Attached files
| file | filename |
|---|---|
| 10-K/A - 10-K/A - INLAND REAL ESTATE CORP | a10-ka12x31x121.htm |
| EX-23.2 - CONSENT - INLAND REAL ESTATE CORP | exhibit232kpmgconsent.htm |
| EX-31.3 - CEO CERTIFICATION - INLAND REAL ESTATE CORP | exhibit313ceocertification.htm |
| EX-32.4 - CFO CERTIFICATION - INLAND REAL ESTATE CORP | exhibit324cfocertification.htm |
| EX-32.3 - CEO CERTIFICATION - INLAND REAL ESTATE CORP | exhibit323ceocertification.htm |
| EX-31.4 - CFO CERTIFICATION - INLAND REAL ESTATE CORP | exhibit314cfocertification.htm |
IN RETAIL FUND, L.L.C. AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 2012, 2011(unaudited) and 2010 (unaudited)
(With Independent Auditors’ Report Thereon)
Independent Auditors’ Report
The Members
IN Retail Fund, L.L.C.:
We have audited the accompanying consolidated financial statements of IN Retail Fund, L.L.C. and its subsidiaries, which comprise the consolidated balance sheet as of December 31, 2012, and the related consolidated statements of operations, members’ equity, and cash flows for the year then ended December 31, 2012, and the related notes to the consolidated financial statements.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly in all material respects, the financial position of IN Retail Fund, L.L.C. and its subsidiaries as of December 31, 2012, and the results of their operations and their cash flows for the year then ended, in accordance with U.S. generally accepted accounting principles.
The accompanying consolidated statements of operations, members’ equity, and cash flows for the years ended December 31, 2011 and 2010 were not audited by us, and accordingly, we do not express an opinion on them.
(signed) KPMG LLP
Chicago, Illinois
March 29, 2013
IN RETAIL FUND, L.L.C. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2012 and 2011
Consolidated Balance Sheets
December 31, 2012 and 2011
2012 | 2011 (unaudited) | ||||||
Assets: | |||||||
Investment properties: | |||||||
Land | $ | 87,569,737 | 88,013,295 | ||||
Building and improvements | 233,636,111 | 231,797,202 | |||||
321,205,848 | 319,810,497 | ||||||
Less accumulated depreciation | 64,177,199 | 55,368,495 | |||||
Net investment properties | 257,028,649 | 264,442,002 | |||||
Cash and cash equivalents | 6,963,756 | 8,309,489 | |||||
Restricted cash | 1,005,438 | 1,431,162 | |||||
Accounts and rents receivable, net | 5,900,428 | 7,213,953 | |||||
Deferred rent | 5,018,971 | 4,870,449 | |||||
Deposits and other assets | 983,255 | 324,817 | |||||
Acquired lease intangibles, net | 7,359,446 | 11,095,171 | |||||
Deferred costs, net | 1,358,452 | 958,041 | |||||
Deferred costs, net to related party | 2,791,118 | 2,356,196 | |||||
Total assets | $ | 288,409,513 | 301,001,280 | ||||
Liabilities: | |||||||
Accounts payable and accrued expenses | $ | 1,933,395 | 2,187,296 | ||||
Acquired below market lease intangibles, net | 3,468,051 | 4,138,116 | |||||
Accrued interest | 760,622 | 752,883 | |||||
Accrued real estate taxes | 11,080,031 | 11,338,338 | |||||
Security and other deposits | 406,740 | 401,424 | |||||
Mortgages payable | 173,571,683 | 180,933,750 | |||||
Prepaid rents and unearned income | 1,558,744 | 1,167,762 | |||||
Total liabilities | 192,779,266 | 200,919,569 | |||||
Members’ equity: | |||||||
Equity: | |||||||
Inland Real Estate Corporation | 47,599,628 | 49,825,360 | |||||
New York State Teachers' Retirement System | 48,030,619 | 50,256,351 | |||||
Total members' equity | 95,630,247 | 100,081,711 | |||||
Total liabilities and members' equity | $ | 288,409,513 | 301,001,280 | ||||
See accompanying notes to consolidated financial statements. | |||||||
2
IN RETAIL FUND, L.L.C. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2012, 2011 and 2010
Consolidated Statements of Operations
Years ended December 31, 2012, 2011 and 2010
2012 | 2011 (unaudited) | 2010 (unaudited) | |||||||||
Revenues: | |||||||||||
Rental income | $ | 30,142,710 | 30,199,150 | 33,433,406 | |||||||
Tenant recoveries | 12,966,827 | 13,876,591 | 14,160,953 | ||||||||
Other property income | 522,919 | 282,328 | 305,651 | ||||||||
Termination fee income | 2,554 | — | 76,797 | ||||||||
Total revenues | 43,635,010 | 44,358,069 | 47,976,807 | ||||||||
Expenses: | |||||||||||
Property operating expenses | 4,473,689 | 4,832,942 | 5,685,543 | ||||||||
Property operating expenses to related party | 1,746,227 | 1,803,326 | 1,918,347 | ||||||||
Bad debt expense | 863,589 | 1,047,127 | 490,284 | ||||||||
Real estate tax expense | 10,871,637 | 11,409,353 | 11,689,262 | ||||||||
Depreciation and amortization expense | 14,917,308 | 16,306,101 | 19,687,211 | ||||||||
General and administrative expenses | 118,590 | 107,975 | 113,489 | ||||||||
Total expenses | 32,991,040 | 35,506,824 | 39,584,136 | ||||||||
Operating income | 10,643,970 | 8,851,245 | 8,392,671 | ||||||||
Other income | 33,579 | 206,039 | 513,147 | ||||||||
Gain on land condemnation | 791,781 | — | — | ||||||||
Interest expense | (9,928,334 | ) | (10,229,042 | ) | (12,535,349 | ) | |||||
Net income (loss) | $ | 1,540,996 | (1,171,758 | ) | (3,629,531 | ) | |||||
See accompanying notes to consolidated financial statements. | |||||||||||
3
IN RETAIL FUND, L.L.C. AND SUBSIDIARIES
Consolidated Statements of Members’ Equity
Years ended December 31, 2012, 2011 and 2010
Consolidated Statements of Members’ Equity
Years ended December 31, 2012, 2011 and 2010
Inland Real Estate Corp. | New York State Teachers' Retirement System | Total | |||||||
Balance at December 31, 2009 (unaudited) | 82,172,616 | 82,603,609 | 164,776,225 | ||||||
Distributions | (4,064,836 | ) | (4,064,837 | ) | (8,129,673 | ) | |||
Property Distribution | (16,226,971 | ) | (16,226,971 | ) | (32,453,942 | ) | |||
Net loss | (1,814,765 | ) | (1,814,766 | ) | (3,629,531 | ) | |||
Balance at December 31, 2010 (unaudited) | 60,066,044 | 60,497,035 | 120,563,079 | ||||||
Contributions | 275,088 | 275,088 | 550,176 | ||||||
Distributions | (9,929,893 | ) | (9,929,893 | ) | (19,859,786 | ) | |||
Net loss | (585,879 | ) | (585,879 | ) | (1,171,758 | ) | |||
Balance at December 31, 2011 (unaudited) | 49,825,360 | 50,256,351 | 100,081,711 | ||||||
Contributions | 4,225,000 | 4,225,000 | 8,450,000 | ||||||
Distributions | (7,221,230 | ) | (7,221,230 | ) | (14,442,460 | ) | |||
Net income | 770,498 | 770,498 | 1,540,996 | ||||||
Balance at December 31, 2012 | 47,599,628 | 48,030,619 | 95,630,247 | ||||||
See accompanying notes to consolidated financial statements. | |||||||||
4
IN RETAIL FUND, L.L.C. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2012, 2011 and 2010
Consolidated Statements of Cash Flows
Years ended December 31, 2012, 2011 and 2010
2012 | 2011 (unaudited) | 2010 (unaudited) | ||||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income (loss) | $ | 1,540,996 | (1,171,758 | ) | (3,629,531 | ) | ||||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 14,917,308 | 16,306,101 | 19,687,211 | |||||||||||||
Amortization of acquired above market lease intangibles | 94,961 | 413,126 | 236,790 | |||||||||||||
Amortization of acquired below market lease intangibles | (670,065 | ) | (733,987 | ) | (785,375 | ) | ||||||||||
Gain on land condemnation | (791,781 | ) | — | — | ||||||||||||
Straight line rental income | (148,522 | ) | (298,664 | ) | (397,878 | ) | ||||||||||
Bad debt expense | 863,589 | 1,047,127 | 490,284 | |||||||||||||
Amortization of loan fees | 232,306 | 180,344 | 202,039 | |||||||||||||
Changes in assets and liabilities: | ||||||||||||||||
Restricted cash | (54,566 | ) | 1,402,513 | (976,478 | ) | |||||||||||
Accounts and rents receivable | 449,936 | 599,609 | 744,231 | |||||||||||||
Deposits and other assets | (658,438 | ) | (25,000 | ) | 13,569 | |||||||||||
Accounts payable and accrued expenses | (43,372 | ) | (168,470 | ) | (17,633 | ) | ||||||||||
Accrued interest | 7,739 | (67,214 | ) | (10,567 | ) | |||||||||||
Accrued real estate taxes | (258,307 | ) | 25,281 | (329,224 | ) | |||||||||||
Security and other deposits | 5,316 | (19,454 | ) | 11,864 | ||||||||||||
Prepaid rents and unearned income | 390,982 | 73,248 | 43,067 | |||||||||||||
Net cash provided by operating activities | 15,878,082 | 17,562,802 | 15,282,369 | |||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Restricted cash | 480,290 | 811,203 | — | |||||||||||||
Additions to investment properties | (3,940,128 | ) | (4,339,463 | ) | (4,869,608 | ) | ||||||||||
Proceeds from land condemnation | 394,450 | — | — | |||||||||||||
Distribution for change in control of property | — | — | (807,075 | ) | ||||||||||||
Leasing fees | (1,029,333 | ) | (698,689 | ) | (952,593 | ) | ||||||||||
Net cash used in investing activities | (4,094,721 | ) | (4,226,949 | ) | (6,629,276 | ) | ||||||||||
Cash flows from financing activities: | ||||||||||||||||
Contributions from members | 8,450,000 | 550,176 | — | |||||||||||||
Distributions to members | (14,442,460 | ) | (19,859,786 | ) | (8,129,673 | ) | ||||||||||
Mortgages payable proceeds | 41,850,000 | 66,780,000 | — | |||||||||||||
Loan fees | (615,457 | ) | (665,088 | ) | (52 | ) | ||||||||||
Payoff of mortgages payable | (47,300,000 | ) | (55,051,252 | ) | — | |||||||||||
Principal payments of mortgages payable | (1,071,177 | ) | (1,196,267 | ) | (2,495,885 | ) | ||||||||||
Net cash used in financing activities | (13,129,094 | ) | (9,442,217 | ) | (10,625,610 | ) | ||||||||||
Net (decrease) increase in cash and cash equivalents | (1,345,733 | ) | 3,893,636 | (1,972,517 | ) | |||||||||||
Cash and cash equivalents at beginning of year | 8,309,489 | 4,415,853 | 6,388,370 | |||||||||||||
Cash and cash equivalents at end of year | $ | 6,963,756 | 8,309,489 | 4,415,853 | ||||||||||||
Supplemental cash flow information | ||||||||||||||||
Cash paid for interest | $ | 9,688,289 | 10,115,912 | 12,343,877 | ||||||||||||
Non - cash accrued additions to investment properties | — | 817,540 | 411,116 | |||||||||||||
Write-off of fully depreciated building and improvements | (1,897,670 | ) | (207,145 | ) | (251,800 | ) | ||||||||||
Write-off of fully amortized acquired lease intangibles | (2,594,216 | ) | (7,836,354 | ) | (1,912,600 | ) | ||||||||||
Write-off of fully amortized deferred costs | (582,120 | ) | (575,192 | ) | (215,457 | ) | ||||||||||
Write-off of fully amortized acquired below market lease intangibles | 257,681 | 396,947 | 539,114 | |||||||||||||
See accompanying notes to consolidated financial statements. | ||||||||||||||||
5
IN RETAIL FUND, L.L.C. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2012, 2011 (unaudited) and 2010 (unaudited)
(1) | Organization and Basis of Accounting |
IN Retail Fund, L.L.C. (the “Company”) was formed October 8, 2004. The Company is a strategic joint venture formed between Inland Real Estate Corporation (“IRC”) and the New York State Teachers’ Retirement System (“NYSTRS”). The Company was formed to acquire Neighborhood Retail Centers and Community Centers located in the targeted markets of Illinois, Wisconsin and Minnesota. The initial term of the venture was seven years after the Company was formed, or October 8, 2011. During the year ended December 31, 2011, the termination date was extended to June 30, 2012. During the year ended December 31, 2012, IRC and NYSTRS entered into an amendment to the joint venture agreement extending the joint venture for a ten-year term through June 30, 2022. No other changes were made to the original joint venture agreement. IRC is the managing member of the Company and earns fees for providing property management, acquisition and leasing services to the Company. The profits and losses of the Company are shared equally between IRC and NYSTRS, except for the interest earned on the initial invested funds, of which IRC was allocated 95%.
Each property is owned by a single member L.L.C., each single member L.L.C. is wholly owned by the Company. The consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
The Company is treated as a Partnership for federal and state income tax purposes. Therefore, no provision has been made for income taxes as the liability for such taxes is that of the members. If an uncertain tax position were to be identified, the Company would account for such in accordance with ASC Topic 740. No uncertain tax positions were identified during 2012, 2011 and 2010.
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (“US GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Accounting Policies
Cash and cash equivalents
The Company considers all demand deposits, money market accounts and investments in certificates of deposit and repurchase agreements purchased with an original maturity of three months or less, at the date of purchase, to be cash equivalents. The Company maintains its cash and cash equivalents at financial institutions. The combined account balances at one or more institutions periodically exceed the Federal Depository Insurance Corporation (“FDIC”) insurance coverage and, as a result, there is a concentration of credit risk related to amounts on deposits in excess of FDIC insurance coverage. However the Company does not believe the risk is significant based on its review of the rating of the institutions where its cash is deposited. FDIC insurance currently covers up to $250,000 per depositor at each insured bank.
Restricted cash consists of escrow deposits required per the mortgage documents for future tenant improvements, replacement costs, real estate taxes, personal property, and insurance.
Capitalization and Depreciation
Depreciation expense is computed using the straight-line method. Building and improvements are depreciated based upon estimated useful lives of each asset type. The Company accounts for tenant allowances as tenant improvements. Tenant improvements are depreciated over the life of the related lease.
Acquired above and below market leases are amortized on a straight‑line basis over the life of the related leases as an adjustment to rental income. Acquired in‑place leases and customer relationship values are amortized over the average lease term as a component of amortization expense.
Leasing fees are amortized on a straight-line basis over the life of the related lease. Loan fees are amortized on a straight-line basis over the life of the related loan. Leasing and loan fees are presented in the accompanying consolidated balance sheets as deferred costs. Deferred costs are presented net of accumulated amortization of $1,722,374 and $1,502,017 for the years ended December 31, 2012 and 2011 (unaudited), respectively.
6
IN RETAIL FUND, L.L.C. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2012, 2011 (unaudited) and 2010 (unaudited)
Acquisition of Investment Properties
The Company allocates the purchase price of each acquired investment property between land, building and improvements, other intangibles (including acquired above market leases, acquired below market leases and acquired in‑place leases) and any assumed financing that is determined to be above or below market terms. Purchase price allocations are based on our estimates. The value allocated to land as opposed to building affects the amount of depreciation the Company records. If more value is attributed to land, depreciation expense is lower than if more value is attributed to building and improvements. In some circumstances, the Company engages independent real estate appraisal firms to provide market information and evaluations that are relevant to its purchase price allocations; however, the Company is ultimately responsible for the purchase price allocations.
Amortization pertaining to the above market lease intangibles of $94,961, $413,126 and $236,790 was recorded as a reduction to rental income for the years ended December 31, 2012, 2011 (unaudited) and 2010 (unaudited), respectively. Amortization pertaining to the below market lease intangibles of $670,065, $733,987 and 785,375 was recorded as an increase to rental income for the years ended December 31, 2012, 2011 (unaudited) and 2010 (unaudited), respectively. The Company incurred amortization expense pertaining to acquired in-place lease intangibles of $3,640,764, $6,224,419 and $7,608,486 for the years ended December 31, 2012, 2011 (unaudited), and 2010 (unaudited) respectively. In the accompanying consolidated balance sheets, acquired lease intangibles is presented net of accumulated amortization of $12,290,920 and $11,149,411 for the years ended December 31, 2012 and 2011 (unaudited), respectively and acquired below market lease intangibles are net of accumulated amortization of $4,515,362 and $4,102,978 for the years ended December 31, 2012 and 2011 (unaudited), respectively. The table below presents the amounts to be recorded for the amortization of intangibles over the next five years:
Year | Amortization of Above Market Lease Intangibles | Amortization of Below Market Lease Intangibles | Amortization of In Place Lease Intangibles | Total | ||||||
2013 | $ | 86,009 | (627,023) | 2,899,494 | 2,358,480 | |||||
2014 | 64,438 | (523,075) | 797,606 | 338,969 | ||||||
2015 | 38,475 | (401,888) | 797,606 | 434,193 | ||||||
2016 | 25,644 | (307,240) | 797,606 | 516,010 | ||||||
2017 | 25,644 | (239,635) | 797,606 | 583,615 | ||||||
Thereafter | 51,288 | (1,369,190) | 978,030 | (339,872) | ||||||
Total | $ | 291,498 | (3,468,051) | 7,067,948 | 3,891,395 | |||||
Impairment of Assets
The Company assesses the carrying values of its investment properties whenever events or changes in circumstances indicate that the carrying amounts of these investment properties may not be fully recoverable. Recoverability of the investment properties is measured by comparison of the carrying amount of the investment property to the estimated future undiscounted cash flows. In order to review the Company's investment properties for recoverability, the Company considers current market conditions, as well as its intent with respect to holding or disposing of the asset. Fair value is determined through various valuation techniques; including discounted cash flow models, quoted market values and third party appraisals, where considered necessary. If the Company's analysis indicates that the carrying value of the investment property is not recoverable on an undiscounted cash flow basis, the Company recognizes an impairment charge for the amount by which the carrying value exceeds the current estimated fair value of the real estate property.
The Company estimates the future undiscounted cash flows based on management’s intent as follows: (i) for real estate properties that the Company intends to hold long-term, including land held for development, properties currently under development and operating buildings, recoverability is assessed based on the estimated future net rental income from operating the property; (ii) for real estate properties that the Company intends to sell, including land parcels, properties currently under development and operating buildings, recoverability is assessed based on estimated proceeds from disposition that are estimated based on future net rental income of the property and expected market capitalization rates; and (iii) for costs incurred related to the potential acquisition or development of a real estate property, recoverability is assessed based on the probability that the acquisition or development is likely to occur as of the measurement date.
7
IN RETAIL FUND, L.L.C. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2012, 2011 (unaudited) and 2010 (unaudited)
The use of projected future cash flows is based on assumptions that are consistent with the Company's estimates of future expectations and the strategic plan it uses to manage its underlying business. However, assumptions and estimates about future cash flows, discount rates and capitalization rates are complex and subjective. Changes in economic and operating conditions and the Company's ultimate investment intent that occur subsequent to the impairment analysis could impact these assumptions and result in future impairment charges of our real estate properties.
Revenue Recognition
Rental income is recognized on a straight-line basis over the term of each lease. The difference between rental income earned on a straight-line basis and the cash rent due under provisions of the lease agreements is recorded as deferred rent receivable and is included as a component of accounts and rents receivable in the accompanying consolidated balance sheets.
As a lessor, the Company defers the recognition of contingent rental income, such as percentage/excess rent until the specified target that triggered the contingent rental income was achieved.
Accounts receivable
The Company periodically reviews the collectability of outstanding receivables. Allowances are taken for those balances that the Company has reason to believe will be uncollectible, including amounts relating to straight-line rent receivables. As of December 31, 2012 and 2011 (unaudited), the Company had recorded approximately $1,095,428 and $1,279,876, respectively, as an allowance for uncollectible accounts on the accompanying consolidated balance sheets.
(2) | Change in Control of Ownership (unaudited) |
During the year ended December 31, 2010, control of Algonquin Commons was transferred from the Company to IRC. NYSTRS paid IRC $11,886,400 in connection with and as part of the distribution of the property. In addition, IRC agreed to release NYSTRS from future obligations associated with the property. The following table summarizes the values of the assets and liabilities that changed control on July 1, 2010, the date of the distribution:
Investment Properties | $ | 116,440,520 |
Cash and cash equivalents | 807,075 | |
Other assets | 9,185,266 | |
Total assets transferred | 126,432,861 | |
Mortgages payable | 91,035,468 | |
Other liabilities | 2,943,451 | |
Net assets distributed | $ | 32,453,942 |
(3) | Land Condemnation |
During the year ended December 31, 2012, the Company completed land condemnations for three investment properties, Maple View, Orland Park Place and Ravinia Plaza. In conjunction with these condemnations, the Company recorded a gain of $791,781, which is included in the accompanying consolidated statement of operations.
(4) | Fair Value Disclosures |
In some instances, certain of the Company’s assets and liabilities are required to be measured or disclosed at fair value according to a fair value hierarchy pursuant to relevant accounting literature. This hierarchy ranks the quality and reliability of the inputs used to determine fair values, which are then classified and disclosed in one of three categories. The three levels of the fair value hierarchy are:
• | Level 1 – quoted prices in active markets for identical assets or liabilities. |
• | Level 2 – quoted prices in active markets for similar assets or liabilities; quoted prices in markets that are not active; and model-derived valuations whose inputs are observable. |
• | Level 3 – model-derived valuations with unobservable inputs that are supported by little or no market activity |
8
IN RETAIL FUND, L.L.C. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2012, 2011 (unaudited) and 2010 (unaudited)
Assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of fair value assets and liabilities and their classifications within the fair value hierarchy levels.
The Company's valuation of mortgages payable utilizes unobservable inputs in which little or no market data is available, requiring the Company to develop its own assumptions and therefore fall into Level 3 of the fair value hierarchy.
The fair value of mortgages payable is the amount at which the instrument could be exchanged in a current transaction between willing parties. As of December 31, 2012 and 2011, the fair value of the Company's mortgages payable is estimated to be $180,279,578 and $177,423,193 (unaudited), respectively. The Company estimates the fair value of its total mortgages payable by discounting the future cash flows of each instrument at rates currently offered for similar debt instruments (4.20% at December 31, 2012 and 5.40% at December 31, 2011) of comparable maturities by the Company's lenders (Level 3 inputs). Accounts and rents receivable, net, deposits and other assets, and accounts payable and accrued expenses are valued at cost which approximates their fair value at December 31, 2012 and 2011.
(5) | Transactions with Related Parties |
IRC performs the Company’s acquisition, property management and leasing functions and earns fees for these services. For the years ended December 31, 2012, 2011 and 2010, the fees for these services totaled $2,726,625, $2,457,451 (unaudited) and $2,826,794 (unaudited), respectively. Of those fees, $1,746,227, $1,803,326 (unaudited) and $1,918,347 (unaudited) are included in property operating expenses in the accompanying consolidated statements of operations, and $980,398, $654,125 (unaudited) and $908,447 (unaudited) are capitalized leasing costs included in deferred costs, net in the accompanying consolidated balance sheets.
(6) | Operating Leases |
Minimum lease payments under operating leases to be received in the future, assuming no expiring leases are renewed are as follows:
2013 | $ | 29,048,660 | ||
2014 | 25,951,396 | |||
2015 | 22,929,746 | |||
2016 | 19,608,810 | |||
2017 | 17,859,340 | |||
Thereafter | 56,041,746 | |||
Total | $ | 171,439,698 | ||
Remaining lease terms range from one to forty six years. As of December 31, 2012, 2011 and 2010, the average physical occupancy (unaudited) of the Company’s properties was 95%, 95% and 96%, respectively. Pursuant to the lease agreements, tenants of the property are required to reimburse the Company for some or all of the particular tenant's pro rata share of the real estate taxes and operating expenses of the property. Such amounts are not included in the future minimum lease payments above, but are included in tenant recoveries on the accompanying consolidated statements of operations.
9
IN RETAIL FUND, L.L.C. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2012, 2011 (unaudited) and 2010 (unaudited)
(7) | Mortgages Payable |
The Company’s mortgages payable are secured by certain of its investment properties, all loans are non-recourse and there are no guarantees on the debt. The loans are at fixed rates of interest and consist of the following at December 31, 2012 and 2011:
Mortgagee | Interest rate at December 31, 2012 (a) | Interest rate at December 31, 2011 (unaudited) | Maturity Date | Current Monthly Payment | Balance at December 31, 2012 | Balance at December 31, 2011 (unaudited) | |||||||||
Midland | - | 4.94% | - | - | $ | — | 17,500,000 | ||||||||
Midland | - | 4.94% | - | - | — | 15,000,000 | |||||||||
Allstate | - | 5.21% | - | - | — | 8,200,000 | |||||||||
Principal Life | - | 5.29% | - | - | — | 6,600,000 | |||||||||
Wachovia Securities (b)(c) | 5.58% | 5.58% | 04/2013 | 83,402 | 11,448,500 | 12,593,048 | |||||||||
Wachovia Securities (b)(c) | 5.66% | 5.66% | 04/2013 | 16,267 | 2,429,687 | 2,483,387 | |||||||||
Wachovia Securities (b)(c) | 5.93% | 5.93% | 04/2013 | 48,735 | 6,989,044 | 7,147,287 | |||||||||
Principal Life (b)(c) | 6.08% | 6.08% | 10/2013 | 73,453 | 10,731,958 | 10,942,876 | |||||||||
TCF National Bank (c) | 6.50% | 6.50% | 09/2014 | 76,590 | 11,538,086 | 11,687,152 | |||||||||
John Hancock Life | 5.83% | 5.83% | 02/2015 | 65,588 | 13,500,000 | 13,500,000 | |||||||||
Allstate | 5.86% | 5.86% | 03/2015 | 41,508 | 8,500,000 | 8,500,000 | |||||||||
Principal Bank | 5.00% | 5.00% | 05/2016 | 33,333 | 8,000,000 | 8,000,000 | |||||||||
Prudential | 4.00% | 4.00% | 01/2019 | 55,000 | 16,500,000 | 16,500,000 | |||||||||
Midland National Life Insurance | 4.75% | - | 06/2019 | 69,271 | 17,500,000 | — | |||||||||
North American Company | 4.60% | - | 07/2019 | 24,342 | 6,350,000 | — | |||||||||
JP Morgan Chase Bank | 5.55% | 5.55% | 09/2021 | 202,063 | 42,280,000 | 42,280,000 | |||||||||
ING Life Insurance and Annuity (c) | 4.40% | - | 04/2022 | 90,137 | 17,804,408 | — | |||||||||
Mortgages Payable | $ | 173,571,683 | 180,933,750 | ||||||||||||
(a) The weighted average interest rate at December 31, 2012 was 5.30%. | |||||||||||||||
(b) $31,599,189 of the Company’s mortgages payable mature during 2013. The Company repaid the loans maturing in April 2013 on March 11, 2013. The Company expects to either repay or replace the loan maturing in October 2013 with new debt for a term of five years or longer at the market interest rate at the time the existing debt matures, although there is no assurance that the Company will be able to replace the debt on terms and conditions the Company finds acceptable, if at all. | |||||||||||||||
(c) These loans require payments of principal and interest monthly, all other loans listed are interest only. | |||||||||||||||
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IN RETAIL FUND, L.L.C. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2012, 2011 (unaudited) and 2010 (unaudited)
As of December 31, 2012, the required future principal payments on the Company’s mortgages payable over the next five years and thereafter are as follows:
2013 | $ | 32,067,133 | ||
2014 | 11,692,483 | |||
2015 | 22,321,686 | |||
2016 | 8,334,209 | |||
2017 | 351,551 | |||
Thereafter | 98,804,621 | |||
Total | $ | 173,571,683 | ||
(8) | Commitments and Contingencies |
The Company is subject, from time to time, to various other legal proceedings and claims that arise in the ordinary course of business. While the resolution of these other matters cannot be predicted with certainty, management believes, based on currently available information, that the final outcome of such matters will not have a material adverse effect on the consolidated financial statements of the Company.
(9) | Subsequent Events |
On March 11, 2013, the Company repaid approximately $20,900,000 of mortgages payable maturing in April 2013 that encumbered the properties Maple View and Regal Showplace. Each partner contributed their share, net of escrow refunds, or approximately $9,900,000.
The Company has evaluated events through March 29, 2013, the date of the financial statement issuance, and did not identify any additional subsequent events requiring adjustment or disclosure in the consolidated financial statements.
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