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

__________

FORM 10-Q

____________

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


For the quarterly period ended March 31, 2013


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


Commission File Number 000-53912

__________


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


Maryland

26-3455189

(State of Organization)

(I.R.S. Employer Identification Number)


2909 Hillcroft, Suite 420 Houston, Texas


77057

(Address of principal executive offices)

(Zip Code)

_______________


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



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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x     No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.:

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

                                                                   


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


As of May 15, 2013 there were 4,455,678 shares of the Registrants common shares issued and outstanding, 19,000 of which were held by an affiliate of the Registrant.







Hartman Short Term Income Properties XX, Inc. and Subsidiaries

Table of Contents



PART I   Financial information

 

Item 1.

Consolidated Financial Statements

2

Item 2.     

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

17

Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

25

Item 4.   

Controls and Procedures

25

 

 

 

PART II  OTHER INFORMATION

 

Item 1.    

Legal Proceedings

26

Item 1A.   

Risk Factors

26

Item 2.    

Unregistered Sales of Equity Securities and Use of Proceeds

26

Item 3.     

Defaults Upon Senior Securities

26

Item 4.     

Reserved

26

Item 5.     

Other Information

26

Item 6.

Exhibits

27

 

SIGNATURES

27










1




PART I

FINANCIAL INFORMATION

Item 1. Financial Statements


HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

March 31, 2013

 

December 31, 2012

ASSETS

 

 (Unaudited)

 

 

Real estate assets, at cost:

 

 

 

 

Property

 

 $                53,564,638

 

 $           42,316,291

Accumulated depreciation and amortization

 

                   (3,329,426)

 

              (2,533,101)

Real estate assets, net

 

                   50,235,212

 

              39,783,190

 

 

 

 

 

Cash and cash equivalents

 

                        494,915

 

                     61,894

Accrued rent and accounts receivable, net

 

                        326,450

 

                   176,159

Deferred loan and leasing commission costs, net

 

                        954,951

 

                   902,038

Goodwill

 

                        249,686

 

                   249,686

Prepaid expenses and other assets

 

                        117,827

 

                   404,863

Real estate assets held for disposition

 

                                 -   

 

                3,253,671

Total assets

 

 $                52,379,041

 

 $           44,831,501

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

Note payable

 

 $                17,850,000

 

 $           15,000,000

Accounts payable and accrued expenses

 

                     1,463,451

 

                1,588,746

Due to related parties

 

                        553,152

 

                   664,911

Tenants' security deposits

 

                        316,612

 

                   292,343

Total liabilities

 

                   20,183,215

 

              17,546,000

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

Preferred stock, $0.001 par value 200,000,000 convertible, non-voting shares authorized, 1,000 shares issued and outstanding at March 31, 2013 and December 31, 2012, respectively

 

                                   1

 

                              1

Common stock, $0.001 par value, 750,000,000 authorized, 4,187,014 shares and 3,538,682 shares issued and outstanding at  March 31, 2013 and December 31, 2012, respectively

 

                            4,187

 

                       3,538

Additional paid in capital

 

                   38,992,659

 

              32,957,063

Accumulated distributions and net loss

 

                   (6,801,021)

 

              (5,675,101)

Total stockholders' equity

 

                   32,195,826

 

              27,285,501

Total liabilities and total stockholders' equity

 

 $                52,379,041

 

 $           44,831,501

 

 

 

 

 

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



2





HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 Three Months Ended March 31,

 

2013

 

2012

Revenues

 

 

 

Rental revenues

 $      1,245,109

 

 $         433,044

Tenant reimbursements and other revenues

            287,072

 

            111,370

Total revenues

         1,532,181

 

            544,414

 

 

 

 

Expenses

 

 

 

Property operating expenses

            328,135

 

              87,526

Asset management and acquisition fees

            238,164

 

              35,906

Organization and offering costs

              25,826

 

              41,958

Real estate taxes and insurance

            308,316

 

            145,160

Depreciation and amortization

            796,325

 

            528,918

General and administrative

            235,364

 

              83,740

Interest expense

            215,260

 

            144,148

Total expenses

         2,147,390

 

         1,067,356

Loss from continuing operations

           (615,209)

 

           (522,942)

Income from discontinued operations

            153,876

 

                      -   

 

 

 

 

Net loss

 $        (461,333)

 

 $        (522,942)

Basic and diluted loss per common share:

 

 

 

Loss attributable to common stockholders

 $              (0.12)

 

 $              (0.26)

Weighted average number of common shares outstanding, basic and diluted

   3,867,148

 

   1,992,145

 

 

 

 

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




3







HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

Preferred Stock

Common Stock

 

Accumulated

 

 

 

 

 

 

Additional Paid-In

Distributions

 

 

Shares

Amount

Shares

Amount

Capital

and Net Loss

 Total

Balance, December 31, 2011

            1,000

$1

              1,813,513

$1,813

$16,902,468

($1,697,584)

$15,206,698

Issuance of common shares (cash investment)

                    -

            -

              1,631,763

       1,632

              16,074,840

                                 -

                 16,076,472

Issuance of common shares (non-cash)

                    -

            -

                   93,406

            93

                   888,269

                                 -

                      888,362

Selling commissions

                    -

            -

                            -

               -

                 (908,514)

                                 -

                    (908,514)

Dividends and distributions (stock)

                    -

            -

                            -

               -

                     -   

                    (924,827)

                    (924,827)

Dividends and distributions (cash)

                    -

            -

                            -

               -

                     -   

                    (941,653)

                    (941,653)

Net loss

                    -

            -

                            -

               -

                             -   

                 (2,111,037)

                 (2,111,037)

Balance, December 31, 2012

            1,000

$1

              3,538,682

$3,538

$32,957,063

($5,675,101)

$27,285,501

Issuance of common shares (cash investment)

                    -

            -

                 615,566

          616

                6,023,959

                                 -

                   6,024,575

Issuance of common shares (non-cash)

                    -

            -

                   32,766

            33

                   311,243

                                 -

                      311,276

Selling commissions

                    -

            -

                            -

               -

                 (299,606)

                                 -

                    (299,606)

Dividends and distributions (stock)

                    -

            -

                            -

               -

                     -   

                    (331,450)

                    (331,450)

Dividends and distributions (cash)

                    -

            -

                            -

               -

                     -   

                    (333,137)

                    (333,137)

Net loss

                    -

            -

                            -

               -

                             -   

                    (461,333)

                    (461,333)

Balance, March 31, 2013

            1,000

$1

              4,187,014

$4,187

$38,992,659

($6,801,021)

$32,195,826

 

 

 

 

 

 

 

 

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




4





HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 Three Months Ended March 31,

 

 

2013

 

2012

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

Net Loss

 

 $                     (461,333)

 

 $               (522,942)

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

 

 

 

 

Stock based compensation

 

                            15,000

 

                     35,000

Depreciation and amortization

 

                          796,325

 

                   528,918

Deferred loan cost and leasing commission costs amortization

 

                            33,023

 

                       9,542

Bad debt provision

 

                            30,623

 

                     10,733

Changes in operating assets and liabilities:

 

 

 

 

Accrued rent and accounts receivable

 

                        (180,913)

 

                    (57,655)

Prepaid expenses and other assets

 

                          (99,248)

 

                    (26,875)

Accounts payable and accrued expenses

 

                        (250,915)

 

                  (228,911)

Due to related parties

 

                        (111,759)

 

                  (260,862)

Tenants' security deposit

 

                            24,269

 

                             -   

 Net cash provided (used) in operating activities

 

                        (204,928)

 

                  (513,052)

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

Acquisition deposit

 

                          350,000

 

                  (100,000)

Additions to real estate

 

                   (11,248,347)

 

                      (1,660)

Property disposition

 

                       3,253,671

 

                             -   

Net cash used in investing activities

 

                     (7,644,676)

 

                  (101,660)

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

Dividend distributions paid in cash

 

                        (316,478)

 

                  (172,866)

Payment of selling commissions

 

                        (299,606)

 

                  (224,738)

Borrowings net of repayment under insurance premium finance note

 

                            73,785

 

                             -   

Deferred loan cost

 

                          (49,651)

 

                             -   

Proceeds from revolving credit borrowings, net

 

                       2,850,000

 

                             -   

Proceeds from issuance of common stock

 

                       6,024,575

 

                2,344,011

Net cash provided by financing activities

 

                       8,282,625

 

                1,946,407

 

 

 

 

 

Net change in cash  and cash equivalents

 

                          433,021

 

                1,331,695

Cash  and cash equivalents at the beginning of period

 

                            61,894

 

                7,440,362

Cash  and cash equivalents at the end of period

 

 $                       494,915

 

 $             8,772,057

 

 

 

 

 

Supplemental disclosures of non-cash investing and financing activities:

 

 

 

 

Issuance of common stock from dividend reinvestment plan

 

 $                       311,276

 

 $                149,578

Cash paid for interests

 

 $                       186,841

 

 $                113,119

 

 

 

 

 

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



5




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Note 1 — Organization and Business


Hartman Short Term Income Properties XX, Inc. (the “Company”), is a Maryland corporation formed on February 5, 2009.  The Company elected to be treated as a real estate investment trust (“REIT”) beginning with the taxable year ending December 31, 2011.  The Company is offering shares to the public in its initial offering (exclusive of 2,500,000 shares available pursuant to the Company’s dividend reinvestment plan) at a price of $10.00 per share. The Company was originally a majority owned subsidiary of Hartman XX Holdings, Inc.  Hartman XX Holdings, Inc. is a Texas corporation wholly owned by Allen R. Hartman.  The Company sold 19,000 shares to Hartman XX Holdings, Inc. at a price of $10.00 per share.  The Company has also issued 1,000 shares of convertible preferred shares to its advisor, Hartman Advisors LLC at a price of $10.00 per share.  Hartman Advisors LLC (the “Advisor”) is the Company’s advisor. The Advisor is owned 70% by Allen R. Hartman and 30% by Hartman Income REIT Management, Inc.


As of March 31, 2013, the Company had accepted investor’s subscriptions for, and issued, 4,004,256 shares of the Company’s common stock in its initial public offering, resulting in gross proceeds to the Company of $39,542,242.


On April 25, 2013, the Company stopped accepting subscriptions for the sale of its common stock pursuant to its initial public offering due to the fact the Company’s offering prospectus is no longer deemed effective under the Securities Act of 1933.  On April 17, 2013 the Company filed Post-Effective Amendment No. 1 to its prospectus dated February 9, 2010.  The Company now intends to withdraw its request for effectiveness of the post-effective amendment and to pursue effectiveness of its follow-on public offering.  


On December 7, 2012, the Company filed a registration statement on Form S-11 with the SEC to register a follow-on public offering of up to $219,000,000 in shares of the Company’s common stock.  In the follow-on offering, the Company is offering up to $200,000,000 in shares of the Company’s common stock to the public and up to $19,000,000 in shares of the Company’s common stock pursuant to the distribution reinvestment plan (the “DRIP”).  The offering price for shares to be offered to the public in the follow-on offering will be determined by the Company’s board of directors.  The Company’s board of directors may change the price at which the Company offers shares to the public in the follow-on offering from time to time during the follow-on offering, but not more frequently than quarterly, to reflect changes in the Company’s estimated per-share net asset value and other factors the Company’s board of directors deems relevant.  On May 15, 2013, the Company filed Amendment No. 1 to Form S-11 with respect to the follow-on public offering.  The Company will recommence offering of its common shares at such time as the SEC declares the follow-on Form S-11 effective.


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


As of March 31, 2013 we owned 4 commercial properties located in Richardson, Arlington, and Dallas, Texas comprising approximately 605,000 square feet plus 3 pad sites.  As of March 31, 2012 we owned 1 commercial property located in Richardson, Texas comprising approximately 201,000 square feet plus 3 pad sites.


Note 2 — Summary of Significant Accounting Policies


Basis of Presentation


The accompanying unaudited consolidated financial statements as of and for the three months ended March 31, 2013 and 2012, have been prepared by us in accordance with accounting principles generally accepted in the United States and pursuant to the rules and regulations of the Securities and Exchange Commission, including Form 10-Q and Regulation S-K. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments), which are, in the opinion of management, necessary to fairly present the operating results for the respective periods.  The results of the three months ended March 31, 2013 are not necessarily indicative of the results to be expected for the year ending December 31, 2013.


The consolidated financial statements herein are condensed and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.



6




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)




        These unaudited consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: Hartman Richardson Heights Properties, LLC for the three months ended March 31, 2013 and 2012; Hartman Cooper Street Plaza, LLC for the three months ended March 31, 2013; Hartman Haute Harwin, LLC for the period from January 1, 2013 to March 28, 2013, the date this subsidiary’s property was sold to an affiliate; Hartman Bent Tree, LLC for the three months ended March 31, 2013; and Hartman Parkway LLC for the period from March 15, 2013, the date this subsidiary acquired the Parkway Property, to March 31, 2013.  All significant intercompany balances and transactions have been eliminated.


Use of Estimates in the Preparation of Financial Statements

 

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


Reclassifications


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


Cash and Cash Equivalents

 

All highly liquid investments with original maturities of three months or less are considered to be cash equivalents.  Cash and cash equivalents at March 31, 2013 and December 31, 2012 consisted of demand deposits at commercial banks.


Financial Instruments


       The accompanying consolidated balance sheets include the following financial instruments: cash and cash equivalents, accrued rent and accounts receivable, accounts payable and accrued expenses and due to related parties.  The Company considers the carrying value to approximate the fair value of these financial instruments based on the short duration between origination of the instruments and their expected realization.  Based on borrowing rates currently available to the Company for loans with similar terms, the carrying value of its note payable approximates fair value.


Revenue Recognition


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


Real Estate


Allocation of Purchase Price of Acquired Assets


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




7




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



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


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


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


Depreciation and amortization


       Depreciation is computed using the straight-line method over the estimated useful lives of 5 to 39 years for buildings and improvements.  Tenant improvements are depreciated using the straight-line method over the lesser of the life of the improvement or the remaining term of the lease. In-place leases are amortized using the straight-line method over the weighted years calculated on terms of all of the leases in-place when acquired.


Impairment


       We review our real estate assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through operations.  We determine whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the estimated residual value of the property, with the carrying cost of the property.  If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the property exceeds its fair value.  Management has determined that there has been no impairment in the carrying value of our real estate assets as of March 31, 2013.


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


Accrued Rent and Accounts Receivable


       Included in accrued rent and accounts receivable are base rents, tenant reimbursements and receivables attributable to recording rents on a straight-line basis. An allowance for the uncollectible portion of accrued rents and accounts receivable is determined based upon customer credit-worthiness (including expected recovery of our claim with respect to any tenants in bankruptcy), historical bad debt levels, and current economic trends.  As of March 31, 2013 and December 31, 2012, we had an allowance for uncollectible accounts of $193,924 and $163,302, respectively.  For the three months ended March 31, 2013 and 2012, we recorded bad debt expense in the amount of $30,622 and $10,733, respectively related to tenant receivables that we specifically identified as potentially uncollectible based on our assessment of each tenant’s credit-worthiness.  Bad debt expenses and any related recoveries are included in property operating expenses in the accompanying consolidated statements of operations.



8




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



 

Deferred Leasing Commissions and Loan Costs


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


Goodwill


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


Organization and Offering Costs


The Company has incurred certain expenses in connection with organizing the company. These costs principally relate to professional and filing fees. For the three months ended March 31, 2013 and 2012, such costs totaled $25,826 and $41,958, respectively.


Organization and offering costs will be reimbursed by the Advisor as set forth in the “Costs of Formation and Fees to Related Parties” section of the prospectus, to the extent that organization and offering costs ultimately exceed 1.5% of gross offering proceeds.  As of March 31, 2013, the excess of offering and organizational expense incurred in excess of 1.5% of gross offering proceeds is $54,385.  No demand has been made of the Advisor for reimbursement as of March 31, 2013 and no receivable has been recorded with respect to the excess costs as of that date.  The Company expects the excess cost to diminish as additional offering proceeds are received. Selling commissions in connection with the offering are recorded and charged to additional paid-in-capital.

 

Stock-Based Compensation


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


       Stock-based compensation expense is included in general and administrative expense in the accompanying consolidated statements of operations.


Advertising


       The Company expenses advertising costs as incurred and such costs are included in general and administrative expenses in the accompanying consolidated statements of operations.  Advertising costs totaled $1,022 and $0 for the three months ended March 31, 2013 and 2012, respectively.


Income Taxes


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



9




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)




For the three months ended March 31, 2013 and 2012, the Company incurred a net loss of $461,333 and $522,942, respectively.   The Company does not currently anticipate forming any taxable REIT subsidiaries or otherwise generating future taxable income which may be offset by the net loss carry forward.  The Company considers that any deferred tax benefit and corresponding deferred tax asset which may be recorded in light of the net loss carry forward would be properly offset by an equal valuation allowance in that no future taxable income is expected.  Accordingly no deferred tax benefit or deferred tax asset has been recorded in the accompanying consolidated financial statements.


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


 Loss Per Share

 

The computations of basic and diluted loss per common share are based upon the weighted average number of common shares outstanding and potentially dilutive securities.  The Company’s potentially dilutive securities include preferred shares that are convertible into the Company’s common stock.  As of March 31, 2013 and 2012, there were no shares issuable in connection with these potentially dilutive securities.  These potentially dilutive securities were excluded from the computations of diluted net loss per share for the three months ended March 31, 2013 and 2012 because no shares are issuable and inclusion of such potentially dilutive securities would have been anti-dilutive.


Concentration of Risk


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


Note 3 — Real Estate


       Real estate assets consisted of the following:


 

 

March 31, 2013          

 

December 31, 2012

Land

$

12,816,250

$

10,443,750

Buildings and improvements

 

29,991,905

 

23,468,037

In-place lease value intangible

 

10,756,483

 

8,404,504

 

 

53,564,638

 

42,316,291

Less accumulated depreciation and amortization

 

(3,329,426)

 

(2,533,101)

Total real estate assets

$

50,235,212

$

39,783,190


       Depreciation expense for the three months ended March 31, 2013 and 2012 was $246,715 and $131,820, respectively.  Amortization expense of in-place lease value intangible was $549,610 and $397,098 for the three months ended, March 31, 2013 and 2012, respectively.

       



10




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



       Acquisition fees paid to Advisor were $156,870 and $0 for the three months ended March 31, 2013 and 2012, respectively.  In connection with the disposition of the retail shopping center commonly known as the Harwin property (the “Harwin Property”) to Hartman XIX, Advisor refunded the acquisition fee of $80,380 previously paid in connection with that acquisition.  Asset management fees paid to Advisor were $81,294 and $35,906 for the three months ended March 31, 2013 and 2012.  Asset management and acquisition fees are captioned as such in the accompanying consolidated statements of operations for the three months ended March 31, 2013 and 2012, respectively.


On March 15, 2013, the Company acquired two office buildings comprising approximately 136,506 square feet located in Dallas, Texas commonly known as Parkway I & II (the “Parkway Property”) through Hartman Parkway, LLC (“Parkway LLC”), a wholly owned subsidiary of the Company.  Parkway LLC acquired the Parkway Property for $9,490,000, exclusive of closing costs.  The Parkway Property was 68% occupied at the acquisition date.  An acquisition fee of $237,250 was earned by the Advisor in connection with the purchase of the Parkway Property.


The following table summarizes the fair values of the Parkway Property assets acquired and liabilities assumed based upon our initial purchase price allocation as of the acquisition date:


Assets acquired:

 

 

Real estate assets

$

9,490,000

  Total assets acquired

 

9,490,000

 

 

 

Liabilities assumed:

 

 

Accounts payable and accrued expenses

 

32,034

Tenants’ security deposits

 

49,768

  Total liabilities assumed

 

81,802

 

 

 

Fair value of net assets acquired

$

9,408,198


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


We identify and record the value of acquired lease intangibles at the property acquisition date. Such intangibles include the value of acquired in-place leases and above and below-market leases. Acquired lease intangibles are amortized over the leases' remaining terms.  With respect to all properties owned by the Company, we consider all of the in-place leases to be market rate leases.


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


 

 

March 31, 2013        

 

 

December 31, 2012

In-place lease value intangible

$

10,756,483

 

$

8,404,504

In-place leases – accumulated amortization

 

(2,238,812)

 

 

(1,689,202)

 Acquired lease intangible assets, net

$

8,517,671

 

$

6,715,302


Note 4 — Accrued Rent and Accounts Receivable, net


Accrued rent and accounts receivable, net, consisted of the following:


 

 

March 31, 2013          

 

 

December 31, 2012

Tenant receivables

$

353,799

 

$

257,665

Accrued rent

 

166,575

 

 

81,796

Allowance for doubtful accounts

 

(193,924)

 

 

(163,302)

 Accrued Rent and Accounts Receivable, net

$

326,450

 

$

176,159




11




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Note 5 — Deferred Loan and Leasing Commission Costs, net


Costs which have been deferred consist of the following:


 

 

March 31, 2013         

 

 

December 31, 2012

Deferred loan and leasing commission costs

$

1,174,361

 

$

1,088,425

Less:  accumulated amortization

 

(219,410)

 

 

(186,387)

Total cost, net of accumulated amortization

$

954,951

 

$

902,038


Note 6 — Note Payable


The Company is a party to a $30.0 million revolving credit agreement (the “Credit Facility”) with a bank.  The borrowing base of the Credit Facility may be adjusted from time to time subject to the lenders underwriting with respect to real property collateral.  In connection with the acquisition of the Parkway Property, the borrowing base of the Credit Facility was increased from $20.0 million to $22.5 million.  The current borrowing base includes a $2.0 million restricted borrowing base to provide construction funding, if required, in connection with substantial building and tenant improvements being undertaken in connection with a substantial new tenant of the Richardson Heights Property.  The note bears interest at the lesser of 5.0% per annum or the bank’s prime rate plus 1% per annum.  The interest rate was 5.0% per annum as of March 31, 2013.  Payment of interest only is due monthly.  The loan matures on May 9, 2015.  As of March 31, 2013, the outstanding balance under the Credit Facility is $17.85 million and the amount available to be borrowed is $2.65 million, exclusive of the $2.0 million restricted borrowing base.  The loan is subject to customary covenants.  As of March 31, 2013 we were in compliance with all loan covenants.  See Note 12 – Commitments and Contingencies.

       

Note 7 — Loss Per Share

 

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

 

 

Three months ended March 31,

 

 

2013    

 

 

2012

Numerator:

 

 

 

 

 

 Net loss attributable to common stockholders

$

      (461,333)

 

$

(522,942)

Denominator:

 

 

 

 

 

 Basic and diluted weighted average shares outstanding

 

3,867,148

 

 

1,992,145

 

 

 

 

 

 

 Basic and diluted loss per common share:

 

 

 

 

 

 Net loss attributable to common stockholders

$

(0.12)

 

$

(0.26)


Note 8 — Income Taxes


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


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

 



12




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Note 9 — Related Party Transactions


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


       As of March 31, 2013 and December 31, 2012, respectively, the Company had a balance due to an affiliated entity, the Property Manager, of $172,941 and $188,660.


The Company owed the Advisor $350,137 and $111,973 for acquisition and asset management fees as of March 31, 2013 and December 31, 2012, respectively.  In connection with the disposition of the Harwin Property to Hartman XIX, Advisor is refunding the acquisition previously paid in connection with that acquisition.  Asset management fees are monthly fees equal to one-twelfth of 0.75% of the sum of the higher of the cost or value of each asset.


Effective March 28, 2013 the Company disposed of the Harwin Property for $3.4 million.  For the three months ended March 31, 2013 the Company recognized income from discontinued operations of the Harwin Property of $14,434 and a gain on sale of discontinued operations of $139,442.


The Company owed $30,074 and $364,278 to Hartman XIX as of March 31, 2013 and December 31, 2012, respectively.  The balance due to Hartman XIX represents undistributed funds from operations due to Hartman XIX with respect to its former ownership interest in the Joint Venture.


Note 10 – Stockholders’ Equity


Common Stock


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


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

       

       As of March 31, 2013, the Company has accepted investors’ subscriptions for and issued 4,004,256 shares of the Company’s common stock in its public offering, resulting in gross proceeds to the Company of $39,542,242.


Preferred Stock


       Under our articles of incorporation the Company’s board of directors has the authority to issue one or more classes or series of preferred stock, and prior to the issuance of such stock, the board of directors shall have the power to classify or reclassify, in one or more series, any unissued shares and designate the preferences, rights and privileges of such shares.  As of March 31, 2013 and December 31, 2012, respectively, we have issued 1,000 shares of convertible preferred shares to Hartman Advisors LLC at a price of $10.00 per share.


Common Stock Issuable Upon Conversion of Convertible Preferred Stock - The convertible preferred stock will convert to shares of common stock if (1) the Company has made total distributions on then outstanding shares of the Company’s common stock equal to the issue price of those shares plus a 6% cumulative, non-compounded, annual return on the issue price of those outstanding shares, (2) the Company lists its common stock for trading on a national securities exchange if the sum of prior distributions on then outstanding shares of our common stock plus the aggregate market value of our common  stock  (based on the  30-day  average  closing   price) meets  the  same  6%  performance  threshold,  or  (3)  the Company’s advisory agreement with Hartman Advisors, LLC expires without renewal or is terminated (other than because of a material breach by our advisor), and at the time of such expiration or termination the Company is deemed to have met the foregoing 6% performance threshold based on the Company’s enterprise value and prior distributions and, at or subsequent to the expiration or termination, the stockholders actually realize such level of performance upon listing or through total distributions. In general, the convertible stock will convert into shares of common stock with a value equal to 15% of the excess of the Company’s enterprise value plus the aggregate value of distributions paid to date on then outstanding shares of common stock over the aggregate issue price of those outstanding shares plus a 6% cumulative, non-compounded, annual return on the issue price of those outstanding shares. With respect to conversion in connection with the termination of the advisory agreement, this calculation is made at the time of termination even though the actual conversion may occur later, or not at all.



13




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)




Stock-Based Compensation


       We award vested restricted common shares to non-employee directors as compensation in part for their service as members of the board of directors of the Company.  These shares are fully vested when granted.  These shares may not be sold while an independent director is serving on the board of directors.  For the three months ended March 31, 2013 and 2012, respectively, the Company granted 1,500 and 1,500 shares of restricted common stock to independent directors as compensation for services.  We recognized $15,000 and $15,000 as stock-based compensation expense for the three months ended March 31, 2013 and 2012, respectively, based upon the estimated fair value per share.  The Compensation Committee of the Board of Directors approved awards of 1,000 shares of restricted common stock issued to each of two executives of Hartman Income REIT Management, the property manager for the Company. We recognized share based compensation expense of $20,000 with respect to these awards based on the amount offering price of $10 per share for the three months ended March 31, 2012.  Stock-based compensation expense is included in general and administrative expenses in the accompanying consolidated statements of operations.


Distributions


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



Quarter paid

 


Distributions per Common Share   

 

 

                     Total Amount Paid

2013

 

 

 

 

 

 

1st Quarter

 

$

0.175

 

$

627,754

 

 

 

 

 

 

 

2012

 

 

 

 

 

 

 4th Quarter

 

$

0.175

 

$

550,016

 3rd Quarter

 

 

0.175

 

 

482,186

 2nd Quarter

 

 

0.175

 

 

402,956

 1st Quarter

 

 

0.175

 

 

324,358

Total

 

$

0.700

 

$

1,759,516


Note 11 – Discontinued Operations


Effective March 28, 2013, the Company sold the Harwin property to Hartman XIX pursuant to the terms agreed upon and approved by both the board of directors of the Company and of Hartman XIX.  The Company sold the Harwin property for $3,400,000 cash.  The Company recognized a $139,442 gain on sale.


      



14




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)



Net income from discontinued operations is comprised as follows:


 

Three months ended March 31,

 

 

2013 

 

    2012

Total property revenues

$

65,901

$

-

 

 

 

 

 

Property operating expenses

 

28,237

 

-

Real estate taxes and insurance

 

23,230

 

-

Depreciation & amortization

 

-

 

-

  Total property and other expenses

 

51,467

 

-

 

 

 

 

 

Income from discontinued operations

 

14,434

 

-

 

 

 

 

 

Gain on sale of property

 

139,442

 

-

 

 

 

 

 

Income from discontinued operations

$

153,876

$

-


Note 12 – Commitments and Contingencies


Economic Dependency


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


Litigation


The Company is subject to various claims and legal actions that arise in the ordinary course of business.  Management of the Company believes that the final disposition of such matters will not have a material adverse effect on the financial position of the Company.


Richardson Heights – Alamo Draft House Lease


On September 26, 2012, the Company, through its wholly owned subsidiary, Hartman Richardson Heights Properties LLC (“HRHP LLC”), entered in to a lease agreement with the exclusive Alamo Draft House franchisee for the Dallas/Fort Worth area.  Alamo Draft House is a specialized movie theatre concept which combines showings of new release and classic films with dining and other entertainment.  The lease agreement has a 15 year term and a total lease value of $9.45 million.  The building and tenant improvement cost for the Alamo Draft House lease is estimated to be approximately $4.8 million.  The City of Richardson, Texas and HRHP LLC have entered into an economic development incentive agreement.  Under the terms of the incentive agreement, the City of Richardson will provide annual grants to be paid to HRHP LLC in equal installments over a five year period of up to $1.5 million and sales tax grants to be paid annually over the first 10 years of the tenant lease.  Funding for the improvement work will be provided by equity capital together with funds as needed under the Company’s Credit Facility.  As of March 31, 2013, the Company has incurred approximately $2.5 million of the estimated total building and tenant improvement cost.


Rescission Rights of Certain Stockholders


In connection with the suspension of the Company’s initial public offering, which is discussed in Note 13 – Subsequent Events below, the Company may have a contingent liability to certain stockholders who purchased shares of the Company’s common stock during the period which the Company’s registration statement was not effective and during which time the Company may have been in violation of one or more securities laws.  The Company has considered the possibility of affording the remedy of rescission to stockholders who purchased common shares during the period that the Company was required to file post-effective amendments to its registration statement.  Any such rescission would obligate the Company to reacquire the stockholders' common shares at a price equal to the price originally paid for such shares with market interest, less the amount of any income received with respect to such shares.  If affected stockholders were successful in seeking rescission and/or damages, we would face financial demands that could adversely affect our business and operations. Additionally, we may become subject to penalties imposed by the SEC and state securities agencies.  If stockholders seek rescission and/or damages or we conduct a rescission offer, we may or may not have the resources to fund the repurchase of all of the securities tendered.  We have determined not to offer rescission because the Advisor and the Company do not believe that any material number of affected investors would choose to rescind their common share purchases.



15




HARTMAN SHORT TERM INCOME PROPERTIES XX, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)




Note 13 – Subsequent Events


On April 17, 2013 the Company filed Post-Effective Amendment No. 1 to its registration statement originally declared effective February 9, 2010. On April 25, 2013, the Company stopped accepting subscriptions for the sale of its common stock pursuant to its initial public offering due to the fact the Company’s registration statement is no longer deemed effective under the Securities Act of 1933.    The Company now intends to withdraw its request for effectiveness of the post-effective amendment and to pursue effectiveness of its follow-on public offering.  The Company will commence its follow-on public offering at such time as the SEC declares the Company’s follow-on offering registration statement on Form S-11 to be effective.





16






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


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

 

Forward-Looking Statements

 

         This Form 10-Q contains forward-looking statements, including discussion and analysis of our financial condition, anticipated capital expenditures required to complete projects, amounts of anticipated cash distributions to our stockholders in the future and other matters. These forward-looking statements are not historical facts but are the intent, belief or current expectations of our management based on its knowledge and understanding of our business and industry. Forward-looking statements are typically identified by the use of terms such as “may,” “will,” “should,” “potential,” “predicts,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates” or the negative of such terms and variations of these words and similar expressions. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.

 

          Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. You are cautioned to not place undue reliance on forward-looking statements, which reflect our management’s view only as of the date of this Form 10-Q. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results. Factors that could cause actual results to differ materially from any forward-looking statements made in this Form 10-Q include:

  

  

  

  

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

  

  

  

  

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

  

  

  

  

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

  

  

  

  

construction costs that may exceed estimates or construction delays;

  

  

  

  

increases in interest rates;

  

  

  

  

availability of credit or significant disruption in the credit markets;

  

  

  

  

litigation risks;

  

  

  

  

lease-up risks;

  

  

  

  

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

  

  

  

  

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

  

  

  

  

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

 

          The forward-looking statements should be read in light of these factors and the factors identified in the “Risk Factors” sections of the December 31, 2012 Form 10-K filed with the SEC on April 1, 2013.


Overview


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



17







On April 25, 2013, the Company stopped accepting subscriptions for the sale of its common stock pursuant to its initial public offering due to the fact the Company’s offering prospectus is no longer deemed effective under the Securities Act of 1933.  On April 17, 2013 the Company filed Post-Effective Amendment No. 1 to its prospectus dated February 9, 2010.  The Company now intends to withdraw its request for effectiveness of the post-effective amendment and to pursue effectiveness of its follow-on public offering.  


On December 7, 2012, the Company filed a registration statement on Form S-11 with the SEC to register a follow-on public offering of up to $219,000,000 in shares of the Company’s common stock.  In the follow-on offering, the Company is offering up to $200,000,000 in shares of the Company’s common stock to the public and up to $19,000,000 in shares of the Company’s common stock pursuant to the distribution reinvestment plan (the “DRIP”).  The offering price for shares to be offered to the public in the follow-on offering will be determined by the Company’s board of directors.  The Company’s board of directors may change the price at which the Company offers shares to the public in the follow-on offering from time to time during the follow-on offering, but not more frequently than quarterly, to reflect changes in the Company’s estimated per-share net asset value and other factors the Company’s board of directors deems relevant.  On May 15, 2013, the Company filed Amendment No. 1 to Form S-11 with respect to the follow-on public offering.  The Company will recommence offering of its common shares at such time as the SEC declares the follow-on Form S-11 effective.


We intend to use substantially all of the net proceeds of our initial and follow-on offerings to purchase additional properties and other real estate-related investments. As of the date of this Form 10-Q, we have acquired 5 commercial real estate properties and disposed of 1 property.  The number of assets we acquire will depend upon the number of shares sold in the initial and follow-on offerings and the resulting amount of the net proceeds available for investment in properties. 

 

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


For the three months ended March 31, 2013 and 2012, the Company incurred a net loss of $461,333 and $522,942, respectively.  The Company does not currently anticipate forming any taxable REIT subsidiaries or otherwise generating future taxable income which may be offset by the net loss carry forward.  The Company considers that any deferred tax benefit and corresponding deferred tax asset which may be recorded in light of the net loss carry forward would be properly offset by an equal valuation allowance in that no future taxable income is expected.  Accordingly no deferred tax benefit or deferred tax asset has been recorded in the financial statements.


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

 

Critical Accounting Policies and Estimates


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




18






Revenue Recognition


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


Real Estate


Allocation of Purchase Price of Acquired Assets


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


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


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


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


Depreciation and amortization


       Depreciation is computed using the straight-line method over the estimated useful lives of 5 to 39 years for buildings and improvements.  Tenant improvements are depreciated using the straight-line method over the lesser of the life of the improvement or the remaining term of the lease.  In-place leases are amortized using the straight-line method over the weighted years calculated on terms of all of the leases in-place when acquired.


Impairment


       We review our real estate assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through operations.  We determine whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the estimated residual value of the property, with the carrying cost of the property.  If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the property exceeds its fair value.  Management has determined that there has been no impairment in the carrying value of our real estate assets as of March 31, 2013.



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


Accrued Rent and Accounts Receivable


       Included in accrued rent and accounts receivable are base rents, tenant reimbursements and receivables attributable to recording rents on a straight-line basis. An allowance for the uncollectible portion of accrued rents and accounts receivable is determined based upon customer credit-worthiness (including expected recovery of our claim with respect to any tenants in bankruptcy), historical bad debt levels, and current economic trends.  As of March 31, 2013 and December 31, 2012, we had an allowance for uncollectible accounts of $193,924 and $163,302, respectively.  For the three months ended March 31, 2013 and 2012 we recorded bad debt expense in the amount of $30,622 and $10,733, respectively related to tenant receivables that we specifically identified as potentially uncollectible based on our assessment of each tenant’s credit-worthiness.  Bad debt expenses and any related recoveries are included in property operating expenses.

 

Deferred Leasing Commissions and Loan Costs


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


Goodwill


       Generally accepted accounting principles in the United States require the Company to test goodwill for impairment at least annually or more frequently whenever events or circumstances occur indicating goodwill might be impaired.  The Company has the option to perform a qualitative assessment to determine if it is more likely than not that the fair value is less than the carrying amount.  If the qualitative assessment determines that it is more likely than not that the fair value is less than the carrying amount, or if the Company elects to bypass the qualitative assessment, the Company performs a two-step impairment test.  In the first step, management compares its net book value of the Company to the carrying amount of goodwill at the balance sheet date. In the event net book value of the Company is less than the carrying amount of goodwill, the Company proceeds to step two and assesses the need to record an impairment charge. As of March 31, 2013 no goodwill impairment was recognized.


RESULTS OF OPERATIONS

 

        As of March 31, 2013 we owned 4 commercial properties located in Richardson, Arlington, and Dallas, Texas comprising approximately 605,000 square feet plus 3 pad sites.  As of March 31, 2012 we owned 1 commercial property located in Richardson, Texas comprising approximately 201,000 square feet plus 3 pad sites.


Revenues – The primary source of our revenue is rental revenues and tenant reimbursements.  For the three months ended March 31, 2013 and 2012, we had total rental revenues and tenant reimbursements of $1,532,181 and $544,414, respectively.  The increase in revenues is attributable to the fact that we owned and operated 3 properties for all of the quarter ending March 31, 2013 versus one property for the quarter ending March 31, 2012.  The fourth property we acquired during the quarter closed on March 15, 2013.


Property operating expenses – Property operating expenses consists of contract services, repairs and maintenance, utilities and property management fees.  For the three months ended March 31, 2013 and 2012, we had total property operating expenses of $328,135 and $87,526, respectively.  Property operating expenses include property management fees paid to our Property Manager of $63,722 and $26,833 for the three months ended March 31, 2013 and 2012, respectively.  The increase in property operating expenses is attributable to the fact that we owned and operated 3 properties for all of the quarter ending March 31, 2013 versus one property for the quarter ending March 31, 2012.  The fourth property we acquired during the quarter closed on March 15, 2013.


Asset management and acquisition fees – Asset management and acquisition fees are fees payable to our advisor in connection with the management of the Company and the acquisition of our properties.  For the three months ended March 31, 2013 and 2012 we paid the Advisor $81,294 and $35,906, respectively for asset management fees.  Acquisition fees paid to Advisor were $237,250 and $0 for the three months ended March 31, 2013 and 2012, respectively.  In connection with the disposition of the Harwin property to Hartman XIX, Advisor refunded the acquisition fee of $80,380 previously paid in connection with that acquisition.  



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Organizational and offering costs - The Company incurs certain expenses in connection with its organization and registration to sell common shares.  These costs principally relate to professional and filing fees. For the three months ending March 31, 2013 and 2012 organization and offering costs were $25,826 and $41,958, respectively.


General and administrative expense - General and administrative expenses were $235,364 and $83,740 for the three months ended March 31, 2013 and 2012, respectively.  General and administrative expenses consist primarily of audit fees, transfer agent fees, other professional fees, independent director compensation and other share based compensation.  We expect general and administrative expenses to increase only modestly in future periods as we acquire additional real estate and real estate related assets.  We expect general and administrative expenses to decrease substantially as a percentage of total revenue.


Fees to affiliatesIn addition to asset management and acquisition fees paid to Advisor and property management fees paid to the Property Manager, we pay leasing commissions and construction management fees to the Property Manager.  For the three months ended March 31, 2013 and 2012, respectively, we paid our Property Manager $36,284 and $0 for leasing commissions and $101,686 and $118 for construction management fees.  Lease commissions and construction management fees are included in deferred loan and lease commission costs and real estate assets, respectively, in the consolidated balance sheets.


Funds From Operations and Modified Funds From Operations


       Funds From Operations (“FFO”) is a non-GAAP financial performance measure defined by the National Association of Real Estate Investment Trusts (“NAREIT”) and widely recognized by investors and analysts as one measure of operating performance of a real estate company.  The FFO calculation begins with net income (loss) and excludes items such as real estate depreciation and amortization, and gains and losses on the sale of real estate assets.  Depreciation and amortization as applied in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time.  Since real estate values have historically risen or fallen with market conditions, it is management’s view, and we believe the view of many industry investors and analysts, that the presentation of operating results for real estate companies by using the GAAP basis alone is insufficient.  In addition, FFO excludes gains and losses from the sale of real estate, which we believe provides management and investors with a helpful additional measure of the performance of our real estate portfolio, as it allows for comparisons, year to year, that reflect the impact on operations from trends in items such as occupancy rates, rental rates, operating costs, general and administrative expenses, and interest costs.


In addition to FFO, we use Modified Funds From Operations (“MFFO”) as a non-GAAP supplemental financial performance measure to evaluate the operating performance of our real estate portfolio.  MFFO, as defined by our Company, excludes from FFO acquisition related costs and real estate impairment charges, which are required to be expensed in accordance with GAAP.  In evaluating the performance of our portfolio over time, management employs business models and analyses that differentiate the costs to acquire investments from the investments’ revenues and expenses.  Management believes that excluding acquisition costs from MFFO provides investors with supplemental performance information that is consistent with the performance models and analysis used by management, and provides investors a view of the performance of our portfolio over time, including after the Company ceases to acquire properties on a frequent and regular basis.  MFFO also allows for a comparison of the performance of our portfolio with other REITs that are not currently engaging in acquisitions, as well as a comparison of our performance with that of other non-traded REITs, as MFFO, or an equivalent measure, is routinely reported by non-traded REITs, and we believe often used by analysts and investors for comparison purposes.


Additionally, impairment charges are items that management does not include in its evaluation of the operating performance of its real estate investments, as management believes that the impact of these items will be reflected over time through changes in rental income or other related costs.  As many other non-traded REITs exclude impairments in reporting their MFFO, we believe that our calculation and reporting of MFFO will assist investors and analysts in comparing our performance versus other non-traded REITs.


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



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MFFO may provide investors with a useful indication of our future performance, particularly after our acquisition stage, and of the sustainability of our current distribution policy.  However, because MFFO excludes acquisition expenses, which are an important component in an analysis of the historical performance of a property, MFFO should not be construed as a historic performance measure.  Neither the SEC, NAREIT, nor any other regulatory body has evaluated the acceptability of the exclusions contemplated to adjust FFO in order to calculate MFFO and its use as a non-GAAP financial performance measure.


Our calculation of FFO and MFFO, and reconciliation to net loss, which is the most directly comparable GAAP financial measure, is presented in the table below for the three months ended March 31, 2013 and 2012.  FFO and MFFO are influenced by the timing of acquisitions and the operating performance of our real estate investments.


 

 

 

Three Months Ending March 31,

 

 

 

2013

 

 

2012

Net loss

 

$

(461,333)

 

$

(522,942)

 Depreciation and amortization of real estate assets

 

 

796,325

 

 

528,918

 Income from discontinued operations

 

 

(153,876)

 

 

-

Funds from operations (FFO)

 

 

181,116

 

 

5,976

 Acquisition related expenses

 

 

156,870

 

 

-

Modified funds from operations (MFFO)

 

$

337,986

 

$

5,976


Distributions


The following table summarizes the quarterly distributions we paid in cash and pursuant to our distribution reinvestment plan (DRIP) for the period from January 2012 through March 31, 2013:


Period

 

Cash (1)

 

DRIP (1) (2)

 

Total      

 

Net Cash

Provided by

(used in)

 Operating Activities

First Quarter 2012

$

174,784

$

149,574

$

324,358

$

(513,052)

Second Quarter 2012

$

208,865

$

194,091

$

402,956

$

(930,975)

Third Quarter 2012

$

236,090

$

246,096

$

482,186

$

236,450

Fourth Quarter 2012

$

271,424

$

278,592

$

550,016

$

1,374,341

Total

$

891,163

$

868,353

$

1,759,516

$

166,341

 

 

 

 

 

 

 

 

 

First Quarter 2013

$

316,478

$

311,276

$

627,754

$

(204,928)

 

 

 

 

 

 

 

 

 



(1) Distributions are paid on a monthly basis. Distributions for all record dates of a given month are paid approximately 20 days following the end of such month.

(2) Amount of distributions paid in shares of common stock pursuant to our distribution reinvestment plan.


For the quarter ended March 31, 2013, we paid aggregate distributions of $627,754.  During the same period, cash used in operating activities was $204,928 and our modified funds from operations, or MFFO, was $337,986.   For the quarter ended March 31, 2012, we paid aggregate distributions of $324,358, our net cash used in operating activities was $513,052 and our MFFO was $5,976.  Of the $627,754 in distributions we paid to our stockholders for the three months ended March 31, 2013, approximately 54% was attributable to MFFO and approximately 46% constituted a return of capital funded from offering proceeds.  Of the $324,358 in distributions we paid to our stockholders for the three months ended March 31, 2012, approximately 2% was attributable to MFFO and approximately 98% constituted a return of capital funded from offering proceeds.  For a discussion of how we calculate FFO and MFFO, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Funds From Operations and Modified Funds From Operations” hereinabove.




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Liquidity and Capital Resources

  

As of March 31, 2013, the Company had issued 4,004,256 shares of the Company’s commons stock in its initial public offering, resulting in gross proceeds to the Company of $39,452,242.


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


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

 

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

 

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

 

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


Cash Flows from Operating Activities


As of March 31, 2013 we owned 4 commercial real estate properties.  During the three months ended March 31, 2013, net cash used in operating activities was $204,928 versus $513,052 for the three months ended March 31, 2012.  The increase in cash flow from operating activities is attributable to the fact that we owned and operated 4 commercial real estate properties during the three months ended March 31, 2013 versus 1 commercial real estate property during the three months ended March 31, 2012.  Our fourth property was acquired on March 15, 2013.  We expect cash flows from operating activities to increase in future periods as a result of anticipated future acquisitions of real estate and real estate related investments.


Cash Flows from Investing Activities


During the three months ended March 31, 2013, net cash used in investing activities was $7,644,676 versus $101,660 for the three months ended March 31, 2012 and consisted primarily of $9,490,000 cash used to acquire the Parkway Property on March 15 2013, $1,637,770 cash used to fund the significant building and tenant improvements at the Richardson Heights Property less $3,253,671 net cash provided by the sale of the Harwin property.



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Cash Flows from Financing Activities


Cash flows from financing activities consisted primarily of proceeds from our ongoing public offering and distributions paid to our common stockholders.  Net cash provided by financing activities for the three months ended March 31, 2013 and 2012, respectively, were and $8,282,625 versus $1,946,407 and consisted of the following:


· $6,024,575 and $2,344,011, respectively of cash provided by offering proceeds related to our public offering, net of payments of commissions on sales of common stock and related dealer manager fees of $299,606 and $224,738, respectively;

· $316,478 and $172,866, respectively of net cash distributions, after giving effect to distributions reinvested by stockholders of $311,276 and $149,578, respectively; and,

· $2,800,349 and $0, respectively of net proceeds drawn under our Revolving Credit Facility in connection with the Parkway Property acquisition and $73,785 financing of prepaid insurance.

 

Contractual Obligations

 

Our board of directors has approved our entering into the Advisory Agreement, the Property Management Agreement and the Dealer Management Agreement.


Off-Balance Sheet Arrangements


       As of March 31, 2013, we had no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.


Recent Accounting Pronouncements


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

 



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Item 3. Quantitative and Qualitative Disclosures about Market Risks

 

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


Item 4. Controls and Procedures


Evaluation of Disclosure Controls and Procedures

 

In connection with the preparation of this Form 10-Q, as of March 31, 2013, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. In performing this evaluation, management reviewed the selection, application and monitoring of our historical accounting policies. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2013, these disclosure controls and procedures were effective and designed to ensure that the information required to be disclosed in our reports filed with the SEC is recorded, processed, summarized and reported on a timely basis. The Chief Executive Officer and the Chief Financial Officer have however determined that that as of March 31, 2013, disclosure controls and procedures as they apply to compliance with undertakings set forth in Industry Guide 5 and the Securities Act may have been deficient.  As of the date of this filing, the Chief Executive Officer and Chief Financial Officer have taken steps which they believe will be effective to overcome any identified deficiency.  In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Management is required to apply judgment in evaluating the cost-benefit relationship of possible controls and procedures.


Changes in Internal Control over Financial Reporting


         There have been no changes during the Company’s quarter ended March 31, 2013, in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financing reporting. There have, however, been changes to the Company’s disclosure controls and procedures as they apply to compliance with undertakings set forth in Industry Guide 5 and the Securities Act subsequent to March 31, 2013.  These changes include identifying and delegating appropriate tasks and actions to ensure compliance with such requirements.

 



25








PART II

OTHER INFORMATION


Item 1.  Legal Proceedings


         None.


Item 1A. Risk Factors


 None.


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


       As of March 31, 2013, we had issued 4,004,256 shares in the Offering for gross proceeds of $39,542,242, out of which we incurred $2,208,476 in selling commissions and $647,519 in organization and offering costs.  With the net offering proceeds, we have invested in Richardson Heights, Cooper Street, Bent Tree Green, and Parkway Plaza properties.


Item 3 Defaults Upon Senior Securities


       None.


Item 4.  Reserved


       None.


Item 5. Other Information


        None.




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Item 6.  Exhibits.


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


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


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


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

 








SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

HARTMAN SHORT TERM INCOME PROPERTIES XX, INC.

 



Date: May 15, 2013                                                                         By: /s/ Allen R. Hartman

Allen R. Hartman,

Chairman of the Board and Chief Executive Officer

(Principal Executive Officer)


Date: May 15, 2013                                                                        By: /s/ Louis T. Fox, III

Louis T. Fox, III,

Chief Financial Officer,

(Principal Financial and Principal Accounting Officer)



27