UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

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

Commission file number 000-51962

COLE CREDIT PROPERTY TRUST, INC.

(Exact name of registrant as specified in its charter)

Maryland		20-0939158
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
2555 East Camelback Road, Suite 400 Phoenix, Arizona, 85016 (Address of principal executive offices; zip code)		(602) 778-8700 (Registrant’s telephone number, including area code)

Not Applicable
(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 þ No o

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

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

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of November 10, 2011, there were 10,090,951 shares of common stock, par value of $0.01, of Cole Credit Property Trust, Inc. outstanding.

 

 

COLE CREDIT PROPERTY TRUST, INC.
INDEX

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Unaudited Balance Sheets as of September 30, 2011 and December 31, 2010			4
Condensed Consolidated Unaudited Statements of Operations for the three and nine months ended September 30, 2011 and 2010			5
Condensed Consolidated Unaudited Statement of Stockholders’ Equity for the nine months ended September 30, 2011			6
Condensed Consolidated Unaudited Statements of Cash Flows for the nine months ended September 30, 2011 and 2010			7
Notes to Condensed Consolidated Unaudited Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3. Quantitative and Qualitative Disclosures About Market Risk			20
Item 4. Controls and Procedures			20
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			22
Item 1A. Risk Factors			22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			22
Item 3. Defaults Upon Senior Securities			22
Item 4. [Removed and Reserved]			22
Item 5. Other Information			22
Item 6. Exhibits			22
Signatures			23
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I
FINANCIAL INFORMATION

The accompanying condensed consolidated unaudited interim financial statements as of and for the three and nine months ended September 30, 2011 have been prepared by Cole Credit Property Trust, Inc. (the “Company,” “we,” “us” or “our”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements, and should be read in conjunction with the audited financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. The financial statements herein should also be read in conjunction with the notes to the financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this Quarterly Report on Form 10-Q. The results of operations for the three and nine months ended September 30, 2011 are not necessarily indicative of the operating results expected for the full year. The information furnished in our accompanying condensed consolidated unaudited balance sheets and condensed consolidated unaudited statements of operations, stockholders’ equity and cash flows reflects all adjustments that are, in our opinion, necessary for a fair presentation of the aforementioned financial statements. Such adjustments are of a normal recurring nature.

Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. We caution readers not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date this Quarterly Report on Form 10-Q is filed with the SEC. We make no representation or warranty (express or implied) about the accuracy of any such forward-looking statements contained in this Quarterly Report on Form 10-Q. Additionally, we undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results.

COLE CREDIT PROPERTY TRUST, INC.

CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEETS
(In thousands except share and per share amounts)

		September 30,				December 31,
		2011				2010
ASSETS
Investment in real estate assets:
Land		$	54,233			$	54,233
Buildings and improvements, less accumulated depreciation of $22,981 and $20,255, respectively			98,232				100,933
Acquired intangible lease assets, less accumulated amortization of $12,536 and $11,094, respectively			15,806				17,244
Total investment in real estate assets, net			168,271				172,410
Cash and cash equivalents			874				1,382
Restricted cash			1,307				872
Rents and tenant receivables, less allowance for doubtful accounts of $0 and $49, respectively			2,408				2,143
Prepaid expenses and other assets			129				77
Deferred financing costs, less accumulated amortization of $1,307 and $962, respectively			2,008				2,423
Total assets		$	174,997			$	179,307
LIABILITIES AND STOCKHOLDERS’ EQUITY
Notes payable		$	118,029			$	118,550
Lines of credit with affiliate			1,935				1,935
Accounts payable and accrued expenses			867				804
Due to affiliates			48				54
Acquired below market lease intangibles, less accumulated amortization of $1,357 and $1,208, respectively			840				989
Distributions payable			415				429
Deferred rental income			567				660
Total liabilities			122,701				123,421
Commitments and contingencies
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.01 par value; 10,000,000 shares authorized, none issued and outstanding			—				—
Common stock, $0.01 par value; 90,000,000 shares authorized, 10,090,951 shares issued and outstanding			101				101
Capital in excess of par value			90,424				90,424
Accumulated distributions in excess of earnings			(38,229	)			(34,639	)
Total stockholders’ equity			52,296				55,886
Total liabilities and stockholders’ equity		$	174,997			$	179,307

The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.

COLE CREDIT PROPERTY TRUST, INC.

CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF OPERATIONS
(In thousands except share and per share amounts)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Revenues:
Rental and other property income		$	3,901			$	3,956			$	11,706			$	11,843
Tenant reimbursement income			97				101				280				293
Total revenue			3,998				4,057				11,986				12,136
Expenses:
General and administrative expenses			182				152				485				449
Property operating expenses			181				390				514				654
Property management expenses			117				115				351				362
Depreciation			909				922				2,726				2,764
Amortization			450				450				1,351				1,351
Impairment of real estate assets			—				2,835				—				2,835
Total operating expenses			1,839				4,864				5,427				8,415
Operating income			2,159				(807	)			6,559				3,721
Other expense:
Interest expense, net			(2,168	)			(2,129	)			(6,375	)			(6,154	)
Loss on early extinguishment of debt			—				—				—				(259	)
Total other expense			(2,168	)			(2,129	)			(6,375	)			(6,413	)
Net (loss) income		$	(9	)		$	(2,936	)		$	184			$	(2,692	)
Weighted average number of common shares outstanding:
Basic and diluted			10,090,951				10,090,951				10,090,951				10,090,951
Net (loss) income per common share:
Basic and diluted		$	(0.00	)		$	(0.29	)		$	0.02			$	(0.27	)
Distributions declared per common share:		$	0.13			$	0.13			$	0.37			$	0.41

The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.

COLE CREDIT PROPERTY TRUST, INC.

CONDENSED CONSOLIDATED UNAUDITED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)

														Accumulated
		Common Stock								Capital in				Distributions				Total
		Number of								Excess				in Excess of				Stockholders’
		Shares				Par Value				of Par Value				Earnings				Equity
Balance, January 1, 2011			10,090,951			$	101			$	90,424			$	(34,639	)		$	55,886
Distributions to investors			—				—				—				(3,774	)			(3,774	)
Net income			—				—				—				184				184
Balance, September 30, 2011			10,090,951			$	101			$	90,424			$	(38,229	)		$	52,296

The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.

COLE CREDIT PROPERTY TRUST, INC.

CONDENSED CONSOLIDATED UNAUDITED STATEMENTS OF CASH FLOWS
(In thousands)

		Nine Months Ended
		September 30,
		2011				2010
Cash flows from operating activities:
Net income (loss)		$	184			$	(2,692	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation			2,726				2,764
Amortization of intangible lease assets and below market lease intangibles, net			1,293				1,260
Amortization of deferred financing costs			415				337
Bad debt expense			—				200
Loss on early extinguishment of debt			—				259
Impairment of real estate assets			—				2,835
Changes in assets and liabilities:
Rents and tenant receivables			(265	)			(24	)
Prepaid expenses and other assets			(52	)			(39	)
Accounts payable and accrued expenses			44				(27	)
Deferred rental income and other liabilities			(93	)			(444	)
Due to affiliates			(6	)			7
Net cash provided by operating activities			4,246				4,436
Cash flows from investing activities:
Additions to real estate and related assets			(10	)			(81	)
Change in restricted cash			(435	)			(727	)
Net cash used in investing activities			(445	)			(808	)
Cash flows from financing activities:
Distributions to investors			(3,788	)			(4,309	)
Proceeds from notes payable			—				51,625
Repayment of notes payable and line of credit			(521	)			(51,653	)
Proceeds from line of credit with affiliates			—				1,935
Payment of loan deposits			—				(433	)
Refund of loan deposits			—				433
Deferred financing costs paid			—				(2,177	)
Payment of costs related to the early extinguishment of debt			—				(212	)
Net cash used in financing activities			(4,309	)			(4,791	)
Net decrease in cash and cash equivalents			(508	)			(1,163	)
Cash and cash equivalents, beginning of period			1,382				1,907
Cash and cash equivalents, end of period		$	874			$	744
Supplemental Disclosures of Non-Cash Investing and Financing Activities:
Distributions declared and unpaid		$	415			$	415
Accrued capital expenditures		$	19			$	—
Supplemental Cash Flow Disclosures:
Interest paid		$	5,977			$	5,799

The accompanying notes are an integral part of these condensed consolidated unaudited financial statements.

COLE CREDIT PROPERTY TRUST, INC.

NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
September 30, 2011

NOTE 1 — ORGANIZATION AND BUSINESS

Cole Credit Property Trust, Inc. (the “Company”) is a Maryland corporation that was formed on March 29, 2004 that is organized and operates as a real estate investment trust (“REIT”) for federal income tax purposes. Substantially all of the Company’s business is conducted through Cole Operating Partnership I, LP (“Cole OP I”), a Delaware limited partnership. The Company is the sole general partner of and owns a 99.99% partnership interest in Cole OP I. Cole REIT Advisors, LLC (“Cole Advisors”), the affiliate advisor to the Company, is the sole limited partner and owner of an insignificant noncontrolling partnership interest of less than 0.01% of Cole OP I.

As of September 30, 2011, the Company owned 42 properties comprising 1.0 million square feet of single-tenant retail and commercial space located in 19 states. As of September 30, 2011, these properties were 100% leased.

The Company’s stock is not currently listed on a national exchange. The Company may seek to list its common stock for trading on a national securities exchange only if the board of directors of the Company believes listing would be in the best interest of its stockholders. The Company does not intend to list its shares at this time. The Company does not anticipate that there would be any market for its common stock until its shares are listed on a national securities exchange. In the event the Company does not obtain listing prior to February 1, 2016, its charter requires that it either: (1) seek stockholder approval of an extension or amendment of this listing deadline; or (2) seek stockholder approval to adopt a plan of liquidation.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Basis of Presentation

The condensed consolidated unaudited financial statements of the Company have been prepared in accordance with the rules and regulations of the SEC, including the instructions to Form 10-Q and Article 8 of Regulation S-X, and do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the statements for the interim periods presented include all adjustments, which are of a normal and recurring nature, necessary to present a fair presentation of the results for such periods. Results for these interim periods are not necessarily indicative of full year results. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements as of and for the year ended December 31, 2010 and related notes thereto set forth in the Company’s Annual Report on Form 10-K.

The accompanying condensed consolidated unaudited financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

Valuation of Real Estate and Related Assets

The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of its real estate and related intangible assets may not be recoverable. Impairment indicators that the Company considers include, but are not limited to, bankruptcy or other credit concerns of a property’s major tenant, such as a history of late payments, rental concessions and other factors, a significant decrease in a property’s revenues due to lease terminations, vacancies, co-tenancy clauses, reduced lease rates or other circumstances. When indicators of potential impairment are present, the Company assesses the recoverability of the assets by determining whether the carrying value of the assets will be recovered through the undiscounted future operating cash flows expected from the Company’s use of the assets and the eventual disposition of such assets. In the event that such expected undiscounted future cash flows do not exceed the carrying value, the Company will adjust the real estate and related intangible assets to their respective fair values and recognize an impairment loss.

The Company continues to monitor one property with a book value of $4.1 million for which it has identified impairment indicators. For this property, the undiscounted future operating cash flows expected from the use of this property and its eventual disposition exceeded its carrying value as of September 30, 2011. Should the conditions related to this, or any of the Company’s other properties change, the underlying assumptions used to determine the expected undiscounted future operating cash flows may change and adversely affect the recoverability of the carrying value related to such property. No impairment losses were recorded during the three and nine months ended September 30, 2011. The company recorded an impairment loss of $2.8 million during the three and nine months ended September 30, 2010.

COLE CREDIT PROPERTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS — (Continued)
September 30, 2011

Projections of expected future cash flows require the Company to use estimates such as future market rental income rates subsequent to the expiration of current lease agreements, property operating expenses, terminal capitalization and discount rates, the expected number of months it takes to re-lease the property, required tenant improvements and the number of years the property will be held for investment. The use of alternative assumptions in the future cash flow analysis could result in a different determination of the property’s future cash flows and a different conclusion regarding the existence of an impairment, the extent of such loss, if any, as well as the fair value of the Company’s real estate and related assets.

When a property is identified as held for sale, the Company will cease depreciation and amortization of the asset and liabilities related to the property and estimate the sales price, net of selling costs. If, in the Company’s opinion, the expected net sales price of the property is less than the carrying value of the property, an adjustment to the carrying value would be recorded to reflect the estimated fair value of the property, net of selling costs.

Restricted Cash

Included in restricted cash as of September 30, 2011, was $1.1 million held by lenders in escrow accounts primarily for tenant and capital improvements, leasing commissions and repairs and maintenance for certain properties, in accordance with the respective lender’s loan agreement. In addition, as of September 30, 2011, the Company had $164,000 in restricted cash held by lenders in a lockbox account. As part of certain debt agreements discussed in Note 4, rents from the encumbered properties are deposited directly into a lockbox account, from which the monthly debt service payment is disbursed to the lender and the excess funds are disbursed to the Company.

Redemptions of Common Stock

In accordance with the Company’s share redemption program, the purchase price paid for redeemed shares will equal the lesser of (1) the price actually paid for those shares or (2) either (i) $8.50 per share or (ii) 90.0% of the net asset value per share as determined by the Company’s board of directors. Therefore, the share redemption price would be $6.89 per share based on the most recently disclosed estimated value of $7.65 per share as determined by the Company’s board of directors, as of December 31, 2010. However, the Company’s share redemption program provides that the Company’s board of directors must determine at the beginning of each fiscal year the maximum amount of shares that the Company may redeem during that year. The Company’s board of directors determined that no amounts were to be made available for redemption during the year ending December 31, 2011.

NOTE 3 — FAIR VALUE MEASUREMENTS

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures (“ASC 820”), defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. ASC 820 emphasizes that fair value is intended to be a market-based measurement, as opposed to a transaction-specific measurement.

The following describes the methods the Company uses to estimate the fair value of the Company’s financial assets and liabilities:

Cash and cash equivalents, restricted cash, rents and tenant receivables, prepaid expenses, and accounts payable and accrued expenses — The Company considers the carrying values of these financial instruments to approximate fair value because of the short period of time between origination of the instruments and their expected realization.

Notes payable and lines of credit — The fair value is estimated using a discounted cash flow technique based on estimated borrowing rates available to the Company as of September 30, 2011 and December 31, 2010. The estimated fair value of the notes payable and lines of credit with affiliate was $119.8 million and $1.9 million, respectively, as of September 30, 2011, as compared to the carrying value of $118.0 million and $1.9 million, respectively. The estimated fair value of the notes payable and the line of credit with affiliate was $118.2 million and $1.9 million, respectively, as of December 31, 2010, as compared to the carrying value of $118.6 million and $1.9 million, respectively.

COLE CREDIT PROPERTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS — (Continued)
September 30, 2011

Considerable judgment is necessary to develop estimated fair values of certain financial instruments. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments.

NOTE 4 — NOTES PAYABLE AND LINES OF CREDIT

As of September 30, 2011, the Company had $120.0 million outstanding in mortgage notes payable and lines of credit borrowings, with fixed interest rates ranging from 5.27% to 8.68% and a weighted average interest rate of 6.60%, which mature on various dates from March 2012 through June 2031, with a weighted average remaining term of 4.9 years. The mortgage notes payable and lines of credit are each secured by the respective properties and their related leases on which the debt was placed. The mortgage notes and lines of credit are generally non-recourse to the Company and Cole OP I, but both are liable for customary non-recourse carve-outs. The mortgage notes and lines of credit are collateralized by all of the Company’s real estate assets. The mortgage notes payable and lines of credit contain customary default provisions and may generally be prepaid subject to meeting certain requirements and payment of a prepayment premium as specified in the respective loan or line of credit agreement. Generally, upon the occurrence of an event of default, interest on the mortgage notes will accrue at an annual default interest rate equal to the lesser of (a) the maximum rate permitted by applicable law, or (b) the then-current interest rate plus a percentage specified in the respective loan agreement. Certain mortgage notes payable contain customary affirmative, negative and financial covenants, including requirements for minimum net worth and debt service coverage ratios, in addition to limits on leverage ratios and variable rate debt. Based on the Company’s analysis and review of its results and related requirements as of September 30, 2011, the Company believes it was in compliance with the covenants of such mortgage notes payable.

During the nine months ended September 30, 2011, the Company elected to extend the maturity date of one mortgage note totaling $7.8 million from June 2011 to June 2031, in accordance with the hyper-amortization provisions of the mortgage note. During the extended maturity period, the lender will apply 100% of the rents collected from the property collateralizing the note to the following items in the order indicated: (1) payment of accrued interest at the original fixed interest rate of 6.68%, (2) all payments for escrow or reserve accounts, (3) any operating expenses of the property pursuant to an approved annual budget and (4) any extraordinary operating or capital expenses. The balance of the rents collected will be applied to the following items in such order as the lender may determine: (1) any other amounts due in accordance with the loan document, (2) the reduction of the principal balance of the mortgage note, and (3) interest accrued at the “Revised Interest Rate” but not previously paid. As used herein, the Revised Interest Rate means an interest rate equal to the greater of (A) the initial fixed interest rate as stated in the loan agreement plus 2.0% per annum or (B) the then current Treasury Constant Maturity Yield Index plus 2.0% per annum. The Revised Interest Rate on the mortgage note during the extended maturity period is 8.68%.

NOTE 5 — COMMITMENTS AND CONTINGENCIES

Litigation

In the ordinary course of business, the Company may become subject to litigation or claims. The Company is not aware of any pending legal proceedings of which the outcome is reasonably likely to have a material effect on its results of operations or financial condition.

Environmental Matters

In connection with the ownership and operation of real estate, the Company may be potentially liable for costs and damages related to environmental matters. The Company carries environmental liability insurance on its properties which provides limited coverage for remediation liability and pollution liability for third-party bodily injury and property damage claims. The Company has not been notified by any governmental authority of any non-compliance, liability or other claim, and the Company is not aware of any other environmental condition that it believes will have a material effect on its results of operations or financial condition.

COLE CREDIT PROPERTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS — (Continued)
September 30, 2011

NOTE 6 — RELATED-PARTY TRANSACTIONS AND ARRANGEMENTS

Certain affiliates of the Company received fees and compensation in connection with the Company’s private placement of shares of its common stock. Certain affiliates of the Company have received, and may continue to receive, fees and compensation in connection with the acquisition, financing and management of the assets of the Company. Other various transactions may result in the receipt of commissions, fees and other compensation by Cole Advisors and its affiliates, including disposition fees, subordinated participation in net sale proceeds and subordinated performance fees.

If Cole Advisors provides substantial services, as determined by the Company, in connection with the origination or refinancing of any debt financing obtained by the Company that is used to acquire properties or to make other permitted investments, or that is assumed, directly or indirectly, in connection with the acquisition of properties, the Company will pay Cole Advisors a financing coordination fee equal to 1% of the amount available under such financing; provided, however, that Cole Advisors shall not be entitled to a financing coordination fee in connection with the refinancing of any loan secured by any particular property that was previously subject to a refinancing in which Cole Advisors received such a fee. Financing coordination fees payable on loan proceeds from permanent financing will be paid to Cole Advisors as the Company acquires such permanent financing. However, no fees will be paid on loan proceeds from any line of credit until such time as all net offering proceeds have been invested by the Company. No such fees were incurred by the Company during the three months ended September 30, 2011 or 2010 and during the nine months ended September 30, 2011. During the nine months ended September 30, 2010, the Company incurred $516,000 for such financing coordination fees.

The Company paid, and expects to continue to pay, Cole Realty Advisors, Inc. (“Cole Realty”), its affiliated property manager, fees for the management and leasing of the Company’s properties. Property management fees are equal to 3% of gross revenues, and leasing fees are at prevailing market rates, not to exceed the greater of $4.50 per square foot or 7.5% of the total lease obligation. During the three months ended September 30, 2011 and 2010, the Company incurred $117,000 and $115,000 for property management fees, respectively. During the nine months ended September 30, 2011 and 2010, the Company incurred $351,000 and $362,000 for property management fees, respectively. As of September 30, 2011 and December 31, 2010, $39,000 and $45,000, respectively, of such costs had been incurred but not paid by the Company, and are included in due to affiliates on the condensed consolidated unaudited balance sheets.

Cole Realty, or its affiliates, also receives acquisition and advisory fees of up to 3% of the contract purchase price of each property. No such fees were incurred by the Company during the three and nine months ended September 30, 2011 and 2010.

The Company is obligated to pay Cole Advisors an annualized asset management fee of up to 0.25% of the aggregate asset value of the Company’s assets. Pursuant to a waiver of the fee by Cole Advisors, no asset management fees were incurred by the Company during the three and nine months ended September 30, 2011 and 2010. The Company is not obligated to pay any amounts for such periods. However, Cole Advisors may elect to charge asset management fees in future periods up to the 0.25% fee.

If Cole Advisors, or its affiliates, provides a substantial amount of services, as determined by the Company, in connection with the sale of one or more properties, the Company will pay Cole Advisors an amount equal to 3% of the contract price of each asset sold. In no event will the combined disposition fee paid to Cole Advisors, its affiliates and unaffiliated third parties exceed the reasonable, customary and competitive amount for such services. In addition, after investors have received a return of their net capital contributions and a 7.5% annual cumulative, non-compounded return, then Cole Advisors is entitled to receive 20% of the remaining net sale proceeds. No such fees were incurred by the Company during the three and nine months ended September 30, 2011 and 2010 relating to the sale of properties.

In the event the Company’s common stock is listed in the future on a national securities exchange, a subordinated incentive listing fee equal to 20% of the amount by which the market value of the Company’s outstanding stock plus all distributions paid by the Company prior to listing exceeds the sum of the total amount of capital raised from investors and the amount of cash flow necessary to generate a 7.5% annual cumulative, non-compounded return to investors, will be paid to Cole Advisors.

COLE CREDIT PROPERTY TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS — (Continued)
September 30, 2011

The Company may reimburse Cole Advisors for expenses it incurs in connection with its provision of administrative services, including related personnel costs. The Company does not reimburse for personnel costs in connection with services for which Cole Advisors receives acquisition fees or disposition fees. No such costs were incurred by the Company during the three and nine months ended September 30, 2011 and 2010.

During the year ended December 31, 2010, the Company entered into two revolving line of credit agreements that provide for an aggregate of $2.9 million of available borrowings from Series C, LLC (“Series C”), which is an affiliate of Cole Advisors, on which the Company borrowed $1.9 million under one of the revolving lines of credit. No financing coordination fee was paid, or will be paid, to Cole Advisors or its affiliates in connection with these revolving lines of credit. The line of credit agreements bear a fixed interest rate of 5.75% and mature in March 2012. During the three months ended September 30, 2011 and 2010, the Company incurred $28,000 of interest expense related to the aforementioned lines of credit. During the nine months ended September 30, 2011 and 2010, the Company incurred $84,000 and $57,000 of interest expense related to the aforementioned lines of credit, respectively. As of September 30, 2011 and December 31, 2010, $9,000 of such expense had been incurred but not paid by the Company, and is included in due to affiliates on the condensed consolidated unaudited balance sheets.

NOTE 7 — ECONOMIC DEPENDENCY

Under various agreements, the Company has engaged or will engage Cole Advisors and its affiliates to provide certain services that are essential to the Company, including asset management services, supervision of the management and leasing of properties owned by the Company, asset acquisition and disposition decisions, the sale of shares of the Company’s common stock available for issue, as well as other administrative responsibilities for the Company including accounting services and investor relations. As a result of these relationships, the Company is dependent upon Cole Advisors and its affiliates. In the event that these companies are unable to provide the Company with these services, the Company would be required to find alternative providers of these services.

NOTE 8 — NEW ACCOUNTING PRONOUNCEMENTS

In December 2010, FASB issued Accounting Standards Update (“ASU”) 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations, (“ASU 2010-29”), which clarifies the manner in which pro forma disclosures are calculated and provides additional disclosure requirements regarding material nonrecurring adjustments recorded as a result of a business combination. ASU 2010-29 was effective for the Company beginning on January 1, 2011. The adoption of ASU 2010-29 has not had a material impact on the Company’s consolidated financial statements.

In May 2011, FASB issued ASU 2011-04, Fair Value Measurements and Disclosures (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, (“ASU 2011-04”), which converges guidance between GAAP and International Financial Reporting Standards (“IFRS”) on how to measure fair value and on what disclosures to provide about fair value measurements. ASU 2011-04 will become effective for the Company on January 1, 2012. The adoption of ASU 2011-04 is not expected to have a material impact on the Company’s consolidated financial statements.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated unaudited financial statements, the notes thereto, and the other unaudited financial data included elsewhere in this Quarterly Report on Form 10-Q. The following discussion should also be read in conjunction with our audited consolidated financial statements, and the notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2010. The terms “we,” “us,” “our” and the “Company” refer to Cole Credit Property Trust, Inc. and unless otherwise defined herein, capitalized terms used herein shall have the same meanings as set forth in our condensed consolidated unaudited financial statements and the notes thereto.

Forward-Looking Statements

Except for historical information, this section contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including discussion and analysis of our financial condition and our subsidiaries, our anticipated capital expenditures, amounts of anticipated cash distributions to our stockholders in the future and other matters. These forward-looking statements are not historical facts but are the intent, belief or current expectations of our management based on their knowledge and understanding of our business and industry. Words such as “may,” “will,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should,” or other similar words are intended to identify forward-looking statements. All statements not based on historical fact are forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or implied in the forward-looking statements.

Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. We caution investors not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date this Quarterly Report on Form 10-Q is filed with the SEC. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results. Factors that could cause actual results to differ materially from any forward-looking statements made in this Quarterly Report on Form 10-Q include, among others, changes in general economic conditions, changes in real estate conditions, construction costs that may exceed estimates, construction delays, increases in interest rates, lease-up risks, inability to obtain new tenants upon the expiration or termination of existing leases, inability to obtain financing or refinance existing debt, and the potential need to fund tenant improvements or other capital expenditures out of operating cash flows.

Management’s discussion and analysis of financial condition and results of operations are based upon our condensed consolidated unaudited financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On a regular basis, we evaluate these estimates. These estimates are based on management’s historical industry experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

Overview

We were formed on March 29, 2004, to acquire and operate commercial real estate primarily consisting of net leased, freestanding, single tenant, income-generating retail and commercial properties located throughout the United States. We have no paid employees and are externally managed by our advisor. We elected to be taxed, and currently qualify, as a REIT for federal income tax purposes.

As of September 30, 2011, we owned 42 properties, which were 100% leased, comprising 1.0 million square feet of single-tenant retail and commercial space located in 19 states. We do not anticipate acquiring any additional properties, unless we were to dispose of any of our properties in the ordinary course of business, in which case we would expect to reinvest the net sales proceeds in additional properties, or use net sales proceeds to pay down existing debt, or distribute the net proceeds to our stockholders.

Our operating results and cash flows are primarily influenced by rental income from our commercial properties and interest expense on our property acquisition indebtedness. Rental and other property income accounted for 98% of total revenue during the three and nine months ended September 30, 2011 and 2010. As 100% of our properties are under lease, with a weighted average remaining lease term of 9.5 years, our exposure to changes in commercial rental rates and contractual lease expirations is substantially mitigated, except for any vacancies caused by tenant bankruptcies or other factors. Our advisor regularly monitors the creditworthiness of our tenants by reviewing the tenant’s financial results, credit rating agency reports (if any) on the tenant or guarantor, the operating history of the property with such tenant, the tenant’s market share and track record within its industry segment, the general health and outlook of the tenant’s industry segment, and other information for changes and possible trends. If our advisor identifies significant changes or trends that may adversely affect the creditworthiness of a tenant, it will gather a more in-depth knowledge of the tenant’s financial condition and, if necessary, attempt to mitigate the tenant’s credit risk by evaluating the possible sale of the property, or identifying a possible replacement tenant should the current tenant fail to perform on the lease.

As of September 30, 2011, the debt leverage ratio of our portfolio, which is the ratio of debt to total gross real estate assets net of gross intangible lease liabilities, was 60%. All of our debt is subject to fixed interest rates, ranging from 5.27% to 8.68%, with a weighted average remaining term of 4.9 years. As we have no outstanding variable rate debt, our exposure to short-term changes in interest rates is limited. However, we will be subject to changes in interest rates as we refinance our debt as it matures. See our contractual obligations table in the section captioned “Liquidity and Capital Resources — Long-term Liquidity and Capital Resources.”

Recent Market Conditions

Beginning in late 2007, domestic and international financial markets experienced significant disruptions that were brought about in large part by challenges in the world-wide banking system. These disruptions severely impacted the availability of credit and contributed to rising costs associated with obtaining credit. In 2010, the volume of mortgage lending for commercial real estate began increasing and lending terms improved; however, such lending activity continues to be significantly less than previous levels. Although lending market conditions have improved, certain factors continue to negatively affect the lending environment, including the sovereign credit issues of certain countries in the European Union. We have experienced, and may continue to experience, more stringent lending criteria, which may affect our ability to finance certain property acquisitions or refinance our debt at maturity. For properties for which we are able to obtain financing, the interest rates and other terms on such loans may be unacceptable. Additionally, if we are able to refinance our existing debt as it matures, it may be at lower leverage levels or at rates and terms which are less favorable than our existing debt or, if we elect to extend the maturity dates of the mortgage notes in accordance with the hyper-amortization provisions, the interest rates charged to us will be higher, each of which may adversely affect our results of operations and the distribution rate we are able to pay to our investors. If we are required to sell any of our properties to meet our liquidity requirements or for any reason, such sale will result in lower rental revenue and may be at a price less than our acquisition price for the property, each of which would adversely impact our results of operations and the distribution rate we are able to pay our investors.

The economic downturn has led to high unemployment rates and a decline in consumer spending. These economic trends have adversely impacted the retail and real estate markets, causing higher tenant vacancies, declining rental rates and declining property values. Recently, the economy has improved and continues to show signs of recovery. Additionally, the real estate markets have observed an improvement in property values and occupancy and rental rates; however, in most markets property values, occupancy and rental rates continue to be below those previously experienced before the economic downturn. As of September 30, 2011, 100% of our rentable square feet was leased. However, if the recent improvements in economic conditions do not continue, we may experience vacancies or be required to further reduce rental rates on occupied space. If we do experience vacancies, our advisor will actively seek to lease our vacant space, however, such space may be leased at lower rental rates and for shorter lease terms than previously experienced. In addition, as many retailers and other tenants have been delaying or eliminating their store expansion plans, the amount of time required to re-lease a property may increase as a result.

Results of Operations

Three Months Ended September 30, 2011 Compared to the Three Months Ended September 30, 2010

Revenue — Revenue remained relatively constant at $4.0 million and $4.1 million for the three months ended September 30, 2011 and 2010, respectively, decreasing $59,000, or 1%. The decrease was primarily a result of a reduction in rental income relating to short-term rent relief granted to one tenant that declared bankruptcy in September 2010 and a new long-term lease entered into with such tenant on March 28, 2011 that provides for lower monthly lease payments and potential percentage rent payments. Our revenue primarily consists of rental and other property income from net leased commercial properties, which accounted for 98% of total revenues during each of the three months ended September 30, 2011 and 2010.

General and Administrative Expenses — General and administrative expenses increased $30,000, or 20%, to $182,000 for the three months ended September 30, 2011, compared to $152,000 for the three months ended September 30, 2010. The increase was primarily due to increased state franchise and income taxes. Our primary general and administrative expense items are legal and accounting fees, state franchise and income taxes, other licenses and fees and transfer agent fees.

Property Operating Expenses — Property operating expenses decreased $209,000, or 54%, to $181,000 for the three months ended September 30, 2011, compared to $390,000 for the three months ended September 30, 2010. The decrease was primarily due to a decrease in both bad debt expense and the amount of non-reimbursable property taxes incurred during the three months ended September 30, 2011, related to the new long term lease entered into with one tenant in September 2010, as discussed above. The primary property operating expenses items are property taxes, insurance and property repairs and maintenance.

Property Management Expenses — Property management expenses remained relatively constant, increasing $2,000 or 2%, to $117,000 for the three months ended September 30, 2011, compared to $115,000 for the three months ended September 30, 2010.

Depreciation and Amortization Expenses — Depreciation and amortization expenses remained relatively constant at $1.4 million during the three months ended September 30, 2011 and 2010, decreasing $13,000, or 1%. The decrease was due to a write down of the carrying amount of one property due to impairment in 2010.

Impairment of Real Estate Assets — There was no impairment of real estate assets for the three months ended September 30, 2011, as compared to an impairment of $2.8 million for the three months ended September 30, 2010. The impairment during the three months ended September 30, 2010 related to the bankruptcy of one tenant, as discussed above.

Net Interest Expense — Net interest expense increased $39,000, or 2%, to $2.2 million for the three months ended September 30, 2011, compared to $2.1 million for the three months ended September 30, 2010. The increase was primarily due to the Company electing to extend the maturity date of one mortgage note totaling $7.8 million in June 2011, and as a result, the interest rate on the mortgage note increased by 2.0% per annum in accordance with the hyper-amortization provision of the mortgage note. The primary net interest expense items are interest expense, amortization of deferred financing costs, and interest income.

Results of Operations

Nine Months Ended September 30, 2011 Compared to the Nine Months Ended September 30, 2010

Revenue — Revenue decreased $150,000, or 1%, to $12.0 million for the nine months ended September 30, 2011, compared to $12.1 million for the nine months ended September 30, 2010. The decrease was primarily a result of a reduction in rental income relating to short-term rent relief granted to one tenant that declared bankruptcy in September 2010 and a new long-term lease entered into with such tenant on March 28, 2011 that provides for lower monthly lease payments and potential percentage rent payments. Our revenue primarily consists of rental and other property income from net leased commercial properties, which accounted for 98% of total revenues during each of the nine months ended September 30, 2011 and 2010.

General and Administrative Expenses — General and administrative expenses increased $36,000, or 8%, to $485,000 for the nine months ended September 30, 2011, compared to $449,000 for the nine months ended September 30, 2010. The increase was primarily due to an increase in accounting fees and state franchise and income taxes. Our primary general and administrative expense items are legal and accounting fees, state franchise and income taxes, transfer agent fees and other licenses and fees.

Property Operating Expenses — Property operating expenses decreased $140,000, or 21%, to $514,000 for the nine months ended September 30, 2011, compared to $654,000 for the nine months ended September 30, 2010. The decrease was primarily due to a decrease in both bad debt expense and the amount of non-reimbursable property taxes incurred during the nine months ended September 30, 2011, related to the new long term lease entered into with one tenant in September 2010, as discussed above. The primary property operating expenses items are property taxes, insurance and property repairs and maintenance.

Property Management Expenses — Property management expenses decreased $11,000 or 3%, to $351,000 for the nine months ended September 30, 2011, compared to $362,000 for the nine months ended September 30, 2010. The decrease was primarily due to decreased rental income, as discussed above.

Depreciation and Amortization Expenses — Depreciation and amortization expenses remained relatively constant at $4.1 million during the nine months ended September 30, 2011 and 2010, decreasing $38,000, or 1%. The decrease was due to the write down of the carrying amount of one property due to impairment in 2010.

Impairment of Real Estate Assets — There was no impairment of real estate assets for the nine months ended September 30, 2011, as compared to an impairment of $2.8 million for the nine months ended September 30, 2011. The impairment during the nine months ended September 30, 2011 related to the bankruptcy of one tenant, as discussed above.

Net Interest Expense — Net interest expense increased $221,000, or 4%, to $6.4 million for the nine months ended September 30, 2011, compared to $6.2 million for the nine months ended September 30, 2010. The increase was primarily due to an increase in the weighted average interest rate on outstanding debt to 6.60% at September 30, 2011, compared to 6.48% at September 30, 2010, and an increase in amortization of deferred financing costs, which were incurred in the refinancing of certain mortgage notes payable in 2010 at higher interest rates. The primary net interest expense items are interest expense and amortization of deferred financing costs.

Loss on Early Extinguishment of Debt — There was no loss on early extinguishment of debt for the nine months ended September 30, 2011, compared to $259,000 loss on early extinguishment of debt for the nine months ended September 30, 2010. The loss during the nine months ended September 30, 2010 was due to the refinancing of 22 mortgage notes payable and one line of credit.

Funds From Operations and Modified Funds From Operations

Funds from Operations (“FFO”) is a non-GAAP financial performance measure defined by the National Association of Real Estate Investment Trusts (“NAREIT”) and widely recognized by investors and analysts as one measure of operating performance of a real estate company. FFO excludes items such as real estate depreciation and amortization, real estate impairment charges and gains and losses on the sale of real estate assets. Depreciation and amortization as applied in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values have historically risen or fallen with market conditions, it is management’s view, and we believe the view of many industry investors and analysts, that the presentation of operating results for real estate companies by using the historical cost accounting method alone is insufficient. FFO also excludes gains and losses from the sale of real estate, which we believe provides management and investors with a helpful additional measure of the historical performance of our real estate portfolio, as it allows for comparisons, year to year, that reflect the impact on operations from trends in items such as occupancy rates, rental rates, operating costs, general and administrative expenses and interest costs. In addition, FFO excludes real estate impairment charges on depreciable real estate, which are required to be expensed in accordance with GAAP. Impairment charges are items that management does not include in its evaluation of the historical operating performance of its real estate investments, as management believes that the impact of these items will be reflected over time through changes in rental income or other related costs. We compute FFO in accordance with NAREIT’s definition.

For all of these reasons, we believe FFO, in addition to net (loss) income and cash flows from operating activities, as defined by GAAP, are helpful supplemental performance measures and useful in understanding the various ways in which our management evaluates the performance of our real estate portfolio over time. However, not all REITs calculate FFO the same way, so comparisons with other REITs may not be meaningful. FFO should not be considered an alternative to net (loss) income or to cash flows from operating activities, and is not intended to be used as a liquidity measure indicative of cash flow available to fund our cash needs.

Our calculation of FFO and reconciliation to net (loss) income, which is the most directly comparable GAAP financial measure, is presented in the table below for the three and nine months ended September 30, 2011 and 2010 (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
NET (LOSS) INCOME		$	(9	)		$	(2,936	)		$	184			$	(2,692	)
Depreciation of real estate assets			909				922				2,726				2,764
Amortization of lease related costs			450				450				1,351				1,351
Impairment of real estate assets			—				2,835				—				2,835
Funds from operations (FFO)		$	1,350			$	1,271			$	4,261			$	4,258

Set forth below is additional information (often considered in conjunction with FFO) that may be helpful in assessing our operating results:

	•		In order to recognize revenues on a straight-line basis over the terms of the respective leases, we recognized additional revenue by straight-lining rental revenue of $25,000 and $110,000 during the three and nine months ended September 30, 2011, respectively, and $34,000 and $116,000 during the three and nine months ended September 30, 2010, respectively.
	•		Amortization of deferred financing costs totaled $137,000 and $415,000 during the three and nine months ended September 30, 2011, respectively, and $140,000 and $337,000 during the three and nine months ended September 30, 2010, respectively.
	•		Loss on the early extinguishment of debt totaled $259,000 during the nine months ended September 30, 2010, which includes the write-off of $47,000 of unamortized deferred financing costs related to the refinanced mortgage notes payable during 2010. There were no losses on the early extinguishment of debt during the three months ended September 30, 2011 and 2010 and during the nine months ended September 30, 2011.

Liquidity and Capital Resources

Short-term Liquidity and Capital Resources

We expect to meet our short-term liquidity requirements through net cash provided by operations. As of September 30, 2011, we had one revolving line of credit outstanding from an affiliate of our advisor in the amount of $1.9 million maturing in March 2012. During the nine months ended September 30, 2011, we elected to extend the maturity date of one mortgage note totaling $7.8 million from June 2011 to June 2031, as further described in Note 4 to our condensed consolidated unaudited financial statements. In accordance with the hyper-amortization provisions, the loan requires us to apply 100% of the rents received from the property securing the debt to pay interest due on the loan, reserves, if any, and principal reductions until such balance is paid in full through the extended maturity date, which will adversely affect our results of operations and may adversely impact the dividend rate that we are able to pay to our investors. We are currently evaluating the possible extension, financing, or refinancing of the $1.9 million revolving line of credit from an affiliate of our advisor maturing in March 2012. If we are unable to extend, finance, or refinance any portion of the amount maturing, we expect to pay down any such amount through a combination of the use of net cash provided by operations and/or the potential sale of certain properties. If we are able to refinance our existing debt as it matures, it may be at rates and terms that are less favorable than our existing debt, which may adversely affect our results of operations and the dividend rate we are able to pay to our investors.

Long-term Liquidity and Capital Resources

We expect to meet our long-term liquidity requirements through proceeds from available borrowings under our revolving lines of credit, secured or unsecured financings or refinancings from banks and other lenders, the selective and strategic sale of properties and net cash flows from operations. We expect that our primary uses of capital will be for the payment of operating expenses, including debt service payments and debt maturities on our outstanding indebtedness, for the payment of tenant improvements, leasing commissions and repairs and maintenance, for the possible reinvestment of proceeds from the strategic sale of properties in replacement properties, and for the payment of distributions to our stockholders, including special distributions of the net proceeds from the sale of properties. We did not have any material commitments for capital or leasing expenditures outstanding as of September 30, 2011.

We expect that substantially all net cash generated from operations will be used to pay distributions to our stockholders after payments of principal on our outstanding indebtedness and certain capital or leasing expenditures are made; however, we may use other sources to fund distributions, as necessary, such as proceeds from available borrowings under our revolving line of credit. To the extent that cash flows from operations are lower than our current expectations due to lower returns on the properties, distributions paid to our stockholders may be reduced.

During the nine months ended September 30, 2011 and 2010, we paid distributions of $3.8 million and $4.3 million, respectively, which were funded entirely by cash flows from operations during such periods.

As of September 30, 2011, we had cash and cash equivalents of $874,000, which we expect to be used primarily to pay operating expenses, interest and principal payments on our indebtedness and stockholder distributions. In addition, we had restricted cash of $1.1 million held by lenders in escrow accounts for tenant and capital improvements, leasing commissions, repairs and maintenance and other lender reserves for certain properties, and $164,000 held by lenders in a lockbox account from which the monthly debt service payment will be disbursed to the lender and the excess funds will be disbursed to us.

As of September 30, 2011, we had $118.0 million of fixed rate debt outstanding, including $1.9 million that was outstanding under one of our revolving lines of credit. The outstanding debt is subject to fixed interest rates ranging from 5.27% to 8.68%, with a weighted average interest rate of 6.60%, and matures on various dates from March 2012 through June 2031. Our debt leverage ratio, which is the ratio of debt to total gross real estate assets, net of gross intangible lease liabilities, was 60%, with a weighted average remaining term to maturity of 4.9 years.

Our contractual obligations are as follows (in thousands):

		Payments due by period(1)
						Less Than 1												More Than 5
		Total				Year				1-3 Years				4-5 Years				Years
Principal payments - notes payable		$	118,029			$	1,144			$	78,277			$	34,488			$	4,120
Interest payments — notes payable			32,544				7,864				21,327				2,502				851
Principal payments - lines of credit			1,935				1,935				—				—				—
Interest payments — lines of credit			57				57				—				—				—
Total		$	152,565			$	11,000			$	99,604			$	36,990			$	4,971

Cash Flow Analysis

Nine Months Ended September 30, 2011 Compared to the Nine Months Ended September 30, 2010

Operating Activities. Net cash provided by operating activities decreased $190,000, or 4%, to $4.2 million for the nine months ended September 30, 2011, compared to $4.4 million for the nine months ended September 30, 2010. The decrease was primarily due to a decrease in net income before the impact of non-cash adjustments for impairment of real estate assets, loss on early extinguishment of debt, and bad debt expense of $407,000, combined with an increase in the change in rents and tenant receivables. These decreases were offset by a decrease in the change in deferred rental income and other liabilities for the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010. See “Results of Operations” for a more complete discussion of the factors impacting our operating performance.

Investing Activities. Net cash used in investing activities decreased $363,000, or 45%, to $445,000 for the nine months ended September 30, 2011, compared to $808,000 for the nine months ended September 30, 2010. The change was primarily due to a decrease in the change of cash deposited into required lender reserve accounts in accordance with the respective loan agreements.

Financing Activities. Net cash used in financing activities decreased $482,000, or 10%, to $4.3 million for the nine months ended September 30, 2011, compared to $4.8 million for the nine months ended September 30, 2010. The decrease was due to lower distributions paid to investors in 2011, in addition to the payment of deferred financing costs and costs related to the early extinguishment of debt during the nine months ended September 30, 2010, offset by proceeds received from the line of credit with affiliates during the nine months ended September 30, 2010, as compared to no payments of deferred financing costs or extinguishment of debt, and no receipt of proceeds from the line of credit with affiliates during the nine months ended September 30, 2011.

Election as a REIT

We are taxed as a REIT under the Internal Revenue Code of 1986, as amended. To maintain our qualification as a REIT, we must meet, and continue to meet, certain requirements relating to our organization, sources of income, nature of assets, distributions of income to our stockholders and recordkeeping. As a REIT, we generally are not subject to federal income tax on taxable income that we distribute to our stockholders so long as we distribute at least 90% of our annual taxable income (computed with regard to the dividends paid deduction excluding net capital gains).

If we fail to maintain our qualification as a REIT for any reason in a taxable year and applicable relief provisions do not apply, we will be subject to tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates. We will not be able to deduct distributions paid to our stockholders in any year in which we fail to qualify as a REIT. We also will be disqualified for the four taxable years following the year during which qualification was lost unless we are entitled to relief under specific statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders. However, we believe that we are organized and operate in such a manner as to maintain our qualification for treatment as a REIT for federal income tax purposes. No provision for federal income taxes has been made in our accompanying condensed consolidated unaudited financial statements. We are subject to certain state and local taxes related to the operations of properties in certain locations, which have been provided for in our accompanying condensed consolidated unaudited financial statements.

Critical Accounting Policies and Estimates

Our accounting policies have been established to conform to GAAP. The preparation of financial statements in conformity with GAAP requires us to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If our judgment or interpretation of the facts and circumstances relating to the various transactions had been different, it is possible that different accounting policies would have been applied, thus, resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses. We consider our critical accounting policies to be the following:

	•		Investment in and Valuation of Real Estate and Related Assets;
	•		Allocation of Purchase Price of Real Estate and Related Assets;
	•		Revenue Recognition; and
	•		Income Taxes.

A complete description of such policies and our considerations is contained in our Annual Report on Form 10-K for the year ended December 31, 2010, and our critical accounting policies have not changed during the nine months ended September 30, 2011. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2010, and related notes thereto.

Commitments and Contingencies

We may be subject to certain commitments and contingencies with regard to certain transactions. Refer to Note 5 of our condensed consolidated unaudited financial statements accompanying this Quarterly Report on Form 10-Q for further explanations.

Related-Party Transactions and Agreements

We have entered into agreements with Cole Advisors and its affiliates, whereby we have paid, and may continue to pay, certain fees to, or reimburse certain expenses of, Cole Advisors or its affiliates for acquisition and advisory fees and expenses, financing coordination fees, asset and property management fees, interest expense on affiliate lines of credit and reimbursement of certain operating costs. See Note 6 of our condensed consolidated unaudited financial statements included in this Quarterly Report on Form 10-Q for a discussion of the various related-party transactions, agreements, and fees.

New Accounting Pronouncements

There are no new accounting pronouncements that have been issued but not yet applied by us that we believe will have a material impact on our consolidated financial statements.

Off Balance Sheet Arrangements

As of September 30, 2011 and December 31, 2010, we had no off-balance sheet arrangements that had or are reasonably likely to have a current or future effect on our financial condition, results of operations, liquidity, or capital resources.

Item 3.		Quantitative and Qualitative Disclosures About Market Risk

Not required for a smaller reporting company.

Item 4.		Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As required by Rules 13a-15(b) and 15d-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we, under the supervision and with the participation of our chief executive officer and chief financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures, as of September 30, 2011, were effective to ensure that information required to be disclosed by us in this Quarterly Report on Form 10-Q is recorded, processed, summarized and reported within the time periods specified by the rules and forms promulgated under the Exchange Act, and is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

No change occurred in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d -15(f) of the Exchange Act) in connection with the foregoing evaluations that occurred during the three months ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II
OTHER INFORMATION

Item 1.		Legal Proceedings

In the ordinary course of business, we may become subject to litigation or claims. We are not aware of any material pending legal proceedings, other than ordinary routine litigation incidental to our business.

Item 1A.		Risk Factors

Not required for a smaller reporting company.

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

We did not sell any unregistered securities during the three months ended September 30, 2011. No shares were redeemed during the three months ended September 30, 2011.

Item 3.		Defaults Upon Senior Securities

No events occurred during the three months ended September 30, 2011 that would require a response to this item.

Item 4.		[Removed and Reserved]

Item 5.		Other Information

No events occurred during the three months ended September 30, 2011 that would require a response to this item.

Item 6.		Exhibits

The exhibits listed on the Exhibit Index (following the signatures section of this Quarterly Report on Form 10-Q) are included herewith, or incorporated by reference.

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.

Date: November 10, 2011

EXHIBIT INDEX

The following exhibits are included, or incorporated by reference, in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011 (and are numbered in accordance with Item 601 of Regulation S-K).

Exhibit No.				Description
	3.1			Articles of Incorporation (Incorporated by reference to Exhibit 2.1 of the Company’s Form 10-SB (File No. 000-51962), filed on May 1, 2006).
	3.2			Amended and Restated Bylaws (Incorporated by reference to Exhibit 2.2 to the Company’s Form 10-SB (File No. 000-51962), filed on May 1, 2006).
	31.1	*		Certification of the Chief Executive Officer of the Company pursuant to Securities Exchange Act Rule 13a-14 (a) or 15d-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2	*		Certification of the Chief Financial Officer of the Company pursuant to Securities Exchange Act Rule 13a-14 (a) or 15d-14 (a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1	**		Certification of the Chief Executive Officer and Chief Financial Officer of the Company pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	101.INS***			XBRL Instance Document.
	101.SCH***			XBRL Taxonomy Extension Schema Document.
	101.CAL***			XBRL Taxonomy Extension Calculation Linkbase Document.
	101.DEF***			XBRL Taxonomy Extension Definition Linkbase Document.
	101.LAB***			XBRL Taxonomy Extension Presentation Linkbase Document.
	101.PRE***			XBRL Taxonomy Extension Presentation Linkbase Document.