IV at Worldgate

   Office    Herndon, VA    August 27, 2004      100     228,000         100

Georgia Door Sales Distribution Center (1)

   Industrial    Austell, GA    February 10, 2005      100     254,000         76

105 Kendall Park Lane (1)

   Industrial    Atlanta, GA    June 30, 2005      100     409,000         100

Marketplace at Northglenn

   Retail    Northglenn, CO    December 21, 2005      100     439,000         92

CHW Medical Office Portfolio

   Office    CA and AZ    December 21, 2005      100     757,000         81

Metropolitan Park North

   Office    Seattle, WA    March 28, 2006      100     179,000         100

Stirling Slidell Shopping Centre

   Retail    Slidell, LA    December 14, 2006      100     139,000         69

4001 North Norfleet Road (1)

   Industrial    Kansas City, MO    February 27, 2007      100     702,000         100

Station Nine Apartments (2)

   Apartment    Durham, NC    April 16, 2007      100     312,000         93

4 Research Park Drive

   Office    St. Charles, MO    June 13, 2007      100     60,000         100

36 Research Park Drive

   Office    St. Charles, MO    June 13, 2007      100     81,000         100

The District at Howell Mill (3)

   Retail    Atlanta, GA    June 15, 2007      87.85     306,000         100

Canyon Plaza

   Office    San Diego, CA    June 26, 2007      100     199,000         100

Railway Street Corporate Centre

   Office    Calgary, Canada    August 30, 2007      100     135,000         100

Cabana Beach San Marcos (2)(4)

   Apartment    San Marcos, TX    November 21, 2007      78     258,000         96

Cabana Beach Gainesville (2)(4)

   Apartment    Gainesville, FL    November 21, 2007      78     598,000         91

Campus Lodge Athens (2)(4)

   Apartment    Athens, GA    November 21, 2007      78     229,000         89

Campus Lodge Columbia (2)(4)

   Apartment    Columbia, MO    November 21, 2007      78     256,000         92

The Edge at Lafayette (2)(4)

   Apartment    Lafayette, LA    January 15, 2008      78     207,000         99

Campus Lodge Tampa (2)(4)

   Apartment    Tampa, FL    February 29, 2008      78     477,000         98

 

(1) On December 15, 2009, this property was designated as held-for-sale and continued its held-for-sale status at March 31, 2010. The property was subsequently removed from held-for-sale and designated as held-for-use on April 15, 2010.
(2) This apartment property is located near a university and during summer months the occupancy will fluctuate due to leasing efforts before the school year.
(3) We acquired an 87.85% ownership interest in the joint venture that owns a fee interest in this property.
(4) We acquired a 78% ownership interest in the joint venture that owns a fee interest in this property.

Unconsolidated Properties

Unconsolidated Properties owned at June 30, 2011 are as follows:

 

Property Name

   Type      Location      Acquisition Date      Ownership
%
    Net Rentable
Square Feet
     Percentage
Leased As of
June 30,
2011
 

Legacy Village

     Retail         Lyndhurst, OH         August 25, 2004         46.5     595,000         89

111 Sutter Street

     Office         San Francisco, CA         March 29, 2005         80     286,000         88

Results of Operations

General

Our revenues are primarily received from tenants in the form of fixed minimum base rents and recoveries of operating expenses. Our expenses primarily relate to the costs of operating and financing the properties. Our share of the net income or net loss from Unconsolidated Properties is included in the equity in income of unconsolidated affiliates. We believe the following analyses of comparable real estate investments provide important information about the operating results of our real estate investments, such as trends in total revenues or operating expenses that may not be as apparent in a period-over-period comparison of the entire Fund. Comparable real estate investments represent properties currently classified as continuing operations and owned by us for the three and six months ended on June 30, 2011, which were also owned by us during the three and six months ended on June 30, 2010 and included all of our Consolidated Properties as of June 30, 2011. Accordingly, with respect to the discussions of revenues and expenses below, the comparable real estate investments amounts are the same as the total real estate investment amounts.

 

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Results of Operations for the three months ended June 30, 2011 and 2010:

Revenues

 

     Total Fund Real Estate Investments/Comparable Real Estate  Investments  
     Three Months
Ended
June 30, 2011
     Three Months
Ended
June 30, 2010
     $
Change
    %
Change
 

Revenues:

          

Minimum rents

   $ 20,259       $ 19,222       $ 1,037        5.4

Tenant recoveries and other rental income

     4,447         4,753         (306     (6.4 )% 
  

 

 

    

 

 

    

 

 

   

Total revenues

   $ 24,706       $ 23,975       $ 731        3.0

Minimum rents increased by $1,037 for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010. The increase is primarily due to increased minimum rents of $756 related to the successful settlement of a tenant lawsuit over disputed rent charges at The District at Howell Mill. The increase is also related to approximately $421 of additional minimum rents at Campus Lodge Columbia, Cabana Beach San Marcos, Cabana Beach Gainesville and The Edge at Lafayette as a result of increased occupancy for the three months ended June 30, 2011 as compared to the same period of 2010. These increases were partially offset by a decrease of $212 at the CHW Medical Office Portfolio due to decreases in occupancy and rental rates for the three months ended June 30, 2011 as compared to the same period of 2010. Occupancy at the CHW Medical Office Portfolio decreased from 85% at June 30, 2010 to 81% at June 30, 2011.

Included in minimum rents, as a net increase, are above- and below-market lease amortization of $504 and $475 for the three months ended June 30, 2011 and 2010, respectively. Also included in minimum rents is straight-line rental income, which caused a $260 increase and a $66 decrease for the three months ended June 30, 2011 and 2010, respectively.

Tenant recoveries relate mainly to real estate taxes and certain property operating expenses that are paid by us and are recoverable under the various tenants’ leases. Tenant recoveries and other rental income decreased by $306 for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010. The decrease is primarily due to decreases of $368 related to lower real estate taxes and operating expenses at the CHW Medical Office Portfolio for the three months ended June 30, 2011 as compared to the same period of 2010.

Operating Expenses

 

     Total Fund Real Estate Investments/Comparable Real Estate  Investments  
     Three Months
Ended
June 30, 2011
    Three Months
Ended
June 30, 2010
    $
Change
    %
Change
 

Operating expenses:

        

Real estate taxes

   $ 2,708      $ 2,958      $ (250     (8.5 )% 

Property operating

     5,722        5,601        121        2.2

Manager and advisor fees

     760        857        (97     (11.3 )% 

Fund level expenses

     347        523        (176     (33.7 )% 

Provision for (net recovery of) doubtful accounts

     (21     176        (197     (111.9 )% 

General and administrative

     39        279        (240     (86.0 )% 

Provision for (net recovery of) impairment of real estate

     14,934        (1,039     15,973        1,537.3

Depreciation and amortization

     6,422        7,353        (931     (12.7 )% 
  

 

 

   

 

 

   

 

 

   

Total operating expenses

   $ 30,911      $ 16,708      $ 14,203        85.0

Real estate tax expense decreased by $250 for the three months ended June 30, 2011 compared to the same period of 2010 primarily due to decreases totaling $215 related to real estate tax reassessments at the CHW Medical Office Portfolio, Monument IV at Worldgate, Campus Lodge Tampa, The District at Howell Mill and Metropolitan Park North.

Property operating expenses consist of the costs of ownership and operation of the real estate investments, many of which are recoverable under net leases. Examples of property operating expenses include insurance, utilities and repair and maintenance expenses. Property operating expenses increased by $121 for the three months ended June 30, 2011 as compared to the same period of 2010. The increase is primarily related to increased utilities and repair and maintenance required at The Edge at Lafayette, Cabana Beach Gainesville and Campus Lodge Columbia totaling $110, in addition to an increase of approximately $33 at The District at Howell Mill for roof repairs and management fees.

 

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Table of Contents

Manager and advisor fees relate to the fixed and variable management and advisory fees earned by the Manager and Advisor. Fixed fees increase or decrease based on changes in the NAV which will be impacted by changes in the value of our properties and the related debt. Variable fees are calculated as a formula of cash flow generated from owning and operating the real estate investments and will fluctuate as future cash flows fluctuate. The decrease in Manager and Advisor fees from 2010 to 2011 relates mainly to a decrease in NAV and lower cash flow generated by the portfolio as a result of discontinued operations.

Our Fund level expenses in 2010 were subject to the Expense Limitation Agreement with the Manager (See Note 7), which limited certain expenses to 0.75% of NAV. These expenses related mainly to our compliance and administration related costs. The Expense Limitation Agreement expired on December 31, 2010 and, going forward, the Fund will be responsible for all expenses incurred. Fund level expenses decreased $176 for the three months ended June 30, 2011 as compared to the same period in 2010 primarily due to a decrease in legal and other professional fees.

Provision for (net recovery of) doubtful accounts relates to receivables deemed as potentially uncollectible due to the age of the receivable or the status of the tenant. Provision for (net recovery of) doubtful accounts decreased $197 for the three months ended June 30, 2011 as compared to the three months ended June 30, 2010 primarily related to a decrease of $199 at the CHW Medical Office Portfolio due to collection of previously reserved accounts and fewer past due accounts.

General and administrative expenses relate mainly to property expenses unrelated to property operations. General and administrative expenses decreased $240 primarily related to the reimbursement of $155 of legal fees related to the successful settlement of a tenant lawsuit at The District at Howell Mill. Additionally accounting for the decrease was $54 of legal costs that incurred during the three months ended June 30, 2010 related to the tenant lawsuit that were reimbursed during the three months ended.

Provision for (net recovery of) impairment of real estate relates to assets whose estimated future undiscounted cash flows have decreased below the carrying value. The increase of $15,973 is due to impairment charges of $14,934 taken on the Marketplace at Northglenn during the three months ended June 30, 2011 due to the Fund decreasing its hold period due to the property’s cash flows being forecasted to no longer cover debt service as a result of Border’s bankruptcy and lower rental rates on a newly signed lease renewal. There was also a $1,039 recovery of previously recorded impairment at 4001 North Norfleet Road, 105 Kendall Park Lane, and Georgia Door Sales Distribution Center taken in 2010. Impairment was recovered when these previously-classified held-for-sale assets were returned to held-for-use status during the three months ended June 30, 2010.

Depreciation and amortization expense will be impacted by the values assigned to buildings, personal property and in-place lease assets as part of the initial purchase price allocation. The decrease of $931 for the three months ended June 30, 2011 as compared to the same period of 2010 primarily related to personal property and intangible assets becoming fully amortized in 2011 resulting in lower deprecation and amortization expense of $344, $148 and $144 at Cabana Beach Gainesville, the CHW Medical Office Portfolio and Campus Lodge Columbia, respectively. Additionally, a $288 decrease at Metropolitan Park North was caused by the impairment charges taken in 2010 decreasing the depreciable asset base.

Other Income and Expenses

 

     Total Fund Real Estate Investments  
     Three Months
Ended
June 30, 2011
    Three Months
Ended
June 30, 2010
    $
Change
    %
Change
 

Other income and (expenses):

        

Interest expense

     (8,404     (8,793     389        4.4

Loss on extinguishment of debt

     —          (73     73        100.0

Equity in loss of unconsolidated affiliates

     (596     (190     (406     (213.7 )% 
  

 

 

   

 

 

   

 

 

   

Total other income and (expenses)

   $ (9,000   $ (9,056   $ 56        0.6

Interest expense decreased from 2010 to 2011 due to lower principal balances on various loans that have amortized. Interest expense includes the amortization of deferred finance fees of $177 and $176 for the three months ended June 30, 2011 and 2010, respectively. Also included in interest expense for the three months ended June 30, 2011 and 2010, as a net reduction, is amortization of debt premium and discount associated with the assumption of debt of $54.

The increase of loss on extinguishment of debt is a result of the debt payoff of Georgia Door Sales Distribution Center during the three months ended June 30, 2010 that did not occur for the three months ended June 30, 2011.

Equity in loss of unconsolidated affiliates increased by $406 as equity in loss at Legacy Village increased by $87 from equity income of $85 for the three months ended June 30, 2010 to equity loss of $2 for the three months ended June 30, 2011. The increase in loss at Legacy Village was result of lower minimum rents and tenant recoveries and higher operating costs and real estate taxes for

 

20


Table of Contents

the three months ended June 30, 2011 as compared to 2010. Equity in loss from 111 Sutter Street increased by $64 from equity loss of $530 for the three months ended June 30, 2010 to equity loss of $594 for the three months ended June 30, 2011. The increase of net loss at 111 Sutter Street for three months ended June 30, 2011 compared to 2010 was a result of increased amortization related to tenant improvements and leasing commissions in addition to various building repairs and maintenance. As a result of the adoption of guidance related to variable interest entities on January 1, 2010, 9800 South Meridian and 18922 Forge Drive were accounted for as unconsolidated affiliates. For the three months ended, June 30, 2010, the Fund recorded an equity loss of $0 from 9800 South Meridian as it was not required to fund losses in the investment in excess of its initial investment and an equity income of $255 from 18922 Forge Drive which represents our allocation of net income from property operations. On September 30, 2010, we assigned our interests in the 9800 South Meridian and 18922 Forge Drive investments to our operating partner.

Discontinued Operations

 

     Total Fund Real Estate Investments  
     Three Months
Ended
June 30, 2011
     Three Months
Ended
June 30, 2010
    $
Change
    %
Change
 

Discontinued Operations:

         

Loss from discontinued operations

   $ —         $ (501   $ 501        100.0

Gain on sale of discontinued operations, net

     —           822        (822     (100.0 )% 
  

 

 

    

 

 

   

 

 

   

Total income from discontinued operations

   $ —         $ 321      $ (321     (100.0 )% 

The decrease of income from discontinued operations is a result of no assets sold or held for sale for the three months ended June 30, 2011 as compared to the same period in 2010. Income from discontinued operations for the three months ended June 30, 2010, primarily related to a loss on extinguishment of debt of $638 which resulted from a prepayment penalty and write-off of unamortized financing fees.

Results of Operations for the six months ended June 30, 2011 and 2010:

Revenues

 

     Total Fund Real Estate Investments/Comparable Real Estate  Investments  
     Six Months
Ended
June 30, 2011
     Six Months
Ended
June 30, 2010
     $
Change
    %
Change
 

Revenues:

          

Minimum rents

   $ 39,982       $ 38,585       $ 1,397        3.6

Tenant recoveries and other rental income

     8,807         9,231         (424     (4.6 )% 
  

 

 

    

 

 

    

 

 

   

Total revenues

   $ 48,789       $ 47,816       $ 973        2.0

Minimum rents at comparable real estate investments increased by $1,397 for the six months ended June 30, 2011 as compared to the same period in 2010. The increase was primarily the result of increased minimum rents at Cabana Beach San Marcos, Campus Lodge Columbia, Cabana Beach Gainesville and The Edge at Lafayette of $892 related to increased occupancy. Additionally, the increase is related to a $756 successful settlement of a tenant lawsuit over disputed rent charges at The District at Howell Mill. The increase was partially offset by decreases of $405 and $134 at the CHW Medical Office Portfolio and Campus Lodge Tampa, respectively, due to decreases in rental rates and occupancy for the six months ended June 30, 2011 as compared to the same period 2010. Occupancy at CHW Medical Office Portfolio decreased from 85% at June 30, 2010 to 81% at June 30, 2011.

Included in minimum rents, as a net decrease, are above- and below-market lease amortization of $1,001 and $953 for the six months ended June 30, 2011 and 2010, respectively. Also included in minimum rents is straight-line rental income, which caused a $397 increase and a $80 decrease for the six months ended June 30, 2011 and 2010, respectively.

Tenant recoveries relate mainly to real estate taxes and certain property operating expenses that are paid by us and are recoverable under the various tenants’ leases. Tenant recoveries and other rental income decreased by $424 for the six months ended June 30, 2011 over the same period in 2010. The decrease primarily consists of $368 at the CHW Medical Office Portfolio related to reassessments of prior year real estate taxes and a $114 decrease at Monument IV at Worldgate due to lower real estate taxes for the six months ended June 30, 2011 as compared to the same period 2010.

Operating Expenses

 

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Table of Contents
     Total Fund Real Estate Investments/Comparable Real Estate  Investments  
     Six Months
Ended
June 30, 2011
     Six Months
Ended
June 30, 2010
    $
Change
    %
Change
 

Operating expenses:

         

Real estate taxes

   $ 5,226       $ 5,262      $ (36     (0.7 )% 

Property operating

     11,326         11,277        49        0.4

Manager and advisor fees

     1,548         1,851        (303     (16.4 )% 

Fund level expenses

     734         1,013        (279     (27.5 )% 

Provision for (net recovery of) doubtful accounts

     293         410        (117     (28.5 )% 

General and administrative

     255         489        (234     (47.9 )% 

Provision for (net recovery of) impairment of real estate

     14,934         (1,580     16,514        1045.2

Depreciation and amortization

     12,859         14,520        (1,661     (11.4 )% 
                           

Total operating expenses

   $ 47,175       $ 33,242      $ 13,933        41.9

Real estate tax expense decreased by $36 for the six months ended June 30, 2011 compared to the same period of 2010 due to decreases of $110 at Monument IV at Worldgate, $88 at Campus Lodge Tampa, $76 at The District at Howell Mill and $58 at Metropolitan Park North as a result of property reassessments in the current year. The decreases were partially offset by increases of $177 at the CHW Medical Office Portfolio and $111 at the Marketplace at Northglenn related to reassessments in 2010 which lowered the taxes for several prior years.

Property operating expenses consist of the costs of ownership and operation of the real estate investments, many of which are recoverable under net leases. Examples of property operating expenses include insurance, utilities and repair and maintenance expenses. Property operating expenses increased $49 for the six months ended June 30, 2011 as compared to the same period of 2010 due to $170 of increased utilities and other operating costs at The Edge at Lafayette, Campus Lodge Columbia and Station Nine Apartments primarily due to increases in occupancy at these properties and $49 of unfavorable foreign exchange rates at Railway Street Corporate Center. The increases were partially offset by decreases of $115 due to lower repair and maintenance required at Campus Lodge Tampa and Cabana Beach Gainesville, respectively, a decrease of $55 in snow removal and landscaping costs at Marketplace at Northglenn and $55 in operating and parking costs at the CHW Medical Office Portfolio.

Manager and advisor fees relate to the fixed and variable management and advisory fees earned by the Manager and Advisor. Fixed fees increase or decrease based on changes in the NAV which will be impacted by changes in the value of our properties and the related debt. Variable fees are calculated as a formula of cash flow generated from owning and operating the real estate investments and will fluctuate as future cash flows fluctuate. The decrease in Manager and Advisor fees from 2010 to 2011 relates mainly to a decrease in NAV and lower cash flow generated by the portfolio as a result of discontinued operations.

Our Fund level expenses in 2010 were subject to the Expense Limitation Agreement with the Manager (See Note 7), which limits certain expenses to 0.75% of NAV. These expenses relate mainly to our compliance and administration related costs. The Expense Limitation Agreement expired on December 31, 2010 and, going forward, the Fund will be responsible for all expenses incurred. Fund level expenses decreased $279 for the six months ended June 30, 2011 as compared to the same period in 2010 primarily due to a decrease in legal and other professional fees.

Provision for (net recovery of) doubtful accounts relates to receivables deemed as potentially uncollectible due to the age of the receivable or the status of the tenant. Provision for (net recovery of) doubtful accounts decreased $117 for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010 primarily related to decreases of $309 and $76 at the CHW Medical Office Portfolio and Cabana Beach Gainesville, respectively, due to collection of previously reserved accounts and fewer past due accounts. These decreases were partially offset by increases of $208 and $62 at Marketplace at Northglenn and The District at Howell Mill, respectively, due to tenant bankruptcies during the six months ended June 30, 2011 as compared to the same period in 2010.

General and administrative expenses relate mainly to property expenses unrelated to property operations. General and administrative expenses decreased $234 primarily due to reimbursement of $155 of legal payments related to the successful settlement of a tenant lawsuit at The District at Howell Mill. Additionally accounting for the decrease was $92 of legal costs that incurred during the six months ended June 30, 2010 related to the tenant lawsuit that were reimbursed during the six months ended June 30, 2011.

Provision for (net recovery of) impairment of real estate relates to assets whose estimated future undiscounted cash flows have decreased below the carrying value. The increase of $16,514 is due to an increase of $14,934 due to the Fund decreasing its hold period due to the property’s cash flows being forecasted to no longer cover debt service as a result of Border’s bankruptcy and lower rental rates on a newly signed lease renewal. There was also a $1,584 recovery of previously recorded impairment at 4001 North Norfleet Road, 105 Kendall Park Lane, and Georgia Door Sales

 

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Distribution Center recorded during the six months ending June 30, 2010 related to the assets returned to held-for-use status during the period.

Depreciation and amortization expense will be impacted by the values assigned to buildings, personal property and in-place lease assets as part of the initial purchase price allocation. The decrease of $1,661 for the six months ended June 30, 2011 as compared to the same period of 2010 primarily related to personal property and intangible assets becoming fully amortized in 2011 resulting in lower depreciation and amortization expense of $683, $290 and $222 at Cabana Beach Gainesville, Campus Lodge Columbia and the CHW Medical Office Portfolio, respectively. Additionally, a $576 decrease at Metropolitan Park North was caused by the impairment charges taken in 2010 decreasing the depreciable asset base. The decreases were partially offset by a total increase of $201 at 4001 N. Norfleet Road, 105 Kendall Park Lane and Georgia Door Sales Distribution Center related to no depreciation expense being recorded while the properties were classified as held for sale in the prior year.

Other Income and Expenses

 

     Total Fund Real Estate Investments  
     Six Months
Ended
June 30, 2011
    Six Months
Ended
June 30, 2010
    $
Change
    %
Change
 

Other income and (expenses):

        

Interest expense

     (16,722     (17,525     803        4.6

Loss on extinguishment of debt

     —          (73     73        100.0

Equity in loss of unconsolidated affiliates

     (1,236     (590     (646     (109.5 )% 
  

 

 

   

 

 

   

 

 

   

Total other income and (expenses)

   $ (17,958   $ (18,188   $ 230        1.3

Interest expense decreased for the six months ended June 30, 2011 from 2010 primarily due to lower principal balances on various loans that have amortized and the loan payoff of the Georgia Door Distribution Center. Interest expense includes the amortization of deferred finance fees of $330 and $345 for the six months ended June 30, 2011 and 2010, respectively. Also included in interest expense for the six months ended June 30, 2011 and 2010, as a net reduction, is amortization of debt premium and discount associated with the assumption of debt of $107.

The increase of loss on extinguishment of debt is a result of the debt payoff of Georgia Door Sales Distribution Center for the six months ended June 30, 2010 that did not occur for the six months ended June 30, 2011.

Equity in loss of unconsolidated affiliates increased by $646 as equity in the loss from Legacy Village decreased by $34 from equity loss of $104 for the six months ended June 30, 2010 to equity loss of $70 for the six months ended June 30, 2011. The decrease in net loss at Legacy Village was a result of lower interest expense and a one time lease termination fee recognized in the six months ended June 30, 2011. Equity in loss at 111 Sutter Street increased by $463 from equity loss of $704 for the six months ended June 30, 2010 to equity loss of $1,166 for the six months ended June 30, 2011. The increased loss at 111 Sutter Street was a result of a decrease in minimum rents due to lower minimum rents for newly-signed leases. As a result of the adoption of guidance related to variable interest entities on January 1, 2010, for the six months ended June 30, 2010, 9800 South Meridian and 18922 Forge Drive were accounted for as unconsolidated affiliates. For the six months ended June 30, 2010, the Fund recorded an equity loss of $0 from 9800 South Meridian as it was not required to fund losses in the investment in excess of its initial investment and an equity income of $218 from 18922 Forge Drive which represents our allocation of net income from property operations. On September 30, 2010, we assigned our interests in the 9800 South Meridian and 18922 Forge Drive investments to our operating partner.

Discontinued Operations

 

     Total Fund Real Estate Investments  
     Six Months
Ended
June 30, 2011
     Six Months
Ended
June 30, 2010
     $
Change
     %
Change
 

Discontinued Operations:

           

Income from discontinued operations

   $ —         $ 1,511       $ 1,511         100.0

Gain on sale of discontinued operations, net

     —           822         822         100.0
  

 

 

    

 

 

    

 

 

    

Total income from discontinued operations

   $ —         $ 2,333       $ 2,333         100.0

The decrease in income from discontinued operations is a result of no assets sold or held for sale for the six months ended June 30, 2011 as compared to the same period in 2010. Income from discontinued operations for the six months ended June 30, 2010, primarily related to a net $1,562 recovery of previously-recorded impairment charges on properties classified as held for sale at December 31, 2009.

 

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Current Share Price

The Current Share Price of the Common Stock (the “Current Share Price”) is established quarterly based on the following valuation methodology, which may be modified from time to time by our board of directors.

Net Asset Value Calculation. The NAV of the Fund is determined as of the end of each of the first three quarters of a fiscal year, within 45 calendar days following the end of such quarter. The Fund’s year-end NAV is determined after the completion of our year-end audit. NAV is determined as follows: (i) the aggregate fair value of (A) our interests in real estate investments (“Investments”) plus (B) all other assets of the Fund, minus (ii) the aggregate fair value of our indebtedness and other outstanding obligations as of the determination date.

We retained independent third-party real estate appraisal firms that appraise each Investment not less than annually beginning one year after acquisition. During the first three quarters after acquisition, the Investment will be carried at capitalized cost and reviewed quarterly for material events at the property or market level that may require an adjustment of the Investment’s valuation.

For each of the three quarters following the independent appraisal of a particular Investment, we are responsible for determining the value of such Investment based on our review of the appraisal and material changes at the property or market level. We are also responsible for determining the value of the indebtedness related to each Investment beginning one year after acquisition of the encumbered property and on a quarterly basis thereafter.

Current Share Price Calculation. The Current Share Price equals the NAV as of the end of each quarter divided by the number of outstanding shares of all classes of common stock of the Fund at the end of such quarter.

The Current Share Price of the Common Stock is $52.36 as of June 30, 2011.

 

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Liquidity and Capital Resources

The Fund’s primary uses and sources of cash are as follows:

 

Uses

  

Sources

Short-term liquidity and capital needs such as:

  

•      Interest payments on debt

 

•      Distributions to shareholders

 

•      Fees payable to the Manager and the Advisor

 

•      Minor improvements made to individual properties that are not recoverable through expense recoveries or common area maintenance charges to tenants

 

•      General and administrative costs

 

•      Other Fund level expenses

 

•      Lender escrow accounts for real estate taxes, insurance, and capital expenditures

  

•      Operating cash flow, including the receipt of distributions of our share of cash flow produced by our unconsolidated real estate affiliates

 

•      Proceeds from secured loans collateralized by individual properties

 

•      Proceeds from construction loans

 

•      Sales of our Common Stock, if we resume sales of Shares

Longer-term liquidity and capital needs such as:

 

•      Acquisitions of new real estate

 

•      Expansion of existing properties

 

•      Tenant improvements and leasing commissions

 

•      Debt repayment requirements, including both principal and interest

 

•      Repurchases of our Common Stock

  

•      Sales of real estate investments

 

•      Draws from lender escrow accounts

The sources and uses of cash for the six months ended June 30, 2011 and 2010 were as follows:

 

     Six Months
Ended
June 30, 2011
    Six Months
Ended
June 30, 2010
    $
Change
 

Net cash provided by operating activities

   $ 11,153      $ 8,323      $ 2,830   

Net cash (used in) provided by investing activities

     (552     44,813        (45,365

Net cash used in financing activities

     (7,143     (57,125     49,982   

Our net cash flows provided by operating activities were impacted by an increase in net loss attributable to the Fund of $15,621 primarily related to an increase in provision for (net recovery of) impairment of real estate of $16,514. Our working capital, which consists of cash, tenant accounts receivable and prepaid expenses and other assets less accounts payable and accrued expenses, accrued interest and accrued real estate taxes, was impacted between December 31, 2010 and June 30, 2011 by the following items:

 

   

an increase in prepaid expenses and other assets of $436 also related to timing of payments offset by a decrease in accounts receivable of $413 due to timing of receipts.

 

   

a decrease in accounts payable of $1,862 due to the timing of payments offset by an increase in accrued real estate taxes and accrued interest of $957 and $63, respectively, due to timing of payments.

Cash (used in) provided by investing activities decreased as a result of sales proceeds received from Havertys Furniture and 25850 S. Ridgeland of $53,382 in 2010 as well as by an increase in capital improvement and lease commission payments of $1,008 for the six months ended June 30, 2011 as compared to the six months ended June 30, 2010. This was offset by an increase in net reimbursements from loan escrows of $7,112 during the six months ended June 30, 2011 as compared to the same period in 2010. In addition, there was an increase in cash (used in) provided by investing activities of $1,913 related to the effect of a change in accounting principle for the six months ended June 30, 2010 that did not occur during the six months ended June 30, 2011. Cash used in financing activities

 

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decreased for the six months ended June 30, 2011 over the same period in 2010 due to a decrease in credit facility payments of $6,525 and a decrease in mortgage note payments of $43,324 as a result of loan paydowns.

Financing

We have relied primarily on fixed-rate financing, locking in what were favorable spreads between real estate income yields and mortgage interest rates and have tried to maintain a balanced schedule of debt maturities. We attempted to limit overall portfolio leverage to 65% at the time we made our investments (portfolio leverage is calculated as our share of the current property debt balance divided by the fair value of all our real estate investments). Declining commercial property values have caused our portfolio leverage to increase above our target leverage ratio of 65%. Based upon the valuation declines in our portfolio, we estimate our current loan-to-value to be approximately 78%.

The following Consolidated Debt table provides information on the outstanding principal balances and the weighted average interest rate at June 30, 2011 and December 31, 2010 for such debt. The Unconsolidated Debt table provides information on our pro rata share of debt associated with our unconsolidated joint ventures.

Consolidated Debt

 

     June 30, 2011     December 31, 2010  
     Principal
Balance
     Weighted
Average
Interest Rate
    Principal
Balance
     Weighted
Average
Interest Rate
 

Fixed

   $ 588,531         5.58   $ 594,340         5.58

Variable

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 588,531         5.58   $ 594,340         5.58

Unconsolidated Debt

 

     June 30, 2011     December 31, 2010  
     Principal
Balance
     Weighted
Average
Interest Rate
    Principal
Balance
     Weighted
Average
Interest Rate
 

Fixed

   $ 86,150         5.60   $ 87,133         5.60

Variable

     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 86,150         5.60   $ 87,133         5.60

We currently only have fixed-rate financing with maturities through 2027.

Line of Credit / Term Loan

On February 19, 2010, we replaced our existing line of credit with a $17,000 term loan with a $6,000 letter of credit sub-limit provided by PNC Bank, National Association. The term loan bore interest at LIBOR plus 3.75%, with a LIBOR floor of 1.00%. The term loan required quarterly principal amortization of $2,125 and could be prepaid without penalty. We fully paid the term loan on November 19, 2010.

Recent Events and Outlook

Given the uncertain economic climate and extraordinary conditions in the commercial real estate industry over the last few years, management made it a priority to implement a cash conservation strategy designed to strengthen our balance sheet and protect the value of the Fund’s assets. Through the establishment of cash reserves, management aims to equip the Fund with sufficient resources to address the portfolio’s fluctuating working capital needs, future capital expenditures, existing loan amortizations, and nearer-term debt maturities until market conditions stabilize. Several actions have been taken toward this objective including reductions in discretionary expenditures, reductions in fees, the suspension of dividend payments and the suspension of the redemption of Shares through tender offers, and lastly, selected property sales. The combination of suspending dividends and Share redemptions, coupled with the results from expense reductions and proceeds generated from property sales, has strengthened the Fund’s balance sheet and moved the Fund into an improved cash position: at June 30, 2011, the Fund had accumulated a cash balance of approximately $27,700.

Despite modest improvements in property market fundamentals and real estate capital markets, the Fund will continue to maintain a defensive tact until indications of a meaningful economic recovery become clearly evident. The Fund will continue its cash

 

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conservation initiatives designed to fortify the balance sheet and provide sufficient working capital to address the portfolio’s working capital needs, capital expenditures, loan amortizations, and nearer-term debt maturities. Opportunities to execute select property dispositions will continue to be evaluated as a means of generating additional liquidity, deleveraging, or reducing risk in the portfolio. We do not intend to engage in property sales unless we believe a fair and reasonable value may be achieved.

The challenge for 2011 and foreseeable future will be to balance the objectives of reducing portfolio risk through the establishment of increased cash reserves and retirement of debt while also returning to one of our original and primary objectives, that being to distribute free cash flow generated from property investments. However, until a marked improvement in the economy is realized and there is clearer evidence of a stabilization of property values, cash conservation will remain a near-term priority of the Fund. To help advance this initiative Bank of America has reduced its portion of the management fee on the Fund, resulting in a decrease in the management fee from 1.5% on NAV to 0.85%. This fee reduction is intended to reduce Fund expenses and benefit investors. Additionally, as fees paid to the Manager and Advisor is based upon the NAV of the Fund, as the NAV has declined their compensation has been significantly reduced.

While we historically provided limited liquidity to our stockholders by conducting tender offers, we did not and do not guarantee that sufficient cash will be available at any particular time to fund repurchases of our Shares. In this regard, we did not conduct a tender offer during the six months ended June 30, 2011 or the years ended December 31, 2009 and 2010, and, in order to preserve cash in light of the current market environment, we do not intend to repurchase Shares for the immediate future. The timing of future tender offers, if any, will be at the discretion of our board of directors, based on, among other things, the Fund’s need for liquidity.

The Fund is considering additional property dispositions as a means of generating cash. Selective dispositions will be considered in situations where we believe a fair and reasonable value may be achieved in light of the Fund’s strategic goals. The Fund will consider dispositions of non-strategic properties when it creates liquidity, deleverages the Fund and reduces risk (debt maturity and tenant lease related risks). The Fund does not intend to participate in distressed asset sales that negatively impact the Fund’s longer-term performance.

Second Quarter NAV

In the second quarter of 2011, the Fund’s NAV increased by $2.44 per share from $49.92 per share at March 31, 2011 to $52.36 per share at June 30, 2011. During the second quarter of 2011, 31% of the portfolio was externally appraised while the balance of the portfolio was internally valued using methodologies consistent with those of external appraisers. Overall, the Fund’s property values at pro-rata share increased 6.7% as compared to the first quarter of 2011, resulting in a $3.36 per share positive contribution to NAV. The second quarter NAV was further increased by $0.95 from property operations. The total property related NAV impact resulted in a $4.31 per share increase.

The increase in the Fund’s NAV was partially offset by the continued decline in the fair value of the Fund’s debt which fluctuates in tandem with market interest rates and availability of credit. Given that interest rates have continued to hover at historically low levels and the availability of credit has increased, the Fund’s accumulated debt mark-to-market as a positive component of our share value has, as of June 30, 2011, been fully eliminated. The debt mark-to-market had a negative $1.87 impact on NAV per share in the second quarter.

While the debt mark-to-market constituted over 30% of the Fund’s NAV at its peak in the third quarter of 2009, today’s NAV per share of $52.36 is comprised of 102%, or $53.41, asset or property value while, for the first time in the history of the Fund, debt value decreased NAV per share by $1.05.

2011 Key Initiatives

In 2011, the Advisor will continue its ongoing evaluation of our investment in Monument IV at Worldgate. While the outcomes of this evaluation cannot be determined at this time, the Advisor continues to closely monitor this investment and its ongoing fit within the Fund’s current strategy. The property is located in the steadily recovering Washington, D.C. submarket of Herndon, VA, directly visible from the Dulles Toll Road. As of this filing, the single tenant of the building, Fannie Mae, has not renewed its lease. Fannie Mae’s lease expires on December 31, 2011 and it did not exercise its market renewal option, which expired on December 31, 2010. Upon the expiration of this option, the Advisor retained a local leasing agent and this agent has begun a broad marketing campaign for the building as available for lease. Based upon the results of this marketing campaign along with feedback from local investment sales brokers and mortgage bankers, a specific hold, sale or refinance strategy will be developed for this property as its existing fixed-rate mortgage loan matures on September 1, 2011. Over the next few months, the Advisor will decide the strategic direction for this investment, which could include selling the property or extending the loan and using cash reserves to re-tenant the building. Under any alternative, the Advisor believes Monument IV at Worldgate continues to represent significant value to the Fund. During April 2011,

 

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the Advisor requested the loan be transferred from the master servicer to the special servicer so as to negotiate a loan extension. The transfer was granted and the Advisor has begun negotiations with the special servicer on a two-year loan extension.

Contractual Cash Obligations and Commitments

The CHW Medical Office Portfolio mortgage debt requires that we deposit an annual amount of $855, up to a cumulative maximum of $1,900, into an escrow account to fund future tenant improvements and leasing commissions. The amount of the escrow funded by each of the fifteen buildings in the portfolio is capped individually pursuant to each loan agreement. At June 30, 2011, we had approximately $1,046 deposited in this escrow, and we expect to fund a net of approximately $428 during the remainder of 2011. Additionally, we are required to deposit approximately $151 per year into an escrow account to fund capital expenditures. At June 30, 2011, our capital escrow account balance was $334. These escrow accounts allow us to withdraw funds as we incur costs related to tenant improvements, leasing commissions and capital expenditures. Additionally, monthly, we are required to fund an escrow account for the future payment of insurance costs and real estate taxes in an amount equal to 1/12th of the estimated insurance premium and real estate taxes. At June 30, 2011, our insurance and real estate tax escrow balance was $625. We expect to fund the escrow requirements with operating cash flows generated by the portfolio.

The mortgage loan collateralized by Metropolitan Park North required that we post a $3,900 reserve in escrow to cover costs of certain tenant improvements, leasing commissions, rent concessions, and lost rental income in connection with re-leasing the space currently occupied by Nordstrom, a major anchor tenant of the building. Since Nordstrom has determined it will not renew its lease at Metropolitan Park North, we were obligated to post an additional $2,800 reserve into the escrow on September 30, 2010. We did not post the $2,800 reserve. On February 9, 2011, we amended the mortgage loan collateralized by Metropolitan Park North. The terms of the modification include an agreement to sweep all future cash flow to the lender and to use the $3,900 reserve to pay down the principal balance of the loan. Additionally, the borrower, a wholly owned entity of ours, was released from its obligation to post an additional $2,800 reserve. Other amendments include changing the loan to interest only until February 1, 2012, and granting the lender certain approval rights over various operating decisions.

The mortgage loan collateralized by Monument IV at Worldgate requires that, should Fannie Mae, the sole tenant at this property, not renew its lease or the space not be leased to a new tenant(s), the Fund must reserve all rental payments received from the tenant beginning on September 1, 2010. As of June 30, 2011, Fannie Mae still has not elected to renew its lease and cash totaling $2,005 had been reserved. We expect to fund approximately $386 through the mortgage loan maturity on September 1, 2011. The lender will return the reserve to the Fund if the following conditions are met: (1) no default has occurred and remains outstanding and either the tenant renewed its lease or the space has been re-leased to a new tenant(s); or (2) the mortgage loan is paid in full. If this loan is not extended and we do not sell the property, we will be obligated to pay the outstanding loan balance of $35,245 at maturity on September 1, 2011, using the Fund’s available cash.

The debt associated with six of the Fund’s student-oriented apartment communities requires that we deposit a total of $224 per year into a replacement reserve to fund future furniture replacement costs. As of June 30, 2011, we had approximately $233 deposited into this escrow. We expect to fund the loan escrows from property operations. These reserve accounts allow us to withdraw funds as we incur costs related to furniture replacement.

As part of the lease with our single tenant at the 4001 North Norfleet Road property, we provided the tenant a right to expand the current building by up to 286,000 square feet of space. If the tenant exercises this right, we will be obligated to construct this expansion space. The tenant has the right to notify us of its desire to expand at any time prior to February 28, 2016, (the end of the ninth year of the lease), or if the lease is extended, until any time prior to the end of the fourth year of any extension. As of the filing of this Form 10-Q, we had not received an expansion notice from the tenant.

Off Balance Sheet Arrangements

Letters of credit are issued in most cases as additional collateral for mortgage debt on properties we own. At June 30, 2011 and December 31, 2010, we had approximately $150 and $5,580, respectively, in outstanding letters of credit, none of which are reflected as liabilities on our balance sheet. We have no other off balance sheet arrangements.

REIT Requirements

To remain qualified as a real estate investment trust for federal income tax purposes, we must distribute or pay tax on 100% of our capital gains and at least 90% of ordinary taxable income to stockholders.

The following factors, among others, will affect operating cash flow and, accordingly, influence the decisions of our board of directors regarding distributions:

 

   

scheduled increases in base rents of existing leases;

 

   

changes in minimum base rents and/or overage rents attributable to replacement of existing leases with new or renewal leases;

 

   

changes in occupancy rates at existing properties and procurement of leases for newly acquired or developed properties;

 

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necessary capital improvement expenditures or debt repayments at existing properties; and

 

   

our share of distributions of operating cash flow generated by the unconsolidated real estate affiliates, less management costs and debt service on additional loans that have been or will be incurred.

We anticipate that operating cash flow, cash on hand, proceeds from dispositions of real estate investments, or refinancings will provide adequate liquidity to conduct our operations, fund general and administrative expenses, fund operating costs and interest payments and allow distributions to our stockholders in accordance with the requirements of the Internal Revenue Code of 1986, as amended.

 

Item 3. Qualitative and Quantitative Disclosures about Market Risk.

We are subject to market risk associated with changes in interest rates both in terms of our variable-rate debt and the price of new fixed-rate debt for refinancing of existing debt. We manage our interest rate risk exposure by obtaining fixed-rate loans where possible. As of June 30, 2011, we had consolidated debt of $588,531, none of which is variable-rate debt. Including the $1,643 net discount on the assumption of debt, we had consolidated debt of $586,888 at June 30, 2011.

As of December 31, 2010, we had consolidated debt of $594,340, none of which is variable-rate debt. Including the $1,536 net discount on the assumption of debt, we have consolidated debt of $592,804 at December 31, 2010.

All our Consolidated and Unconsolidated Properties are currently financed with fixed-rate debt; therefore we are not currently subject to interest rate exposure at these properties, except to the extent (i) changes in interest rates impact the fair value of our fixed rate financing as discussed below and (ii) we are required to refinance a property.

Of our total consolidated outstanding debt, $35,245 and $12,170 will become due in 2011 and 2012, respectively. As we intend on refinancing some or all of such debt at the then-existing market interest rates, which may be greater than the current interest rate, our interest expense would increase by approximately $352 in 2011 and $393 in 2012 if the interest rate on the refinanced debt increased by 100 basis points.

We are subject to interest rate risk with respect to our fixed-rate financing in that changes in interest rates will impact the fair value of our fixed-rate financing. To determine fair market value, the fixed-rate debt is discounted at a rate based on an estimate of current lending rates, assuming the debt is outstanding through maturity and considering the collateral. At June 30, 2011, the fair value of our mortgage notes payable was estimated to be approximately $9,813 lower than the carrying value of $586,888. If treasury rates were 25 basis points higher at June 30, 2011, the fair value of our mortgage notes payable would have been approximately $14,659 lower than the carrying value.

At December 31, 2010, the fair value of our mortgage notes payable was estimated to be approximately $27,860 lower than the carrying value of $594,340. If treasury rates were 25 basis points higher at December 31, 2010, the fair value of our mortgage notes payable would have been approximately $33,052 lower than the carrying value.

In August 2007, we purchased Railway Street Corporate Centre located in Calgary, Canada. For this investment, we use the Canadian dollar as the functional currency. When preparing consolidated financial statements, assets and liabilities of foreign entities are translated at the exchange rates at the balance sheet date, while income and expense items are translated at weighted average rates for the period. Foreign currency translation adjustments are recorded in Accumulated other comprehensive income on the Consolidated Balance Sheet and foreign currency translation adjustment on the Consolidated Statement of Operations and Comprehensive Loss.

As a result of our Canadian investment, we are subject to market risk associated with changes in foreign currency exchange rates. These risks include the translation of local currency balances of our Canadian investment and transactions denominated in Canadian dollars. Our objective is to control our exposure to these risks through our normal operating activities. For the six months ended June 30, 2011, we recognized a foreign currency translation gain of $415 as opposed to a loss of $154 for the six months ended June 30, 2010. At June 30, 2011, a 10% unfavorable exchange rate movement would have caused our $415 foreign currency translation gain to be decreased by $1,017 resulting in a foreign currency translation loss of approximately $602.

 

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this report. Based on management’s evaluation, our chief executive officer and chief financial officer concluded, that as of the end of the period covered by this report, our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within

 

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the time periods specified in the SEC’s rules and forms and such information is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes to our internal control over financial reporting during the quarter ended June 30, 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 involved in various matters of litigation arising in the normal course of business. While we are unable to predict with any certainty the amounts involved, management is of the opinion that, when such litigation is resolved, our resulting net liability, if any, will not have a significant effect on our consolidated financial position or results of operations.

 

Item 1A. Risk Factors.

The most significant risk factors applicable to the Fund are described in Item 1A of our 2010 Form 10-K. There have been no material changes from those previously-disclosed risk factors.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Not Applicable.

 

Item 3. Defaults Upon Senior Securities.

Not Applicable.

 

Item 4. (Removed and Reserved).

 

Item 5. Other Information.

Not Applicable.

 

Item 6. Exhibits.

The Exhibit Index that immediately follows the signature page to this Form 10-Q is incorporated herein by reference.

 

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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.

 

    EXCELSIOR LASALLE PROPERTY FUND, INC.
Date: August 4, 2011     By:   /s/    JAMES D. BOWDEN        
        James D. Bowden
        President and Chief Executive Officer
Date: August 4, 2011     By:   /s/    STEVEN SUSS        
        Steven Suss
        Chief Financial Officer (principal financial officer)

 

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EXHIBIT INDEX

 

Exhibit No.

 

Description

    3.1(1)   Amended and Restated Articles of Incorporation of Excelsior LaSalle Property Fund, Inc.
    3.2(2)   Amended and Restated Bylaws of Excelsior LaSalle Property Fund, Inc.
    4.1(3)   Form of Subscription Agreement for Excelsior LaSalle Property Fund, Inc.
  31.1   Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2   Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1   Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2   Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*   XBRL Instance Document
101.SCH*   XBRL Schema Document
101.CAL*   XBRL Calculation Linkbase Document
101.DEF*   Definition Linkbase Document
101.LAB*   XBRL Labels Linkbase Document
101.PRE*   XBRL Presentation Linkbase Document

 

(1) Incorporated by reference to the same numbered exhibit previously filed with the Fund’s Registration Statement on Form 10 filed with the SEC on April 28, 2006 (SEC File No. 0-51948).
(2) Incorporated by reference to Exhibit 3.2 to the Fund’s Annual Report on Form 10-K filed with the SEC on March 6, 2007.
(3) Incorporated by reference to Exhibit 4.1 to the Fund’s Annual Report on Form 10-K filed with the SEC on March 7, 2008.
* Pursuant to Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

 

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