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EXCEL - IDEA: XBRL DOCUMENT - WELLS MID-HORIZON VALUE-ADDED FUND I LLCFinancial_Report.xls
EX-31.2 - SECTION 302 PFO CERTIFICATION - WELLS MID-HORIZON VALUE-ADDED FUND I LLCwellsvafq12013_ex312.htm
EX-31.1 - SECTION 302 PEO CERTIFICATION - WELLS MID-HORIZON VALUE-ADDED FUND I LLCwellsvafq12013_ex311.htm
EX-32.1 - SECTION 906 PEO AND PFO CERTIFICATIONS - WELLS MID-HORIZON VALUE-ADDED FUND I LLCwellsvafq12013_ex321.htm

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________ 
FORM 10-Q
__________________________________ 
(Mark One)
 
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended March 31, 2013 or
 
 
o
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from _____________ to _____________

Commission file number 000-53626
__________________________________ 
WELLS MID-HORIZON VALUE-ADDED FUND I, LLC
(Exact name of registrant as specified in its charter)
__________________________________ 

Georgia
 
20-3192853
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
 
6200 The Corners Pkwy.
Norcross, Georgia
 
30092-3365
(Address of principal executive offices)
 
(Zip Code)
 
 
Registrant's telephone number, including area code
 
(770) 449-7800
N/A
(Former name, former address, and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§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  o
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 file," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o (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 Exchange Act). Yes  o    No  x
As of April 30, 2013, there were 51,854 shares of investor member interests outstanding.


 
 
 
 
 



CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q of Wells Mid-Horizon Value-Added Fund I, LLC ("Wells VAF I," "we," "our," or "us") other than historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such statements include, in particular, statements about our plans, strategies, and prospects and are subject to certain risks and uncertainties, as well as known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as "may," "will," "expect," "intend," "anticipate," "estimate," "believe," "continue," or other similar words. Specifically, we consider, among others, statements concerning future operating results and cash flows, our ability to meet future obligations, and the amount and timing of any future distributions to investor members to be forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this report is filed with the Securities and Exchange Commission ("SEC"). We make no representations or warranties (express or implied) about the accuracy of any such forward-looking statements contained in this Form 10-Q, and we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Any such forward-looking statements are subject to unknown risks, uncertainties, and other factors and are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive, and market conditions, all of which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual results, our ability to meet such forward-looking statements, including our ability to generate positive cash flow from operations, provide distributions to members, and maintain the value of our real estate properties, may be significantly hindered.
The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:
Although we currently have no outstanding loan obligations, we have the ability to utilize debt financing from third parties to fund re-leasing costs, capital expenditures, and operating costs of the portfolio. If we do incur additional debt, our cash from operations would be needed to make debt service payments and, as a result, cash available for engaging in value-enhancing strategies would be reduced. Our current loan with NXT Capital is secured by the Nathan Lane Building and the Commerce Street Building. Should we draw on the remaining availability of our current loan and we are unable to make any payments under the loan or are found to be in default under the terms of the loan, the lender could foreclose on the properties. Any such default or foreclosure would have a material adverse effect on our financial condition and results of operations. In addition, provisions under the loan require that net proceeds from the sale of certain properties be applied against the outstanding balance of the respective loan up to a disclosed release price prior to funding any capital requirements, operating needs of the portfolio, or distributions to investors.
The current economic conditions and their impact on office market conditions may require that we extend our fund life longer than originally projected in order to achieve better disposition pricing for our investor members.
Real estate investments are subject to general downturns in the economy as well as downturns in specific geographic areas. We cannot predict what the occupancy level will be in a particular building or that any tenant will remain solvent. We depend on tenants for our revenue and, accordingly, our revenue is dependent upon the success and economic viability of our current and future tenants.
The management and other key personnel of our manager, whose services are essential to Wells VAF I, will face a conflict in allocating their time and other resources between Wells VAF I and the other Wells real estate programs and activities in which they are involved. Failure of our manager to devote sufficient time or resources to our operations could result in reduced returns to our members.
We will pay certain prescribed fees to our manager and its affiliates regardless of the quality of services provided.


2


WELLS MID-HORIZON VALUE-ADDED FUND I, LLC
TABLE OF CONTENTS
 
 
  
 
 
Page No.
 
 
 
 
 
 
PART I.
  
 
 
 
 
 
 
 
 
 
  
Item 1.
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
  
Item 2.
 
 
 
 
 
 
 
 
  
Item 3.
 
 
 
 
 
 
 
 
  
Item 4.
 
 
 
 
 
 
 
PART II.
  
 
 
 
 
 
 
 
 
 
  
Item 1.
 
 
 
 
 
 
 
 
  
Item 1A.
 
 
 
 
 
 
 
 
  
Item 2.
 
 
 
 
 
 
 
 
  
Item 3.
 
 
 
 
 
 
 
 
  
Item 4.
 
 
 
 
 
 
 
 
  
Item 5.
 
 
 
 
 
 
 
 
  
Item 6.
 


3


PART I.
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
The information presented in Wells VAF I's accompanying balance sheets and statements of operations, members' capital, and cash flows reflects all adjustments that are, in management's opinion, necessary for a fair and consistent presentation of the aforementioned financial statements. The accompanying financial statements should be read in conjunction with the notes to Wells VAF I's financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations included in this Quarterly Report on Form 10-Q and in Wells VAF I's Annual Report on Form 10-K for the year ended December 31, 2012. Wells VAF I's results of operations for the three months ended March 31, 2013 are not necessarily indicative of the operating results expected for the full year.

4


WELLS MID-HORIZON VALUE-ADDED FUND I, LLC
BALANCE SHEETS
 
(Unaudited)
 
 
 
March 31,
2013
 
December 31,
2012
Assets:
 
 
 
Real estate, at cost:
 
 
 
Land
$
3,780,435

 
$
3,780,435

Building and improvements, less accumulated depreciation of $4,196,160 and
    $3,987,525 as of March 31, 2013 and December 31, 2012, respectively
20,479,454

 
20,654,102

Intangible lease assets, less accumulated amortization of $2,598,680 and
    $2,483,210 as of March 31, 2013 and December 31, 2012, respectively
693,673

 
809,143

Construction in progress
213,588

 
33,280

Total real estate assets
25,167,150

 
25,276,960

 
 
 
 
Cash and cash equivalents
6,627,320

 
6,586,461

Tenant receivables
560,257

 
592,114

Other assets
494,738

 
473,575

Deferred financing costs, less accumulated amortization of $931,414 and
    $827,906 as of March 31, 2013 and December 31, 2012, respectively
310,523

 
414,031

Intangible lease origination costs, less accumulated amortization of $2,212,879 and
    $2,114,913 as of March 31, 2013 and December 31, 2012, respectively
406,430

 
504,396

Deferred leasing costs, less accumulated amortization of $440,617 and
    $402,870 as of March 31, 2013 and December 31, 2012, respectively
1,368,127

 
1,405,874

Total assets
$
34,934,545

 
$
35,253,411

 
 
 
 
Liabilities:
 
 
 
Accounts payable, accrued expenses and accrued capital expenditures
$
656,988

 
$
586,673

Due to affiliates
40,345

 
34,071

Deferred income
230,517

 
208,941

Intangible lease liabilities, less accumulated amortization of $308,006 and
    $294,789 as of March 31, 2013 and December 31, 2012, respectively
78,466

 
91,683

Total liabilities
1,006,316

 
921,368

 
 
 
 
Commitments and Contingencies

 

 
 
 
 
Members' Capital:
 
 
 
Member Shares, $1,000 par value; 150,000 shares authorized;
51,854 shares issued and outstanding
33,928,229

 
34,332,043

Total liabilities and members' capital
$
34,934,545

 
$
35,253,411

See accompanying notes.

5


WELLS MID-HORIZON VALUE-ADDED FUND I, LLC
STATEMENTS OF OPERATIONS
 
 
(Unaudited)
 
Three Months Ended
 
March 31,
 
2013
 
2012
Revenues:
 
 
 
Rental income
$
776,950

 
$
772,856

Tenant reimbursements
306,670

 
302,731

Total revenues
1,083,620

 
1,075,587

Expenses:
 
 
 
Property operating costs
689,503

 
660,332

Asset and property management fees:
 
 
 
Related-party
63,615

 
74,709

Other
13,307

 
19,502

Depreciation
208,635

 
211,449

Amortization
219,300

 
219,300

General and administrative expenses
189,566

 
193,046

Total expenses
1,383,926

 
1,378,338

Real Estate Operating Loss
(300,306
)
 
(302,751
)
 
 
 
 
Other Expense:
 
 
 
Interest expense
(103,508
)
 
(456,067
)
Loss from Continuing Operations
(403,814
)

(758,818
)
 
 
 
 
Operating Income from Discontinued Operations

 
52,760

Net Loss
$
(403,814
)
 
$
(706,058
)
 
 
 
 
Net Income (Loss) per Weighted-Average Share of Investor Members' Interests
 
 
 
Loss from continuing operations
$
(7.79
)
 
$
(14.63
)
Income from discontinued operations

 
1.01

Net loss per weighted-average share of members' interests
$
(7.79
)
 
$
(13.62
)
 
 
 
 
Weighted-Average Shares of Investor Members' Interests Outstanding
51,854

 
51,854

See accompanying notes.

6


WELLS MID-HORIZON VALUE-ADDED FUND I, LLC
STATEMENTS OF MEMBERS' CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2012
AND THE THREE MONTHS ENDED MARCH 31, 2013 (UNAUDITED)
 
 
Sponsoring
Member
 
Investor  Members'
Interests
 
Total
Members'
Capital
 
Shares    
 
Amount    
 
Members' Capital as of December 31, 2011
$
959,727

 
51,854

 
$
38,162,182

 
$
39,121,909

 
 
 
 
 
 
 
 
Net income

 

 
2,210,134

 
2,210,134

Distributions

 

 
(7,000,000
)
 
(7,000,000
)
Members' Capital as of December 31, 2012
959,727

 
51,854

 
33,372,316

 
34,332,043

 
 
 
 
 
 
 
 
Net loss

 

 
(403,814
)
 
(403,814
)
Members' Capital as of March 31, 2013
$
959,727

 
51,854

 
$
32,968,502

 
$
33,928,229

See accompanying notes.

7


WELLS MID-HORIZON VALUE-ADDED FUND I, LLC
STATEMENTS OF CASH FLOWS
 
 
(Unaudited)
 
Three Months Ended
 
March 31,
 
2013
 
2012
Cash Flows from Operating Activities:
 
 
 
Net loss
$
(403,814
)
 
$
(706,058
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation
208,635

 
508,186

Amortization of deferred financing costs
103,508

 
103,508

Other amortization
237,966

 
295,443

Changes in assets and liabilities:
 
 
 
Decrease (increase) in tenant receivables
31,857

 
(7,542
)
(Increase) decrease in other assets
(21,163
)
 
314,492

Increase (decrease) in accounts payable and accrued expenses
25,352

 
(288,260
)
Increase in due to affiliates
6,274

 
15,963

Increase in deferred income
21,576

 
31,381

Net cash provided by operating activities
210,191

 
267,113

 
 
 
 
Cash Flows from Investing Activities:
 
 
 
Investment in real estate
(169,332
)
 
(300,937
)
Net Increase (Decrease) in Cash and Cash Equivalents
40,859

 
(33,824
)
 
 
 
 
Cash and Cash Equivalents, beginning of period
6,586,461

 
2,963,396

Cash and Cash Equivalents, end of period
$
6,627,320

 
$
2,929,572

 
 
 
 
Supplemental Disclosure of Noncash Investing Activities:
 
 
 
Accrued capital expenditures
$
213,588

 
$
144,504

See accompanying notes.

8


WELLS MID-HORIZON VALUE-ADDED FUND I, LLC
CONDENSED NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2013 (unaudited)
1.
ORGANIZATION AND BUSINESS
Wells Mid-Horizon Value-Added Fund I, LLC ("Wells VAF I") was organized as a Georgia limited liability company on July 15, 2005 for the purpose of acquiring, developing, owning, operating, and improving or otherwise enhancing income-producing commercial properties, and liquidating such investments over a fund life of four to eight years. The term of Wells VAF I shall continue until the earlier of December 31, 2020, or the filing of a Certificate of Termination upon the dissolution and completion of the liquidation of Wells VAF I.
Wells Management Company, Inc. ("Wells Management") is the sponsoring member of Wells VAF I and has the exclusive authority to conduct the day-to-day and overall direction and supervision of the business and affairs of Wells VAF I pursuant to an operating agreement. Wells Management has contributed $1,000,000 to Wells VAF I for a subordinated interest therein. Wells Investment Management Company, LLC ("WIM"), a wholly owned subsidiary of Wells Management, has been appointed by Wells Management to serve as the manager of Wells VAF I. In addition, Wells VAF I and WIM have entered into an agreement (the "Advisory Agreement"), under which WIM will perform certain key functions on behalf of Wells VAF I, including, but not limited to, the investment of capital proceeds and management of day-to-day operations.
On September 15, 2005, Wells VAF I commenced an offering of up to 150,000 shares of investor member interests under a private placement to qualified purchasers who meet the definition of "accredited investors," as provided in Regulation D of the Securities Act. Wells VAF I commenced active operations upon receiving and accepting subscriptions for 10,000 shares of investor member interests on June 22, 2006. Its offering terminated on September 15, 2008, at which time Wells VAF I had sold approximately 51,854 shares of investor member interests resulting in gross offering proceeds of approximately $51,854,000. After deductions for payments of acquisition fees of approximately $1,037,000; selling commissions, discounts, and dealer-manager fees of approximately $2,852,000; and other offering expenses of approximately $259,000; Wells VAF I received net offering proceeds of approximately $47,706,000. As of October 31, 2008, all equity proceeds raised from the sale of investor member interests had been utilized to fund property acquisitions and capital expenditures. No public market exists for the shares of investor member interests and none is expected to develop.
Wells VAF I's investment policy includes, but is not limited to, acquiring properties with opportunities for value enhancement related to leasing or re-leasing available space, renovating or redeveloping properties, entering into leases with sub-investment-grade tenants at above market rates, and/or benefiting from favorable market conditions. Wells VAF I does not expect to make any additional investments in the future and its current focus is on enhancing the value of its remaining portfolio and positioning the remaining properties for sale.
During the periods presented, Wells VAF I owned direct interests in the following properties:
 
% Leased as of
  
March 31, 2013
1. Nathan Lane Building
A five-story office building located in Plymouth, Minnesota
 
45%
2. Commerce Street Building
A four-story office building and two floors of a parking deck located in Nashville,
Tennessee
 
85%
3. Parkway at Oak Hill Buildings(1)
Two separate two-story office buildings located in Austin, Texas
 
(1) These buildings were sold in May 2012.

2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements of Wells VAF I have been prepared in accordance with the rules and regulations of the SEC, including the instructions to Form 10-Q and Article 10 of Regulation S-X, and in accordance with such rules and regulations, do not include all of the information and footnotes required by U.S. generally accepted accounting principles ("GAAP") for complete financial statements. In the opinion of WIM, Wells VAF I's manager, the statements for the unaudited interim periods presented include all adjustments that are of a normal and recurring nature and necessary to fairly and consistently present the results for these periods.

9


Results for interim periods are not necessarily indicative of full-year results. For further information, refer to the financial statements and footnotes included in Wells VAF I's Annual Report on Form 10-K for the year ended December 31, 2012.
Fair Value Measurements
Wells VAF I estimates the fair value of its assets and liabilities (where currently required under GAAP) consistent with the provisions of the accounting standard for fair value measurements and disclosures. Under this standard, fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date. While various techniques and assumptions can be used to estimate fair value depending on the nature of the asset or liability, the accounting standard for fair value measurements and disclosures provides the following fair value technique parameters and hierarchy, depending upon availability:
Level 1 - Assets or liabilities for which the identical term is traded on an active exchange, such as publicly traded instruments or futures contracts.
Level 2 - Assets and liabilities valued based on observable market data for similar instruments.
Level 3 - Assets or liabilities for which significant valuation assumptions are not readily observable in the market. Such assets or liabilities are valued based on the best available data, some of which may be internally developed. Significant assumptions may include risk premiums that a market participant would require.
Intangible Assets and Liabilities Arising from In-Place Leases where Wells VAF I is the Lessor

As of March 31, 2013 and December 31, 2012, Wells VAF I had the following gross intangible in-place lease assets and liabilities:
 
 
As of March 31, 2013
 
 
Intangible Lease Assets
 
Intangible
Lease
Origination
Costs
 
Intangible
Below-Market
In-Place
Lease Liabilities
 
 
Above-Market
In-Place
Lease Assets
 
Absorption
Period
Costs
 
Gross
 
$
357,971

 
$
2,934,382

 
$
2,619,309

 
$
386,472

Accumulated Amortization
 
(240,707
)
 
(2,357,973
)
 
(2,212,879
)
 
(308,006
)
Net
 
$
117,264

 
$
576,409

 
$
406,430

 
$
78,466


 
 
As of December 31, 2012
 
 
Intangible Lease Assets
 
Intangible
Lease
Origination
Costs
 
Intangible
Below-Market
In-Place
Lease Liabilities
 
 
Above-Market
In-Place
Lease Assets
 
Absorption
Period
Costs
 
Gross
 
$
357,971

 
$
2,934,382

 
$
2,619,309

 
$
386,472

Accumulated Amortization
 
(231,449
)
 
(2,251,761
)
 
(2,114,913
)
 
(294,789
)
Net
 
$
126,522

 
$
682,621

 
$
504,396

 
$
91,683

During the three months ended March 31, 2013 and 2012, Wells VAF I recognized the following amortization of acquired intangible lease assets and liabilities: 
 
 
Intangible Lease Assets
 
Intangible
Lease
Origination
Costs
 
Intangible
Below-Market
In-Place
Lease Liabilities
For the three months ended March 31:
 
Above-Market
In-Place
Lease Assets
 
Absorption
Period 
Costs
 
2013
 
$
9,258

 
$
106,212

 
$
97,966

 
$
13,217

2012
 
$
9,258

 
$
106,213

 
$
97,966

 
$
13,216


10


The remaining net intangible assets and liabilities balances as of March 31, 2013 will be amortized as follows: 
 
 
Intangible Lease Assets
 
Intangible
Lease
Origination
Costs
 
Intangible
Below-Market
In-Place
Lease Liabilities
For the year ending December 31,
 
Above-Market
In-Place
Lease Assets
 
Absorption
Period
Costs
 
2013
 
$
27,773

 
$
163,021

 
$
131,646

 
$
22,356

2014
 
37,032

 
158,067

 
113,705

 
23,218

2015
 
37,032

 
158,067

 
113,705

 
23,218

2016
 
15,427

 
81,558

 
47,374

 
9,674

2017
 

 
15,696

 

 

 
 
$
117,264

 
$
576,409

 
$
406,430

 
$
78,466

Weighted-Average Amortization Period
 
3 years
 
3 years
 
3 years
 
3 years

Other Assets
Other assets are comprised of (i) certain escrow accounts restricted by the lender to fund future real estate taxes and (ii) prepaid taxes, prepaid insurance, and nontenant receivables. Prepaid expenses and other assets will be expensed as incurred. Management assesses the collectability of other assets on an ongoing basis and provides for allowances as such balances, or portions thereof, become uncollectible. No such allowances have been recorded as of March 31, 2013 and December 31, 2012.
Income Taxes
Wells VAF I is not subject to federal or state income taxes; therefore, none have been provided for in the accompanying financial statements. The members are required to include their respective shares of profits and losses in their individual income tax returns, regardless of whether any cash distributions were made during the respective period.
Allocation of Profits and Losses
Wells VAF I allocates profits or losses for each allocation period to the investor members in proportion to their respective percentage interests in an amount not to create a deficit capital balance.
Distribution of Net Cash Flow
Net cash flow, as defined in the operating agreement, is distributed to the members in the order and priority that follows:
First, to pay the following returns on capital:
First, to the investor members up to a 10% per annum compounded return on their capital contributions during the offering period;
Second, to the investor members in proportion to their percentage interests, as defined, until each investor member receives a 10% per annum compounded return on their capital contributions for the period following the offering period;
Third, to Wells Management up to a 10% per annum compounded return on its capital contribution;
Second, to the investor members in proportion to their percentage interests until each investor member has received $1,000 per share;
Third, to Wells Management until it has received its capital contribution; and
Fourth,
To Wells Management in the amount of 20% of all distributable proceeds, less any disposition fees previously paid to Wells Management, of which Wells Management has agreed to pay up to 50% of any such amount received to broker/dealers who participated in its private placement offering; and
The remainder to the investor members in accordance with their percentage interests.
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2013-02, Comprehensive Income Topic Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"). ASU 2013-02 requires an entity to disclose information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to disclose significant amounts reclassified out of

11


accumulated other comprehensive income by the respective line items of net income if the amount reclassified to net income in its entirety in the same reporting period is required under GAAP. For amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. ASU 2013-02 was effective for Wells VAF I beginning January 1, 2013. The adoption of ASU 2013-02 has not had a material impact on Wells VAF I's financial statements or disclosures.
In April 2013, the FASB issued Accounting Standards Update 2013-07, Presentation of Financial Statements Topic Liquidation Basis of Accounting ("ASU 2013-07"). ASU 2013-07 requires an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. Liquidation is considered imminent when the likelihood is remote that the organization will return from liquidation and either: (a) a plan for liquidation is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the plan will be blocked by other parties; or (b) a plan for liquidation is being imposed by other forces. ASU 2013-07 will be effective for Wells VAF I beginning on January 1, 2014. Wells VAF I expects that the adoption of ASU 2013-07 will not have a material impact on its financial statements or disclosures.

3.
NOTE PAYABLE
On December 17, 2010, Wells VAF I entered into an agreement with NXT Capital, LLC ("NXT Capital") for a loan in the amount of up to $30 million (the "NXT Loan"). Following the repayment of the outstanding balance in May 2012 in connection with the disposition of the Parkway at Oak Hill Buildings, the remaining availability on the NXT Loan was $10 million, subject to certain funding requirements. The NXT Loan, which matures on December 16, 2013, bears interest at the greater of (i) one-month London Interbank Offered Rate ("LIBOR") plus a margin of 3.75% or (ii) 7.25%. As of March 31, 2013, the NXT Loan was secured by the Nathan Lane Building and the Commerce Street Building.
Wells VAF I paid cash for interest expense on its note payable of approximately $0 and $353,000 during the three months ended March 31, 2013 and 2012, respectively. During the periods presented, Wells VAF I did not capitalize any interest expense related to the NXT Loan.
4.
MEMBERS' EQUITY
Sponsoring Member Interest
On September 27, 2005, Wells VAF I received a $1,000,000 contribution from Wells Management. During the start-up period, proceeds from this contribution were held as working capital and used primarily to fund initial operating costs. Following the start-up period, the residual proceeds were distributed to investor members. Wells Management has a subordinated interest to that of the investor members in earnings allocations and distributions from Wells VAF I.
Investor Member Interests
Wells VAF I commenced active operations upon receiving and accepting subscriptions for 10,000 shares of investor member interests on June 22, 2006. The offering was terminated on September 15, 2008, at which time Wells VAF I had sold approximately 51,854 shares of investor member interests. Investor members have a priority interest over that of the sponsoring member in earnings allocations and distributions from Wells VAF I.
5.
RELATED-PARTY TRANSACTIONS
Advisory Agreement
On September 15, 2005, Wells VAF I entered into the Advisory Agreement with WIM. Pursuant to the Advisory Agreement, WIM is entitled to specified fees for certain services, including, but not limited to, the investment of offering proceeds in real estate projects, sales of properties, and management of day-to-day operations. The Advisory Agreement has a one-year term and is subject to an unlimited number of successive one-year renewals upon the consent of the parties. Effective September 15, 2012, the Advisory Agreement was renewed for a one-year term through September 14, 2013 upon terms identical to those in effect through September 14, 2012. Wells VAF I may terminate the Advisory Agreement upon 60 days' written notice without cause or penalty. If Wells VAF I terminates the Advisory Agreement, Wells VAF I will pay WIM all unpaid reimbursements of expenses and all earned but unpaid fees. The negotiations of the Advisory Agreement were not at arm's length, and Wells VAF I will pay certain prescribed fees to WIM and its affiliates regardless of the quality of its services.
Under the terms of the Advisory Agreement, Wells VAF I incurs the following fees and reimbursements payable to WIM:
Monthly asset management fees equal to one-twelfth of 0.75% of the gross value of Wells VAF I's real estate assets, as determined and approved in good faith and consistent with applicable fiduciary duties by the investment committee of

12


Wells VAF I. Any portion of the asset management fee may be deferred upon WIM's request and paid in a subsequent month or year.
Reimbursement for all costs and expenses that WIM incurs in fulfilling its duties as the asset portfolio manager. These costs and expenses may include wages and salaries and other employee-related expenses of WIM's employees engaged in management, administration, operations, and marketing functions. Employee-related expenses include taxes, insurance, and benefits relating to such employees, and legal, travel, and other out-of-pocket expenses that are directly related to the services they provide. WIM allocates its reimbursable costs of providing these services among Wells VAF I and various other affiliated public real estate investment programs based on time spent on each entity by individual personnel.
For any property sold by Wells VAF I, a disposition fee equal to 0.25% of the sales price, if WIM provides a substantial amount of services in connection with the sale.
Property Management Agreement
On November 1, 2010, Wells VAF I entered into a management agreement with Wells Real Estate Services, LLC ("WRES") to manage the operations of the Commerce Street Building, which was previously managed by a third-party vendor (the "Commerce Management Agreement"). Pursuant to the Commerce Management Agreement, WRES was entitled to a monthly management fee equal to the greater of (i) $2,000 per month or (ii) 2.5% of gross monthly income actually collected from the property for the preceding month. In addition, WRES was entitled to reimbursement for all costs and expenses WRES incurs in fulfilling its duties as the property manager. These costs and expenses may include wages, salaries, and other employee-related expenses of WRES employees engaged in management, administration, operations, and marketing functions. Further, WRES was entitled to reimbursement for construction management services rendered for projects on behalf of Wells VAF I equal to 4% for construction costs up to $500,000, 3% for construction costs over $500,000 but less than $1,500,000, and 2% for construction costs greater than $1,500,000 on a per construction project basis. For tenant improvement projects managed by a tenant, WRES was entitled to a construction management fee for supervision of the project equal to 1% of construction costs. On February 28, 2013, Wells VAF I terminated the Commerce Management Agreement with WRES. Effective March 1, 2013, Wells VAF I entered into a one-month management agreement with Wells Management (the "Revised Commerce Management Agreement") to manage the operations of the Commerce Street Building upon terms identical to those in the original Commerce Management Agreement with WRES. Effective March 31, 2013, Wells VAF I terminated the Revised Commerce Management Agreement with Wells Management and entered into an agreement with a third-party provider.
Related-Party Costs
Pursuant to the terms of the agreements described above, Wells VAF I incurred the following related-party costs for the three months ended March 31, 2013 and 2012, portions of which are included in income from discontinued operations in the accompanying statements of operations:
 
Three Months Ended
 
March 31,
 
2013
 
2012
Administrative reimbursements(1)
$
77,937

 
$
129,048

Asset management fees(1)
53,812

 
118,950

Property management fees(1)
9,803

 
33,730

Total
$
141,552

 
$
281,728

(1) 
Administrative reimbursements, asset management fees, and property management fees are expensed as incurred.
Due to Affiliates
As of March 31, 2013 and December 31, 2012, due to affiliates was comprised of the following items:
 
March 31,
2013
 
December 31,
2012
Administrative reimbursements and bill-backs
$
40,345

 
$
29,442

Property management fees

 
4,629

 
$
40,345

 
$
34,071

WIM's affiliates pay for certain expenses of Wells VAF I directly and invoice Wells VAF I for reimbursement thereof on a quarterly basis. Amounts for these reimbursements are included in the aforementioned administrative reimbursements.

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Operational Dependency
Wells VAF I has engaged WIM and Wells Management to provide certain services essential to Wells VAF I, including asset management services, supervision of the management of properties, asset acquisition and disposition services, as well as other administrative responsibilities for Wells VAF I, including accounting services, investor member communications, and investor relations. As a result of these relationships, Wells VAF I's operations are dependent upon WIM and Wells Management.
WIM and Wells Management are owned and controlled by Wells Real Estate Funds ("WREF"). The operations of Wells Capital, Inc. ("Wells Capital"), WIM, Wells Investment Securities, Inc. ("WIS"), Wells Management, Wells Core Office Income REIT Advisory Services, LLC and their affiliates represent substantially all of the business of WREF. Accordingly, Wells VAF I focuses on the financial condition of WREF when assessing the financial condition of WIM and Wells Management. In the event that WREF were to become unable to meet its obligations as they become due, Wells VAF I might be required to find alternative service providers.
Future net income generated by WREF is largely dependent upon the amount of fees earned by WREF's subsidiaries based on, among other things, the level of investor proceeds raised from the sale of common stock for certain WREF-sponsored programs and the volume of future acquisitions and dispositions of real estate assets by WREF-sponsored programs, as well as distribution income earned from equity interests in a real estate investment trust previously sponsored by Wells Capital. As of March 31, 2013, Wells VAF I has no reason to believe that WREF does not have access to adequate liquidity and capital resources, including cash flow generated from operations, cash on hand, other investments, and borrowing capacity, necessary to meet its current and future obligations as they become due. Modifying service agreements between WREF, or its affiliates, and Wells VAF I, or other WREF-sponsored programs, could impact WREF's future net income and future access to liquidity and capital resources. For example, a large portion of WREF's income is derived under agreements with Columbia Property Trust, Inc. ("Columbia"), formerly known as Wells Real Estate Investment Trust II, Inc. Effective February 28, 2013, Columbia transitioned to self-management and indicated that it does not expect to rely on WREF for the same level of services beyond December 31, 2013. As such, WREF does not expect to receive significant compensation from Columbia beyond December 31, 2013.
6.
ECONOMIC DEPENDENCY
Wells VAF I is dependent upon the ability of its current tenants to pay their contractual base rent amounts as they become due. The inability of a tenant to pay future rental amounts would have a negative impact on Wells VAF I's results of operations. Wells VAF I is not aware of any reason why its current tenants will not be able to pay their contractual rental amounts as they become due in all material respects. Situations preventing Wells VAF I's tenants from paying contractual rents could result in a material adverse impact on its results of operations.

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7.        DISCONTINUED OPERATIONS
In accordance with GAAP, Wells VAF I has classified the results of operations related to the Parkway at Oak Hill Buildings, which were sold on May 9, 2012, as discontinued operations in the accompanying statements of operations. The Parkway at Oak Hill Buildings were sold for a gross sales price of $31.3 million, exclusive of adjustments and closing costs, and generated net sale proceeds of approximately $30.5 million. The details comprising income from discontinued operations are presented below:
 
Three Months Ended
 
March 31,
 
2013
 
2012
Revenues:
 
 
 
Rental income
$

 
$
559,241

Tenant reimbursements

 
328,943

Total revenues

 
888,184

 
 
 
 
Expenses:
 
 
 
Property operating costs

 
366,904

Asset and property management fees:
 
 
 
Related-party

 
77,971

Other

 
11

Depreciation

 
296,737

Amortization

 
54,550

General and administrative expenses

 
39,251

Total expenses

 
835,424

Operating Income from Discontinued Operations
$

 
$
52,760

8.
COMMITMENTS AND CONTINGENCIES
Wells VAF I is not subject to any material litigation nor to management's knowledge is any material litigation currently threatened against Wells VAF I.
Certain lease agreements include provisions that, at the option of the tenant, may obligate Wells VAF I to expend capital to expand an existing property or provide other expenditures for the benefit of the tenant. In December 2012, Wells VAF I executed a lease amendment with Country Music Television, Inc. ("CMT"). As a result, CMT has the right to request the reimbursement of tenant improvements up to approximately $602,200, which would be required to be funded by Wells VAF I. In addition, Wells VAF I is also required to complete certain building improvements, as defined in the CMT lease amendment, which are estimated at approximately $495,000, of which approximately $214,000 has been incurred as of March 31, 2013.
In addition, Wells VAF I is contractually obligated to pay certain lobby and reciprocal easement rental expenses at the Commerce Street Building through December 31, 2083. As of March 31, 2013, the annualized lobby and reciprocal easement lease obligations were approximately $153,000. The tenants at the Commerce Street Building currently reimburse Wells VAF I for a portion of these rental expense obligations.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the accompanying financial statements and notes thereto. See also "Cautionary Note Regarding Forward-Looking Statements" preceding Part I, as well as the notes to our financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations provided in our Annual Report on Form 10-K for the year ended December 31, 2012.
Overview
We were formed on July 15, 2005 for the purpose of acquiring, developing, owning, operating, and improving or otherwise enhancing income-producing commercial properties. Our investment strategy includes, but is not limited to, acquiring properties with opportunities for value enhancement related to leasing or re-leasing available space, renovating or redeveloping properties, entering into leases with sub-investment-grade tenants at above-market rates and/or benefiting from favorable market conditions. We are externally advised and managed by WIM. In June 2006, we commenced active operations upon receiving the minimum proceeds in our private placement offering of investor member interests, which offering raised approximately $51,854,000 in gross

15


proceeds prior to its termination in September 2008. We do not expect to make any additional investments in the future, and our current focus is on enhancing the value of our current portfolio and positioning our remaining properties for sale. As a result of the current economic conditions and their impact on office market conditions, we have determined to hold individual assets longer than originally projected in order to achieve better disposition pricing for our investor members.  We intend to continue to focus on positioning our remaining properties for sale and dispose of the remaining assets in our portfolio this year, which is the final year of our projected fund life; however, we will evaluate offers to sell our remaining properties on an as-is basis. We can provide no guarantees, however, that our portfolio will be liquidated by December 2013 as our manager, in its discretion, may hold our remaining assets longer in order to achieve better returns for our investor members. As of April 30, 2013, we owned interests in two properties.
Portfolio Overview
Summary information relating to our properties owned during the periods discussed is presented below:
The Nathan Lane Building is a five-story office building located in Plymouth, Minnesota, that was acquired in September 2006 and is currently approximately 45% leased to two tenants, Brocade and Stanley. We are marketing the vacant space in this building for lease.
The Commerce Street Building is a four-story office building and the top two floors of a parking deck located in Nashville, Tennessee, that was acquired in December 2007 and is approximately 85% leased to two tenants, CMT and Tennessee Information Consortium. The major lease to CMT for approximately 76% extends through May 2020. Our fee-simple interest in the Commerce Street Building is subject to a reciprocal easement lease through December 31, 2083. We are currently marketing the property for disposition.
The Parkway at Oak Hill Buildings are two separate two-story office buildings located in Austin, Texas, that were acquired vacant in October 2008 and sold to an unrelated third-party on May 9, 2012 for a gross sales price of $31.3 million, exclusive of adjustments and closing costs. The disposition resulted in net sale proceeds of approximately $30.5 million, of which $19.2 million was used to repay the outstanding balance on the NXT loan, and a gain of approximately $5.6 million. These buildings were 94% leased to seven tenants at the time of their disposition.
Liquidity and Capital Resources
Overview
During the period from September 2005 through September 2008, we raised funds through the sale of shares of investor member interests under our private placement offering, and we used substantially all offering proceeds, net of offering costs, and other expenses, to acquire real properties and to fund certain re-leasing costs and capital improvements. We expect that our primary source of future cash flows will be cash generated from the operations of our properties, the remaining availability on the NXT Loan, and net proceeds from the sale of our remaining properties.
Our operating strategy entails funding expenditures related to the recurring operations of the properties with operating cash flows, assessing the amount of operating cash flows and proceeds from the NXT Loan that will be required to fund future re-leasing costs and other capital improvements, and distributing residual operating cash flows to our investor members. We continue to carefully monitor market conditions and their impact on our earnings, our cash flows, and future distributions to investor members.
We are party to an agreement with NXT Capital for a loan in the amount of up to $30 million, referred to as the NXT Loan. Following the repayment of the outstanding balance in May 2012 in connection with the disposition of the Parkway at Oak Hill Buildings, the remaining availability on the NXT Loan was $10 million, subject to certain funding requirements. The NXT Loan, which matures on December 16, 2013, with an option to extend the maturity date for two additional 12-month terms provided that certain conditions are met, bears interest at the greater of (i) one-month LIBOR plus a margin of 3.75% or (ii) 7.25%. The NXT Loan is secured by the Nathan Lane Building and the Commerce Street Building. The NXT Loan requires monthly interest-only payments from our net cash flow. To the extent there is an outstanding balance on the NXT Loan, we may prepay the balance in full, but not in part, except as permitted with respect to a partial release, provided an exit fee equal to 1% of the outstanding loan amount and a minimum interest recovery amount are paid. Our most significant risks and challenges include (i) re-leasing vacant space and space that may become vacant upon the expiration of our current leases at our properties in order to achieve better disposition pricing for our investor members and (ii) extending the maturity date of the NXT Loan, which currently matures in December 2013, or obtaining replacement third-party financing, if necessary, to fund future re-leasing costs and other capital improvements to further position our properties for disposition.

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Short-Term Liquidity and Capital Resources
During the three months ended March 31, 2013, we generated net operating cash flows of approximately $0.2 million. Operating cash inflows reflect receipts of rental payments and tenant reimbursements, less payments for property operating costs, asset and property management fees, and general and administrative expenses.
During the three months ended March 31, 2013, we invested approximately $0.2 million in real estate by utilizing cash on hand to fund tenant improvements and capital expenditures at our remaining properties.
We expect to utilize the residual cash balance on hand as of March 31, 2013 of approximately $6.6 million and remaining availability on the NXT Loan to satisfy current liabilities and to fund anticipated re-leasing costs and capital expenditures at our remaining properties. Future distributions paid to our investor members will be largely dependent on the amount of cash generated from our operating activities, our expectations of future cash flows, net proceeds from the sale of our remaining properties, and our determination of near-term cash needs for capital improvements and tenant re-leasing costs.
Long-Term Liquidity and Capital Resources
We expect that our primary sources of capital over the long term will include proceeds from net cash flows from operations, net proceeds received from the sale of properties, and future third-party borrowings, if necessary. We expect that our primary uses of capital will be for capital improvements, re-leasing costs, operating expenses, including interest expense on any future outstanding indebtedness, and repayment of such borrowings.
In determining how and when to allocate cash resources, we initially consider the source of the cash. We expect that substantially all future net operating cash flows will be used for reserves for certain capital expenditures such as re-leasing costs and capital improvements and repayment of any third-party borrowings. To the extent our properties continue to remain partially vacant, property operating expenses and asset and property management fees may continue to reduce our cash flow from operating activities. We expect that substantially all future third-party borrowings, if necessary, would be used to fund certain re-leasing costs and capital expenditures for our existing properties.
Contractual Commitments and Contingencies
We are contractually obligated to pay certain lobby and reciprocal easement rental expenses at the Commerce Street Building through December 31, 2083. As of March 31, 2013, the annualized lobby and reciprocal easement lease obligations were approximately $153,000. The tenants at the Commerce Street Building currently reimburse us for a portion of these rental expense obligations.
Certain lease agreements include provisions that, at the option of the tenant, may obligate us to expend capital to expand an existing property or provide other expenditures for the benefit of the tenant. In December 2012, we executed a lease amendment with CMT and as a result, CMT has the right to request the reimbursement of tenant improvements up to approximately $602,200, which would be required to be funded by Wells VAF I. In addition, we are also required to complete certain building improvements, as defined in the CMT lease amendment, which are estimated at approximately $495,000, of which approximately $214,000 has been incurred as of March 31, 2013.
Results of Operations
Comparison of the three months ended March 31, 2012 versus the three months ended March 31, 2013
Rental income remained relatively stable at $772,856 for the three months ended March 31, 2012 and $776,950 for the three months ended March 31, 2013. Absent future leasing or disposition activity, we expect future rental income to remain at a relatively similar level, as compared to the first quarter of 2013.
Tenant reimbursements remained relatively stable at $302,731 for the three months ended March 31, 2012 and $306,670 for the three months ended March 31, 2013. Absent future leasing or disposition activity, we expect future tenant reimbursements to remain at a relatively similar level, as compared to the first quarter of 2013.
Property operating costs increased slightly from $660,332 for the three months ended March 31, 2012 to $689,503 for the three months ended March 31, 2013, primarily due to an increase in real estate taxes and utility expenses at the Nathan Lane Building. Absent future leasing or disposition activity, we expect future property operating costs to remain at a relatively similar level, as compared to the first quarter of 2013.
Asset and property management fees decreased from $94,211 for the three months ended March 31, 2012 to $76,922 for the three months ended March 31, 2013, primarily due to a slight decrease in the gross value of our remaining real estate assets in connection

17


with the 2012 year-end valuation. Asset management fees are incurred as a percentage of our gross asset value. Absent future disposition activity, we anticipate asset and property management fees to remain at a relatively similar level, as compared to the first quarter of 2013.
Depreciation expense remained relatively stable at $211,449 for the three months ended March 31, 2012 and $208,635 for the three months ended March 31, 2013. Absent future leasing or disposition activity, we expect future depreciation expense to increase slightly, as compared to the first quarter of 2013, as a result of the anticipated completion of tenant improvement project at the Commerce Street Building incurred in connection with CMT's lease extension.

General and administrative expenses remained relatively stable at $193,046 for the three months ended March 31, 2012 and $189,566 for the three months ended March 31, 2013. We expect future general and administrative expenses to remain at a relatively similar level, as compared to the first quarter of 2013.

Interest expense decreased from $456,067 for the three months ended March 31, 2012 to $103,508 for the three months ended March 31, 2013, primarily due to the full repayment of the NXT Loan balance in the second quarter of 2012. We continue to incur non-cash interest expense related to the amortization of deferred financing costs associated with NXT Loan since we still have the ability to draw on the remaining availability. We expect future interest expense to remain at a relatively similar level, as compared to the first quarter of 2013.
Our income from discontinued operations decreased from $52,760 for the three months ended March 31, 2012 to $0 for the three months ended March 31, 2013, as a result of the sale of the Parkway at Oak Hill Buildings in the second quarter of 2012.
Our net loss decreased from $706,058 for the three months ended March 31, 2012 to $403,814 for the three months ended March 31, 2013, primarily due to a decrease in interest expense from the full repayment of the NXT Loan balance in the second quarter of 2012. Absent future leasing or disposition activity, we expect future net loss to remain at a relatively similar level, as compared to the first quarter of 2013.
Inflation
We are exposed to inflation risk, as income from long-term leases is the primary source of our cash flows from operations. There are provisions in the majority of our tenant leases that would protect us from the impact of inflation. These provisions include rent steps, reimbursement billings for operating expense pass-through charges, real estate tax and insurance reimbursements on a per-square-foot basis, or in some cases, annual reimbursement of operating expenses above a certain per-square-foot allowance. However, due to the long-term nature of our leases, the leases may not readjust their reimbursement rates frequently enough to cover inflation.
Application of Critical Accounting Policies
Our accounting policies have been established to conform with GAAP. The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If management's judgment or interpretation of the facts and circumstances relating to various transactions is different, it is possible that different accounting policies would be applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses.
Below is a discussion of the accounting policies used by Wells VAF I, which are considered critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.

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Investment in Real Estate Assets
We are required to make subjective assessments as to the useful lives of our depreciable assets. We consider the period of future benefit of the asset to determine the appropriate useful lives. These assessments have a direct impact on net income (loss). The estimated useful lives of our assets are depreciated or amortized using the straight-line method over the following useful lives:
Buildings
40 years
Building improvements
5-25 years
Site improvements
15 years
Tenant improvements
Shorter of lease term or economic life
Intangible lease assets
Lease term
Evaluating the Recoverability of Real Estate Assets
We continually monitor events and changes in circumstances that could indicate that the carrying amounts of the real estate assets and related intangible assets which Wells VAF I owns may not be recoverable. When indicators of potential impairment are present which suggest that the carrying amounts of real estate assets and related intangible assets may not be recoverable, we assess the recoverability of the real estate assets and related intangible assets by determining whether the respective carrying values will be recovered through the estimated undiscounted future cash flows expected from the use of the assets and their eventual disposition for assets held for use, or with the estimated fair values, less costs to sell, for assets held for sale. In the event that such expected undiscounted future cash flows for assets held for use or the estimated fair values, less costs to sell, for assets held for sale do not exceed the carrying values, we adjust the carrying value of real estate assets and related intangible assets (liabilities) to the estimated fair values, pursuant to the provisions of the property, plant, and equipment accounting standard for the impairment or disposal of long-lived assets, and recognize an impairment loss. Estimated fair values are determined based on the following information, dependent upon availability: (i) recently quoted market price(s) for the subject property, or highly comparable properties, under sufficiently active and normal market conditions, or (ii) the present value of future cash flows, including estimated residual value. We have determined that there have been no additional impairments in the carrying value of our real estate assets and related intangible assets to date (see below for historical impairment); however, certain of our assets may be carried at an amount more than could be realized in a current disposition transaction.
In the third quarter of 2012, we recorded an impairment loss on the Commerce Street Building of approximately $1,588,000 to reduce the carrying value of the property to its estimated fair value based on the present value of future cash flows based on management's strategy in shortening the estimated holding period of this asset in the third quarter of 2012.
Projections of expected future operating cash flows require that we estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, the number of months it takes to re-lease the property, and the number of years the property is held for investment, among other factors. The subjectivity of assumptions used in the future cash flow analysis, including discount rates, could result in an incorrect assessment of the property's ultimate fair value and could result in the misstatement of the carrying value of our real estate and related intangible assets and net income (loss).
Evaluating the Recoverability of Intangible Assets and Liabilities
The values of intangible lease assets and liabilities are determined based on assumptions made at the time of acquisition and have defined useful lives, which correspond with the lease terms. There may be instances in which intangible lease assets and liabilities become impaired and we are required to expense the remaining asset or liability immediately or over a shorter period of time. Lease restructurings, including but not limited to lease terminations and lease extensions, may impact the value and useful life of in-place leases. In-place leases that are terminated, partially terminated, or modified will be evaluated for impairment if the original in-place lease terms have been modified. In situations where the discounted cash flows of the modified in- place lease stream are less than the discounted cash flows of the original in-place lease stream, we reduce the carrying value of the intangible lease assets to reflect the modified lease terms and recognize an impairment loss. For in-place lease extensions  that are executed  more than one year prior to the original in-place lease expiration date, the useful life of the in-place lease will be extended over the new lease term with the exception of those in-place lease components, such as lease commissions and tenant allowances, which have been renegotiated for the extended term. Renegotiated in-place lease components, such as lease commissions and tenant allowances, will be amortized over the shorter of the useful life of the asset or the new lease term. We have determined that there has been no impairment in the carrying value of our intangible lease assets and liabilities to date.

19


Related-Party Transactions and Agreements
Transactions and Agreements
During the periods presented, we were party to agreements with WIM, Wells Management, and WRES whereby we paid certain fees and expense reimbursements to WIM, Wells Management, and WRES for asset management fees; property management fees; administrative services relating to accounting, portfolio management, and other general and administrative, and we incurred the related expenses.We terminated our property management agreements with WRES and Wells Management on February 28, 2013 and March 31, 2013, respectively. See Note 5 to our financial statements included in this report for a description of these fees and reimbursements and amounts incurred.
Assertion of Legal Action Against Related-Parties
On March 12, 2007, a stockholder of Piedmont REIT filed a putative class action and derivative complaint, presently styled In re Wells Real Estate Investment Trust, Inc. Securities Litigation, in the United States District Court for the District of Maryland against, among others, Piedmont REIT; Leo F. Wells, III; Wells Capital; Wells Management, our sponsoring member; certain affiliates of WREF; the directors of Piedmont REIT; and certain individuals who formerly served as officers or directors of Piedmont REIT prior to the closing of the internalization transaction on April 16, 2007.

The complaint alleged, among other things, violations of the federal proxy rules and breaches of fiduciary duty arising from the Piedmont REIT internalization transaction and the related proxy statement filed with the SEC on February 26, 2007, as amended. The complaint sought, among other things, unspecified monetary damages and nullification of the Piedmont REIT internalization transaction.
On June 27, 2007, the plaintiff filed an amended complaint, which attempted to assert class action claims on behalf of those persons who received and were entitled to vote on the Piedmont REIT proxy statement filed with the SEC on February 26, 2007, and derivative claims on behalf of Piedmont REIT.
On March 31, 2008, the Court granted in part the defendants' motion to dismiss the amended complaint. The Court dismissed five of the seven counts of the amended complaint in their entirety. The Court dismissed the remaining two counts with the exception of allegations regarding the failure to disclose in the Piedmont REIT proxy statement details of certain expressions of interest in acquiring Piedmont REIT. On April 21, 2008, the plaintiff filed a second amended complaint, which alleged violations of the federal proxy rules based upon allegations that the proxy statement to obtain approval for the Piedmont REIT internalization transaction omitted details of certain expressions of interest in acquiring Piedmont REIT. The second amended complaint sought, among other things, unspecified monetary damages, to nullify and rescind the internalization transaction, and to cancel and rescind any stock issued to the defendants as consideration for the internalization transaction. On May 12, 2008, the defendants answered and raised certain defenses to the second amended complaint. Subsequent to the filing of the second amended complaint, the plaintiff said it intended to seek monetary damages of approximately $159 million plus prejudgment interest.
On June 23, 2008, the plaintiff filed a motion for class certification. On September 16, 2009, the Court granted the plaintiff's motion for class certification. On September 20, 2009, the defendants filed a petition for permission to appeal immediately the Court's order granting the motion for class certification with the Eleventh Circuit Court of Appeals. The petition for permission to appeal was denied on October 30, 2009.
On April 13, 2009, the plaintiff moved for leave to amend the second amended complaint to add additional defendants. The Court denied the plaintiff's motion for leave to amend on June 23, 2009.
On December 4, 2009, the parties filed motions for summary judgment. On August 2, 2010, the Court entered an order denying the defendants' motion for summary judgment and granting, in part, the plaintiff's motion for partial summary judgment. The Court ruled that the question of whether certain expressions of interest in acquiring Piedmont REIT constituted "material" information required to be disclosed in the proxy statement to obtain approval for the Piedmont REIT internalization transaction raises questions of fact that must be determined at trial.
On November 17, 2011, the Court issued rulings granting several of the plaintiff's motions in limine to prohibit the defendants from introducing certain evidence, including evidence of the defendants' reliance on advice from their outside legal and financial advisors, and limiting the defendants' ability to relate their subjective views, considerations, and observations during the trial of the case. On February 23, 2012, the Court granted several of the defendants' motions, including a motion for reconsideration regarding a motion the plaintiff had filed seeking exclusion of certain evidence impacting damages, and motions seeking exclusion of certain evidence proposed to be submitted by the plaintiff.

20


On March 20, 2012, the Court granted the defendants leave to file a motion for summary judgment.  On April 5, 2012, the defendants filed a motion for summary judgment. On September 26, 2012, the Court granted the defendants' motion for summary judgment and entered judgment in favor of the defendants. On October 12, 2012, the plaintiff filed a notice of appeal with the Eleventh Circuit Court of Appeals. 
On October 22, 2012, Piedmont REIT announced that the parties reached an agreement in principle to settle the lawsuit on October 12, 2012.  Under the terms of the settlement, the plaintiff will dismiss the appeal and release all defendants from liability in exchange for total payment of $4.9 million in cash by Piedmont REIT and its insurer.  On December 31, 2012, the plaintiff filed a motion for preliminary approval of the settlement with the Court.  On January 2, 2013, the Court preliminarily approved the settlement.  Pursuant to the terms of the settlement and the Court's order preliminarily approving the settlement, notice of the proposed settlement was given to the class.  On March 21, 2013, the plaintiff filed a motion for final approval of the settlement and for an award of attorneys' fees and expenses.  On April 18, 2013, the Court entered an order granting final approval of the settlement, dismissing the lawsuit with prejudice, and awarding attorneys' fees and expenses to the plaintiff. 

Commitments and Contingencies
We are subject to certain commitments and contingencies with regard to certain transactions. Refer to Note 5 and Note 8 to our financial statements included in this report for further explanation. Examples of such commitments and contingencies include:
lobby and reciprocal easement agreements;
commitments under existing lease agreements;
the Advisory Agreement; and
property management agreements.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Wells VAF I has omitted a discussion of quantitative and qualitative disclosures about market risk because, as a smaller reporting company, it is not required to provide such information.
ITEM 4.
CONTROLS AND PROCEDURES
Management's Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of management of WIM, our manager, including the Principal Executive Officer and the Principal Financial Officer of WIM, of the effectiveness of the design and operation of Wells VAF I's disclosure controls and procedures as defined in Rule 13a-15(e) of the Exchange Act as of the end of the quarterly period covered by this report. Based upon that evaluation, the Principal Executive Officer and the Principal Financial Officer of WIM concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report in providing a reasonable level of assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in applicable SEC rules and forms, including providing a reasonable level of assurance that information required to be disclosed by us in such reports is accumulated and communicated to our management, including the Principal Executive Officer and the Principal Financial Officer of WIM, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There have been no significant changes in our internal control over financial reporting during the quarter ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II.
OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
From time to time, we are party to legal proceedings, which arise in the ordinary course of our business. We are not currently involved in any legal proceedings of which the outcome is reasonably likely to have a material adverse effect on our results of operations or financial condition, nor are we aware of any such legal proceedings contemplated by governmental authorities.
ITEM 1A.
RISK FACTORS
Wells VAF I has omitted a discussion of risk factors because as a smaller reporting company, it is not required to provide such information.

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ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)
We did not sell any equity securities that were not registered under the Securities Act during the quarter ended March 31, 2013.
(b)
Not applicable.
(c)
We did not redeem any securities during the quarter ended March 31, 2013.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
(a)
There have been no defaults with respect to any of our indebtedness.
(b)
Not applicable.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5.
OTHER INFORMATION
(a)
During the quarter ended March 31, 2013, there was no information required to be disclosed in a report on Form
8-K which was not disclosed in a report on Form 8-K.
(b)
Not applicable.
ITEM 6.
EXHIBITS
The Exhibits to this report are set forth on the Exhibit Index to First Quarter Form 10-Q attached hereto.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
WELLS MID-HORIZON VALUE-ADDED FUND I, LLC
(Registrant)
 
 
 
 
By:
WELLS INVESTMENT MANAGEMENT COMPANY, LLC
(Manager)
 
 
 
May 14, 2013
 
/s/ BRIAN M. DAVIS
 
 
Brian M. Davis
Principal Financial Officer
of Wells Investment Management Company, LLC

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EXHIBIT INDEX
TO FIRST QUARTER FORM 10-Q
OF
WELLS MID-HORIZON VALUE-ADDED FUND I, LLC
 
Exhibit
No.
 
Description of Document
 
 
3.1

 
 
Amended and Restated Articles of Organization, dated as of September 1, 2005, incorporated by reference to Exhibit 3.1 to the Form 10 filed April 15, 2009
 
 
 
 
4.1

 
 
Operating Agreement among Wells Management Company, Inc., Wells Investment Management Company, LLC, and the Several Investor Members, dated as of September 1, 2005, and subsequently amended, incorporated by reference to Exhibit 4.1 to the Form 10 filed April 15, 2009
 
 
 
 
31.1*

 
 
Certification of the Principal Executive Officer of the manager of Wells Mid-Horizon Value-Added Fund I, LLC, pursuant to Securities Exchange Act Rules 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
31.2*

 
 
Certification of the Principal Executive Officer of the manager of Wells Mid-Horizon Value-Added Fund I, LLC, pursuant to Securities Exchange Act Rules 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
32.1*

 
 
Certification of the Principal Executive Officer and Principal Financial Officer of the manager of Wells Mid-Horizon Value-Added Fund I, LLC, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
 
101.INS**

 
 
XBRL Instance Document.
 
 
 
 
101.SCH**

 
 
XBRL Taxonomy Extension Schema.
 
 
 
 
101.CAL**

 
 
XBRL Taxonomy Extension Calculation Linkbase.
 
 
 
 
101.DEF**

 
 
XBRL Taxonomy Extension Definition Linkbase.
 
 
 
 
101.LAB**

 
 
XBRL Taxonomy Extension Label Linkbase.
 
 
 
 
101.PRE**

 
 
XBRL Taxonomy Extension Presentation Linkbase.
 
 
 
 
 
*
Filed herewith
 
**
Furnished with this Form 10-Q, but not filed under the Exchange Act



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