AmREIT Monthly Income & Growth Fund III Ltd - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - AmREIT Monthly Income & Growth Fund III Ltd	Financial_Report.xls
EX-10.1 - OMNIBUS AMENDMENT TO LOAN DOCUMENTS - AmREIT Monthly Income & Growth Fund III Ltd	amreit142940migiii_ex10-1.htm
EX-32.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 906 - AmREIT Monthly Income & Growth Fund III Ltd	amreit142940migiii_ex32-1.htm
EX-32.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 906 - AmREIT Monthly Income & Growth Fund III Ltd	amreit142940migiii_ex32-2.htm
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 - AmREIT Monthly Income & Growth Fund III Ltd	amreit142940migiii_ex31-2.htm
EX-31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 - AmREIT Monthly Income & Growth Fund III Ltd	amreit142940migiii_ex31-1.htm

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



FORM 10-Q


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

For the quarterly period ended June 30, 2014


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

For the transition period from _________ to _________


Commission file number 000-52619

AmREIT MONTHLY INCOME & GROWTH FUND III, LTD.

(Exact Name of Registrant as Specified in Its Charter)


Texas		20-2964630
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

8 Greenway Plaza, Suite 1000
Houston, TX		77046
(Address of Principal Executive Offices)		(Zip Code)

(713) 850-1400

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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

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

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


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

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

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			PAGE

Definitions			ii
PART I - FINANCIAL INFORMATION
	ITEM 1.	Financial Statements.	1
	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	14
	ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk.	18
	ITEM 4.	Controls and Procedures.	18
PART II - OTHER INFORMATION
	ITEM 1.	Legal Proceedings.	18
	ITEM 1A.	Risk Factors.	18
	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	18
	ITEM 3.	Defaults Upon Senior Securities.	18
	ITEM 4.	Mine Safety Disclosures.	18
	ITEM 5.	Other Information.	18
	ITEM 6.	Exhibits.	18
SIGNATURES			19
EXHIBIT INDEX			20

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DEFINITIONS

As used in this Quarterly Report, the following abbreviations and terms have the meanings as listed below. Additionally, the terms “we,” “our,” “MIG III,” the “Partnership” and “us” refer collectively to AmREIT Monthly Income & Growth Fund III, Ltd. and its subsidiaries, including joint ventures, unless the context clearly indicates otherwise.


ABBREVIATION		DEFINITION

AmREIT		AmREIT, Inc., a Maryland corporation and parent of our General Partner.

Annual Report		Annual report on Form 10-K filed with the SEC for the year ended December 31, 2013.

AOCI		Accumulated Other Comprehensive Income (Loss).

ARIC		AmREIT Realty Investment Corporation and its consolidated subsidiaries, a wholly-owned taxable REIT subsidiary of AmREIT.

CEO		Chief Executive Officer.

CFO		Chief Financial Officer.

Exchange Act		Securities Exchange Act of 1934, as amended.

FASB		Financial Accounting Standards Board.

GAAP		U.S. generally accepted accounting principles.

General Partner		AmREIT Monthly Income & Growth III Corporation, a wholly-owned subsidiary of AmREIT, Inc.

GLA		Gross leasable area.

Limited Partners		Owners / holders of our Units.

MIG IV		AmREIT Monthly Income & Growth Fund IV, L.P., an affiliated entity.

NYSE		New York Stock Exchange.

Offering		Both the issuance and sale of our initial 80 Units pursuant to the terms of a private placement memorandum dated April 19, 2005, and subsequent sale of Units through October 31, 2006 (a total of 2,844 Units).

Partners		Collectively our General Partner and Limited Partners.

PTC/BSQ		PTC/BSQ Holding Company LLC.

REIT		Real Estate Investment Trust.

SEC		Securities and Exchange Commission.

Securities Act		Securities Act of 1933, as amended.

Units		Limited partnership units sold in our Offering.

Quarterly Report		Quarterly Report on Form 10-Q filed with the SEC for the three and six months ended June 30, 2014.

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PART I – FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS.

AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except for Unit data)


	June 30, 2014			December 31, 2013
	(unaudited)
ASSETS
Real estate investments at cost:
Land	$	4,760		$	11,089
Buildings		9,723			21,662
Tenant improvements		308			1,350
		14,791			34,101
Less accumulated depreciation and amortization		(2,631	)		(6,612	)
		12,160			27,489

Investment in non-consolidated entities		16,108			16,825
Net real estate investments		28,268			44,314

Cash and cash equivalents		7,987			1,203
Tenant and account receivables, net		409			566
Accounts receivable - related party		336			622
Notes receivable		100			106
Deferred costs, net		364			566
Other assets		269			418
TOTAL ASSETS	$	37,733		$	47,795

LIABILITIES AND PARTNERS’ CAPITAL
Liabilities:
Notes payable	$	9,163		$	24,587
Notes payable - related party		—			267
Accounts payable and other liabilities		538			994
Accounts payable - related party		142			24
Distributions payable		3,734			—
Security deposits		72			132
TOTAL LIABILITIES		13,649			26,004

Partners’ capital:
General partner		—			—
Limited partners, 2,833 Units outstanding at June 30, 2014, and December 31, 2013		24,141			21,846
AOCI of non-consolidated investment		(57	)		(55	)
TOTAL PARTNERS’ CAPITAL		24,084			21,791

TOTAL LIABILITIES AND PARTNERS’ CAPITAL	$	37,733		$	47,795

See Notes to Consolidated Financial Statements.

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AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the three and six months ended June 30, 2014 and 2013
(in thousands, except for per Unit data)
(unaudited)


	Three months ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
Revenues:
Rental income from operating leases	$	312		$	345		$	615		$	639
Total revenues		312			345			615			639

Expenses:
General and administrative		24			19			43			45
General and administrative - related party		88			99			175			190
Asset management fees - related party		89			58			178			117
Property expense		93			132			189			171
Property management fees - related party		12			12			25			24
Legal and professional		60			81			140			145
Depreciation and amortization		88			90			175			182
Total operating expenses		454			491			925			874

Operating loss		(142	)		(146	)		(310	)		(235	)

Other income (expense):
Interest and other income		—			—			—			1
Interest expense		(261	)		(188	)		(421	)		(405	)
Loss from non-consolidated entities		(150	)		(138	)		(226	)		(334	)
State income tax expense		—			—			—			(7	)
Total other income (expense), net		(411	)		(326	)		(647	)		(745	)

Income (loss) from continuing operations		(553	)		(472	)		(957	)		(980	)

Income from discontinued operations, net of taxes		76			63			188			92
Gain on sale of real estate acquired for investment		6,798			—			6,798			—
Income from discontinued operations		6,874			63			6,986			92

Net income (loss)		6,321			(409	)		6,029			(888	)

Net income (loss) per Unit
Income (loss) from continuing operations		(195.20	)		(166.61	)		(337.80	)		(345.92	)
Income from discontinued operations		2,426.40			22.24			2,465.94			32.47
Net income (loss) per Unit	$	2,231.20		$	(144.37	)	$	2,128.14		$	(313.45	)

Weighted average Units outstanding		2,833			2,833			2,833			2,833

Net income (loss)		6,321			(409	)		6,029			(888	)

Equity portion of change in fair value of derivative held by non-consolidated entity		(3	)		—			(2	)		—

Net comprehensive income (loss)	$	6,318		$	(409	)	$	6,027		$	(888	)

See Notes to Consolidated Financial Statements.

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AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL
For the six months ended June 30, 2014
(in thousands)
(unaudited)


	Partners’ Capital
	General Partner		Limited Partners			AOCI of non- consolidated investment			Total

Balance at December 31, 2013	$	—	$	21,846		$	(55	)	$	21,791

Net income (loss) ⁽¹⁾		—		6,029			—			6,029
Distributions		—		(3,734	)		—			(3,734	)
Equity portion of change in fair value of derivative held by non-consolidated entity		—		—			(2	)		(2	)

Balance at June 30, 2014	$	—	$	24,141		$	(57	)	$	24,084


	(1)	The allocation of net loss includes a curative allocation to decrease the General Partner capital account by $60 for the six months ended June 30, 2014. The cumulative curative allocation since inception of the Partnership is $340. The Partnership Agreement provides that no Partner shall be required to fund a deficit balance in their capital account.

See Notes to Consolidated Financial Statements.

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AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)


	Six months ended June 30,
	2014			2013
Cash flows from operating activities:
Net income (loss)	$	6,029		$	(888	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Gain on sale of real estate		(6,798	)		—
Equity in losses from non-consolidated entities		226			334
Depreciation and amortization		524			622
Bad debt recovery		—			(62	)
(Increase) decrease in tenant and accounts receivables		(25	)		5
Decrease in accounts receivable - related party		—			204
(Increase) decrease in other assets		(128	)		(1	)
Decrease in accounts payable and other liabilities		(648	)		81
Increase in accounts payable - related party		374			131
Increase in security deposits		4			—
Net cash provided by (used in) operating activities		(442	)		426

Cash flows from investing activities:
Improvements to real estate		(53	)		(148	)
Proceeds from property sale		22,700			—
Payments received on notes receivable		6			6
Repayments from related party		400			—
Investments in and advances to non-consolidated entities		(104	)		(318	)
Distributions from non-consolidated entities		517			2,137
Net cash provided by (used in) investing activities		23,466			1,677

Cash flows from financing activities:
Payments on notes payable		(15,424	)		(86	)
Payments on notes payable - related party		(550	)		(2,250	)
Loan modification costs		(266	)		—
Net cash provided by (used in) financing activities		(16,240	)		(2,336	)

Net increase (decrease) in cash and cash equivalents		6,784			(233	)
Cash and cash equivalents, beginning of period		1,203			3,170
Cash and cash equivalents, end of period	$	7,987		$	2,937

Supplemental schedule of cash flow information:

Cash paid during the period for interest	$	869		$	525
Cash paid during the period for taxes	$	20		$	30

Supplemental schedule of noncash investing and financing activities:

Distributions declared, but unpaid at June 30, 2014	$	3,734		$	—

Reclassification from accounts payable - related party to notes payable - related party	$	283		$	191

Construction fees included in accounts payable	$	28		$	107

Reclass fom tenant and accounts receivable to notes receivable	$	—		$	16

See Notes to Consolidated Financial Statements.

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AmREIT MONTHLY INCOME & GROWTH FUND III, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2014
(unaudited)


1.	DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS

General

We are a Texas limited partnership formed on April 19, 2005 to acquire, develop and operate, directly or indirectly through joint venture arrangements, a portfolio of commercial real estate consisting primarily of multi-tenant shopping centers and mixed-use developments. Our General Partner is a subsidiary of AmREIT, an SEC reporting, Maryland corporation that is publicly traded on the NYSE and that has elected to be taxed as a REIT. As of June 30, 2014, our investments included one wholly-owned property comprised of approximately 43,000 square feet of GLA and six properties in which we own a non-controlling interest through joint ventures comprising approximately 985,000 square feet of GLA. A majority of our properties are located in highly populated, suburban communities in Texas.

Our operating period ended on October 31, 2012, and we have entered into our liquidation period. However, an orderly liquidation of all of our properties will likely take years for our General Partner to complete and wind up our operations. Because we have entered into our liquidation period, we will not invest in any new real estate without approval of our limited partners. Liquidation was not imminent as of June 30, 2014; accordingly, the financial statements are presented assuming we continue as a going concern.

Economic Conditions and Liquidity

Our results of operations and valuations of our real estate assets have been negatively impacted by overall economic conditions from the recent recession. Most of our retail properties were purchased prior to 2008 when retail real estate market prices were much higher, and our property valuations were negatively impacted by these market dynamics. The United States has experienced recent improvements in the general economy; however, it is difficult to determine if the improvements experienced in 2013 will continue through 2014 and into the future.

As of June 30, 2014, we have $8.0 million in cash on hand. On June 25, 2014, we sold our Lantern Lane property to AmREIT for $22.7 million, which resulted in net sales proceeds of approximately $7.4 million after repayment of the mortgage loan secured by the property. We retained approximately 50% of the net sales proceeds to fund the anticipated capital activities related to Casa Linda Shopping Center and 5433 Westheimer. We declared a distribution of approximately $3.7 million from the net sales proceeds to our Limited Partners, which we paid on July 23, 2014.

Our continuing short-term liquidity requirements consist primarily of operating expenses and other expenditures associated with our properties, regular debt service requirements and capital expenditures. We anticipate that our primary long-term liquidity requirements will include, but will not be limited to, operating expenses, making scheduled debt service payments, funding renovations, expansions, and other significant capital expenditures for our existing portfolio of properties including those of with our joint ventures.

On June 6, 2014, we modified our Westside Plaza debt agreement. The modification had the effect of deferring $1.3 million of accrued principal and interest payments until maturity and contains a provision that may result in forgiveness of all or a portion of our outstanding Note B debt obligation upon a sale or refinancing of the property. As part of the modification agreement, we paid $1.2 million, including a principal reduction and increases to escrow accounts, as well as loan modification and legal fees. See Note 5.

During 2012, we and MIG IV initiated a lease-up strategy at our Casa Linda property (a 50% joint venture between us and MIG IV). We expect to fund a total of approximately $1.5 million in capital expenditures representing our 50% share of a lease-up strategy at this property. The lease-up strategy includes certain tenant build-out and site improvements. As of June 30, 2014, the joint venture has incurred approximately $1.4 million of the planned capital expenditures. Additionally, the joint venture refinanced the $38.0 million mortgage on the property on December 27, 2013, with a four-year, non-recourse loan with the opportunity for an additional funding of approximately $4.5 million related to the potential acquisition of an adjacent property.

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Although no assurance can be given, we believe that we will be able to generate liquidity sufficient to continue to execute our strategic plan.

Strategic Plan

We plan to maximize the potential value of our real estate portfolio and then execute an orderly, but opportunistic liquidation. We plan to:


	•	Complete our development and redevelopment projects with a goal to stabilize these projects over the next 6-12 months. We believe that completing our development and redevelopment projects, including their lease-up and stabilization, will allow us to maximize the return on these properties upon sale. Our investments in 5433 Westheimer and PTC/BSQ represent our assets currently under development/redevelopment. See Note 4 for further discussion of redevelopment plans at each of these properties.

	•	Continue to operate our projects in a first-class manner with a goal to generate operating cash flow in order to re-commence distributions. We believe that the stabilization of our development and redevelopment properties, coupled with the continued and intense oversight of our properties will generate liquidity that could allow us to make distributions to our Limited Partners. With the sale of our Lantern Lane property, we made a distribution in July 2014. However, future distributions will most likely occur only from further sales of our real estate assets.

	•	Sell our properties opportunistically as the market continues to recover. Once a property is marketed for sale, it may take several months to receive offers and complete due diligence by both parties. Our General Partner continues to review market sales opportunities for our remaining operating properties, but believes that retail property valuations continue to be challenged, and, accordingly, that attractive sales opportunities may not exist in the near term for our other properties. When deciding whether or when to sell properties, our General Partner will consider factors such as potential appreciation of value, and timing of cash flows. As we have now entered the liquidation period, we will not be acquiring new real estate investments. We intend to complete our development and redevelopment projects and distribute net proceeds generated from property sales to our Limited Partners unless the General Partner has identified attractive acquisition opportunities and obtained a majority vote of the Limited Partners to re-invest such proceeds.

An orderly liquidation of all of our properties will take years for our General Partner to complete and wind up our operations. Because of challenging real estate market conditions, it is possible that investors may not recover all of their original investment.


2.	BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

Our financial records are maintained on the accrual basis of accounting whereby revenues are recognized when earned and expenses are recorded when incurred. The consolidated financial statements include our accounts as well as the accounts of any wholly- or majority-owned subsidiaries in which we have a controlling financial interest. Investments in joint ventures and partnerships where we have the ability to exercise significant influence but do not exercise financial and operating control are accounted for using the equity method (see Note 4). The significant accounting policies of our non-consolidated entities are consistent with those of our subsidiaries in which we have a controlling financial interest. As of June 30, 2014, we do not have any interests in variable interest entities. All significant inter-company accounts and transactions have been eliminated in consolidation.

The consolidated financial statements included in this Quarterly Report have been prepared pursuant to the rules and regulations of the SEC and are unaudited. In our opinion, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments consisted of normal recurring items. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted from these statements pursuant to the SEC rules and regulations and, accordingly, these financial statements should be read in conjunction with our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2013.

Use of Estimates

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

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Cash and Cash Equivalents

We consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consist of demand deposits at commercial banks and money market funds.

Revenue Recognition

Rental income from operating leases – We lease space to tenants under agreements with varying terms. Our leases are accounted for as operating leases, and, although certain leases of the properties provide for tenant occupancy during periods for which no rent is due and/or for changes 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 lessee takes possession of or controls the physical use of the leased asset. Generally, possession or control occurs on the lease commencement date. In cases where significant tenant improvements are made prior to lease commencement, the leased asset is considered to be the finished space, and revenue recognition therefore begins when the improvements are substantially complete. Revenue from tenant reimbursements of taxes, maintenance expenses and insurance is recognized in the period the related expense is recorded. Additionally, certain of our lease agreements contain provisions that grant additional rents based upon tenants’ sales volumes (contingent or percentage rent). Percentage rents are recognized when the tenants achieve the specified targets as defined in their lease agreements. Accrued rents are included in tenant and accounts receivable, net.

Redevelopment Properties

Expenditures related to the development of real estate are capitalized as part of construction in progress, which includes carrying charges, primarily interest, real estate taxes and loan acquisition costs, and direct and indirect development costs related to buildings under construction. The capitalization of such costs ceases at the earlier of completion of major construction or when the property, or any completed portion, becomes available for occupancy. We capitalize costs associated with pending acquisitions of raw land once the acquisition of the property is determined to be probable.

Acquired Properties and Acquired Intangibles

We account for acquisitions of operating real properties as business acquisitions, as we believe most operating real estate meets the definition of a “business” under GAAP. Accordingly, we allocate the purchase price of each acquired property to land, building and improvements, identifiable intangible assets and to the acquired liabilities based on their respective fair values. Identifiable intangibles include amounts allocated to acquired above and below market leases, the value of in-place leases and customer relationship value, if any. Intangibles related to in-place lease value and above and below-market leases are recorded as acquired lease intangibles and are amortized as an adjustment to rental revenue or amortization expense, as appropriate, over the remaining terms of the underlying leases. Below market leases include fixed-rate renewal periods where we believe the renewal is reasonably assured. Premiums or discounts on debt are amortized to interest expense over the remaining term of such debt. Costs related to acquiring operating properties are expensed as incurred.

Depreciation

Depreciation is computed using the straight-line method over an estimated useful life of up to 39 years for buildings and site improvements and the term of the lease for tenant improvements. We re-evaluate the useful lives of our buildings and improvements as warranted by changing conditions at our properties. As part of this re-evaluation, we may also consider whether such changing conditions indicate a potential impairment, and we perform an impairment analysis, as necessary, at the property level. In the case of a property redevelopment, we reassess the useful lives of specific buildings or other improvements to be demolished as part of that redevelopment once the redevelopment is probable of occurring.

Impairment

We review our properties for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets, including acquired lease intangibles and 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 residual value of the property, with the carrying value of the individual property. If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its fair value. Both the estimated undiscounted cash flow analysis and fair value determination are based upon various factors that require complex and subjective judgments to be made by management. For our multi-building retail centers, we consider the entire retail center as the asset group for purposes of our impairment analysis. We review our investments in non-consolidated entities for impairment based on a similar review of the properties held by the investee entity. No impairment charges were recognized during the six months ended June 30, 2014 or 2013.

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New Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers” that will supersede the existing revenue recognition guidance under GAAP. The accounting update states that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. It also establishes a five-step model that requires companies to exercise judgment when considering the terms of a contract and all relevant facts and circumstances. It is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. We are currently evaluating this accounting update and our existing revenue recognition policies to determine what impact, if any, this new guidance could have on our consolidated financial statements as well as what transition method we would utilize, if any, upon adoption.

In April 2014, the FASB issued Accounting Standards Update No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” Under the update, discontinued operations as defined as either 1) A component of and entity (or group of components) that (i) has been disposed of or meets the criteria to be classified as held-for-sale and (ii) represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results, or 2) is a business or nonprofit activity that on acquisition, meets the criteria to be classified as held-for-sale. The accounting update is effective on a prospective basis for disposals or assets meeting the definition as held-for-sale for accounting periods beginning on or after December 15, 2014. Early application is permitted, but only for those disposals that have not been reported in previously issued financial statements. We did not elect to early adopt this update. The results of operations from our Lantern Lane property sold on June 25, 2014 are shown as discontinued operations. See Note 3.

Subsequent Events

We identified no additional subsequent events as of the date of this filing that materially impacted our consolidated financial statements.

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3.	ASSET DISPOSITIONS AND DISCONTINUED OPERATIONS

On June 25, 2014, we sold our Lantern Lane property to AmREIT for $22.7 million, which generated net sales proceeds of approximately $7.4 million after repayment of the mortgage loan secured by the property. We have presented the operating results of this property as discontinued operations in the accompanying consolidated statements of comprehensive income (loss) for all periods presented. A summary of our discontinued operations for the periods presented is detailed below (amounts in thousands):


		Three Months Ended June 30,						Six Months Ended June 30,
		2014			2013			2014			2013
Revenues:
Rental income from operating leases	$	529		$	537		$	1,115		$	1,093
Total revenues		529			537			1,115			1,093

Expenses:
General and administrative		10			19			16			25
Property expense		156			148			324			308
Property management fees- related party		19			20			43			39
Legal and professional		1			2			2			4
Depreciation and amortization		156			164			311			335
Total operating expenses		342			353			696			711

Operating income		187			184			419			382

Other income (expense):
Interest and other income		—			—			1			1
Interest expense		(111	)		(121	)		(232	)		(291	)
Total other income (expense), net		(111	)		(121	)		(231	)		(290	)

Income from discontinued operations		76			63			188			92

Gain on sale of real estate acquired for investment		6,798			—			6,798			—
Income from discontinued operations	$	6,874		$	63		$	6,986		$	92


4.	INVESTMENTS IN NON-CONSOLIDATED ENTITIES

As of June 30, 2014, we have investments in five entities, PTC/BSQ Holding Company LLC, Casa Linda, Woodlake Pointe, and 5433 Westheimer, through which we owned an interest in six properties that are accounted for using the equity method of accounting due to our ability to exercise significant influence over them. Our investment balances as reported on our consolidated balance sheet are as follows ($ in thousands):


Investment	Ownership			June 30, 2014		December 31, 2013
PTC/BSQ		20	%	$	7,577	$	7,960
Casa Linda		50	%		2,950		3,104
Woodlake Pointe		30	%		2,962		3,014
5433 Westheimer		57.5	%		2,569		2,726
Woodlake Square		3	%		50		21
Total				$	16,108	$	16,825

PTC/BSQ - We own a 20% interest in PTC/BSQ Holding Company LLC, which owns three multi-tenant retail properties located in Plano, Texas with a combined GLA of 444,000 square feet. The remaining 80% is owned by an unaffiliated third party. We initiated a redevelopment in January 2012, which was substantially completed in the fourth quarter of 2013. As of June 30, 2014, approximately $11.6 million in redevelopment costs have been incurred out of a total expected cost of $11.9 million, including tenant improvements and leasing costs. Our PTC/BSQ joint venture refinanced its debt on June 28, 2013, increasing the total debt from $44.4 million to $54.0 million with an additional $4.5 million available for future capital improvements. The loan matures in June 2016 with two one-year extension options.

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PTC/BSQ Holding Company LLC has an interest rate swap with a notional amount of $54.0 million and a fixed rate of 0.6625% in order to manage the volatility inherent in its variable-rate mortgage. The interest rate swap was designated as a hedge for financial reporting purposes. Changes in fair value of derivatives that qualify as cash flow hedges are recognized in other comprehensive income. For the six months ended June 30, 2014, our portion of the decrease in fair value totaled $2,000 and is recorded as “equity portion of change in fair value of derivative held by non-consolidated entity” on our Consolidated Statements of Comprehensive Income (Loss).

Casa Linda - We own a 50% interest in AmREIT Casa Linda, LP, which owns a 325,000 square foot retail shopping center located in Dallas, Texas. The remaining 50% is owned by MIG IV, an affiliate of our General Partner. During 2012, we and MIG IV initiated a lease-up strategy at our Casa Linda property. We expect to fund a total of approximately $1.5 million in capital expenditures representing our 50% share of a lease-up strategy at this property. The lease-up strategy includes certain tenant build-out and site improvements. As of June 30, 2014, the joint venture has incurred approximately $1.4 million of the planned capital expenditures. The property is secured by a $38.0 million mortgage loan that was refinanced on December 27, 2013, with a four-year, non-recourse mortgage on the property that includes additional funding of approximately $4.5 million for the potential acquisition of an adjacent property. The mortgage matures in December 2017.

The mortgage bears interest at a variable rate, but includes an interest rate cap of 3% per annum. The interest rate cap was not designated as a hedge for financial reporting purposes, and our portion of the change in fair value is recognized in income (loss) from non-consolidated entities. For the six months ended June 30, 2014 and 2013, our portion of the decrease in fair value totaled $47,000 and $0, respectively, and is included in income (loss) from non-consolidated entities on our Consolidated Statements of Comprehensive Income (Loss).

Woodlake Pointe - We own a 30% interest in AmREIT Westheimer Gessner, LP, which owns Woodlake Pointe, a multi-tenant retail property located in Houston, Texas with a combined GLA of 82,120 square feet. The remaining 70% is owned by affiliated AmREIT entities, MIG IV (60%) and ARIC (10%). On September 30, 2013, our Woodlake Pointe joint venture sold a 45,000 square foot single-tenant building and land parcel at our Woodlake Pointe property for $12.0 million to an unrelated third party. The land and building were secured by a $6.6 million loan that was repaid in full with proceeds from the sale, and we received a distribution of $1.5 million in connection with this sale.

5433 Westheimer – We own a 57.5% interest in 5433 Westheimer, LP, which owns an office building with 134,000 square feet of GLA in Houston, Texas. The remaining 42.5% is owned by a third party, joint venture partner. The property is not consolidated in our financial statements as we and our joint venture partner share equally in decision-making rights. The property is secured with a five-year term loan in the amount of $8.7 million, which includes amounts to be funded in the form of construction draws for the redevelopment of the property. As of June 30, 2014, this loan had an outstanding balance of $8.2 million and matures in October 2017. We and our joint venture partner are joint and several guarantors of 25% of this debt, and we and our joint venture partner initiated a redevelopment plan, primarily in the form of building and site improvements that will allow for lease-up of the property at improved rental rates. As of June 30, 2014, approximately $10.2 million in redevelopment costs have been incurred out of a total expected cost of approximately $11.9 million (including lease-up costs).

Our 5433 joint venture is currently not in compliance with its debt service coverage ratio covenant and the lender may discontinue funding the remaining redevelopment draws provided for under the loan agreement. We do not believe that the joint venture has sufficient cash on hand to fund remaining development costs solely from its operating cash flows. The loan agreement between the lender and our joint venture requires that the lender be notified of any noncompliance. While we have not yet notified the lender, we expect to do so in the near term in connection with our plan to refinance this debt. Based upon current estimates of fair value, we believe that there is sufficient equity in the property that supports a successful refinancing of the debt and completing the redevelopment. In the near term, we may be required to help fund our portion of the remaining development through operating cash flows and potentially additional loans from AmREIT. While the lender could take possession of the property, we do not believe that they will elect to do so; however, all or a portion of our investment of $2.6 million is subject to risk of loss.

We also serve as a guarantor of this debt (see Note 5); however, we do not believe that we would be required to perform under the guarantee as we believe the fair value of the property exceeds the amount of the loan. Accordingly, we believe that our potential exposure is limited to our investment balance. While we believe that we will be able to successfully refinance the debt, we can provide no assurances that we will be able to do so, or under circumstances and timing that allow us to maximize the value of the property.

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Woodlake Square - We previously owned a 3% interest in the Woodlake Square property through a joint venture arrangement with affiliates of our General Partner, MIG IV (6% ownership interest), ARIC (1% ownership interest) and an unaffiliated third party institutional partner (the remaining 90% ownership interest). On September 18, 2013, VIF II/AmREIT Woodlake L.P. sold Woodlake Square to AmREIT for $41.6 million based on arms-length negotiations between AmREIT and our third party institutional partner that owned a 90% interest in the property. Our remaining interest at June 30, 2014 and December 31, 2013 represents undistributed sales proceeds as the joint venture winds up its operations.

Combined condensed financial information for our non-consolidated entities, at 100%, is summarized for the three and six months ended June 30, 2014 and 2013, as follows (amounts in thousands):


	Three months ended June 30,						Six months ended June 30,
	2014			2013			2014			2013
Revenue	$	4,160		$	4,983		$	8,587		$	9,709
Depreciation and amortization		1,553			1,740			3,187			3,458
Interest expense		992			1,250			1,959			2,492
Net income (loss)		(86	)		(51	)		(150	)		(242	)


5.	NOTES PAYABLE

Our outstanding consolidated debt to third party lenders as of June 30, 2014 and December 31, 2013 was as follows (amounts in thousands):


Notes payable	June 30, 2014		December 31, 2013
Lantern Lane	$	—	$	15,000
Westside Plaza- Note A		8,530		8,954
Westside Plaza- Note B		633		633
Total	$	9,163	$	24,587

During June 2014, the Lantern Lane note payable was repaid in connection with the sale of the property. See Note 3.

The Westside Plaza mortgage loan is secured by our real estate property. On June 6, 2014, we modified the Westside Plaza debt. We made a payment of approximately $1.2 million, which included a $424,000 principal reduction on the Note A balance, a $357,000 payment of principal and interest that was two months in arrears, a $100,000 loan modification fee, $166,000 of escrows related to property taxes, insurance, and anticipated future leasing costs escrow accounts, and $166,000 in other closing and legal fees.

Under the modified agreement, Note A payments are interest-only at 5.62% and Note B payments are deferred with no interest due until the debt is refinanced or the property is sold (a “capital event”). Upon the occurrence of a capital event, we and the lender will share evenly in any excess proceeds until Note B principal is repaid, after which we would receive all remaining proceeds. If the proceeds received after a capital event are not sufficient to repay any or all of Note B, the unpaid amount will be forgiven.

We also serve as guarantor on debt in the amount of $8.2 million, which relates to our 5433 Westheimer joint venture, of which we own 57.5%, and matures in 2017. See Note 4. While we serve as guarantor on this debt, we do not believe that we would be required to perform under the guarantee as we believe the fair value of the property exceeds the amount of the loan. Accordingly, we believe that our potential exposure is limited to our investment balance.

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6.	FAIR VALUE MEASUREMENTS

GAAP emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. GAAP requires the use of observable market data, when available, in making fair value measurements. Observable inputs are inputs that the market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of ours. When market data inputs are unobservable, we utilize inputs that we believe reflect our best estimate of the assumptions market participants would use in pricing the asset or liability. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement. As a basis for considering market participant assumptions in fair value measurements, GAAP establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified that are within Level 3 of the hierarchy). The three levels of inputs used to measure fair value are as follows:


	•	Level 1 Inputs – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Partnership has the ability to access.

	•	Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.

	•	Level 3 Inputs – Unobservable inputs for the asset or liability, which are typically based on the Partnership’s own assumptions, as there is little, if any, related market activity.

Our consolidated financial instruments consist of cash and cash equivalents, tenant and accounts receivable, accounts receivable – related party, notes receivable, notes payable, notes payable – related party, accounts payable – related party, and accounts payable and other liabilities. The carrying values of all of these financial instruments, except for our notes payable, are representative of the fair values due to the short-term nature of the instruments. In determining the fair value of our debt, we determine the appropriate treasury bill rate based on the remaining time to maturity for each of the debt instruments. We then add the appropriate yield spread to the treasury bill rate. The yield spread is a risk premium estimated by investors to account for credit risk involved in debt financing. The spread is typically estimated based on the property type and loan-to-value ratio of the debt instrument. The result is an estimate of the market interest rate a typical investor would expect to receive given the underlying subject asset (property type) and remaining time to maturity.

The fair value of our Note A payable was approximately $9.2 million and classified in Level 2 of the fair value hierarchy as of June 30, 2014. Subsequent to the modification of our notes payable for the Westside Plaza property, our Note B does not accrue interest and its payment is dependent upon the occurrence and amount of a capital event. See Note 5. Accordingly, we determined the fair value of our Note B payable of approximately $500,000 using internal estimates of potential proceeds in the event we were to sell the underlying property in the current market. Because the estimates used to determine fair value are not readily observable, we have classified the fair value of the Note B payable in Level 3 of the fair value hierarchy as of June 30, 2014. As of December 31, 2013, we estimated the fair value of our notes payable was $25.0 million and classified in Level 2 of the fair value hierarchy.


7.	CONCENTRATIONS

As of June 30, 2014, Westside Plaza was our sole consolidated property which comprised greater than 10% of our consolidated total assets. As of December 31, 2013, Westside Plaza and Lantern Lane each comprised greater than 10% of our consolidated total assets. Consistent with our strategy of investing in geographic areas that we know well, Westside Plaza is located in the Houston metropolitan area. Houston is Texas’ largest city and the fourth largest city in the United States.

Following are the base rents generated by our top five tenants during the three and six months ended June 30, 2014 and 2013 (amounts in thousands):


	For the three months ended June 30,				For the six months ended June 30,
Tenant	2014		2013		2014		2013
Trend Mall	$	97	$	95	$	191	$	190
Fadis Mediterranean Delight		35		35		70		70
Potbelly Sandwich Works		30		30		61		61
Cricket Communications		19		19		38		38
Bless Beauty		16		16		32		32
Totals	$	197	$	195	$	392	$	391

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8.	PARTNERS’ CAPITAL AND NON-CONTROLLING INTEREST

Distributions – As a result of the sale of our Lantern Lane property, we declared a distribution of $3.7 million to our Limited Partners, which we paid on July 23, 2014. Net cash flow, as defined in the partnership agreement, is distributed among the Limited Partners and the General Partner in the following manner:


	•	first - 99% to the Limited Partners and 1% to the General Partner until such time as the Limited Partners have received cumulative distributions from all sources (including monthly cash distributions during the operating stage of the Partnership) equal to 100% of their unreturned invested capital plus an amount equal to 10% per annum uncompounded on their invested capital;

	•	second - 100% to the General Partner until it has received cumulative distributions from all sources (other than with respect to its Limited Partner units it purchased) in an amount equal to 40% of the net cash flow paid to date to the Limited Partners in excess of their adjusted capital; and

	•	thereafter - 60% to the limited partners and 40% to the General Partner.


9.	RELATED PARTY TRANSACTIONS

We have no employees or offices. Certain of our affiliates receive fees for ongoing property management and administrative services. In the event that these companies are unable to provide us with the respective services, we would be required to find alternative providers of these services. The following table summarizes the amount of such compensation incurred by us during the three and six months ended June 30, 2014 and 2013 (amounts in thousands):


	Three months ended June 30,				Six months ended June 30,
Type of service	2014		2013		2014		2013
Asset management fees	$	89	$	58	$	178	$	117
Property management fees		31		32		68		63
Leasing costs		9		21		13		34
Interest expense - related party		1		29		5		88
Administrative costs reimbursements		88		99		175		190
	$	218	$	239	$	439	$	492

						June 30, 2014		December 31, 2013
Notes payable - related party ⁽¹⁾					$	—	$	267


	(1)	Amounts accrue interest monthly at 2.8%.

In addition to the above fees incurred by us, the non-consolidated entities, in which we have investments, pay property management and leasing fees to one of our affiliated entities. During the six months ended June 30, 2014 and 2013, such fees totaled $617,000 and $536,000, respectively. For more information, see Note 4 regarding investments in non-consolidated entities.

On June 25, 2014, we sold our Lantern Lane property to our General Partner, AmREIT. See Note 3.


10.	COMMITMENTS AND CONTINGENCIES

Litigation - In the ordinary course of business, we may become subject to litigation or claims. There are no material legal proceedings known to be contemplated against us.

Environmental matters - In connection with the ownership and operation of real estate, we may be potentially liable for costs and damages related to environmental matters. In particular, we are subject to numerous environmental laws and regulations as they apply to real estate pertaining to chemicals used by the dry cleaning industry, the existence of asbestos in older shopping centers, and underground petroleum storage tanks. We are not aware of any pending environmental proceedings with respect to our properties that would have a material adverse effect on our consolidated financial statements.

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

The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto.

Certain information presented in this Quarterly Report constitutes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Although we believe that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, our actual results could differ materially from those set forth in the forward-looking statements. Certain factors that might cause such a difference include, but are not limited to, the following: changes in general economic conditions, changes in real estate market conditions, continued availability of proceeds from our debt or equity capital, our ability to locate suitable tenants for our properties, the ability of tenants to make payments under their respective leases, timing of development starts and sales of properties, the ability to meet development and redevelopment schedules and other risks, uncertainties and assumptions. Any forward-looking statement speaks only as of the date on which it was made, and we undertake no duty or obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

OVERVIEW

We are a Texas limited partnership formed to acquire, develop and operate, directly or indirectly through joint venture arrangements, commercial real estate consisting primarily of single-tenant and multi-tenant retail properties. Our Units are not currently listed on a securities exchange, and there currently is no established public trading market for our Units. We do not intend to list our Units on a securities exchange in the future.

Our General Partner is a Texas corporation and wholly-owned subsidiary of AmREIT, an SEC reporting Maryland corporation that is publicly traded on the NYSE and has elected to be taxed as a REIT. Our General Partner has the exclusive right to manage our business and affairs on a day-to-day basis pursuant to our limited partnership agreement. The Limited Partners have the right to remove and replace our General Partner, with or without cause, by a vote of the Limited Partners owning a majority of the outstanding Units (excluding any Units held by our General Partner). Our General Partner is responsible for all of our investment decisions, including decisions relating to the properties to be developed, the method and timing of financing or refinancing the properties, the selection of tenants, the terms of the leases, the method and timing of the sale of the properties and the reinvestment of net sales proceeds. Our General Partner utilizes the services of AmREIT and its affiliates in performing its duties under our limited partnership agreement.

As of June 30, 2014, our investments included one wholly-owned property comprised of approximately 43,000 square feet of GLA and six properties in which we own a non-controlling interest through joint ventures comprising approximately 985,000 square feet of GLA. A majority of our properties are located in highly populated, suburban communities in Texas. Substantially all of our revenue is derived from rental income from these properties, primarily from net leasing arrangements, where most of the operating expenses of the properties are absorbed by our tenants. As a result, our operating results and cash flows are primarily influenced by rental income from our properties and interest expense on our property acquisition indebtedness. Rental income accounted for 100% of our total revenue during the six months ended June 30, 2014 and 2013. As of June 30, 2014, our properties had an average occupancy of approximately 83.5%.

On June 25, 2014, we sold our Lantern Lane property to AmREIT for $22.7 million, which resulted in net sales proceeds of approximately $7.4 million after repayment of the mortgage loan secured by the property. We retained approximately 50% of the net sales proceeds to fund the anticipated capital activities related to Casa Linda Shopping Center and 5433 Westheimer. We declared a distribution of approximately $3.73 million from the net sales proceeds to our Limited Partners, which we paid on July 23, 2014.

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We have created a strategic plan to maximize the potential value of our real estate portfolio and execute an orderly, but opportunistic liquidation. The components of this strategic plan are as follows:


	•	Complete our development and redevelopment projects with a goal to stabilize these projects over the next 6-12 months. We believe that completing our development and redevelopment projects, including their lease-up and stabilization, will allow us to maximize the return on these properties upon sale. Our investments in 5433 Westheimer and PTC/BSQ represent our assets currently under development/redevelopment. See Note 4 of the Notes to Consolidated Financial Statements for further discussion of redevelopment plans at each of these properties.

	•	Continue to operate our projects in a first-class manner with a goal to generate operating cash flow in order to re-commence distributions. We believe that the stabilization of our development and redevelopment properties, coupled with the continued and intense oversight of our properties will generate liquidity that could allow us to make distributions to our Limited Partners. With the sale of our Lantern Lane property, we made a distribution in July 2014. However, future distributions will most likely occur only from further sales of our real estate assets.

	•	Sell our properties opportunistically as the market continues to recover. Once a property is marketed for sale, it may take several months to receive offers and complete due diligence by both parties. Our General Partner continues to review market sales opportunities for our remaining operating properties, but believes that retail property valuations continue to be challenged, and, accordingly, that attractive sales opportunities may not exist in the near term for our other properties. When deciding whether or when to sell properties, our General Partner will consider factors such as potential appreciation of value, and timing of cash flows. As we have now entered the liquidation period, we will not be acquiring new real estate investments. We intend to complete our development and redevelopment projects and distribute net proceeds generated from property sales to our Limited Partners unless the General Partner has identified attractive acquisition opportunities and obtained a majority vote of the Limited Partners to re-invest such proceeds.

Although no assurance can be given, we believe that we will be able to generate liquidity sufficient to continue to execute or strategic plan.

RESULTS OF OPERATIONS

Below is a discussion of our results of operations for the three and six months ended June 30, 2014, as compared to the same period in 2013.

Comparison of the Three Months Ended June 30, 2014, to the Three Months Ended June 30, 2013

Revenues. Revenues decreased approximately $33,000 for the three months ended June 30, 2014, as compared to the same period in 2013. This decrease is due to lower recovery income in 2014 due to lower property expenses incurred during the second quarter of 2014.

Asset management fees – related party. Asset management fees – related party increased approximately $31,000 for the three months ended June 30, 2014, as compared to the same period in 2013. Our asset management fees are calculated based upon the average net value of our assets, which increased as compared to the same period in 2013.

Property Expense. Property expense decreased $39,000 during the six months ended June 30, 2014 as compared to the same period during 2013. The increase is driven by higher repair costs incurred in 2013 as compared to 2014, including sprinkler repairs of $25,000 and electrical repairs of $11,000.

Interest Expense. Interest expense increased $73,000 for the three months ended June 30, 2014 as compared to the same period in 2013. This increase is due to additional interest paid as part of the Westside Plaza loan modification. See Note 5 of the Notes to Consolidated Financial Statements.

Gain on sale of real estate acquired for investment. Gain on sale of real estate acquired for investment increased approximately $6.8 million for the three months ended June 30, 2014, as compared to the same period in 2013. The entire increase is attributable to the gain recorded upon the sale of Lantern Lane in June 2014.

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Comparison of the Six Months Ended June 30, 2014, to the Six Months Ended June 30, 2013

Asset management fees – related party. Asset management fees – related party increased approximately $61,000 for the six months ended June 30, 2014, as compared to the same period in 2013. Our asset management fees are calculated based upon the average net value of our assets, which increased as compared to the same period 2013.

Income (loss) from non-consolidated entities. Loss from non-consolidated entities decreased $108,000 for the six months ended June 30, 2014 as compared to the same period in 2013. The resulting decrease in loss is primarily related to improved occupancy at our properties which drove improved operating performance at PTC/BSQ, Casa Linda and 5433 Westheimer as compared to the comparable period in 2013.

Gain on sale of real estate acquired for investment. Gain on sale of real estate acquired for investment increased approximately $6.8 million for the six months ended June 30, 2014, as compared to the same period in 2013. The entire increase is attributable to the gain recorded upon the sale of Lantern Lane in June 2014.

LIQUIDITY AND CAPITAL RESOURCES

On June 6, 2014, we modified our Westside Plaza debt agreement. The modification had the effect of deferring $1.3 million of accrued principal and interest payments until maturity and contains a provision that may result in forgiveness of all or a portion of our outstanding Note B debt obligation upon a sale or refinancing of the property. As part of the modification agreement, we paid $1.2 million, including a principal reduction, increases to escrow accounts, as well as loan modification and legal fees. See Note 5 of the Notes to Consolidated Financial Statements.

Although no assurance can be given, we believe that we will be able to generate liquidity sufficient to continue to execute our strategic plan.

Market Conditions

Our operations are sensitive to changes in overall economic conditions that impact our tenants, including, market and economic challenges experienced by the U.S. economy, the real estate industry or within our geographic markets where our properties are located. Most of our retail properties were purchased prior to 2008 when retail real estate market prices were much higher, and our property valuations were negatively impacted by these market dynamics. The U.S. economy has improved from the recent severe recession; however, should recessionary conditions return, such conditions could prevent us from realizing growth or maintaining the value of our properties. Even if such conditions do not impact us directly, such conditions could adversely affect our tenants.

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While it is difficult to determine the breadth and duration of financial market problems and the many ways in which they may affect our tenants and our business, a general reduction in the level of tenant leasing or shifts in tenant leasing practices could adversely affect our business, financial condition, liquidity, results of operations, our redevelopment projects and future property dispositions. Additionally, if credit markets and/or debt or equity capital markets contract, our ability to obtain financing on terms and conditions that we find acceptable, or at all, may be limited, which could reduce our ability to refinance existing debt and increase our future interest expense.

Cash Flow Activities for the Six Months Ended June 30, 2014 and 2013

Cash flows provided by (used in) operating activities, investing activities and financing activities during the six months ended June 30, 2014 and 2013, are as follows (in thousands):


	Six months ended June 30,
	2014			2013
Operating activities	$	(442	)	$	426
Investing activities		23,466			1,677
Financing activities		(16,240	)		(2,336	)

Net cash flows used in operating activities increased by $868,000 during the six months ended June 30, 2014, as compared to the same period in 2013. This increase is primarily due to decreased receipts of accounts receivable – related party and increased payments of liabilities compared to the same period in 2013.

Net cash flows provided by investing activities increased by $21.8 million during the six months ended June 30, 2014, as compared to the same period in 2013. This increase in cash inflows is primarily due to the sale of Lantern Lane ($22.7 million) as well as the $490,000 distribution that we received from our PTC/BSQ joint venture and receipt of $400,000 in repayments from Casa Linda, which MIG III had advanced to the property in the fourth quarter of 2013 for the payment of property taxes. This increase was partially offset by a $1.9 million distribution in 2013 from our PTC/BSQ joint venture.

Net cash flows used in financing activities increased by $13.9 million for the six months ended June 30, 2014, as compared to the same period in 2013. This increase was primarily due to repayment of the Lantern Lane note payable upon sale of the property ($14.9 million); partially offset by a decrease in payments made during the period on notes payable – related party.

OFF BALANCE SHEET ARRANGEMENTS

We also serve as guarantor on debt in the amount of $8.2 million, which relates to our 5433 Westheimer joint venture, of which we own 57.5%, and matures in 2017. See Note 4 of the Notes to Consolidated Financial Statements. While we serve as guarantor on this debt, we do not believe that we would be required to perform under the guarantee as we believe the fair value of the property exceeds the amount of the loan. Accordingly, we believe that our potential exposure is limited to our investment balance.

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ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.


ITEM 4.	CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

Under the supervision and with the participation of our General Partner’s CEO and CFO, our General Partner’s management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Exchange Act) as of June 30, 2014. Based on that evaluation, our General Partner’s CEO and CFO concluded that, as of June 30, 2014, our disclosure controls and procedures were effective in causing material information relating to us to be recorded, processed, summarized and reported by management on a timely basis and to ensure the quality and timeliness of our public disclosures in accordance with SEC disclosure obligations.

Changes in Internal Controls Over Financial Reporting

There has been no change to our internal control over financial reporting during the quarter ended June 30, 2014, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS.

In the ordinary course of business, we may become subject to litigation or claims. Neither we nor our properties are the subject of any material pending legal proceeding, nor are we aware of any legal proceeding that a government authority is contemplating against us.


ITEM 1A.	RISK FACTORS.

Not applicable.

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.	MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5.	OTHER INFORMATION.

None.

ITEM 6.	EXHIBITS.

The exhibits listed on the accompanying Exhibit Index are filed, furnished, or incorporated by reference (as stated therein) as part of this Quarterly Report.

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SIGNATURES

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


	AmREIT Monthly Income & Growth Fund III, Ltd.

	By:	AmREIT Monthly Income & Growth III Corporation, its General Partner

Date: August 13, 2014	By:	/s/ H. Kerr Taylor
		H. Kerr Taylor
		President, Chief Executive Officer, and Director

Date: August 13, 2014	By:	/s/ Chad C. Braun
		Chad C. Braun
		Executive Vice President, Chief Financial Officer, Chief Operating Officer, Treasurer and Secretary

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EXHIBIT INDEX


Exhibit 3.1	Certificate of Limited Partnership of AmREIT Monthly Income & Growth Fund III, Ltd., dated April 19, 2005 (incorporated herein by reference from Exhibit 3.1 to the Partnership’s Registration Statement on Form 10-SB dated April 30, 2007).

Exhibit 3.2	Agreement of Limited Partnership of AmREIT Monthly & Income Growth Fund III, Ltd., dated April 19, 2005 (incorporated herein by reference from Exhibit 3.2 to the Partnership’s Registration Statement on Form 10-SB dated April 30, 2007).

Exhibit 10.1	Omnibus Amendment to Westside Plaza Loan Documents.

Exhibit 31.1	Certification of the Chief Executive Officer of the Partnership’s General Partner pursuant to Exchange Act Rule 13a-14(a) (filed herewith).

Exhibit 31.2	Certification of the Chief Financial Officer of the Partnership’s General Partner pursuant to Exchange Act Rule 13a-14(a) (filed herewith).

Exhibit 32.1	Certification of the Chief Executive Officer of the Partnership’s General Partner pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

Exhibit 32.2	Certification of the Chief Financial Officer of the Partnership’s General Partner pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

Exhibit 101.INS	XBRL Instance Document*

Exhibit 101.SCH	XBRL Taxonomy Extension Schema Document*

Exhibit 101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document*

Exhibit 101.LAB	XBRL Taxonomy Extension Label Linkbase Document*

Exhibit 101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document*

Exhibit 101.DEF	XBRL Taxonomy Extension Definition Linkbase Document*


	*	Attached as Exhibit 101 to this Quarterly Report on Form 10-Q are the following materials, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets as of June 30, 2014 (unaudited) and December 31, 2013, (ii) the Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2014 and 2013 (unaudited), (iii) the Consolidated Statements of Partners’ Capital for the six months ended June 30, 2014 (unaudited), (iv) the Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013 (unaudited) and (v) the Notes to the Consolidated Financial Statements (unaudited).

AmREIT Monthly Income & Growth Fund III Ltd - FORM 10-Q - August 13, 2014

Attached files

AmREIT Monthly Income & Growth Fund III Ltd Reports