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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

__________

FORM 10-Q/A

____________

xQuarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934


For the quarterly period ended    September 30, 2012


 ¨ Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934


Commission File Number 000-53912

__________


HARTMAN SHORT TERM INCOME PROPERTIES XX, INC.
(Exact name of registrant as specified in its charter)


Maryland

26-3455189

(State of Organization)

(I.R.S. Employer Identification Number)


2909 Hillcroft, Suite 420 Houston, Texas


77057

(Address of principal executive offices)

(Zip Code)

_______________


(713) 467-2222
(Registrant’s telephone number, including area code)



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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes 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. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.:

Large accelerated filer ¨     Accelerated filer ¨          Non-accelerated filer (Do not check if a smaller reporting company) ¨                         Smaller reporting company x

                                                                   


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


As of   November 12, 2012 there were 3,288,305 shares of the Registrants common shares issued and outstanding, 19,000 of which were held by an affiliate of the Registrant.


 

 

 

 

EXPLANATORY NOTE

      In this Amendment No. 1 to Current Report on Form 10-Q (this Form 10Q/A), we refer to Hartman Short Term Income Properties XX, Inc., a Maryland corporation, as “we,” “us,” “our”, “the Company” or “our Company.”

 

     We are filing this Amendment No. 1 to amend our Form 10-Q for the quarter ended September 30, 2012, to include the mandatory XBRL exhibit of our financial statements. We are also including Exhibit 10.12 which is  indicated as being filed with the Form 10-Q. The original filing with the Securities and Exchange Commission on November 14, 2012, is correct other than these exhibits were  left out.  This error may have occurred during file uploading and data processing.

 

     Other than the inclusion of  XBRL and other exhibits discussed above, our original Form 10-Q remains unchanged.  For the convenience of the reader, this amendment includes those items in our original filing.  This Form 10-Q/A continues to describe conditions as of our original filing, and does not update disclosures contained herein to reflect events that occurred at a later date.


 










Hartman Short Term Income Properties XX, Inc.

Table of Contents



PART I   Financial information

 

Item 1.

Consolidated Financial Statements

2

Item 2.     

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

19

Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

28

Item 4.   

Controls and Procedures

28

 

 

 

PART II  OTHER INFORMATION

 

Item 1.    

Legal Proceedings

29

Item 1A.   

Risk Factors

29

Item 2.    

Unregistered Sales of Equity Securities and Use of Proceeds

29

Item 3.     

Defaults Upon Senior Securities

29

Item 4.     

Reserved

29

Item 5.     

Other Information

29

Item 6.

Exhibits

30

 

SIGNATURES

30
















PART I

FINANCIAL INFORMATION

Item 1. Financial Statements


HARTMAN SHORT TERM INCOME PROPERTIES XX, INC.

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2012

 

2011

 

 

 (Unaudited)

 

 

ASSETS

 

 

 

 

Real estate assets, at cost:

 

 

 

 

Property

 

 $      29,845,534

 

 $    18,968,145

Accumulated depreciation and amortization

 

         (1,750,921)

 

          (352,612)

Real estate assets, net

 

         28,094,613

 

       18,615,533

 

 

 

 

 

Cash and cash equivalents

 

              262,056

 

         7,440,362

Accrued rent and accounts receivable, net

 

              294,896

 

              36,047

Deferred loan and leasing commission costs, net

 

              820,275

 

              95,153

Goodwill

 

              249,686

 

            249,686

Subscription proceeds receivables

 

                46,025

 

                     -   

Prepaid expenses and other assets

 

              407,394

 

              18,942

Real estate assets held for disposition

 

           3,298,561

 

                     -   

Total assets

 

 $      33,473,506

 

 $    26,455,723

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

Note payable

 

 $        7,407,041

 

 $      9,575,000

Accounts payable and accrued expenses

 

           1,070,242

 

            698,508

Due to related parties

 

              566,989

 

            908,511

Tenants' security deposits

 

              129,232

 

              67,006

Total liabilities

 

           9,173,504

 

       11,249,025

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

  

 

 

 

 

Preferred stock, $0.001 par value 200,000,000 convertible, non-voting shares authorized, 1,000 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively

 

                         1

 

                       1

 

 

 

 

 

Common stock, $0.001 par value, 750,000,000 authorized, 3,059,008 shares and 1,813,513 shares issued and outstanding at  September 30, 2012 and December 31, 2011, respectively

 

                  3,058

 

                1,813

 

 

 

 

 

 

 

 

 

 

Additional paid in capital

 

         28,503,902

 

       16,902,468

 

 

 

 

 

Accumulated distributions and net loss

 

         (4,206,959)

 

       (1,697,584)

Total stockholders' equity

 

         24,300,002

 

       15,206,698

Total liabilities and total stockholders' equity

 

 $      33,473,506

 

 $    26,455,723

 

 

 

 

 

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



2







HARTMAN SHORT TERM INCOME PROPERTIES XX, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

 Three Months Ended September 30

 

 Nine Months Ended September 30

Revenues

 

2012

 

2011

 

2012

 

2011

 

 

 

 

(restated)

 

 

 

(restated)

Rental revenues

 

 $             717,323

 

 $                      -   

 

 $          1,760,880

 

 $                      -   

Tenant reimbursements and other revenues

 

                317,496

 

                         -   

 

                600,556

 

                         -   

Total revenues

 

             1,034,819

 

                         -   

 

             2,361,436

 

                         -   

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

Property operating expenses

 

                149,812

 

                         -   

 

                345,013

 

                         -   

Asset management and acquisition fees

 

                  55,805

 

                100,337

 

                497,574

 

                212,877

Organization and offering costs

 

                    4,924

 

                    6,785

 

                  90,713

 

                  42,692

Real estate taxes and insurance

 

                206,610

 

                    8,604

 

                531,345

 

                  23,398

Depreciation and amortization

 

                498,685

 

                         -   

 

             1,401,328

 

                         -   

General and administrative

 

                  38,542

 

                  46,572

 

                218,817

 

                136,311

Total expenses

 

                954,378

 

                162,298

 

             3,084,790

 

                415,278

 

 

 

 

 

 

 

 

 

Income (loss) before other income (expense) and equity in earnings of unconsolidated joint venture, net

 

                  80,441

 

              (162,298)

 

              (723,354)

 

              (415,278)

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

Interest expense

 

              (146,434)

 

                         -   

 

              (522,474)

 

                         -   

Other income (expense)

 

              (146,434)

 

                         -   

 

              (522,474)

 

                         -   

 

 

 

 

 

 

 

 

 

Loss after other income (expense)  and before equity in earnings of unconsolidated joint venture, net

 

                (65,993)

 

              (162,298)

 

           (1,245,828)

 

              (415,278)

Equity in earnings of unconsolidated joint venture

 

                         -   

 

                  (4,154)

 

                         -   

 

                  (7,802)

Loss from continuing operations

 

 $             (65,993)

 

 $           (166,452)

 

 $        (1,245,828)

 

 $           (423,080)

 

 

 

 

 

 

 

 

 

Income from discontinued operations

 

                  19,510

 

                         -   

 

                  19,510

 

                         -   

 

 

 

 

 

 

 

 

 

Net loss

 

                (46,483)

 

              (166,452)

 

           (1,226,318)

 

              (423,080)

Basic and diluted loss per common share:

 

 

 

 

 

 

 

 

Loss attributable to common stockholders

 

 $                 (0.02)

 

 $                 (0.19)

 

 $                 (0.50)

 

 $                 (0.71)

Weighted average number of common shares outstanding, basic and diluted

 

       2,863,779

 

          855,837

 

       2,429,485

 

          598,189

 

 

 

 

 

 

 

 

 

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






3









HARTMAN SHORT TERM INCOME PROPERTIES XX, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Preferred Stock

Common Stock

 

 

Accumulated

 

 

 

 

 

 

Common Stock

Additional Paid-In

Distributions

 

 

Shares

Amount

Shares

Amount

Subscribed

Capital

and Net Loss

 Total

Balance, December 31, 2010

            1,000

$1

                 274,966

$275

              100,000

$2,573,210

($580,644)

$2,092,842

Issuance of common shares (cash investment)

                    -

            -

              1,500,961

       1,500

                         -

              14,966,525

                                 -

                 14,968,025

Issuance of common shares (non-cash)

                    -

            -

                   37,586

            38

                         -

                   363,089

                                 -

                      363,127

Common shares subscribed

                    -

            -

                            -

               -

            (100,000)

                               -

                                 -

                    (100,000)

Selling commissions

                    -

            -

                            -

               -

                         -

              (1,000,356)

                                 -

                 (1,000,356)

Dividends and distributions (stock)

                    -

            -

                            -

               -

                         -

 

                    (288,045)

                    (288,045)

Dividends and distributions (cash)

                    -

            -

                            -

               -

                         -

                               -

                    (308,501)

                    (308,501)

Net loss

                    -

            -

                            -

               -

                         -

                               -

                    (520,394)

                    (520,394)

Balance, December 31, 2011

            1,000

$1

              1,813,513

$1,813

                       -   

$16,902,468

($1,697,584)

$15,206,698

Issuance of common shares (cash investment)

                    -

            -

              1,181,415

       1,181

                         -

         11,743,544

                                 -

                 11,744,725

Issuance of common shares (non-cash)

                    -

            -

                   64,080

            64

                         -

                   609,696

                                 -

                      609,760

Selling commissions

                    -

            -

                            -

               -

                         -

                 (751,806)

                                 -

                    (751,806)

Dividends and distributions (stock)

                    -

            -

                            -

               -

                         -

                               -

                    (631,130)

                    (631,130)

Dividends and distributions (cash)

                    -

            -

                            -

               -

                         -

                               -

                    (651,927)

                    (651,927)

Net loss

                    -

            -

                            -

               -

                         -

                               -

                 (1,226,318)

                 (1,226,318)

Balance, September 30, 2012

            1,000

$1

              3,059,008

$3,058

                       -   

$28,503,902

($4,026,959)

$24,300,002

 

 

 

 

 

 

 

 

 

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











HARTMAN SHORT TERM INCOME PROPERTIES XX, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 Nine Months Ended September 30

 

 

2012

 

2011

 

 

 

 

(restated)

Cash flows from operating activities:

 

 

 

 

Net Loss

 

 $                  (1,226,318)

 

 $                   (423,080)

Adjustments to reconcile net loss to cash used in operating activities:

 

 

 

 

Stock based compensation

 

                            45,000

 

                          61,250

Depreciation and amortization

 

                       1,401,328

 

                                 -   

Amortization of deferred loan costs

 

                          118,967

 

                                 -   

Equity in earnings of unconsolidated joint venture, net

 

                                    -   

 

                            7,802

Bad debt provision

 

                          46,903

 

                                 -   

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

Accrued rent and accounts receivable

 

                        (305,752)

 

                                 22

Deferred leasing commissions and loan costs

 

                        (847,108)

 

                                 -   

Prepaid expenses and other assets

 

                        (388,452)

 

                        (20,075)

Subscription proceeds receivable

 

(46,025)

 

                  -

Accounts payable and accrued expenses

 

                        273,176

 

                          (5,048)

Due to related parties

 

                        (341,522)

 

                        182,881

Tenants' security deposit

 

                            62,226

 

                                 -   

 Net cash used in operating activities

 

                     (1,207,577)

 

                      (196,248)

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

Acquisition deposit

 

                                    -   

 

                                 -   

Additions to real estate

 

                   (14,175,950)

 

                                 -   

Investments in affiliate

 

                                    -   

 

                   (7,468,500)

Net cash used in investing activities

 

                   (14,175,950)

 

                   (7,468,500)

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

Dividend distributions paid in cash

 

                        (619,739)

 

                      (134,676)

Payment of selling commissions

 

                        (751,806)

 

                      (580,054)

Repayments on note payable

 

                   (16,175,000)

 

                                 -   

Proceeds from refinancing, net

 

                   14,007,041

 

                                 -   

Proceeds from issuance of common stock

 

                     11,744,725

 

                     8,779,588

Net cash provided by financing activities

 

                       8,205,221

 

                     8,064,858

 

 

 

 

 

Net change in cash

 

                     (7,178,306)

 

                        400,110

Cash at the beginning of period

 

                       7,440,362

 

                        636,523

Cash at the end of period

 

 $                       262,056

 

 $                  1,036,633

 

 

 

 

 

Supplemental disclosures of non-cash investing and financing activities:

 

 

 

 

Issuance of common stock from dividend reinvestment plan

 

 $                       589,760

 

 $                     140,853

Cash paid for interest

 

 $                       374,581

 

$                                -

 

 

 

 

 

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







HARTMAN SHORT TERM INCOME PROPERTIES XX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Note 1 — 

Organization and Business


Hartman Short Term Income Properties XX, Inc. (the “Company”), is a Maryland corporation formed on February 5, 2009.  The Company elected to be treated as a real estate investment trust (“REIT”) beginning with the taxable year ending December 31, 2011.  The Company is offering shares to the public in its primary offering (exclusive of 2,500,000 shares available pursuant to the Company’s dividend reinvestment plan) at a price of $10.00 per share.


As of September 30, 2012, the Company had accepted investor’s subscriptions for, and issued, 2,938,342 shares of the Company’s common stock in its public offering (excluding 19,000 shares issued to an affiliate), resulting in gross proceeds to the Company of $29,185,653.


The management of the Company is through Hartman Advisors LLC (the “Advisor”).  The Advisor is owned 70% by Allen R. Hartman and 30% by Hartman Income REIT Management, Inc. Management of the Company’s properties is provided by Hartman Income REIT Management, Inc. (“HIR Management” or the “Property Manager”). D.H. Hill Securities LLLP (the “Dealer Manager”) serves as the dealer manager of the Company’s public offering. These parties receive compensation and fees for services related to the offering and for the investment and management of the Company’s assets. These entities will receive fees during the offering, acquisition, operational and liquidation stages.


As of September 30, 2012 we owned 3 commercial properties located in Richardson, Arlington and Houston, Texas comprising approximately 367,000 square feet plus 3 pad sites.  




Note 2 — 

Summary of Significant Accounting Policies



Basis of Presentation


The accompanying unaudited consolidated financial statements as of September 30, 2012 and 2011 and for the three months and nine months ended September 30, 2012 and 2011, have been prepared in accordance with accounting principles generally accepted in the United States and pursuant to the rules and regulations of the Securities and Exchange Commission, including Form 10-Q and Regulation S-K. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments), which are, in the opinion of management necessary to fairly present the operating results for the respective periods.  The results of the three months and nine months ended September 30, 2012 are not necessarily indicative of the results to be expected for the year ending December 31, 2012.


The consolidated financial statements herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.


Effective January 1, 2011, we determined that we were no longer a development stage company.  Prior to January 1, 2011 and for the period from February 5, 2009 (date of inception) to December 31, 2010 the Company was considered a development stage entity, as defined by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 915.  For the period from February 5, 2009 (date of inception) to December 31, 2010, the Company had accumulated net losses of $579,177.


These consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Hartman Richardson Heights Properties, LLC for the three months and nine months ended September 30, 2012, and the period from October 31, 2011, the date we acquired control of this subsidiary, to December 31, 2011, and Hartman Cooper Street Plaza, LLC for the period from May 11, 2012, the date this subsidiary acquired the Cooper Street Property, to September 30, 2012.  Prior to October 31, 2011, the financial statements were not consolidated and present only the activity of the Company.




6




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)




Use of Estimates in the Preparation of Financial Statements

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.




Reclassifications


We have reclassified certain prior fiscal year amounts in the accompanying financial statements in order to be consistent with the current fiscal year presentation. These reclassifications had no effect on the previously reported working capital or results of operations.




Cash and Cash Equivalents

 

All highly liquid investments with original maturities of three months or less are considered to be cash equivalents.  Cash and cash equivalents as of September 30, 2012 and December 31, 2011 consisted of demand deposits at commercial banks.




Financial Instruments


       The accompanying consolidated balance sheets include the following financial instruments: cash and cash equivalents, accrued rent and accounts receivable, accounts payable and accrued expenses and due to related parties.  The Company considers the carrying value to approximate the fair value of these financial instruments based on the short duration between origination of the instruments and their expected realization.




Revenue Recognition


Our leases are accounted for as operating leases.  Certain leases provide for tenant occupancy during periods for which no rent is due and/or for increases or decreases in the minimum lease payments over the terms of the leases.  Revenue is recognized on a straight-line basis over the terms of the individual leases.  Revenue recognition under a lease begins when the tenant takes possession of or controls the physical use of the leased space.  When the Company acquires a property, the term of existing leases is considered to commence as of the acquisition date for the purposes of this calculation. Accrued rents are included in accrued rent and accounts receivable, net.  In accordance with ASC 605-10-S99, Revenue Recognition, the Company will defer the recognition of contingent rental income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved. Cost recoveries from tenants are included in tenant reimbursement income in the period the related costs are incurred.



Real Estate



Allocation of Purchase Price of Acquired Assets


       Upon the acquisition of real properties, it is the Company’s policy to allocate the purchase price of properties to acquired tangible assets, consisting of land and buildings, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases and leasehold improvements and value of tenant relationships, based in each case on their fair values. The Company utilizes internal valuation methods to determine the fair values of the tangible assets of an acquired property (which includes land and buildings).


The fair values of above-market and below-market in-place lease values, including below-market renewal options for which renewal has been determined to be reasonably assured, are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (a) the contractual amounts to be paid pursuant to the in-place leases and (b) an estimate of fair market lease rates for the corresponding in-place leases and below-market renewal options, which is generally obtained from independent appraisals, measured over a period equal to the remaining non-cancelable term of the lease. The above-market and below-market lease and renewal option values are capitalized as intangible lease assets or liabilities and amortized as an adjustment of rental income over the remaining expected terms of the respective leases.




7




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



The fair values of in-place leases include direct costs associated with obtaining a new tenant, opportunity costs associated with lost rentals which are avoided by acquiring an in-place lease, and tenant relationships. Direct costs associated with obtaining a new tenant include commissions, tenant improvements, and other direct costs and are estimated based on independent appraisals and management’s consideration of current market costs to execute a similar lease. These direct costs are included in intangible lease assets and are amortized to expense over the remaining terms of the respective leases. The value of opportunity costs is calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease. Customer relationships are valued based on expected renewal of a lease or the likelihood of obtaining a particular tenant for other locations. These intangibles will be included in intangible lease assets in the balance sheet and are amortized to expense over the remaining term of the respective leases.


The determination of the fair values of the assets and liabilities acquired requires the use of significant assumptions with regard to the current market rental rates, rental growth rates, discount rates and other variables. The use of inappropriate estimates would result in an incorrect assessment of the purchase price allocations, which could impact the amount of the Company’s reported net income.




Depreciation


       Depreciation is computed using the straight-line method over the estimated useful lives of 5 to 39 years for buildings and improvements.  Tenant improvements are depreciated using the straight-line method over the lesser of the life of the improvement or the remaining term of the lease.




Impairment


       We review our real estate assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through operations.  We determine whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the estimated residual value of the property, with the carrying cost of the property.  If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the property exceeds its fair value.  Management has determined that there has been no impairment in the carrying value of our real estate assets as of September 30, 2012.


Projections of expected future cash flows require management to estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, discount rates, the number of months it takes to release the property and the number of years the property is held for investment. The use of inappropriate assumptions in the future cash flow analysis would result in an incorrect assessment of the property’s future cash flow and fair value and could result in the overstatement of the carrying value of our real estate and related intangible assets and net income.




Accrued Rent and Accounts Receivable


       Included in accrued rent and accounts receivable are base rents, tenant reimbursements and receivables attributable to recording rents on a straight-line basis. An allowance for the uncollectible portion of accrued rents and accounts receivable is determined based upon customer credit-worthiness (including expected recovery of our claim with respect to any tenants in bankruptcy), historical bad debt levels, and current economic trends.  As of September 30, 2012 and December 31, 2011, we had an allowance for uncollectible accounts of $83,685 and $36,791, respectively.  For the three months ended September 30, 2012 and 2011, we recorded bad debt expense in the amount of $21,233 and $0, respectively related to tenant receivables that we specifically identified as potentially uncollectible based on our assessment of each tenant’s credit-worthiness.  For the nine months ended September 30, 2012 and 2011, we recorded bad debt expense in the amount of $46,903 and $0.  Bad debt expenses and any related recoveries are included in property operating expenses.


 


Deferred Leasing Commissions and Loan Costs


       Leasing commissions are amortized using the straight-line method over the term of the related lease agreements.  Loan costs are amortized using the straight-line method over the terms of the loans, which approximate the interest method.





8




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)




Goodwill


       Generally accepted accounting principles in the United States require the Company to test goodwill for impairment at least annually or more frequently whenever events or circumstances occur indicating goodwill might be impaired.  The Company has the option to perform a qualitative assessment to determine if it is more likely than not that the fair value is less than the carrying amount.  If the qualitative assessment determines that it is more likely than not that the fair value is less than the carrying amount, or if the Company elects to bypass the qualitative assessment, the Company performs a two-step impairment test.  In the first step, management compares its net book value of the Company to the carrying amount of goodwill at the balance sheet date. In the event net book value of the Company is less than the carrying amount of goodwill, the Company proceeds to step two and assesses the need to record an impairment charge. No goodwill impairment has been recognized in the accompanying financial statements.




Organization and Offering Costs


The Company has incurred certain expenses in connection with organizing the company. These costs principally relate to professional and filing fees. For the three months ended September 30, 2012 and 2011, such costs totaled $5,681 and $6,785, respectively.  For the nine months ended September 30, 2012 and 2011, such costs totaled $96,445 and $42,692, respectively.


Organization and offering costs will be reimbursed by the Advisor as set forth in the “Costs of Formation and Fees to Related Parties” section of the prospectus, to the extent that organization and offering costs ultimately exceed 1.5% of gross offering proceeds.  As of September 30, 2012 the excess of offering and organizational expense incurred in excess of 1.5% of gross offering proceeds is $138,300.  No demand has been made of the Advisor for reimbursement as of September 30, 2012 and no receivable has been recorded with respect to the excess costs as of that date.  The Company expects the excess cost to diminish as additional offering proceeds are received. Selling commissions in connection with the offering are recorded and charged to additional paid-in-capital.


 


Share-Based Compensation


The Company follows ASC 718- Compensation- Stock Compensation with regard to issuance of stock in payment of services.  ASC 718 requires that compensation cost relating to share-based payment transactions be recognized in financial statements. The compensation cost is measured based on the fair value of the equity or liability instruments issued.


       Share based compensation expense is included in general and administrative expense in the consolidated statements of operations.




Advertising


       The Company expenses advertising costs as incurred and such costs are included in general and administrative expenses.  Advertising costs totaled $3,179 and $0 for the three months ended September 30, 2012 and 2011 and $3,424 and $0 for the nine months ended September 30, 2012 and 2011, respectively.  The Company’s properties are currently marketed under third party leasing agreements.  Marketing costs related to third party leasing are the responsibility of the leasing broker.




Income Taxes


We have elected to be treated as a REIT under the Internal Revenue Code of 1986, as amended, beginning with our taxable year ended December 31, 2011. To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of the Company’s annual REIT taxable income to stockholders (which is computed without regard to the dividends-paid deduction or net capital gain and which does not necessarily equal net income as calculated in accordance with GAAP).  As a REIT, the Company generally will not be subject to federal income tax on income that it distributes as dividends to its stockholders.  If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax on its taxable income at regular corporate income tax rates and generally will not be permitted to qualify for treatment as a REIT for federal income tax purposes for the four taxable years following the year during which qualification is lost, unless the Internal Revenue Service grants the Company relief under certain statutory provisions.  Such an event could materially and adversely affect the Company’s net income and net cash available for distribution to stockholders.  However, the Company believes that it is organized and will operate in such a manner as to qualify for treatment as a REIT. 



9




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)




For the nine months ended September 30, 2012 and 2011, the Company incurred a net loss of $1,226,318 and $423,080 respectively.  The Company elected to be treated as a REIT beginning in 2011.  The Company does not currently anticipate forming any taxable REIT subsidiaries or otherwise generating future taxable income which may be offset by the net loss carry forward.  The Company considers that any deferred tax benefit and corresponding deferred tax asset which may be recorded in light of the net loss carry forward would be properly offset by an equal valuation allowance in that no future taxable income is expected.  Accordingly no deferred tax benefit or deferred tax asset has been recorded in the financial statements.


The Company is required to recognize in its consolidated financial statements the financial effects of a tax position only if it is determined that it is more likely than not that the tax position will not be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position.  Management has reviewed the Company’s tax positions and is of the opinion that material positions taken by the Company would more likely than not be sustained upon examination.  Accordingly, the Company has not recognized a liability related to uncertain tax positions.



 

Loss Per Share

 

The computations of basic and diluted loss per common share are based upon the weighted average number of common shares outstanding and potentially dilutive securities.  The Company’s potentially dilutive securities include preferred shares that are convertible into the Company’s common stock.  As of September 30, 2012 and 2011, there were no shares issuable in connection with these potentially dilutive securities.  These potentially dilutive securities were excluded from the computations of diluted net loss per share for the three months and nine months ended September 30, 2012 and 2011 because no shares are issuable and inclusion of such potentially dilutive securities would have been anti-dilutive.




Concentration of Risk


       Substantially all of our revenues are derived from 2 retail shopping centers in the Dallas, Texas metropolitan area.  We maintain cash accounts in two U.S. financial institutions.  The terms of these deposits are on demand to minimize risk.  The balances of these accounts may exceed the federally insured limits.  No losses have been incurred in connection with these deposits nor are any expected.




Note 3 — 

Investment in Unconsolidated Joint Venture


On December 28, 2010, the Company entered into the limited liability company operating agreement of Hartman Richardson Heights Properties LLC (the “Joint Venture”).  The Company made an initial capital contribution to the Joint Venture of $1.915 million representing a 10% interest in the Joint Venture.  Hartman Short Term Income Properties XIX, Inc. (“Hartman XIX”), the other member of the Joint Venture, is a REIT that is managed by affiliates of the Company’s manager and real property manager.  As of December 31, 2010 Hartman XIX made capital contributions totaling $17.235 million to the Joint Venture representing a 90% interest therein.


On April 19, 2011 the Board of Directors of the Company authorized the Company’s officers to consider and execute a series of related transactions to acquire up to all of the limited liability company interest of Hartman XIX in the Joint Venture.  The Company was not obligated to acquire any specific portion of the Hartman XIX joint venture interest.  Each prospective acquisition was subject to management’s discretion and the Company’s financial position and liquidity.


      On April 20, 2011 the Company acquired an additional 15% limited liability company interest in the Joint Venture from Hartman XIX for $2,872,500 cash.  On May 27, 2011 the Company acquired an additional 4% limited liability company interest in the Joint Venture from Hartman XIX for $766,000 cash.  On September 30, 2011 the Company acquired an additional 2% limited liability company interest in the Joint Venture from Hartman XIX for $383,000 cash.  On July 20, 2011 the Company acquired an additional 4% limited liability company interest in the Joint Venture from Hartman XIX for $766,000 cash.  On August 12, 2011 the Company acquired an additional 7% limited liability company interest in the Joint Venture from Hartman XIX for $1,340,500 cash. On September 13, 2011 the Company acquired an additional 7% limited liability company interest in the Joint Venture from Hartman XIX for $1,340,500 cash.  The source of the cash used to acquire the interest of Hartman XIX in the Joint Venture was proceeds from the current public offering of the Company’s common shares.




10




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



        On October 31, 2011 the Joint Venture distributed a note receivable by the Joint Venture from Hartman XIX to Hartman XIX as a reduction in equity capital attributable to Hartman XIX.  The Company acquired the remaining equity interest of Hartman XIX in the Joint Venture for $16,500 cash.  As of November 1, 2011 the Company was the sole member of the Joint Venture.  


       The Company’s equity in earnings of the unconsolidated investment in Richardson Heights Shopping Center was ($4,154) and ($7,802) for the three and nine months ended September 30, 2011.  Equity in earnings of the consolidated investment in Richardson Heights Shopping Center has been restated for the three months ended September 30, 2011 and the nine months ended September 30, 2011.  The restatement is attributable to the recalculation of depreciation and amortization expense based on the revised final allocation of the purchase price of the property acquired during 2011.  The following tables set forth the previously reported net loss, earnings per share, and accumulated distributions and net loss together with the restated amounts described hereinabove.



 

Previously reported

Restated

Change

 

 

 

 

Three months ended September 30, 2011:

 

 

 

Net loss

$                   (91,792)

$                 (166,452)

$                   (74,660)

Earnings per share

$                       (0.11)

$                       (0.19)

$                       (0.08)

Accumulated distributions and net loss

$              (1,188,269)

$              (1,345,544)

$                 (157,275)

 

 

 

 

Nine months ended September 30, 2011:

 

 

 

Net loss

$                 (265,805)

$                 (423,080)

$                 (157,275)

Earnings per share

$                       (0.44)

$                       (0.71)

$                       (0.27)

Accumulated distributions and net loss

$              (1,188,269)

$              (1,345,544)

$                 (157,275)





Note 4 — Real Estate


On May 11, 2012, the Company acquired a retail shopping center for an aggregate purchase price of $10,414,349 from Regency Centers, LP.  The property, located in Arlington, Texas, is commonly known as Cooper Street Plaza.  The property consists of approximately 127,000 square feet and was 92% occupied at the acquisition date.  Arlington is a suburb of Dallas, Texas.


The initial purchase price allocation for the Cooper Street Plaza property is as follows:


Land

$                  2,653,125

Building and improvements

5,475,231

In-place lease value

2,399,223

 

$                10,527,579


The initial purchase price allocation is subject to change as the Company receives all information necessary to finalize its purchase price allocation as provided by ASC Topic 805.


On August 7, 2012, the Company foreclosed on its investment in the Haute Harwin Note (see Note 5) and converted its ownership in the Harwin Property to fee simple.


As of September 30, 2012, the Company owned 2 retail shopping centers in the DFW metroplex comprising approximately 328,000 square feet plus 3 pad sites.  




11




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Real estate assets consist of the following (exclusive of Haute Harwin):



 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

 

 

 

Land

$  7,440,625

 

$  4,787,500

Building and improvements

16,675,984

 

10,706,882

In-place lease value intangible

5,728,925

 

3,473,763

 

 

 

$29,845,534

 

$18,968,145

 

 

 

 

Less accumulated depreciation and amortization

 (1,750,921)

 

 (352,612)

 

 

 

 

 

 

Real estate assets, net

$28,094,612

 

$18,615,533



Depreciation expense for the three months ended September 30, 2012 and 2011 was $145,367 and $0, respectively.  Depreciation expense for the nine months ended September 30, 2012 and 2011 was $412,249 and $0, respectively.  Amortization expense of in-place lease value intangible was $348,810 and $0 for the three months ended, September 30, 2012 and 2011, respectively.  Amortization expense of in-place lease value was $986,060 and $0 for the nine months ended September 30, 2012 and 2011, respectively.

       

       Acquisition fees paid to Advisor were $950 and $100,337 for the three months ended September 30, 2012 and 2011, respectively and $354,292 and $212,877 for the nine months ended September 30, 2012 and 2011, respectively.  Acquisition fees paid to Advisor are included in asset management and acquisition fees of the Company’s consolidated statements of operations.


The following table summarizes the fair values of the Cooper Street Plaza Shopping Center assets acquired and liabilities assumed at the acquisition date:


Assets acquired:

 

Real estate assets

$    10,527,579

  Total assets acquired

10,527,579

 

 

Liabilities assumed:

 

Accounts payable and accrued expenses

85,407

Tenants’ security deposits

27,823

  Total liabilities assumed

113,230

 

 

Fair value of net assets acquired

 $    10,414,349


As noted in Note 3, on November 1, 2011 the Company acquired the remaining 51% interest of the joint venture we previously did not control.  In accordance with ASC Topic 810 – Business Combinations, the Company re-measured its previously held 49% interest, with a carrying value of $9,361,988.  The acquisition date fair value of the previous equity interest in the Joint Venture was $9,870,093.


The following table summarizes the fair values of the Richardson Heights Shopping Center assets acquired and liabilities assumed at the acquisition date:


Assets acquired:

 

Real estate assets

$    18,968,145

Cash and cash equivalents

830,671

Accounts receivable

36,608

Other assets

285,011

  Total assets acquired

20,120,435


Liabilities assumed:

 

Note payable

9,575,000

Accounts payable and accrued expenses

504,658

Tenant security deposits

68,556

Due to related parties

351,814

  Total liabilities assumed

10,500,028

 

 

Fair value of net assets acquired

 $     9,620,407

Fair value of previous equity interest at acquisition date

$     9,870,093

Recognized goodwill

$        249,686


The Company acquired the controlling interest in the Joint Venture without the transfer of consideration, as defined in ASC Topic 815, as control was obtained by a distribution of equity to the former controlling interest.  Therefore, as required by ASC Topic 815, in order to determine whether the Company had goodwill or a bargain purchase gain as a result of this transaction, the fair value of the assets acquired and liabilities assumed  is compared to the value of the investment in the acquired entity.  The fair value of the identifiable assets and liabilities assumed were less than the fair value of the investment in the Joint Venture.  As a result we recognized goodwill of $249,686.  None of the goodwill recognized is expected to be deductible for tax purposes.  Management has determined that the goodwill asset has not been impaired as of September 30, 2012 or December 31, 2011, and accordingly no impairment loss has been recorded for the three months and year then ended, respectively.


As further discussed in Note 3, the Company’s interest in the now former Unconsolidated Joint Venture increased from 49% to 100% effective November 1, 2011.  For the period from November 1, 2011 through December 31, 2011 and for the three and nine months ended September 30, 2012, the accounts of Hartman Richardson Heights Properties, LLC are consolidated with the accounts of the Company.  All significant inter-company balances have been eliminated.



Note 5 — 

Investment – Haute Harwin Note


On May 2, 2012, the Company acquired the lenders interest of Wells Fargo Bank, N.A., as Trustee for the Registered Holders of Credit Suisse First Boston Mortgage Securities Corp., Commercial Mortgage Pass-Through Certificates, Series 2005-C6, in a promissory note dated August 11, 2005 in the face amount of $5,200,000 (the “Haute Harwin Note”).  The Haute Harwin Note is secured by a Deed of Trust and Security Agreement together with other customary security instruments covering a commercial retail shopping center consisting or approximately 38,813 rentable square feet and located at 6959 Harwin Drive, Houston, Texas (the “Harwin Property”).


The assets secured by the lenders interest are subject to a receivership order dated August 5, 2011 by the 164th Judicial District Court of Harris County, Texas.  The Company paid $3,215,237 cash for the lenders interest acquired.


The Haute Harwin Note was posted for foreclosure in Harris County, Texas and on August 7, 2012, the Company acquired fee simple title to the Harwin Property.  The receivership order to which the lenders interest is subject will dissolve by its own terms subject to a 45 day winding-up period provided in the receivership order.


        On July 23, 2012 the Company’s board of directors approved a sale of the Company’s interest in the Harwin Property to Hartman XIX for $3,272,000 cash.  Entry into a material definitive agreement for the sale is subject to an independent appraisal of the Harwin Property.

       

       On August 7, 2012, the Company foreclosed on its investment in the Haute Harwin Note and converted its ownership in the Harwin Property to fee simple.  The Harwin Property is recorded on the consolidated balance sheets as real estate assets held for disposition, consistent with the board of director’s resolution to sell the property.


       On October 23, 2012 the company’s board of directors reviewed the independent appraisal reflecting as “As Is” fair value of $3.4 million.  Based on the independent appraisal the board of directors amended its offer to sell the Harwin Property to increase the asking price to $3.4 million.  The board of director of Harwin XIX accepted the price modification.  The parties are proceeding to enter into a definitive purchase agreement.





13




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Note 6 — 

Acquired Lease Intangibles

       

       We identify and record the value of acquired lease intangibles at the property acquisition date. Such intangibles include the value of acquired in-place leases and above and below-market leases. Acquired lease intangibles are amortized over the leases' remaining terms, which range from 6 months to 10 years.  With respect to the Richardson Heights and Cooper Street Plaza properties, we consider all of the in-place leases to be market rate leases.  For the nine months ended September 30, 2012, the Cooper Street Plaza acquisition resulted in the addition of $2,256,442 of acquired lease intangibles.


The amount of total in-place lease intangible asset and the respective accumulated amortization are as follows:



 

 

September 30, 2012

 

 

December 31, 2011

Acquired lease intangible assets:

 

 

 

 

 

 In-place lease value intangible

$

5,728,925

 

$

3,473,763

In-place leases – accumulated amortization

 

 (1,250,792)

 

 

 (264,732)

Acquired lease intangible assets, net

$

4,478,133

 

$

3,209,031




Note 7 — 


Accrued Rent and Accounts Receivable, net



 

 

September 30, 2012

 

 

December 31, 2011

Tenant receivables

$

336,506

 

$

67,857

Accrued rent

 

42,075

 

 

4,981

Allowance for doubtful accounts

 

(83,685)

 

 

(36,791)

Net rent and accounts receivable, net

$

294,896

 

$

36,047




Note 8 — 

Deferred Leasing Commissions and Loan Costs


Costs which have been deferred consist of the following:



 

 

Deferred

Lease, Commissions, Net

 

 

Deferred Loan

Costs, Net

Balance at December 31, 2011

$

-

 

$

96,642

Additions

 

636,439

 

 

216,469

Amortization

 

(4,508)

 

 

 (124,767)

Balance at September 30, 2012

$

631,931

 

$

188,344





Note 9 — 

Note Payable


In connection with the acquisition of the Cooper Street Property, the Company entered into a $30 million revolving credit agreement (the “Credit Facility”) with Texas Capital Bank.  The Credit Facility has an initial borrowing base of $14 million.  The Company initially borrowed $14 million to repay the $9.575 million mortgage note secured by Richardson Heights and $4.425 million for the Cooper Street Property acquisition.  The note bears interest at the lesser of 5.0% per annum or Texas Capital Bank Prime plus 1% per annum.  The interest rate was 5.0% per annum as of September 30, 2012.  Monthly payments of interest only began September 10, 2012.  The loan matures on May 11, 2015.  As of September 30, 2012 the outstanding balance under the Credit Facility is $7,400,000and the amount available to be borrowed is $6,600,000.  The loan is subject to customary covenants.  As of September 30, 2012 we were in compliance with all loan covenants.  We have requested that Texas Capital Bank provide a formal consent to incur capital costs in excess of the annual covenant amount provided for in the Credit Facility for a substantial new tenant for Richardson Heights.  See Note 14 – Commitments and Contingencies.


Related to the Richardson Heights property acquisition discussed in Note 4, we acquired a $9.575 million mortgage note payable with a bank secured by the Richardson Heights shopping center.  This mortgage note was repaid in connection with the Credit Facility financing.



14




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)






Note 10 — 

Loss Per Share

 

       Basic earnings per share is computed using net income attributable to common stockholders and the weighted average number of common shares outstanding.  Diluted earnings per share reflect common shares issuable from the assumed conversion of convertible preferred stock into common shares. Only those items that have a dilutive impact on basic earnings per share are included in the diluted earnings per share.



 

Three months ended

 

Nine months ended

 

September 30,

 

September 30,

 

 

 

2012

 

2011

(restated)

 

 

2012

 

2011

(restated)

Numerator:

 

 

 

 

 

 

 

 

 

 

 Net (loss) attributable to common stockholders

 

$

(46,483)

$

(166,452)

 

$

(1,226,318)

$

(423,080)

Denominator:

 

 

 

 

 

 

 

 

 

 

 Basic and diluted weighted average shares outstanding

 

 

2,863,779

 

855,837

 

 

2,429,485

 

598,189

 

 

 

 

 

 

 

 

 

 

 

 Basic and diluted loss per common share:

 

 

 

 

 

 

 

 

 

 

 Net loss attributable to common stockholders

 

$

(0.02)

$

(0.19)

 

$

 (0.50)

$

(0.71)




Note 11 — 

Income Taxes


       Federal income taxes are not provided for because we qualify as a REIT under the provisions of the Internal Revenue Code and because we have distributed and intend to continue to distribute all of our taxable income to our stockholders. Our stockholders include their proportionate taxable income in their individual tax returns. As a REIT, we must distribute at least 90% of our real estate investment trust taxable income to our stockholders and meet certain income sources and investment restriction requirements. In addition, REITs are subject to a number of organizational and operational requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate tax rates.


Taxable income differs from net income for financial reporting purposes principally due to differences in the timing of recognition of interest, real estate taxes, depreciation and rental revenue.

 


Note 12 — 

Related Party Transactions


Hartman Advisors LLC, is a Texas limited liability company owned 70% by Allen R. Hartman individually and 30% by the Property Manager.  The Property Manager is a wholly owned subsidiary of Hartman Income REIT Management, LLC, which is wholly owned by Hartman Income REIT of which Allen R. Hartman is the Chief Executive Officer and Chairman of the Board of Directors.


We pay acquisition fees and asset management fees to our advisor in connection with the acquisition of properties and management of the Company.  We pay property management and leasing commissions to our property manager in connection with the management and leasing of our properties.  For the three months ended September 30, 2012 and 2011 we paid our Property Manager $114,181 and $0, respectively for property management fees and leasing commissions; and, we paid the Advisor $55,805 and $14,161, respectively for asset management fees.  For the nine months ended September 30, 2012 and 2011 we paid our Property $753,697 and $0, respectively for property management fees and leasing commissions; and, we paid the Advisor $144,232 and $103,926, respectively for asset management fees.  Acquisition fees paid to our Advisor $0 and $86,175 for the three months ended September 30, 2012 and 2011 $354,292 and $108,950 for the nine months ended September 30, 2012 and 2011, respectively.  Acquisition fees for the nine months ending September 30, 2012 includes $80,380 fee related to the investment in the Haute Harwin note.


       As of September 30, 2012 and December 31, 2011, respectively, the Company had a balance due to the Property Manager of $184,132 and $500,342.




15




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



The Company owed the Advisor $37,203 and $56,356 for asset management fees as of September 30, 2012 and December 31, 2011, respectively.  These fees are monthly fees equal to one-twelfth of 0.75% of the sum of the higher of the cost or value of each asset. The asset management fee will be based only on the portion of the cost or value attributable to the Company’s investment in an asset, if we do not own all or a majority of an asset.


The Company owed $351,446 and $351,813 to Hartman XIX as of September 30, 2012 and December 31, 2011, respectively.  The balance due to Hartman XIX represents undistributed funds from operations due to Hartman XIX with respect to its former ownership interest in the Joint Venture.


The Company was owed $5,792 and $0 by Hartman Development Fund LLC as September 30, 2012 and December 31, 2011, respectively.  The balance due represents the deposit made by the Company in connection with an on-line auction.


The Company will pay the Dealer Manager up to 7.0% of the gross proceeds of the primary offering for any selling commissions on sales of shares from participating retail broker-dealers, except those issued under the distribution reinvestment plan.  The Company will also pay the Dealer Manager up to 2.5% of its dealer manager fees to participating broker-dealers.  At September 30, 2012 and December 31, 2011, respectively, the Company owed the Dealer Manager $0 and $15,019 for selling commissions and dealer management fees.



Note 13 –

Stockholders’ Equity


Common Stock


       Shares of common stock entitle the holders to one vote per share on all matters which stockholders are entitled to vote, to receive dividends and other distributions as authorized by the Company’s board of directors in accordance with the Maryland General Corporation Law and to all rights of a stockholder pursuant to the Maryland General Corporation Law.  The common stock has no preferences or preemptive, conversion or exchange rights.


       Under our articles of incorporation, we have authority to issue 750,000,000 common shares of beneficial interest, $0.001 par value per share, and 200,000,000 preferred shares of beneficial interest, $0.001 par value per share.

       

       As of September 30, 2012, the Company has accepted investors’ subscriptions for and issued 2,938,342 shares of the Company’s common stock in its public offering (excluding 19,000 shares issued to an affiliate), resulting in gross proceeds to the Company of $29,185,653.


Preferred Stock


       Under our articles of incorporation the Company’s board of directors has the authority to issue one or more classes or series of preferred stock, and prior to the issuance of such stock, the board of directors shall have the power to classify or reclassify, in one or more series, any unissued shares and designate the preferences, rights and privileges of such shares.  As of September 30, 2012 and December 31, 2011, respectively, we have issued 1,000 shares of convertible preferred shares to Hartman Advisors LLC at a price of $10.00 per share.


Common Stock Issuable Upon Conversion of Convertible Preferred Stock - The convertible preferred stock will convert to shares of common stock if (1) the Company has made total distributions on then outstanding shares of the Company’s common stock equal to the issue price of those shares plus a 6% cumulative, non-compounded, annual return on the issue price of those outstanding shares, (2) the Company lists its common stock for trading on a national securities exchange if the sum of prior distributions on then outstanding shares of our common stock plus the aggregate market value of our common  stock  (based on the  30-day  average  closing   price) meets  the  same  6%  performance  threshold,  or  (3)  the Company’s advisory agreement with Hartman Advisors, LLC expires without renewal or is terminated (other than because of a material breach by our advisor), and at the time of such expiration or termination the Company is deemed to have met the foregoing 6% performance threshold based on the Company’s enterprise value and prior distributions and, at or subsequent to the expiration or termination, the shareholders actually realize such level of performance upon listing or through total distributions. In general, the convertible stock will convert into shares of common stock with a value equal to 15% of the excess of the Company’s enterprise value plus the aggregate value of distributions paid to date on then outstanding shares of common stock over the aggregate issue price of those outstanding shares plus a 6% cumulative, non-compounded, annual return on the issue price of those outstanding shares. With



16




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



respect to conversion in connection with the termination of the advisory agreement, this calculation is made at the time of termination even though the actual conversion may occur later, or not at all.


Share-Based Compensation


       We award vested restricted common shares to non-employee directors as compensation in part for their service as members of the board of directors of the Company.  These shares are fully vested when granted.  These shares may not be sold while an independent director is serving on the board of directors.  For the three and nine months ended September 30, 2012 and 2011, respectively, the Company granted 1,500 and 4,500 shares of restricted common stock and 3,000 and 4,125 shares of restricted common stock, to independent directors as compensation for services, respectively.  We recognized $15,000 and $11,250 for the three months ended September 30, 2012 and 2011 and $45,000 and $41,250 for the nine months ended September 30, 2012 and 2011 as share-based compensation expense based upon the estimated fair value per share, respectively.  The Compensation Committee of the Board of Directors approved awards of 1,000 shares of restricted common stock issued to each of two executives of Hartman Income REIT Management, the property manager for the Company. We recognized share based compensation expense of $20,000 with respect to these awards based on the amount offering price of $10 per share for the nine months ended September 30, 2012.


These amounts are included in general and administrative expenses for the three and nine months ended September 30, 2012 and 2011, respectively.


Distributions


During the three and nine months ended September 30, 2012 we paid distributions in cash totaling $246,964 and $625,055 respectively.  We paid $88,462 in cash in October 2012 with respect to 2012 distributions declared through September 30, 2012.  During 2011 we paid distributions in cash totaling $253,677.  We issued 4,859.6 distribution reinvestment plan shares in January 2012 with respect to the 2011 distribution declaration.  In 2011 we issued 25,405.1 distribution reinvestment plan shares with respect to 2011 declared distributions.  We issued 9,214.4 such shares in October 2012 with respect to distributions declared through September 30, 2012.

 

The following table reflects the total cash distributions we have paid, including the total amount paid and amount paid per common share, in each indicated quarter:




Quarter paid

 


Distribution per Common Share

 

 


Total Amount Paid

2012

 

 

 

 

 

 

3rd Quarter

 

$

0.175

 

$

246,964

2nd Quarter

 

 

0.17

 

 

205,925

1st Quarter

 

 

0.175

 

 

172,166

Total

 

$

0.350

 

$

625,055

2011

 

 

 

 

 

 

 4th Quarter

 

$

0.175

 

$

119,000

 3rd Quarter

 

 

0.175

 

 

69,559

 2nd Quarter

 

 

0.175

 

 

44,563

 1st Quarter

 

 

0.175

 

 

20,555

Total

 

$

0.700

 

$

253,677




Note 14 –

Commitments and Contingencies


Economic Dependency


       The Company is dependent on the Advisor and the Dealer Manager for certain services that are essential to the Company, including the sale of the Company’s shares of common stock and preferred stock available for issue; the identification, evaluation, negotiation, purchase and disposition of properties’, management of the daily operations of the Company’s real estate portfolio, and other general and administrative responsibilities.  In the event that these companies are unable to provide the respective services, the Company will be required to obtain such services from other providers.




17




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Richardson Heights – Alamo Draft House Lease


On September 26, 2012, the Company through its wholly owned subsidiary Hartman Richardson Heights Properties LLC (“HRHP LLC”), entered in to a lease agreement with the exclusive Alamo Draft House franchisee for the Dallas/Fort Worth area.  Alamo Draft House is a specialized movie theatre concept which combines showings of new release and classic films with dining and other entertainment.  The building and tenant improvement cost for the Alamo Draft House lease is estimated to be approximately $4.8 million.  The City of Richardson, Texas and HRHP LLC have entered into an economic development incentive agreement.  Under the terms of the incentive agreement, the City of Richardson will provide annual grants to be paid in equal installments over a five year period of up to $1.5 million and sales tax grants to be paid annually over the first 10 years of the tenant lease.  Funding for the improvement work will be provided by equity capital together with funds as need under the Company’s Credit Facility.



Note 15 –

Subsequent Events


On July 23, 2012 the Company’s board of directors approved a sale of the Company’s interest in the Harwin property to Hartman XIX for $3,272,000 cash.  Entry into a material definitive agreement for the sale is subject to an appraisal of the Harwin property.


       On October 23, 2012, the board of directors revised the offer price to $3.4 million which is equal to the appraisal value per the independent appraisal.


On October 16, 2012, the Company acquired a fee simple interest in a 139,609 square foot office building located in Dallas, Texas commonly known as Bent Tree Green (the “Bent Tree Green Property”) through Hartman Bent Tree Green, LLC (“Bent Tree LLC”), a wholly owned subsidiary of the Company.


        Bent Tree LLC acquired the Bent Tree Green Property from Behringer Harvard Bent Tree, LP, an unrelated third party seller, for a purchase price of $12,012,500, exclusive of closing costs.  Bent Tree LLC financed the payment of the purchase price for the Bent Tree Green with (1) proceeds from the Company’s ongoing public offering and (2) loan proceeds drawn under a revolving loan agreement provided by Texas Capital Bank, NA. 


Through November 14, 2012, the date these financial statements were available to be issued, the Company has evaluated subsequent events and determined that no such events have occurred subsequent to September 30, 2012 that warrant additional disclosure other than as disclosed in these notes to the consolidated financial statements.





18






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


       Unless the context otherwise requires, all references in this report to the “Company,” “we,” “us” or “our” are to Hartman Short Term Income Properties XX, Inc..

 

Forward-Looking Statements

 

         This Form 10-Q contains forward-looking statements, including discussion and analysis of our financial condition, anticipated capital expenditures required to complete projects, amounts of anticipated cash distributions to our shareholders 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 its knowledge and understanding of our business and industry. Forward-looking statements are typically identified by the use of terms such as “may,” “will,” “should,” “potential,” “predicts,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” or the negative of such terms and variations of these words and similar expressions. 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 forecasted in the forward-looking statements.

 

          Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. You are cautioned to not place undue reliance on forward-looking statements, which reflect our management’s view only as of the date of this Form 10-Q. 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 Form 10-Q include:

  

  

  

  

the imposition of federal taxes if we fail to qualify as a REIT in any taxable year or forego an opportunity to ensure REIT status;

  

  

  

  

uncertainties related to the national economy, the real estate industry in general and in our specific markets;

  

  

  

  

legislative or regulatory changes, including changes to laws governing REITS;

  

  

  

  

construction costs that may exceed estimates or construction delays;

  

  

  

  

increases in interest rates;

  

  

  

  

availability of credit or significant disruption in the credit markets;

  

  

  

  

litigation risks;

  

  

  

  

lease-up risks;

  

  

  

  

inability to obtain new tenants upon the expiration of existing leases;

  

  

  

  

inability to generate sufficient cash flows due to market conditions, competition, uninsured losses, changes in tax or other applicable laws; and

  

  

  

  

the potential need to fund tenant improvements or other capital expenditures out of operating cash flow.

 

          The forward-looking statements should be read in light of these factors and the factors identified in the “Risk Factors” sections of the December 31, 2011 Form 10-K filed with the SEC on April 12, 2012.


Overview


         We were formed as a Maryland corporation on February 5, 2009 to invest in and operate real estate and real estate-related assets on an opportunistic basis. We may acquire a wide variety of commercial properties, including office, industrial, retail, and other real properties. These properties may be existing, income-producing properties, newly constructed properties or properties under development or construction. In particular, we will focus on acquiring properties with significant possibilities for short-term capital appreciation, such as those requiring development, redevelopment or repositioning or those located in markets with high growth potential. We also may invest in real estate-related securities and, to the extent that our advisor determines that it is



19






advantageous, we may invest in mortgage loans. We expect to make our investments in or in respect of real estate assets located in the United States and other countries. The net proceeds of this offering will provide funds to enable us to purchase properties and other real estate-related investments. As of the date of this Form 10-Q, we have acquired 3 commercial real estate properties.  The number of assets we acquire will depend upon the number of shares sold in the current offering and the resulting amount of the net proceeds available for investment in properties. 

 

We elected to be taxed as a REIT, beginning with the taxable year ending December 31, 2011. Once qualified as a REIT for federal income tax purposes, we will not generally be subject to federal income tax. If we later fail to qualify as a REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year in which our qualification is denied. Such an event could materially and adversely affect our net income. However, we believe that we are organized and will operate in a manner that will enable us to qualify for treatment as a REIT for federal income tax purposes and we intend to continue to operate so as to remain, thereafter qualified as a REIT for federal income tax purposes.


For the three months ended September 30, 2012 and 2011, the Company incurred a net loss of $46,483 and $166,452, respectively.  For the nine months ended September 30, 2012 and 2011, the Company incurred a net loss of $1,226,318 and $423,080, respectively.  The Company does not currently anticipate forming any taxable REIT subsidiaries or otherwise generating future taxable income which may be offset by the net loss carry forward.  The Company considers that any deferred tax benefit and corresponding deferred tax asset which may be recorded in light of the net loss carry forward would be properly offset by an equal valuation allowance in that no future taxable income is expected.  Accordingly no deferred tax benefit or deferred tax asset has been recorded in the financial statements.


The following discussion and analysis should be read in conjunction with the accompanying interim financial information.

 

Critical Accounting Policies and Estimates


Our results of operations and financial condition, as reflected in the accompanying consolidated financial statements and related notes, require us to make estimates and assumptions that are subject to management’s evaluation and interpretation of business conditions, changing capital market conditions and other factors related to the ongoing viability of our customers.  With different estimates or assumptions, materially different amounts could be reported in our financial statements.  We believe the following are our more critical accounting policies due to the significance, subjectivity and judgment used in determining our estimates included in the preparation of our consolidated financial statements. See also Note 2 of the Notes to Consolidated Financial Statements for a discussion of the application of these and other accounting policies. We evaluate our assumptions and estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable and appropriate based upon the circumstances.


Revenue Recognition


Our leases are accounted for as operating leases.  Certain leases provide for tenant occupancy during periods for which no rent is due and/or for increases or decreases in the minimum lease payments over the terms of the leases.  Revenue is recognized on a straight-line basis over the terms of the individual leases.  Revenue recognition under a lease begins when the tenant takes possession of or controls the physical use of the leased space.  When the Company acquires a property, the term of existing leases is considered to commence as of the acquisition date for the purposes of this calculation. Accrued rents are included in tenant and accounts receivable, net.  In accordance with ASC 605-10-S99, Revenue Recognition, the Company will defer the recognition of contingent rental income, such as percentage rents, until the specific target that triggers the contingent rental income is achieved. Cost recoveries from tenants are included in tenant reimbursement income in the period the related costs are incurred.


Investment in Unconsolidated Joint Venture


The investment in unconsolidated joint venture consisted of our interest in a joint venture that owns one multi-tenant property (the “Unconsolidated Joint Venture”).  For the period from January 1, 2011 through October 31, 2011, consolidation of this investment was not required as the entity did not qualify as a variable interest entity and did not meet the control requirements for consolidation, as defined in ASC 810, Consolidation.  Both the Company and the Unconsolidated Joint Venture partner were required to approve significant decisions about the Unconsolidated Joint Venture’s activities.


The Company accounted for the Unconsolidated Joint Venture using the equity method of accounting pursuant to guidance established under ASC 323, Investments – Equity Method and Joint Ventures (“ASC 323”).  The equity method of accounting requires this investment to be initially recorded at cost and subsequently adjusted for the Company’s share of equity in the joint



20






venture’s earnings and distributions.  The Company evaluated the carrying amount of this investment for impairment in accordance with ASC 323.  The Unconsolidated Joint Venture was reviewed for potential impairment if the carrying amount of the investment exceeded its fair value.  To determine whether impairment was other-than-temporary, the Company considered whether it had the ability and intent to hold the investment until the carrying value is fully recovered.  The evaluation of an investment in a joint venture for potential impairment can require our management to exercise significant judgments.   


Real Estate


Allocation of Purchase Price of Acquired Assets


       Upon the acquisition of real properties, it is the Company’s policy to allocate the purchase price of properties to acquired tangible assets, consisting of land and buildings, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, other value of in-place leases and leasehold improvements and value of tenant relationships, based in each case on their fair values. The Company utilizes internal valuation methods to determine the fair values of the tangible assets of an acquired property (which includes land and buildings).


The fair values of above-market and below-market in-place lease values, including below-market renewal options for which renewal has been determined to be reasonably assured, are recorded based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (a) the contractual amounts to be paid pursuant to the in-place leases and (b) an estimate of fair market lease rates for the corresponding in-place leases and below-market renewal options, which is generally obtained from independent appraisals, measured over a period equal to the remaining non-cancelable term of the lease. The above-market and below-market lease and renewal option values are capitalized as intangible lease assets or liabilities and amortized as an adjustment of rental income over the remaining expected terms of the respective leases.


The fair values of in-place leases include direct costs associated with obtaining a new tenant, opportunity costs associated with lost rentals which are avoided by acquiring an in-place lease, and tenant relationships. Direct costs associated with obtaining a new tenant include commissions, tenant improvements, and other direct costs and are estimated based on independent appraisals and management’s consideration of current market costs to execute a similar lease. These direct costs are included in intangible lease assets and are amortized to expense over the remaining terms of the respective leases. The value of opportunity costs is calculated using the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease. Customer relationships are valued based on expected renewal of a lease or the likelihood of obtaining a particular tenant for other locations. These intangibles will be included in intangible lease assets in the balance sheet and are amortized to expense over the remaining term of the respective leases.


The determination of the fair values of the assets and liabilities acquired requires the use of significant assumptions with regard to the current market rental rates, rental growth rates, discount rates and other variables. The use of inappropriate estimates would result in an incorrect assessment of the purchase price allocations, which could impact the amount of the Company’s reported net income.


Depreciation


       Depreciation is computed using the straight-line method over the estimated useful lives of 5 to 39 years for buildings and improvements.  Tenant improvements are depreciated using the straight-line method over the lesser of the life of the improvement or the remaining term of the lease.


Impairment


       We review our real estate assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through operations.  We determine whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the estimated residual value of the property, with the carrying cost of the property.  If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the property exceeds its fair value.  Management has determined that there has been no impairment in the carrying value of our real estate assets as of September 30, 2012.


Projections of expected future cash flows require management to estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, discount rates, the number of months it takes to release the property and the number of years the property is held for investment. The use of inappropriate assumptions in the future cash flow



21






analysis would result in an incorrect assessment of the property’s future cash flow and fair value and could result in the overstatement of the carrying value of our real estate and related intangible assets and net income.


Accrued Rent and Accounts Receivable


       Included in accrued rent and accounts receivable are base rents, tenant reimbursements and receivables attributable to recording rents on a straight-line basis. An allowance for the uncollectible portion of accrued rents and accounts receivable is determined based upon customer credit-worthiness (including expected recovery of our claim with respect to any tenants in bankruptcy), historical bad debt levels, and current economic trends.  As of September 30, 2012 and December 31, 2011, we had an allowance for uncollectible accounts of $83,685 and $36,791, respectively.  For the three months ended September 30, 2012 we recorded bad debt expense in the amount of $21,233 related to tenant receivables that we specifically identified as potentially uncollectible based on our assessment of each tenant’s credit-worthiness.  For the nine months ended September 30, 2012 we recorded bad debt expense in the amount of $46,903 related to such tenant receivables.  Bad debt expense and any related recoveries are included in property operating expenses.

 

Deferred Leasing Commissions and Loan Costs


       Leasing commissions are amortized using the straight-line method over the term of the lease agreements.  Loan costs are amortized using the straight-line method over the terms of the loans, which approximate the interest method.


Goodwill


       Generally accepted accounting principles in the United States require the Company to test goodwill for impairment at least annually or more frequently whenever events or circumstances occur indicating goodwill might be impaired.  The Company has the option to perform a qualitative assessment to determine if it is more likely than not that the fair value is less than the carrying amount.  If the qualitative assessment determines that it is more likely than not that the fair value is less than the carrying amount, or if the Company elects to bypass the qualitative assessment, the Company performs a two-step impairment test.  In the first step, management compares its net book value of the Company to the carrying amount of goodwill at the balance sheet date. In the event net book value of the Company is less than the carrying amount of goodwill, the Company proceeds to step two and assesses the need to record an impairment charge. As of September 30, 2012 no goodwill impairment was recognized.


RESULTS OF OPERATIONS

 

As of September 30, 2012 we owned 3 retail commercial properties comprising approximately 367,000 square feet plus 3 pad sites.


Net Income (loss) – We incurred net losses of $46,483 and $166,452 for the three months ended September 30, 2012 and 2011, respectively.  We incurred net losses of $1,226,318 and $423,080 for the nine months ended September 30, 2012 and 2011, respectively.  The net loss for the nine months ended September 30, 2012 is primarily attributable to depreciation and amortization expense and asset acquisition fees incurred in connection with the Cooper Street Plaza property acquisition.  For the three and nine months ended September 30, 2011 net income attributable to the Richardson Heights property is reflected as equity in earnings of unconsolidated joint venture, net in the accompanying consolidated statements of operations.


Revenues – The primary source of our revenue is rental revenues and tenant reimbursements.  For the three and nine months ended September 30, 2012 we had total rental revenues and tenant reimbursements of $1,034,819 and $2,361,436, respectively.  We had no rental revenues and tenant reimbursements for the three and nine months ended September 30, 2011.  Our interest in the Richardson Heights property for the three and nine months ended September 30, 2011 is reflected as equity in earnings of unconsolidated joint venture, net in the accompanying consolidated statements of operations.


Operating expensesOperating expenses consist of property operating expenses (contract services, repairs and maintenance, utilities and management fees); real estate taxes and insurance; depreciation and amortization expense; and, general and administrative expenses.  


Fees to affiliatesWe pay acquisition fees and asset management fees to our advisor in connection with the acquisition of properties and management of the Company.  We pay property management and leasing commissions to our property manager in connection with the management and leasing of our properties.  For the three months ended September 30, 2012 and 2011 we paid our Property Manager $114,181 and $0, respectively for property management fees and leasing commissions; and, we paid the Advisor $55,805 and $14,161, respectively for asset management fees.  For the nine months ended September 30, 2012 and 2011



22






we paid our Property Manager $753,697 and $0, respectively for property management fees and leasing commissions; and, we paid the Advisor $144,232 and $103,926, respectively for asset management fees.


General and administrative expense - General and administrative expenses were $38,542 and $46,572 for the three months ended September 30, 2012 and 2011, respectively.  General and administrative expenses were $218,817 and $136,311 for the nine months ended September 30, 2012 and 2011, respectively.  General and administrative expenses consist primarily of audit fees, transfer agent fees, other professional fees, independent director compensation and other share based compensation.  We expect general and administrative expenses to increase only modestly in future periods as we acquire additional real estate and real estate related assets.  We expect general and administrative expenses to decrease substantially as a percentage of total revenue.


Acquisition Fees


Acquisition fees were $950 and $100,337 for the three months ended September 30, 2012 and 2011, respectively and $354,292 and $212,877 for the nine months ended September 30, 2012 and 2011, respectively.  Acquisition fees for the nine months ending September 30, 2012 includes $80,380 fee related to the investment in the Haute Harwin note.


The Company has incurred certain expenses in connection with organizing the Company and registering to sell common shares.  These costs principally relate to professional and filing fees. For the three months ending September 30, 2012 and 2011 organization and offering costs were $5,681 and $6,785, respectively.  For the nine months ending September 30, 2012 and 2011 organization and offering costs were $96,445 and $42,692, respectively.


We are dependent on the Advisor and the Dealer Manager for certain services that are essential to the Company, including the sale of the Company’s shares of common stock and preferred stock available for issue; the identification, evaluation, negotiation, purchase and disposition of properties, management of the daily operations of the Company’s real estate portfolio, and other general and administrative responsibilities.  In the event that these companies are unable to provide the respective services, we will be required to obtain such services from other providers.


Funds From Operations and Modified Funds From Operations

 

Funds From Operations (“FFO”) is a non-GAAP financial measure defined by the National Association of Real Estate Investment Trusts ("NAREIT"), an industry trade group, which the Company believes is an appropriate supplemental measure to reflect the operating performance of a real estate investment trust, or REIT.  FFO is used by the REIT industry as a supplemental performance measure.  FFO is not equivalent to the Company’s net income or loss as determined under GAAP.


The Company defines FFO, a non-GAAP measure, consistent with the standards established by the White Paper on FFO approved by the Board of Governors of NAREIT, as revised in February 2004 (the "White Paper").  The White Paper defines FFO as net income or loss computed in accordance with GAAP, excluding gains or losses from sales of property and asset impairment write-downs, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures.  Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO.  The Company’s FFO calculation complies with NAREIT’s policy described above.


The historical accounting convention used for real estate assets requires straight-line depreciation of buildings and improvements, which implies that the value of real estate assets diminishes predictably over time, especially if such assets are not adequately maintained or repaired and renovated as required by relevant circumstances and/or is requested or required by lessees for operational purposes in order to maintain the value disclosed.  The Company believes that, since real estate values historically rise and fall with market conditions, including inflation, interest rates, the business cycle, unemployment and consumer spending, presentations of operating results for a REIT using historical accounting for depreciation may be less informative.  Additionally, the Company believes it is appropriate to disregard impairment charges, as this is a fair value adjustment that is largely based on market fluctuations and assessments regarding general market conditions which can change over time.  An asset will only be evaluated for impairment if certain impairment indications exist and if the carrying, or book value, exceeds the total estimated undiscounted future cash flows (including net rental and lease revenues, net proceeds on the sale of the property, and any other ancillary cash flows at a property or group level under GAAP) from such asset.  Investors should note, however, that determinations of whether impairment charges have been incurred are based partly on anticipated operating performance, because estimated undiscounted future cash flows from a property, including estimated future net rental and lease revenues, net proceeds on the sale of the property, and certain other ancillary cash flows, are taken into account in determining whether an impairment charge has been incurred.  While impairment charges are excluded from the calculation of FFO as described above, investors are cautioned that due to the fact that impairments are based on estimated future undiscounted cash flows and the relatively limited term of the Company’s operations, it could be difficult to recover any impairment charges.



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Historical accounting for real estate involves the use of GAAP.  Any other method of accounting for real estate such as the fair value method cannot be construed to be any more accurate or relevant than the comparable methodologies of real estate valuation found in GAAP.  Nevertheless, the Company believes that the use of FFO, which excludes the impact of real estate related depreciation and amortization and impairments, provides a more complete understanding of the Company’s performance to investors and to management, and when compared year over year, reflects the impact on the Company’s operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs, which may not be immediately apparent from net income.  However, FFO and MFFO, as described below, should not be construed to be more relevant or accurate than the current GAAP methodology in calculating net income or in its applicability in evaluating the operating performance of the Company.  The method utilized to evaluate the value and performance of real estate under GAAP should be construed as a more relevant measure of operational performance and considered more prominently than the non-GAAP FFO and MFFO measures and the adjustments to GAAP in calculating FFO and MFFO.


Changes in the accounting and reporting promulgations under GAAP (for acquisition fees and expenses from a capitalization/depreciation model to an expensed-as-incurred model) that were put into effect in 2009 and other changes to GAAP accounting for real estate subsequent to the establishment of NAREIT’s definition of FFO have prompted an increase in cash-settled expenses, specifically acquisition fees and expenses for all industries as items that are expensed under GAAP, that are typically accounted for as operating expenses.  Management believes these fees and expenses do not affect the Company’s overall long-term operating performance.  Publicly registered, non-listed REITs typically have a significant amount of acquisition activity and are substantially more dynamic during their initial years of investment and operation.  While other start up entities may also experience significant acquisition activity during their initial years, the Company believes that non-listed REITs are unique in that they have a limited life with targeted exit strategies within a relatively limited time frame after the acquisition activity ceases.  As disclosed in the prospectus for the Company’s offering (the “Prospectus”), the Company will use the proceeds raised in the offering to acquire properties, and intends to begin the process of achieving a liquidity event (i.e., listing of its common stock on a national exchange, a merger or sale of the Company or another similar transaction) within five to ten years of the completion of the offering.  The Investment Program Association (“IPA”), an industry trade group, has standardized a measure known as Modified Funds From Operations (“MFFO”), which the IPA has recommended as a supplemental measure for publicly registered non-listed REITs and which the Company believes to be another appropriate supplemental measure to reflect the operating performance of a non-listed REIT having the characteristics described above.  MFFO is not equivalent to the Company’s net income or loss as determined under GAAP, and MFFO may not be a useful measure of the impact of long-term operating performance on value if the Company does not continue to operate with a limited life and targeted exit strategy, as currently intended.  The Company believes that, because MFFO excludes costs that the Company considers more reflective of investing activities and other non-operating items included in FFO and also excludes acquisition fees and expenses that affect the Company’s operations only in periods in which properties are acquired, MFFO can provide, on a going forward basis, an indication of the sustainability (that is, the capacity to continue to be maintained) of the Company’s operating performance after the period in which the Company is acquiring its properties and once the Company’s portfolio is in place.  By providing MFFO, the Company believes it is presenting useful information that assists investors and analysts to better assess the sustainability of the Company’s operating performance after the Company’s offering has been completed and the Company’s properties have been acquired.  The Company also believes that MFFO is a recognized measure of sustainable operating performance by the non-listed REIT industry.  Further, the Company believes MFFO is useful in comparing the sustainability of the Company’s operating performance after the Company’s offering and acquisitions are completed with the sustainability of the operating performance of other real estate companies that are not as involved in acquisition activities. Investors are cautioned that MFFO should only be used to assess the sustainability of the Company’s operating performance after the Company’s offering has been completed and properties have been acquired, as it excludes acquisition costs that have a negative effect on the Company’s operating performance during the periods in which properties are acquired.


The Company defines MFFO, a non-GAAP measure, consistent with the IPA’s Guideline 2010-01, Supplemental Performance Measure for Publicly Registered, Non-Listed REITs: Modified Funds from Operations, or the Practice Guideline, issued by the IPA in November 2010.  The Practice Guideline defines MFFO as FFO further adjusted for the following items, as applicable, included in the determination of GAAP net income: acquisition fees and expenses; amounts relating to deferred rent receivables and amortization of above and below market leases and liabilities (which are adjusted in order to reflect such payments from a GAAP accrual basis to a cash basis of disclosing the rent and lease payments); accretion of discounts and amortization of premiums on debt investments; mark-to-market adjustments included in net income; nonrecurring gains or losses included in net income from the extinguishment or sale of debt, hedges, foreign exchange, derivatives or securities holdings where trading of such holdings is not a fundamental attribute of the business plan, unrealized gains or losses resulting from consolidation from, or deconsolidation to, equity accounting, and after adjustments for consolidated and unconsolidated partnerships and joint ventures, with such adjustments calculated to reflect MFFO on the same basis.  The accretion of discounts and amortization of premiums on debt investments, nonrecurring unrealized gains and losses on hedges, foreign exchange, derivatives or securities holdings,



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unrealized gains and losses resulting from consolidations, as well as other listed cash flow adjustments are adjustments made to net income in calculating the cash flows provided by operating activities and, in some cases, reflect gains or losses which are unrealized and may not ultimately be realized.


The Company’s MFFO calculation complies with the IPA’s Practice Guideline described above. In calculating MFFO, the Company excludes acquisition related expenses.  The Company does not currently exclude amortization of above and below market leases, fair value adjustments of derivative financial instruments, deferred rent receivables and the adjustments of such items related to noncontrolling interests.  Under GAAP, acquisition fees and expenses are characterized as operating expenses in determining operating net income.  These expenses are paid in cash by the Company, and therefore such funds will not be available to distribute to investors.  All paid and accrued acquisition fees and expenses negatively impact the Company’s operating performance during the period in which properties are acquired and will have negative effects on returns to investors, the potential for future distributions, and cash flows generated by the Company, unless earnings from operations or net sales proceeds from the disposition of other properties are generated to cover the purchase price of the property, these fees and expenses and other costs related to such property.  Accordingly, MFFO may not be an accurate indicator of the Company’s operating performance, especially during periods in which properties are being acquired.  MFFO that excludes such costs and expenses would only be comparable to non-listed REITs that have completed their acquisition activities and have similar operating characteristics as the Company.  Further, under GAAP, certain contemplated non-cash fair value and other non-cash adjustments are considered operating non-cash adjustments to net income in determining cash flow from operating activities.  In addition, the Company views fair value adjustments of derivatives and gains and losses from dispositions of assets as non-recurring items or items which are unrealized and may not ultimately be realized, and which are not reflective of on-going operations and are therefore typically adjusted for when assessing operating performance.  As disclosed elsewhere in the Prospectus, the purchase of properties, and the corresponding expenses associated with that process, is a key operational feature of the Company’s business plan to generate operational income and cash flows in order to make distributions to investors. Acquisition fees and expenses will not be reimbursed by the advisor if there are no further proceeds from the sale of shares in this offering, and therefore such fees and expenses will need to be paid from either additional debt, operational earnings or cash flows, net proceeds from the sale of properties or from ancillary cash flows.


The Company’s management uses MFFO and the adjustments used to calculate it in order to evaluate the Company’s performance against other non-listed REITs which have limited lives with short and defined acquisition periods and targeted exit strategies shortly thereafter.  As noted above, MFFO may not be a useful measure of the impact of long-term operating performance on value if the Company does not continue to operate in this manner.  The Company believes that its use of MFFO and the adjustments used to calculate it allow the Company to present its performance in a manner that reflects certain characteristics that are unique to non-listed REITs, such as their limited life, limited and defined acquisition period and targeted exit strategy, and hence that the use of such measures is useful to investors.  For example, acquisitions costs are funded from the proceeds of the Company’s offering and other financing sources and not from operations.  By excluding expensed acquisition costs, the use of MFFO provides information consistent with management’s analysis of the operating performance of the properties.  Additionally, fair value adjustments, which are based on the impact of current market fluctuations and underlying assessments of general market conditions, but can also result from operational factors such as rental and occupancy rates, may not be directly related or attributable to the Company’s current operating performance.  By excluding such changes that may reflect anticipated and unrealized gains or losses, the Company believes MFFO provides useful supplemental information.


Presentation of this information is intended to provide useful information to investors as they compare the operating performance of different REITs, although it should be noted that not all REITs calculate FFO and MFFO the same way, so comparisons with other REITs may not be meaningful. FFO and MFFO are not necessarily indicative of cash flow available to fund cash needs and should not be considered as an alternative to net income (loss) or income (loss) from continuing operations as an indication of the Company’s performance, as an alternative to cash flows from operations as an indication of its liquidity, or indicative of funds available to fund its cash needs including its ability to make distributions to its stockholders.  FFO and MFFO should be reviewed in conjunction with other GAAP measurements as an indication of the Company’s performance.  MFFO has limitations as a performance measure in an offering such as the Company’s where the price of a share of common stock is a stated value and there is no net asset value determination during the offering stage and for a period thereafter.  MFFO is useful in assisting management and investors in assessing the sustainability of operating performance in future operating periods, and in particular, after the offering and acquisition stages are complete and net asset value is disclosed.  FFO and MFFO are not useful measures in evaluating net asset value because impairments are taken into account in determining net asset value but not in determining FFO or MFFO.


Neither the SEC, NAREIT, nor any other regulatory body has passed judgment on the acceptability of the adjustments that the Company uses to calculate FFO or MFFO.  In the future, the SEC, NAREIT, or another regulatory body may decide to standardize



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the allowable adjustments across the non-listed REIT industry and the Company would have to adjust its calculation and characterization of FFO or MFFO.


The table below reflects FFO in accordance with the NAREIT definition as well as MFFO in the IPA recommended format for the three months and nine months ended September 30, 2012 and 2011, respectively:


 

Three months ended

Nine months ended

 

 

 

 

2012

2011

2012

2011

(restated)

(restated)

Net loss

$  (46,483)

$ (166,452)

$  (1,226,318)

$ (423,080)

Depreciation and amortization of real estate assets

498,685

34,767

1,401,328

88,153

Funds from operations (FFO)

452,202

(131,685)

175,010

(334,927)

 

 

 

 

 

Acquisition related expenses

950

100,337

354,292

212,877

Modified funds from operations (MFFO)

$  453,152

$   (31,348)

$       529,302

$ (122,050)


Liquidity and Capital Resources

 

Our principal demands for funds will be for real estate and real estate-related acquisitions, for the payment of operating expenses and distributions, and for the payment of interest on our outstanding indebtedness. Generally, we expect to meet cash needs for items other than acquisitions from our cash flow from operations, and we expect to meet cash needs for acquisitions from the net proceeds of this offering and from financings. 


There may be a delay between the sale of our shares and the purchase of properties or other investments, which could result in a delay in our ability to make distributions to our stockholders. Some or all of our distributions will be paid from other sources, such as from the proceeds of this offerings, cash advances to us by our advisor, cash resulting from a waiver of asset management fees and borrowings secured by our assets in anticipation of future operating cash flow until such time as we have sufficient cash flow from operations to fund fully the payment of distributions. We expect to have limited cash flow from operations available for distribution until we make substantial investments. In addition, to the extent our investments are in development or redevelopment projects or in properties that have significant capital requirements, our ability to make distributions may be negatively impacted, especially during our early periods of operation.

 

We intend to borrow money to acquire properties and make other investments. There is no limitation on the amount we may invest in any single property or other asset or on the amount we can borrow for the purchase of any individual property or other investment. We do not expect that the maximum amount of our indebtedness will exceed 300% of our “net assets” (as defined by the NASAA REIT Guidelines) as of the date of any borrowing; however, we may exceed that limit if approved by a majority of our independent directors and if disclosed to the stockholders in the next quarterly report along with the explanation for such excess borrowings. Our board of directors has adopted a policy to generally limit our aggregate borrowings to approximately 50% of the aggregate value of our assets unless substantial justification exists that borrowing a greater amount is in our best interests.  Our policy limitation, however, does not apply to individual real estate assets and only will apply once we have ceased raising capital under this or any subsequent offering and invested substantially all of our capital.  As a result, we expect to borrow more than 50% of the contract purchase price of each real estate asset we acquire to the extent our board of directors determines that borrowing these amounts is prudent.  Our policy of limiting the aggregate debt to equity ratio to 50% relates primarily to mortgage loans and other debt that will be secured by our properties.  The NASAA guideline limitation of 300% of our net assets includes secured and unsecured indebtedness that we may issue.  We do not anticipate issuing significant amounts of unsecured indebtedness and therefore we intend to limit the balance of our borrowings to 50% of the purchase prices, in the aggregate, of our property portfolio. 

 

Our advisor may, but is not required to, establish capital reserves from gross offering proceeds, out of cash flow generated by operating properties and other investments or out of non-liquidating net sale proceeds from the sale of our properties and other investments. Capital reserves are typically utilized for non-operating expenses such as tenant improvements, leasing commissions and major capital expenditures. Alternatively, a lender may require its own formula for escrow of capital reserves.



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Potential future sources of capital include proceeds from secured or unsecured financings from banks or other lenders, proceeds from the sale of properties and undistributed funds from operations. If necessary, we may use financings or other sources of capital in the event of unforeseen significant capital expenditures.


Cash Flows from Operating Activities


As of September 30, 2012 we owned two real estate properties through our wholly owned subsidiaries.  During the nine months ended September 30, 2012, net cash used in operating activities was $1,207,577 versus $196,248 for the nine months ended September 30, 2011.  The decrease in cash flow from operating activities is attributable to an increase in net loss from operations, an increase in accounts receivable and decrease in accounts payable and accrued expenses.  We expect cash flows from operating activities to increase in future periods as a result of additional acquisitions of real estate and real estate related investments.


Cash Flows from Investing Activities


During the nine months ended September 30, 2012, net cash used in investing activities was $14,175,950 versus $7,468,500 for the nine months ended September 30, 2011 and consisted primarily of cash used to acquire the Cooper Street Property and the Haute Harwin Note in May 2012.


Cash Flows from Financing Activities


Cash flows from financing activities consisted primarily of proceeds from our ongoing public offering and distributions paid to our common shareholders.  Net cash provided by financing activities for the nine months ended September 30, 2012 and 2011, respectively, were $8,205,221 and $8,064,858 and consisted of the following:


·

$11,698,700 and $8,779,588, respectively of cash provided by offering proceeds related to our public offering, net of payments of commissions on sales of common stock and related dealer manager fees of $766,825 and $580,054 respectively; and,

·

$619,739 and $134,676, respectively of net cash distributions, respectively.

·

($2,167,959) and $0, respectively due to payment of note payable and refinancing.

 

Contractual Obligations

 

Our board of directors has approved our entering into the Advisory Agreement, the Property Management Agreement and the Dealer Management Agreement.  The Advisory Agreement and the Property Management Agreement are renewable annually and will expire on February 9, 2013.  The Dealer Manager Agreement, unless terminated earlier by either party, will remain in effect until it expires which will be concurrently with the termination of the current public offering of common shares.


Off-Balance Sheet Arrangements


       As of September 30, 2012, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.


Recent Accounting Pronouncements


Management does not believe that any recently issued, but not yet effective accounting standards if currently adopted, would have a material effect on the accompanied financial statements.  (See note to financial statements disclosed in Item 2 to this quarterly report.)

 



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Item 3. Quantitative and Qualitative Disclosures about Market Risks

 

We will be exposed to interest rate changes primarily as a result of long-term debt used to acquire properties and make loans and other permitted investments. Our interest rate risk management objectives will be to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we expect to borrow primarily at fixed rates or variable rates with the lowest margins available and, in some cases, with the ability to convert variable rates to fixed rates. With regard to variable rate financing, we will assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities.


Item 4. Controls and Procedures


Evaluation of Disclosure Controls and Procedures

 

In connection with the preparation of this Form 10-Q, as of September 30, 2012, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. In performing this evaluation, management reviewed the selection, application and monitoring of our historical accounting policies. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2012, these disclosure controls and procedures were effective and designed to ensure that the information required to be disclosed in our reports filed with the SEC is recorded, processed, summarized and reported on a timely basis. In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Management is required to apply judgment in evaluating the cost-benefit relationship of possible controls and procedures.


Changes in Internal Control over Financial Reporting


         There have been no changes during the Company’s quarter ended September 30, 2012, in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financing reporting.

 



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PART II

OTHER INFORMATION


Item 1.  Legal Proceedings


         None.


Item 1A. Risk Factors


 None.


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


       As of September 30, 2012, we had issued 2,938,342 shares (excluding 19,000 shares issued to an affiliate) in the Offering for gross proceeds of $29,185,653, out of which we incurred $1,853,772 in selling commissions and $529,988 in organization and offering costs.  With the net offering proceeds, we have invested a total of $23,311,061 in commercial real estate, including $9,400,000 in the Richardson Heights property, $10,612,500 in the Cooper Street property and $3,298,561 in the Haute Harwin property.


Item 3 Defaults Upon Senior Securities


       None.


Item 4.  Reserved


       None.


Item 5. Other Information


        None.




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Item 6.  Exhibits.


10.12 Economic Development Incentive Agreement by and between the City of Richardson, Texas and Hartman Richardson Heights Properties, LLC (FILED HEREWITH)


31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH)


31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH)


32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH)


32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (FILED HEREWITH)

 







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.

 

HARTMAN SHORT TERM INCOME PROPERTIES XX, INC.

 



Date: November 14, 2012                                                          

              By: /s/ Allen R. Hartman

Allen R. Hartman,

Chairman of the Board and Chief Executive Officer

(Principal Executive Officer)


Date: November 14, 2012                                                          

              By: /s/ Louis T. Fox, III

Louis T. Fox, III,

Chief Financial Officer,

(Principal Financial and Principal Accounting Officer)



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