UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
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| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2007
or
For the fiscal year ended December 31, 2005
or
o |
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period fromto
For the transition period from to
Commission file number: 333-121238000-52566
CORNERSTONE CORE PROPERTIES REIT, INC.
(Exact name of registrant as specified in its charter)
Maryland |
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(State or other jurisdiction |
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1920 Main Street, Suite 400, Irvine, California 92614
(Address of Principal Executive Offices)
949-852-1007
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address And Former Fiscal Year, If Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class: |
| |
| None |
Securities registered pursuant to Section 12(g) of the Act:None
Title of Each Class: |
Common Stock, $0.01 par value per share |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ýx
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ýx
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 ýx No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ýo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filed.smaller reporting company. See definitiondefinitions of “accelerated filer and“large accelerated filer”, “and large 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 | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes o No ýx
As of June 30, 20052007 (the last business day of the registrant’s second fiscal quarter), there were no7,607,378 shares of common stock held by non-affiliates of the registrant.registrant having an aggregate market value of $60,752,466.
As of March 17, 2006,7, 2008, there were 250,94811,039,484 shares of common stock of Cornerstone Core Properties REIT, Inc. outstanding. The Registrant incorporates by reference portions of its Definitive Proxy Statement for the 2008 Annual Meeting of Stockholders, which is expected to be filed no later than April 29, 2008, into Part III of this Form 10-K to the extent stated herein.
CORNERSTONE CORE PROPERTIES REIT, INC.
(A Maryland Corporation)
TABLE OF CONTENTS
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SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally are identified by the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results to differ materially from the forward-looking statements. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled “Risk Factors” in Item 1A of this report. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
Our Company
Cornerstone Core Properties REIT, Inc., a Maryland corporation, was formed on October 22, 2004 for the purpose of engaging in the business of investing in and owning commercial real estate. We have qualified, and intend to continue to qualify, as a real estate investment trust (REIT) for federal tax purposes commencing with our taxable year ending December 31, 2006.purposes.
We conductare structured as an umbrella partnership REIT, referred to as an “UPREIT,” under which substantially all of our principalcurrent and future business is, and plan to own propertieswill be, conducted through our operating partnership,a majority owned subsidiary, Cornerstone Operating Partnership, L.P., a Delaware limited partnership, formed on November 30, 2004. We are the sole general partner of the operating partnership and have control over its affairs. On July 15, 2005, our advisor purchased a 99% limited partnership interest in the operating partnership for $200,000. As used in this report, “we,” “us” and “our” refer to Cornerstone Core Properties REIT, Inc. and its consolidated subsidiarysubsidiaries except where the context otherwise requires.
Our advisor is Cornerstone Realty Advisors, LLC, a newly formedDelaware limited liability company.company and an affiliate of ours. Some of our directors are also directors of our advisor and all of our officers are also officers of our advisor. Our advisor has contractual and fiduciary responsibilities to us and our stockholders. Under the terms of the advisory agreement, our advisor will use commercially reasonable efforts to present to us investment opportunities and to provide a continuing and suitable investment program consistent with the investment policies and objectives adopted by our board of directors. Our advisor will beis responsible for managing our affairs on a day-to-day basis and for identifying and making property acquisitions on our behalf. Currently, there are no employees of Cornerstone Core Properties REIT, Inc. and its subsidiaries. All management and administrative personnel responsible for conducting our business are currently employed by our advisor and its affiliates.
From our formation through the end of the year ended December 31, 2005, our activities consisted solely of organizational activities, including preparing for and launching our initial public offering. We did not accept any subscriptions for shares inoffering (the “Offering”). On January 13, 2006, we commenced our initial public offering until January 2006. Accordingly, asoffer and retained Pacific Cornerstone Capital, Inc. (“PCC”), an affiliate of the endadvisor, to serve as the dealer manager for the Offering. As of December 31, 2007, excluding shares issued under the distribution reinvestment plan, approximately 9.7 million shares of our fiscal year, wecommon stock had neither purchased nor contracted to purchase any interestsbeen sold in any real properties.the Offering for aggregate gross proceeds of approximately $77.7 million.
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Investment Objectives
Our investment objectives are to:
•· preserve stockholder capital by owning and operating real estate on an all-cash basis with no permanent financing;
•· purchase investment grade properties with the potential for capital appreciation to our stockholders;
•· purchase income-producing properties which will allow us to pay cash distributions to our stockholders at least quarterly, if not more frequently; and
•· provide liquidity to our stockholders within the shortest reasonable time necessary to accomplish the above objectives.
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Within five years from the closing of our initial public offering, our board of directors will take one or more of the following actions to provide enhanced liquidity for our stockholders:
•· modify our stock repurchase program to allow us to use proceeds from the sale of our properties to redeem shares;
•· list our stock for trading on a national securities exchange or the Nasdaq NationalGlobal Market;
•· seek stockholder approval to begin an orderly liquidation of our assets and distribute the available proceeds of such sales to our stockholders; or
•· seek stockholder approval of another liquidity event such as a sale of our assets to or a merger with another entity.
Investment Strategy
Large institutional investors have proven how to build a successful real estate portfolio. They generally start with a foundation of “core” holdings. “Core” holdings are generally existing, high quality properties owned “all-cash” free and clear of debt. We believe that “core” holdings are necessary to help investors build the base of their investment portfolio. That is why our primary investment focus is to acquire investment real estate “all cash” with no permanent financing.
All cash real estate investments add a layer of safety to conservative real estate investment which we believe would be difficult to match by any other strategy. By owning and operating properties on an “all-cash” basis, risk of foreclosure of mortgage debt is substantially eliminated. Following acquisition of “core” real property investments, many large institutional investors then make “core plus,” “valued added” and “opportunistic” real property investments each of which has increasing levels of debt, risk and yield.
Acquisition Policies
Primary Investment Focus
We expect to use substantially all of the net proceeds from our initial public offering to invest in investment grade real estate including multi-tenant industrial properties that are:
•· owned and operated on an all-cash basis with no permanent financing;
•· high-quality, existing, and currently producing income;
•· leased to a diversified tenant base; and
•· leased with overall shorter term operating type leases, allowing for annual rental increases and greater potential for capital growth.
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We intend to seek potential property acquisitions meeting the above criteria that are located in major metropolitan markets throughout the United States. Among the most important criteria we expect to use in evaluating the markets in which we purchase properties are:
•· high population;
•· historically high levels of tenant demand and lower historic investment volatility for type of property being acquired;
•· high historical and projected employment growth;
•· stable household income and general economic stability;
•· a scarcity of land for new competitive properties; and
•· sound real estate fundamentals, such as high occupancy rates and strong rent rate potential.
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The markets in which we invest may not meet all of these criteria and the relative importance that we assign to any one or more of these criteria may differ from market to market or change as general economic and real estate market conditions evolve. We may also consider additional important criteria in the future.
Multi-tenant industrial properties generally offer a combination of both warehouse and office space adaptable to a broad range of tenants and uses and typically cater to local and regional businesses. Multi-tenant industrial properties comprise one of the major segments of the commercial real estate market and tenants in these properties come from a broad spectrum of industries including light manufacturing, assembly, distribution, import/export, general contractors, telecommunications, general office/ warehouse, wholesale, service, high-tech and other fields. These properties diversify revenue by generating rental income from multiple businesses in a variety of industries instead of relying on one or two large tenants.
Other Potential Investments
While we intend to invest in multi-tenant industrial properties, we have the ability to invest in any type of real estate investment that we believe to be in the best interests of our stockholders, including other real estate funds or REITs, mortgage funds, mortgage loans and sale lease-backs. Furthermore, there are no restrictions on the number or size of properties we may purchase or on the amount or proportion of net proceeds of our initial public offering that we may invest in a single property. Although we can invest in any type of real estate investment, our charter restricts certain types of investments. We do not intend to make loans to other persons (other than mortgage loans permitted by our charter), to underwrite securities of other issuers or to engage in the purchase and sale of any types of investments other than real estate investments.
Investment Strategies and Decisions
Our advisor will make recommendations to our board of directors, which will approve or reject all proposed property acquisitions. Our independent directors will review our investment policies at least annually to determine whether these policies continue to be in the best interests of our stockholders.
We will purchase properties based on the decision of our board of directors after an examination and evaluation by our advisor of many factors including but not limited to the functionality of the property, the historical financial performance of the property, current market conditions for leasing space at the property, proposed purchase price, terms and conditions, potential cash flows and potential profitability of the property. The number of properties that we will purchase will depend on the amount of funds we raise in this offering and upon the price we pay for the properties we purchase. To identify properties that best fit our investment criteria, our advisor will study regional demographics and market conditions and work through local commercial real estate brokers.
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Leases and Tenant Improvements
The properties we acquire will generally have operating type leases. Operating type leases generally have either gross or modified gross payment terms. Under gross leases, the landlord pays all operating expenses of the property. Under modified gross leases, the tenant reimburses the landlord for certain operating expenses. A “net” lease, which is generally not considered an operating-type lease, provides that the tenant pays or reimburses the owner for all or substantially all property operating expenses. As landlord, we will generally have responsibility for certain capital repairs or replacement of specific structural components of a property such as the roof, heating and air conditioning systems, the interior floor or slab of the building as well as parking areas.
When a tenant at one of our properties vacates its space, it is likely that we will be required to expend funds for tenant improvements and refurbishments to the vacated space in order to attract new tenants. If we do not have adequate cash on hand to fund tenant improvements and refurbishments, we may use interim debt financing in order to fulfill our obligations under lease agreements with new tenants.
Joint Ventures and Other Arrangements
We may acquire some of our properties in joint ventures, some of which may be entered into with affiliates of our advisor. We may also enter into joint ventures, general partnerships, co-tenancies and other participations with real estate developers, owners and others for the purpose of owning and leasing real properties. Among other reasons, we may want to acquire properties through a joint venture with third parties or affiliates in order to diversify our portfolio of properties in terms of geographic region, property type and tenant industry group. Joint ventures may also allow us to acquire an interest in a property without requiring that we fund the entire purchase price. In addition, certain properties may be available to us only through joint ventures. In determining whether to recommend a particular joint venture, the advisor will evaluate the real property which such joint venture owns or is being formed to own under the same criteria described elsewhere in this prospectus. These entities may employ debt financing. (See “Borrowing Policies” below.)
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Borrowing Policies
We intend to be an all-cash REIT that will own and operate our properties with no permanent indebtedness. Generally, we will pay the entire purchase price of each property in cash or with equity securities, or a combination of each. Being an all-cash REIT mitigates the risks associated with mortgage debt, including the risk of default on the mortgage payments and a resulting foreclosure of a particular property.
During our initial public offering, we intend towill use temporary financing to facilitate acquisitions of properties in anticipation of receipt of offering proceeds. We will endeavor to repay anysuch debt financing promptly upon receipt of proceeds in the offering. To the extent sufficient proceeds from the offering are unavailable to repay such debt financing within a reasonable time as determined by our board of directors, we may sell properties or raise equity capital to repay the debt so that we will own our properties all-cash, with no permanent acquisition financing.
We may incur indebtedness for working capital requirements, tenant improvements, capital improvements, leasing commissions and to make distributions including but not limited to those necessary in order to maintain our qualification as a REIT for federal income tax purposes. We will endeavor to borrow funds on an unsecured basis but we may secure indebtedness with some or all of our portfolio of properties if a majority of our independent directors determine that it is in the best interests of us and our stockholders.
We may also acquire properties encumbered with existing financing which cannot be immediately repaid. To the extent we cannot repay the financing that encumbers these properties within a reasonable time as determined by a majority of our independent directors, we intend to sell properties or raise equity capital to pay debt in order to maintain our all-cash status or reserve an amount of cash sufficient to repay the loan to mitigate the risks of foreclosure.
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We may invest in joint venture entities that borrow funds or issue senior equity securities to acquire properties, in which case our equity interest in the joint venture would be junior to rights of the lender or preferred stockholders. In some cases, our advisor may control the joint venture.
Our charter limits our borrowings to the equivalent of 75% of our cost, before deducting depreciation or other non-cash reserves, of all our assets unless any excess borrowing is approved by a majority of our independent directors and is disclosed to our stockholders in our next quarterly report with an explanation from our independent directors of the justification for the excess borrowing. While there is no limitation on the amount we may borrow for the purchase of any single property, we intend to repay such debt within a reasonable time or raise additional equity capital or sell properties in order to maintain our all-cash status.
Competition
We compete with a considerable number of other real estate companies seeking to acquire and lease industrial space, most of which may have greater marketing and financial resources than we do. Principal factors of competition in our business are the quality of properties (including the design and condition of improvements), leasing terms (including rent and other charges and allowances for tenant improvements), attractiveness and convenience of location, the quality and breadth of tenant services provided and reputation as an owner and operator of quality office properties in the relevant market. Our ability to compete also depends on, among other factors, trends in the national and local economies, financial condition and operating results of current and prospective tenants, availability and cost of capital, construction and renovation costs, taxes, governmental regulations, legislation and population trends.
We may hold interests in properties located in the same geographic locations as other entities managed by our advisor or our advisor’s affiliates. Our properties may face competition in these geographic regions from such other properties owned, operated or managed by other entities managed our advisor or our advisor’s affiliates. Our advisor or its affiliates have interests that may vary from those we may have in such geographic markets.
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Government Regulations
Our company and the properties we expect to own are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. Federal laws such as the National Environmental Policy Act, the Comprehensive Environmental Response, Compensation, and Liability Act, the Resource Conservation and Recovery Act, the Federal Water Pollution Control Act, the Federal Clean Air Act, the Toxic Substances Control Act, the Emergency Planning and Community Right to Know Act and the Hazard Communication Act govern such matters as wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials and the remediation of contamination associated with disposals. Some of these laws and regulations impose joint and several liability on tenants, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. Compliance with these laws and any new or more stringent laws or regulations may require us to incur material expenditures. Future laws, ordinances or regulations may impose material environmental liability. In addition, there are various federal, state and local fire, health, life-safety and similar regulations with which we may be required to comply, and which may subject us to liability in the form of fines or damages for noncompliance.
Our properties may be affected by our tenants’ operations, the existing condition of land when we buy it, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties. The presence of hazardous substances, or the failure to properly remediate these substances, may make it difficult or impossible to sell or rent such property.
Under various federal, state and local environmental laws, ordinances and regulations, a current or previous real property owner or operator may be liable for the cost to remove or remediate hazardous or toxic substances on, under or in such property. These costs could be substantial. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which
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property may be used or businesses may be operated, and these restrictions may require substantial expenditures or prevent us from entering into leases with prospective tenants that may be impacted by such laws. Environmental laws provide for sanctions for noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles could be used to impose liability for release of and exposure to hazardous substances, including asbestos-containing materials into the air. Third parties may seek recovery from real property owners or operators for personal injury or property damage associated with exposure to released hazardous substances. The cost of defending against claims of liability, of complying with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could be substantial.
Significant TenantsAcquisition Activity
As ofAt December 31, 2005,2007, we owned eleven properties. All of these properties are consolidated into our accompanying consolidated financials statements and included in the properties summary as provided under “Item 2 Properties” referenced below.
We have not purchased anyacquired our properties accordingly, we have no significant tenants.to date with a combination of the proceeds from our ongoing initial public offering and debt incurred upon the acquisition of certain properties.
Employees
We have no employees and our executive officers are all employees of our advisor’s affiliates. Substantially all of our work is performed by employees of our advisor’s affiliates. We are dependent on our advisor and PCC for certain services that are essential to us, including the sale of shares in our ongoing initial public offering; the identification, evaluation, negotiation, purchase and disposition of properties; the management of the daily operations of our real estate portfolio; and other general and administrative responsibilities. In the event that these companies are unable to provide the respective services, we will be required to obtain such services from other sources.
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Available Information
Information about us is available on our website (http:// www.cornerstonerealestatefunds.com)www.crefunds.com). We make available, free of charge, on our Internet website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with the SEC. These materials are also available at no cost in print to any person who requests it by contacting our Investor Services Department at 1920 Main Street, Suite 400, Irvine, California 92614; telephone (877) 805-3333Our805-3333. Our filings with the SEC will be available to the public over the Internet at the SEC’s website at http://www.sec.gov. You may read and copy any filed document at the SEC’s public reference room in Washington, D.C. at 100 F Street, N.E., Room 1580, Washington D.C. Please call the SEC at (800) SEC-0330 for further information about the public reference rooms.
The risk factors described below are not the only ones we face, but do represent those risks and uncertainties that we believe are material to us. Additional risks and uncertainties not currently known to us or that we currently deem immaterial may also harm our business.
General
Our lack of priorlimited operating history makes it difficult for you to evaluate us.
We have noa limited operating history. The past performance of other real estate investment programs sponsored by affiliates of our advisor may not be indicative of the performance we will achieve. We were formed on October 22, 2004 in order to invest primarily in investment real estate. We have noacquired eleven properties as of the date of this report and generated limited income, cash flow, funds from operations or funds from which we canto make distributions to our shareholders. We have not acquired any properties. We may not be able to conduct business as we intend to.
Because there is no public trading market for our stock it will be difficult for stockholders to sell their stock. If stockholders do sell your stock, they will likely sell it at a substantial discount.
There is no current public market for our stock and there is no assurance that a public market will ever exist for our stock. Our charter contains restrictions on the ownership and transfer of our stock, and these restrictions may inhibit our stockholders’ ability to sell their stock. Our charter prevents any one person from owning more than 9.8% in number of shares or value, whichever is more restrictive, of the outstanding shares of any class or series of our stock unless exempted by our board of directors. Our charter also limits our stockholders’ ability to transfer their stock to prospective stockholders unless (i) they meet suitability standards regarding income or net worth and (ii) the transfer complies with minimum purchase requirements. We plan to adopt a stock repurchase program, but it will be limited in terms of the number of
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shares of stock that may be redeemed annually. Our board of directors may also limit, suspend or terminate our stock repurchase program at any time.
It may be difficult for our stockholders’stockholders to sell their stock promptly or at all. If our stockholders are able to sell shares of stock, they may only be able to sell them at a substantial discount from the price they paid. This may be the result, in part, of the fact that the amount of funds available for investment is expected to be reduced by sales commissions, dealer manager fees, organization and offering expenses, and acquisition fees and expenses. If our offering expenses are higher than we anticipate, we will have a smaller amount available for investment.
Competition with third parties for properties and other investments may result in our paying higher prices for properties, or impair our ability to sell our properties for an acceptable return, which could reduce our profitability.
We compete with many other entities engaged in real estate investment activities, including individuals, corporations, banks, insurance companies, other REITs, real estate limited partnerships, and other entities engaged in real estate investment activities, many of which have greater resources than we do. Some of these investors may enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies. In addition, the number of entities and the amount of funds competing for suitable investments may increase. Any such increase would result in increased demand for these assets and increased prices. If competitive pressures cause us to pay higher prices for properties, our ultimate profitability may be reduced and the value of our properties may not appreciate or may decrease significantly below the amount paid for such properties. At the time we elect to dispose of one or more of our properties, we will be in competition with sellers of similar properties to locate suitable purchasers, which may result in us receiving lower proceeds from the disposal or result in us not being able to dispose of the property due to the lack of an acceptable return.
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If we are unable to find or experience delays in finding suitable investments, we may experience a delay in the commencement of distributions and a lower rate of return to investors.
Our ability to achieve our investment objectives and to make distributions depends upon the performance of our advisor in the acquisition and operation of our investments and upon the performance of property managers and leasing agents in the management of our properties and identification of prospective tenants. We may be delayed in making investments in properties due to delays in the sale of our stock, delays in negotiating or obtaining the necessary purchase documentation for properties, delays in locating suitable investments or other factors. We cannot be sure that our advisor will be successful in obtaining suitable investments on financially attractive terms or that our investment objectives will be achieved. We may also make other real estate investments such as investments in publicly traded REITs, mortgage funds and other entities that make real estate investments. Until we make real estate investments, we will hold the proceeds from our initial public offering in an interest-bearing account or invest the proceeds in short-term, investment-grade securities. We expect the rates of return on these short-term investments to be substantially less than the returns we make on real estate investments. If we are unable to invest the proceeds from our initial public offering in properties or other real estate investments for an extended period of time, distributions to our stockholders may be delayed and may be lower and the value of our stockholders’ investment could be reduced.
If we do not raise substantial funds, we will be limited in the number and type of investments we may make, and our performance will fluctuate with the performance of the specific properties we acquire.
Our initial public offering is being made on a “best efforts” basis and no individual, firm or corporation has agreed to purchase any of our stock. The amount of proceeds we raise in our initial public offering may be substantially less than the amount we would need to achieve a broadly diversified property portfolio. If we are unable to raise substantially more than the minimum offering amount, we will make fewer investments resulting in less diversification in terms of the number of investments owned and the geographic regions in which our investments are located. In that case, the likelihood that any single property’s performance would materially reduce our overall profitability will increase. We are not limited in the number or size of our investments or the percentage of net proceeds we may dedicate to a single
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investment. In addition, any inability to raise substantial funds would increase our fixed operating expenses as a percentage of gross income, and our net income and the distributions we make to stockholders would be reduced.
We may not generate sufficient cash for distributions. The cash distributions our stockholders receive may be less frequent or lower in amount than expected.
If the rental revenues from the properties we own do not exceed our operational expenses, we may not be able to make cash distributions until such time as we sell a property. We currently expect to make distributions to our stockholders monthly, but may make distributions quarterly ifor not more frequently.at all. All expenses we incur in our operations, including payment of interest to temporarily finance properties acquisitions, are deducted from cash funds generated by operations prior to computing the amount of cash available to be paid as distributions to our stockholders. Our directors will determine the amount and timing of distributions. Our directors will consider all relevant factors, including the amount of cash available for distribution, capital expenditure and reserve requirements and general operational requirements. We cannot determine how long it may take to generate sufficient available cash flow to make distributions or that sufficient cash will be available to make distributions. We may borrow funds to enable us to make distributions. With no prior operations, we cannot predict the amount of distributions our stockholders may receive. We may be unable to pay or maintain cash distributions or increase distributions over time.
We have, and may in the future, pay distributions from sources other than cash provided from operations.
We declared distributions of approximately $3.2 million during the year ended December 31, 2007. Net cash used in operating activities during the same period was approximately $1.2 million. Because we did not have sufficient positive cash flow from operations and proceeds of borrowings were used to acquire properties during the year ended December 31, 2007, we paid these distributions using proceeds from our public offering. Until proceeds from this offering are invested and generating operating cash flow sufficient to make distributions to stockholders, we intend to pay all or a substantial portion of our distributions from the proceeds of our public offering or from borrowings in anticipation of future cash flow. To the extent that we use offering proceeds to fund distributions to stockholders, the amount of cash available for investment in properties will be reduced.
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If we borrow money to meet the REIT minimum distribution requirement or for other working capital needs, our expenses will increase, our net income will be reduced by the amount of interest we pay on the money we borrow and we will be obligated to repay the money we borrow from future earnings or by selling assets, which will decrease future distributions to stockholders.
If we fail for any reason to distribute at least 90% of our REIT taxable income, then we would not qualify for the favorable tax treatment accorded to REITs. It is possible that 90% of our income would exceed the cash we have available for distributions due to, among other things, differences in timing between the actual receipt of income and actual payment of deductible expenses and the inclusion/deduction of such income/expenses when determining our taxable income, nondeductible capital expenditures, the creation of reserves, the use of cash to purchase stock under our stock repurchase program, and required debt amortization payments. We may decide to borrow funds in order to meet the REIT minimum distribution requirements even if our management believes that the then prevailing market conditions generally are not favorable for such borrowings or that such borrowings would not be advisable in the absence of such tax considerations. Distributions made in excess of net income will constitute a return of capital to stockholders.
The inability of our advisor to retain or obtain key personnel, property managers and leasing agents could delay or hinder implementation of our investment strategies, which could impair our ability to make distributions.
Our success depends to a significant degree upon the contributions of Terry G. Roussel, the President and Chief Executive Officer of our advisor. Our advisor does not have an employment agreement with Mr. Roussel. If Mr. Roussel was to cease his affiliation with our advisor, our advisor may be unable to find a suitable replacement, and our operating results could suffer. We believe that our future success depends, in large part, upon our advisor’s, property managers’ and leasing agents’ ability to hire and retain highly skilled managerial, operational and marketing personnel. Competition for highly skilled personnel is intense, and our advisor and any property managers we retain may be unsuccessful in attracting and retaining such skilled personnel. If we lose or are unable to obtain the services of highly skilled personnel, property managers or leasing agents, our ability to implement our investment strategies could be delayed or hindered.
FINRA has commenced an investigation of our dealer manager which is in the preliminary stage. We cannot predict the outcome of the investigation. Some potential outcomes could adversely affect our ability to raise proceeds in this offering and the investigation itself could distract our management or the management of our advisor, either of which could increase the risk that you would suffer a loss on your investment.
Our advisor has informed us that the Financial Industry Regulatory Authority (“FINRA”) (formerly, the NASD) is conducting a non-public investigation of our affiliated dealer manager that is, we understand, focused on the private placements conducted by our dealer manager during the period from January 1, 2004 through October 31, 2007. The investigation is in the preliminary stage. FINRA’s correspondence requesting document production states, “This inquiry should not be construed as an indication that the Enforcement Department or its staff has determined that any violations of federal securities laws or NASD, NYSE or MSRB rules have occurred.” We have been advised that our dealer manager is responding to FINRA’s request for information and intends to continue to cooperate in the investigation.
Although we cannot, at this time, assess either the duration or the likely outcome or consequences of this investigation, FINRA has the authority to impose sanctions on our dealer manager that could adversely affect its effectiveness in that capacity. Due to our dependence on our dealer manager to raise funds in this offering, and due to the importance of substantial fundraising in order to invest in a diversified portfolio of assets and to reduce our fixed operating expenses as a percentage of gross income, any FINRA action that adversely affects our dealer manager’s ability to raise funds in this offering could also adversely affect the value of your investment. In addition, to the extent that the FINRA investigation distracts our management or the management of our advisor from pursuing our business plan, our results and the value of your investment could be adversely affected.
Risks Related to Conflicts of Interest
Our advisor will face conflicts of interest relating to the purchase and leasing of properties, and such conflicts may not be resolved in our favor, which could limit our investment opportunities and impair our ability to make distributions.
We rely on our advisor to identify suitable investment opportunities. We may be buying properties at the same time as other entities that are affiliated with or sponsored by our advisor. Other programs
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sponsored by our advisor or its affiliates also rely on our advisor for investment opportunities. Many investment opportunities would be suitable for us as well as other programs. Our advisor could direct attractive investment opportunities or tenants to other entities. Such events could result in our investing in properties that provide less attractive returns, thus reducing the level of dividendsdistributions that we may be able to pay to our stockholders.
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If we acquire properties from affiliates of our advisor, the price may be higher than we would pay if the transaction was the result of arm’s-length negotiations.
The prices we pay to affiliates of our advisor for our properties will be equal to the prices paid by them, plus the costs incurred by them relating to the acquisition and financing of the properties or if the price to us is in excess of such cost, substantial justification for such excess will exist and such excess will be reasonable and consistent with current market conditions as determined by a majority of our independent directors. Substantial justification for a higher price could result from improvements to a property by the affiliate of our advisor or increases in market value of the property during the period of time the property is owned by the affiliates of our advisor as evidenced by an appraisal of the property. These prices will not be the subject of arm’s-length negotiations, which could mean that the acquisitions may be on terms less favorable to us than those negotiated in an arm’s-length transaction. Even though we will use an independent third party appraiser to determine fair market value when acquiring properties from our advisor and its affiliates, we may pay more for particular properties than we would have in an arm’s-length transaction, which would reduce our cash available for investment in other properties or distribution to our stockholders.
We may purchase properties from persons with whom our advisor or its affiliates have prior business relationships and our advisor’s interest in preserving its relationship with these persons could result in us paying a higher price for the properties than we would otherwise pay.
We may have the opportunity to purchase properties from third parties including affiliates of our independent directors who have prior business relationships with our advisor or its affiliates. If we purchase properties from such third parties, our advisor may experience a conflict between our interests and its interest in preserving any ongoing business relationship with these sellers.
Our advisor will face conflicts of interest relating to joint ventures that we may form with affiliates of our advisor, which conflicts could result in a disproportionate benefit to the other venture partners at our expense.
We may enter into joint venture agreements with third parties (including entities that are affiliated with our advisor or our independent directors) for the acquisition or improvement of properties. Our advisor may have conflicts of interest in determining which program should enter into any particular joint venture agreement. The co-venturer may have economic or business interests or goals that are or may become inconsistent with our business interests or goals. In addition, our advisor may face a conflict in structuring the terms of the relationship between our interests and the interest of the affiliated co-venturer and in managing the joint venture. Since our advisor and its affiliates will control both the affiliated co-venturer and, to a certain extent, us, agreements and transactions between the co-venturers with respect to any such joint venture will not have the benefit of arm’s-length negotiation of the type normally conducted between unrelated co-venturers. Co-venturers may thus benefit to our detriment.
Our advisor and its affiliates receive commissions, fees and other compensation based upon the sale of our stock, our property acquisitions, the property we own and the sale of our properties and therefore our advisor and its affiliates may make recommendations to us that we buy, hold or sell property in order to increase their compensation. Our advisor will have considerable discretion with respect to the terms and timing of our acquisition, disposition and leasing transactions.
Our advisor and its affiliates receive commissions, fees and other compensation based upon the sale of our stock and based on our investments. Therefore, our advisor may recommend that we purchase properties that generate fees for our advisor, but are not necessarily the most suitable investment for our portfolio. In some instances our advisor and its affiliates may benefit by us retaining ownership of our
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assets, while our stockholders may be better served by sale or disposition. In other instances they may benefit by us selling the properties which may entitle our advisor to disposition fees and possible success-based sales fees. In addition, our advisor’s ability to receive asset management fees and reimbursements depends on our continued investment in properties and in other assets that generate fees to them. Therefore, the interest of our advisor and its affiliates in receiving fees may conflict with our interests.
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Our advisor and its affiliates, including our officers and some of our directors, will face conflicts of interest caused by compensation arrangements with us and other advisor-sponsored programs, which could result in actions that are not in the long-term best interests of our stockholders.
Our advisor and its affiliates will receive substantial fees from us. These fees could influence our advisor’s advice to us, as well as the judgment of the affiliates of our advisor who serve as our officers or directors. Among other matters, the compensation arrangements could affect their judgment with respect to:
•· property acquisitions from other advisor-sponsored programs, which might entitle our advisor to disposition fees and possible success-based sale fees in connection with its services for the seller;
•· whether and when we seek to list our common stock on a national securities exchange or the Nasdaq National Market, which listing could entitle our advisor to a success-based listing fee but could also adversely affect its sales efforts for other programs if the price at which our stock trades is lower than the price at which we offered stock to the public; and
•· whether and when we seek to sell the company or its assets, which sale could entitle our advisor to success-based fees but could also adversely affect its sales efforts for other programs if the sales price for the company or its assets resulted in proceeds less than the amount needed to preserve our stockholders’ capital.
Considerations relating to their compensation from other programs could result in decisions that are not in the best interests of our stockholders, which could hurt our ability to make distributions.
If the competing demands for the time of our advisor, its affiliates and our officers result in them spending insufficient time on our business, we may miss investment opportunities or have less efficient operations which could reduce our profitability and result in lower distributions to stockholders.
We do not have any employees. We rely on the employees of our advisor and its affiliates for the day-to-day operation of our business. We estimate that over the life of the company, our advisor and its affiliates will dedicate, on average, less than half of their time to our operations. The amount of time that our advisor and its affiliates spend on our business will vary from time to time and is expected to be more while we are raising money and acquiring properties. Our advisor and its affiliates, including our officers, have interests in other programs and engage in other business activities. As a result, they will have conflicts of interest in allocating their time between us and other programs and activities in which they are involved. Because these persons have competing interests on their time and resources, they may have conflicts of interest in allocating their time between our business and these other activities. During times of intense activity in other programs and ventures, they may devote less time and fewer resources to our business than are necessary or appropriate to manage our business. We expect that as our real estate activities expand, our advisor will attempt to hire additional employees who would devote substantially all of their time to our business. There is no assurance that our advisor will devote adequate time to our business. If our advisor suffers or is distracted by adverse financial or operational problems in connection with its operations unrelated to us, it may allocate less time and resources to our operations. If any of these things occur, the returns on our investments and our ability to make distributions to stockholders may suffer.
Our officers and some of our directors face conflicts of interest related to the positions they hold with our advisor and its affiliates which could hinder our ability to successfully implement our business strategy and to generate returns to our stockholders.
Our executive officers and some of our directors are also officers and directors of our advisor, our dealer manager and other affiliated entities. As a result, they owe fiduciary duties to these various entities
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and their stockholders and members, which fiduciary duties may from time to time conflict with the fiduciary duties that they owe to us and our stockholders. Their loyalties to these other entities could result in actions or inactions that are detrimental to our business, which could harm the implementation of our business strategy and our investment, property management and leasing opportunities. If we do not successfully implement our business strategy, we may be unable to generate cash needed to make distributions to our stockholders and to maintain or increase the value of our assets.
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Our board’s possible loyalties to existing advisor-sponsored programs (and possibly to future advisor-sponsored programs) could result in our board approving transactions that are not in our best interest and that reduce our net income and lower our distributions to stockholders.
Some of our directors are also directors of our advisor which is an affiliate of the managing member of another affiliate-sponsored program. The loyalties of those directors to the other affiliate-sponsored program may influence the judgment of our board when considering issues for us that may affect the other affiliate-sponsored program, such as the following:
•· We could enter into transactions with the other program, such as property sales or acquisitions, joint ventures or financing arrangements. Decisions of our board regarding the terms of those transactions may be influenced by our board’s loyalties to the other program.
•· A decision of our board regarding the timing of a debt or equity offering could be influenced by concerns that the offering would compete with an offering of the other program.
•· A decision of our board regarding the timing of property sales could be influenced by concerns that the sales would compete with those of the other program.
•· We could also face similar conflicts and some additional conflicts if our advisor or its affiliates sponsor additional REITs, assuming some of our directors are also directors of the additional REITs.
•· Our independent directors must evaluate the performance of our advisor with respect to whether our advisor is presenting to us our fair share of investment opportunities. If our advisor is not presenting a sufficient number of investment opportunities to us because it is presenting many opportunities to other advisor-sponsored entities or if our advisor is giving preferential treatment to other advisor-sponsored entities in this regard, our independent directors may need to enforce our rights under the terms of the advisory agreement or seek a new advisor.
If our advisor is unable to adequately fund our offering and organizational activities, we may sell fewer shares in our initial public offering, we may be unable to acquire a diversified portfolio of properties, our operating expenses may be a larger percentage of our revenue and our net income may be lower.
Our advisor is newly formed, has limited capitalization, has incurred losses since its inception and is continuing to incur losses. Our advisor must raise funds through the sale of its own debt or equity securities, or obtain financial support from its affiliates or its sole member, to obtain the cash necessary to provide these advances. Our advisor’s sole member is also dependent on raising funds to provide financial support to our advisor. There can be no assurance as to the amount or timing of our advisor’s receipt of funds. If our advisor’s financial circumstances reduce the amount of funds available to us for offering and organizational activities, we may not be able to raise as much money in this offering. Cornerstone Industrial Properties, LLC, the sole member of our advisor, has limited capitalization, has incurred significant losses since its inception and is continuing to incur significant losses.
There is no separate counsel for our affiliates and us, which could result in conflicts of interest and actions not in our stockholders’ best interests.
Preston Gates & Ellis LLP is counsel both to us and to our advisor and its affiliates, including Pacific Cornerstone Capital, Inc. As discussed above, there is a possibility that the interests of the various parties may conflict. If we do not obtain separate counsel when our interests conflict with those of our advisor and
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its affiliates, our counsel’s loyalties to our advisor and its affiliates could interfere with its independent professional judgment in considering alternatives that we should pursue, which could result in our pursuing courses of action that are not in our stockholders’ best interests.
Risks Related to Our Corporate Structure
A limit on the percentage of our securities a person may own may discourage a takeover or business combination, which could prevent our stockholders from realizing a premium price for their stock.
In order for us to qualify as a REIT, no more than 50% of our outstanding stock may be beneficially owned, directly or indirectly, by five or fewer individuals (including certain types of entities) at any time during the last half of each taxable year. To assure that we do not fail to qualify as a REIT under this test, our charter restricts direct or indirect ownership by one person or entity to no more than 9.8% in number of shares or value, whichever is more restrictive, of the outstanding shares of any class or series of our stock unless exempted by our board of directors. This restriction may have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price to our stockholders.
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Our charter permits our board of directors to issue stock with terms that may subordinate the rights of our common stockholders or discourage a third party from acquiring us in a manner that could result in a premium price to our stockholders.
Our board of directors may increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we have authority to issue and classify or reclassify any unissued common stock or preferred stock and establish the preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications and terms or conditions of redemption of any such stock. Our board of directors could authorize the issuance of preferred stock with terms and conditions that could have priority as to distributions and amounts payable upon liquidation over the rights of the holders of our common stock. Such preferred stock could also have the effect of delaying, deferring or preventing a change in control of us, including an extraordinary transaction (such as a merger, tender offer or sale of all or substantially all of our assets) that might provide a premium price to holders of our common stock.
The payment of the subordinated performance fee due upon termination, and the purchase of interests in our operating partnership held by our advisor and its affiliates as required in our advisory agreement, may discourage a takeover attempt that could have resulted in a premium price to our stockholders.
In the event of a merger in which we are not the surviving entity, and pursuant to which our advisory agreement is terminated, our advisor and its affiliates may require that we pay the subordinated performance fee due upon termination, and that we purchase all or a portion of the operating partnership units they hold at any time thereafter for cash, or our stock, as determined by the seller. The subordinated performance fee due upon termination ranges from a low of 5% if the sum of the appraised value of our assets minus our liabilities on the date the advisory agreement is terminated plus total dividendsdistributions (other than stock dividends)distributions) paid prior to termination of the advisory agreement exceeds the amount of invested capital plus annualized returns of 6%, to a high of 15% if the sum of the appraised value of our assets minus our liabilities plus all prior dividendsdistributions (other than stock dividends)distributions) exceeds the amount of invested capital plus annualized returns of 10% or more. This deterrence may limit the opportunity for stockholders to receive a premium for their stock that might otherwise exist if an investor attempted to acquire us through a merger.
Our rights to recover claims against our directors, officers, employees and other agents are limited, which could reduce our recovery against them if they are liable to us for their conduct.
Maryland law provides that a director has no liability as a director if he performs his duties in good faith, in a manner he reasonably believes to be in the best interests of the company and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our charter also provides that we will generally indemnify our directors, our officers, our advisor and its affiliates and their
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respective officers, directors, managers and employees for losses they may incur by reason of their service in those capacities unless:
•· their act or omission was material to the matter giving rise to the proceeding and was committed in bad faith or was the result of active and deliberate dishonesty;
•· they actually received an improper personal benefit in money, property or services; or
•· in the case of any criminal proceeding, they had reasonable cause to believe that the act or omission was unlawful.
In addition to the above provisions of the Maryland General Corporation Law, our charter provides that in order for a director, an officer, our advisor or its affiliates to be exonerated from liability or receive indemnification, all of the following conditions must be met:
•· our directors, our advisor or its affiliates have determined, in good faith, that the course of conduct that caused the loss or liability was in our best interests;
•· our directors, our officers, our advisor or its affiliates were acting on our behalf or performing services for us;
•· in the case of our independent directors, the liability or loss was not the result of gross negligence or willful misconduct by the party seeking indemnification;
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•· in the case of our non-independent directors, our advisor or its affiliates, the liability or loss was not the result of negligence or misconduct by the party seeking indemnification; and
•· the indemnification is recoverable only out of our net assets or the proceeds of insurance and not from the stockholders.
As a result, we may have more limited rights against our directors, officers, employees and other agents than might otherwise exist under common law, which could reduce our recovery from such persons if they cause us to incur losses. In addition, we may be obligated to fund the defense costs incurred by our directors (as well as by our officers, employees and agents) in some cases, which would decrease the cash otherwise available to us to make distributions to our stockholders.
Payment of fees to our advisor and its affiliates will reduce cash available for investment and distribution.
Our advisor and its affiliates will perform services for us in connection with the offer and sale of our stock, the selection and acquisition of our properties, and possibly the management and leasing of our properties. They will be paid significant fees for these services, which will reduce the amount of cash available for investment in properties and distribution to stockholders. The fees to be paid to our advisor and its affiliates were not determined on an arm’s-length basis. AWe cannot assure you that a third-party unaffiliated with our advisor couldwould not be willing to provide such services to us at a lower price. The expenses we incur in connection with the offer and sale of our stock, excluding acquisition fees and expenses, may exceed the amount we expect and could be as high as 13.5% of gross proceeds. These fees increase the risk that the amount available for payment of distributions to our stockholders upon a liquidation of our portfolio would be less than the purchase price of the shares of stock.
If we are unable to obtain funding for future capital needs, cash distributions to our stockholders could be reduced and the value of our investments could decline.
If we need additional capital in the future to improve or maintain our properties or for any other reason, we will have to obtain financing from other sources, such as cash flow from operations, borrowings, property sales or future equity offerings. These sources of funding may not be available on attractive terms or at all. If we cannot procure additional funding for capital improvements, our investments may generate lower cash flows or decline in value, or both.
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General Risks Related to Investments in Real Estate
Economic and regulatory changes that impact the real estate market may reduce our net income and the value of our properties.
We are subject to risks related to the ownership and operation of real estate, including but not limited to:
•· worsening general or local economic conditions and financial markets could cause lower demand, tenant defaults, and reduced occupancy and rental rates, some or all of which would cause an overall decrease in revenue from rents;
•· increases in competing properties in an area which could require increased concessions to tenants and reduced rental rates;
•· increases in interest rates or unavailability of permanent mortgage funds which may render the sale of a property difficult or unattractive; and
•· changes in laws and governmental regulations, including those governing real estate usage, zoning and taxes.
Some or all of the foregoing factors may affect our properties, which would reduce our net income, and our ability to make distributions to our stockholders.
Lease terminations could reduce our revenues from rents and our distributions to our stockholders.
The success of our investments depends upon the occupancy levels, rental income and operating expenses of our properties and our company. In the event of a tenant default or bankruptcy, we may experience delays in enforcing our rights as landlord and may incur costs in protecting our investment and re-leasing our property. We may be unable to re-lease the property for the rent previously received. We may be unable to sell a property with low occupancy without incurring a loss. These events and others could cause us to reduce the amount of distributions we make to stockholders.
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Rising expenses at both the property and the company level could reduce our net income and our cash available for distribution to stockholders.
Our properties will be subject to operating risks common to real estate in general, any or all of which may reduce our net income. If any property is not substantially occupied or if rents are being paid in an amount that is insufficient to cover operating expenses, we could be required to expend funds with respect to that property for operating expenses. The properties will be subject to increases in tax rates, utility costs, operating expenses, insurance costs, repairs and maintenance and administrative expenses. If we are unable to lease properties on a basis requiring the tenants to pay such expenses, we would be required to pay some or all of those costs which would reduce our income and cash available for distribution to stockholders.
Costs incurred in complying with governmental laws and regulations may reduce our net income and the cash available for distributions.
Our company and the properties we expect to own are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. Federal laws such as the National Environmental Policy Act, the Comprehensive Environmental Response, Compensation, and Liability Act, the Resource Conservation and Recovery Act, the Federal Water Pollution Control Act, the Federal Clean Air Act, the Toxic Substances Control Act, the Emergency Planning and Community Right to Know Act and the Hazard Communication Act govern such matters as wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials and the remediation of contamination associated with disposals. The properties we acquire will be subject to the Americans with Disabilities Act of 1990 which generally requires that certain types of buildings and services be made accessible and available to people with disabilities. These laws may require us to make modifications to our
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properties. Some of these laws and regulations impose joint and several liability on tenants, owners or operators for the costs to investigate or remediate contaminated properties, regardless of fault or whether the acts causing the contamination were legal. Compliance with these laws and any new or more stringent laws or regulations may require us to incur material expenditures. Future laws, ordinances or regulations may impose material environmental liability. In addition, there are various federal, state and local fire, health, life-safety and similar regulations with which we may be required to comply, and which may subject us to liability in the form of fines or damages for noncompliance.
Our properties may be affected by our tenants’ operations, the existing condition of land when we buy it, operations in the vicinity of our properties, such as the presence of underground storage tanks, or activities of unrelated third parties. The presence of hazardous substances, or the failure to properly remediate these substances, may make it difficult or impossible to sell or rent such property. Any material expenditures, fines, or damages we must pay will reduce our ability to make distributions.
Discovery of environmentally hazardous conditions may reduce our cash available for distribution to our stockholders.
Under various federal, state and local environmental laws, ordinances and regulations, a current or previous real property owner or operator may be liable for the cost to remove or remediate hazardous or toxic substances on, under or in such property. These costs could be substantial. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. Environmental laws also may impose restrictions on the manner in which property may be used or businesses may be operated, and these restrictions may require substantial expenditures or prevent us from entering into leases with prospective tenants that may be impacted by such laws. Environmental laws provide for sanctions for noncompliance and may be enforced by governmental agencies or, in certain circumstances, by private parties. Certain environmental laws and common law principles could be used to impose liability for release of and exposure to hazardous substances, including asbestos-containing materials into the air. Third parties may seek recovery from real property owners or operators for personal injury or property damage associated with exposure to released hazardous substances. The cost of defending against claims of liability, of complying with environmental regulatory requirements, of remediating any contaminated property, or of paying personal injury claims could be substantial and reduce our ability to make distributions.
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Any uninsured losses or high insurance premiums will reduce our net income and the amount of our cash distributions to stockholders.
Our advisor will attempt to obtain adequate insurance to cover significant areas of risk to us as a company and to our properties. However, there are types of losses at the property level, generally catastrophic in nature, such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or environmental matters, which are uninsurable or not economically insurable, or may be insured subject to limitations, such as large deductibles or co-payments. We may not have adequate coverage for such losses. If any of our properties incurs a casualty loss that is not fully insured, the value of our assets will be reduced by any such uninsured loss. In addition, other than any working capital reserve or other reserves we may establish, we have no source of funding to repair or reconstruct any uninsured damaged property. Also, to the extent we must pay unexpectedly large amounts for insurance, we could suffer reduced earnings that would result in lower distributions to stockholders.
We may have difficulty selling real estate investments, and our ability to distribute all or a portion of the net proceeds from such sale to our stockholders may be limited.
Equity real estate investments are relatively illiquid. We will have a limited ability to vary our portfolio in response to changes in economic or other conditions. We will also have a limited ability to sell assets in order to fund working capital and similar capital needs. When we sell any of our properties, we may not realize a gain on such sale. We may not elect to distribute any proceeds from the sale of properties to our stockholders; for example, we may use such proceeds to:
•· purchase additional properties;
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•· repay debt, if any;
•· buy out interests of any co-venturers or other partners in any joint venture in which we are a party;
•· create working capital reserves; or
•· make repairs, maintenance, tenant improvements or other capital improvements or expenditures to our remaining properties.
Our ability to sell our properties may also be limited by our need to avoid a 100% penalty tax that is imposed on gain recognized by a REIT from the sale of property characterized as dealer property. In order to ensure that we avoid such characterization, we may be required to hold our properties for a minimum period of time, generally four years, and comply with certain other requirements in the Internal Revenue Code.
Real estate market conditions at the time we decide to dispose of a property may be unfavorable which could reduce the price we receive for a property.
We intend to hold the properties in which we invest until we determine that selling or otherwise disposing of properties would help us to achieve our investment objectives. General economic conditions, availability of financing, interest rates and other factors, including supply and demand, all of which are beyond our control, affect the real estate market. We may be unable to sell a property for the price, on the terms, or within the time frame we want.
As part of otherwise attractive portfolios of properties, substantially all of which we can own on an all-cash basis, we may acquire some properties with existing lock-out provisions which may inhibit us from selling a property, or may require us to maintain specified debt levels for a period of years on some properties.
Loan provisions could materially restrict us from selling or otherwise disposing of or refinancing properties. These provisions would affect our ability to turn our investments into cash and thus affect cash available for distributions to our stockholders. Loan provisions may prohibit us from reducing the outstanding indebtedness with respect to properties, refinancing such indebtedness on a non-recourse basis at maturity, or increasing the amount of indebtedness with respect to such properties.
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Loan provisions could impair our ability to take actions that would otherwise be in the best interests of our stockholders and, therefore, may have an adverse impact on the value of our stock, relative to the value that would result if the loan provisions did not exist. In particular, loan provisions could preclude us from participating in major transactions that could result in a disposition of our assets or a change in control even though that disposition or change in control might be in the best interests of our stockholders.
If we sell properties by providing financing to purchasers of our properties, distribution of net sales proceeds to our stockholders would be delayed and defaults by the purchasers could reduce our cash available for distribution to stockholders.
If we provide financing to purchasers, we will bear the risk that the purchaser may default. Purchaser defaults could reduce our cash distributions to our stockholders. Even in the absence of a purchaser default, the distribution of the proceeds of sales to our stockholders, or their reinvestment in other assets, will be delayed until the promissory notes or other property we may accept upon a sale are actually paid, sold, refinanced or otherwise disposed of or completion of foreclosure proceedings.
Actions of our joint venture partners could subject us to liabilities in excess of those contemplated or prevent us from taking actions that are in the best interests of our stockholders which could result in lower investment returns to our stockholders.
We are likely to enter into joint ventures with affiliates and other third parties to acquire or improve properties. We may also purchase properties in partnerships, co-tenancies or other co-ownership
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arrangements. Such investments may involve risks not otherwise present when acquiring real estate directly.
Risks Associated with Debt Financing
We may usehave used temporary acquisition financing to acquire properties and otherwise incur other indebtedness, which will increase our expenses and could subject us to the risk of losing properties in foreclosure if our cash flow is insufficient to make loan payments.
We may, in some instances, acquire real properties usingused temporary acquisition financing.financing to acquire eight of the eleven properties we owned as of December 31, 2007. We may continue to use temporary acquisition financing to acquire additional properties. This will enable us to acquire properties before we have raised offering proceeds for the entire purchase price. We plan to use subsequently raised offering proceeds to pay off the temporary acquisition financing.
We may borrow funds for operations, tenant improvements, capital improvements or for other working capital needs. We may also borrow funds to make distributions including but not limited to funds to satisfy the REIT tax qualification requirement that we distribute at least 90% of our annual REIT taxable income to our stockholders. We may also borrow if we otherwise deem it necessary or advisable to ensure that we maintain our qualification as a REIT for federal income tax purposes. To the extent we borrow funds, we may raise additional equity capital or sell properties to pay such debt.
If there is a shortfall between the cash flow from a property and the cash flow needed to service temporary acquisition financing on that property, then the amount available for distributions to stockholders may be reduced. In addition, incurring mortgage debt increases the risk of loss since defaults on indebtedness secured by a property may result in lenders initiating foreclosure actions. In that case, we could lose the property securing the loan that is in default. For tax purposes, a foreclosure of any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure, but we would not receive any cash proceeds. We may give full or partial guarantees to lenders of mortgage debt to the entities that own our properties. When we give a guaranty on behalf of an entity that owns one of our properties, we will be responsible to the lender for satisfaction of the debt if it is not paid by such entity. If any mortgages contain cross-collateralization or cross-default provisions, a default on a single property could affect multiple properties.
Lenders may require us to enter into restrictive covenants relating to our operations, which could limit our ability to make distributions to our stockholders.
When providing financing, a lender may impose restrictions on us that affect our distribution and operating policies and our ability to incur additional debt. Loan documents we have enter into may contain covenants that limit our ability to further mortgage the property, discontinue insurance coverage, or replace our advisor. These or other limitations may limit our flexibility and prevent us from achieving our operating plans.
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High levels of debt or increases in interest rates could increase the amount of our loan payments, reduce the cash available for distribution to stockholders and subject us to the risk of losing properties in foreclosure if our cash flow is insufficient to make loan payments.
Our policies do not limit us from incurring debt. High debt levels would cause us to incur higher interest charges, would result in higher debt service payments, and could be accompanied by restrictive covenants. Interest we pay could reduce cash available for distribution to stockholders. Additionally, if we incur variable rate debt could result in increases in interest rates which would increase our interest costs, which would reduce our cash flows and our ability to make distributions to our stockholders. In addition, if we need to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments in properties at times which may not permit realization of the maximum return on such investments and could result in a loss.
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Risks Associated with Being a REIT
If we fail to qualify as a REIT, we will be subjected to tax on our income and the amount of distributions we make to our stockholders will be less.
We intend to qualify as a REIT under the Internal Revenue Code. A REIT generally is not taxed at the corporate level on income it currently distributes to its stockholders. Qualification as a REIT involves the application of highly technical and complex rules for which there are only limited judicial or administrative interpretations. The determination of various factual matters and circumstances not entirely within our control may affect our ability to continue to qualify as a REIT. In addition, new legislation, regulations, administrative interpretations or court decisions could significantly change the tax laws with respect to qualification as a REIT or the federal income tax consequences of such qualification.
If we elected to be taxed as a REIT and then were to fail to qualify as a REIT in any taxable year:
•· we would not be allowed to deduct our distributions to our stockholders when computing our taxable income;
•· we would be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates;
•· we would be disqualified from being taxed as a REIT for the four taxable years following the year during which qualification was lost, unless entitled to relief under certain statutory provisions;
•· we would have less cash to make distributions to our stockholders; and
•· we might be required to borrow additional funds or sell some of our assets in order to pay corporate tax obligations we may incur as a result of our disqualification.
Even if we qualify and maintain our status as a REIT, we may be subject to federal and state income taxes in certain events, which would reduce our cash available for distribution to our stockholders.
Net income from a “prohibited transaction” will be subject to a 100% tax. We may not be able to pay sufficient distributions to avoid excise taxes applicable to REITs. We may also decide to retain income we earn from the sale or other disposition of our property and pay income tax directly on such income. In that event, our stockholders would be treated as if they earned that income and paid the tax on it directly. However, stockholders that are tax-exempt, such as charities or qualified pension plans, would have no benefit from their deemed payment of such tax liability. We may also be subject to state and local taxes on our income or property, either directly or at the level of our Operating Partnershipoperating partnership or at the level of the other companies through which we indirectly own our assets. Any federal or state taxes we pay will reduce the cash available to make distributions to our stockholders.
If our operating partnership is classified as a “publicly-traded partnership” under the Internal Revenue Code, it will be subjected to tax on our income and the amount of distributions we make to our stockholders will be less.
We structured our operating partnership so that it would be classified as a partnership for federal income tax purposes. In this regard, the Internal Revenue Code generally classifies “publicly traded partnerships” (as defined in Section 7704 of the Internal Revenue Code) as associations taxable as corporations (rather than as partnerships), unless substantially all of
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their taxable income consists of specified types of passive income. In order to minimize the risk that the Internal Revenue Code would classify our operating partnership as a “publicly traded partnership” for tax purposes, we placed certain restrictions on the transfer and/or redemption of partnership units in our operating partnership. If the Internal Revenue Service were to assert successfully that our operating partnership is a “publicly traded partnership,” and substantially all of our operating partnership’s gross income did not consist of the specified types of passive income, the Internal Revenue Code would treat our operating partnership as an association taxable as a corporation. In such event, the character of our assets and items of gross income would change and would prevent us from qualifying and maintaining our status as a REIT. In addition, the
18
imposition of a corporate tax on our operating partnership would reduce the amount of cash distributable to us from our operating partnership and therefore would reduce our amount of cash available to make distributions to you.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.
20
As of December 31, 2005, we have not purchased any properties.2007, our portfolio consists of eleven properties which was approximately 96.9% leased. The following table provides summary information regarding our properties and each property is briefly discussed after the table.
Property |
| Location |
| Date Purchased |
| Square |
| Purchase |
| Debt |
| December 31, 2007 |
| ||
2111 South Industrial Park |
| North Tempe, AZ |
| June 1, 2006 |
| 26,800 |
| $ | 1,975,000 |
| $ | — |
| 94.0 | % |
Shoemaker Industrial Buildings |
| Santa Fe Springs, CA |
| June 30, 2006 |
| 18,921 |
| 2,400,000 |
| — |
| 100.0 | % | ||
15172 Goldenwest Circle |
| Westminster, CA |
| December 1, 2006 |
| 102,200 |
| 11,200,000 |
| 6,650,000 |
| 100.0 | % | ||
20100 Western Avenue |
| Torrance, CA |
| December 1, 2006 |
| 116,434 |
| 19,650,000 |
| 12,732,000 |
| 100.0 | % | ||
Mack Deer Valley |
| Phoenix, AZ |
| January 21, 2007 |
| 180,985 |
| 23,150,000 |
| 12,908,000 |
| 97.3 | % | ||
Marathon Center |
| Tampa Bay, FL |
| April 2, 2007 |
| 52,020 |
| 4,450,000 |
| — |
| 84.5 | % | ||
Pinnacle Park Business Center |
| Phoenix, AZ |
| October 2, 2007 |
| 158,976 |
| 20,050,000 |
| 10,989,000 |
| 96.1 | % | ||
Orlando Small Bay Portfolio |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Carter |
| Winter Garden, FL |
| November 15, 2007 |
| 49,125 |
|
|
|
|
| 92.4 | % | ||
Goldenrod |
| Orlando, FL |
| November 15, 2007 |
| 78,646 |
|
|
|
|
| 100.0 | % | ||
Hanging Moss |
| Orlando, FL |
| November 15, 2007 |
| 94,200 |
|
|
|
|
| 100.0 | % | ||
Monroe South |
| Sanford, FL |
| November 15, 2007 |
| 172,500 |
|
|
|
|
| 95.4 | % | ||
|
|
|
|
|
| 394,471 |
| 37,128,000 |
| 22,420,000 |
| 97.0 | % | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
| 1,050,807 |
| $ | 120,003,000 |
| $ | 65,699,000 |
| 96.9 | % |
Following are descriptions of our properties:
2111 South Industrial Park, North Tempe, Arizona
The 2111 South Industrial Park is an industrial building located in a master planned business park environment in the North Tempe submarket of Phoenix. At December 31, 2007, the property is approximately 94.0% leased to 14 tenants ranging in size from 1,600 to 2,800 square foot.
Shoemaker Industrial Buildings. Santa Fe Springs, California
Shoemaker Industrial Buildings consists of three single-story buildings located on approximately one acre of land in Santa Fe Springs, California. At December 31, 2007, the property was 100% leased to four tenants whose spaces range in size from approximately 4,600 square feet to 5,121 square feet.
15172 Goldenwest Circle, Westminister, California
15172 Goldenwest Circle consists one single building located on approximately 5.4 acres of land in Westminister, California. At December 31, 2007, the property was 100% leased to a single tenant, a provider of steel and concrete construction products for residential, commercial and government contractors. The current lease will expire on May 31, 2013.
20100 Western Avenue, Torrance, California
20100 Western Avenue consists of one building located on approximately 6.3 acres of land in Torrance, California. At December 31, 2007, the property was 100% leased to five tenants whose size range in size from approximately 11,700 to 29,800 square feet.
Mack Deer Valley - Phoeniz, Arizona
Mack Deer Valley consists of two single-story buildings located on approximately 11.7 acres of land in a master planned business park in Phoenix, Arizona. At December 31, 2007, the property was approximately 97.3% leased to 11 tenants whose spaces range in size from approximately 4,879 to 35,782 square feet.
21
Marathon Center - Tampa, Florida
Marathon Center consists of two single-story buildings located on approximately 4.8 acres of land near Tampa Bay, Florida. At December 31, 2007, the property was approximately 84.5% leased to nine tenants whose spaces range in size from approximately 1,300 square feet to approximately 25,117square feet.
Pinnacle Park Business Center - Phoeniz, Arizona
Pinnacle Park Business Center consists of three single-story buildings located on approximately 11.9 acres of land in Phoenix, Arizona. At December 31, 2007, the property was approximately 96.1% leased to seven tenants whose spaces range in size from approximately 6,208 square feet to approximately 57,846 square feet. One tenant, operating an assembly and distribution of military equipment business occupies 36.2% of the property, and another tenant, operating a pet furniture distribution business, occupies 31.9% of the property.
Orlando Small Bay – Orlando, Florida
Orlando Small Bay is located in the metropolitan Orlando, Florida area. Orlando Small Bay consists of four industrial business parks comprised of 18 buildings, with 93 units providing approximately 394,471 leaseable square feet of space on approximately 33.9 acres of land.
The following table sets forth certain information with respect to the business parks comprising Orlando Small Bay.
Property |
| Total Building Area |
| Number of |
| Number |
| Space Range (Sq. Feet) |
| |
Carter |
| 3.4 | acres |
| 16 |
| 2 |
| 1,875 to 6,000 |
|
Goldenrod |
| 9.9 | acres |
| 20 |
| 3 |
| 2,000 to 12,216 |
|
Hanging Moss |
| 7.3 | acres |
| 23 |
| 5 |
| 1,875 to 16,500 |
|
Monroe South |
| 13.3 | acres |
| 34 |
| 8 |
| 1,250 to 22,500 |
|
At December 31, 2007, Orlando Small Bay was approximately 97.0% leased to 90 tenants. Currently, one tenant, a building material distributor, occupies approximately 47,500 square feet of space or approximately 12.6% of the Orlando Small Bay portfolio.
Portfolio Lease Expirations
The following table sets forth lease expiration information at December 31, 2007:
Year Ending |
| No. of |
| Approx. |
| Base Rent |
| Percent of |
| Percent of |
| |
2008 |
| 33 |
| 211,983 |
| $ | 1,550,000 |
| 20.2 | % | 20.9 | % |
2009 |
| 16 |
| 85,112 |
| 641,000 |
| 8.1 | % | 8.6 | % | |
2010 |
| 34 |
| 112,172 |
| 923,000 |
| 10.7 | % | 12.4 | % | |
2011 |
| 38 |
| 258,882 |
| 2,397,000 |
| 24.6 | % | 32.3 | % | |
2012 and thereafter |
| 17 |
| 340,174 |
| 2,622,000 |
| 32.4 | % | 25.8 | % | |
|
| 138 |
| 1,008,323 |
| $ | 8,133,000 |
| 96.0 | % | 100.0 | % |
22
From time to time in the ordinary course of business, we may become subject to legal proceeding, claims, or disputes. As of the date hereof, we are not a party to any pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 20, 2005, our sole stockholder as of such date approved, by written consent, Articles of Amendment and RestatementNo matters were submitted to a vote of our Articlesstockholders during the fourth quarter of Incorporation.2007.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
During the period covered by this report, there was no established public trading market for our shares of common stock.
In order for FINRA members and their associated persons to participate in the offering and sale of shares of common stock pursuant to our ongoing public offering, we are required pursuant to NASD Rule 2710(f)(2)(M) to disclose in each annual report distributed to stockholders a per share estimated value of the shares, the method by which it was developed and the date of the data used to develop the estimated value. In addition, we prepare annual statements of estimated share values to assist fiduciaries of retirement plans subject to the annual reporting requirements of ERISA in the preparation of their reports relating to an investment in our shares. For these purposes, the deemed value is $8.00 per share as of December 31, 2007. There is no public trading market for the shares at this time, and there can be no assurance that stockholders would receive $8.00 per share if such a market did exist and they sold their shares or that they will be able to receive such amount for their shares in the future. Nor does this deemed value reflect the distributions that stockholders would be entitled to receive if our properties were sold and the sale proceeds were distributed upon liquidation of our company. Such a distribution upon liquidation is likely to be less than $8.00 per share primarily due to the fact that the funds initially available for investment in properties were reduced from the gross offering proceeds in order to pay selling commissions and dealer manager fees, organization and offering expenses, and acquisitions and advisory fees. We do not currently anticipate obtaining appraisals for the properties we acquire, and accordingly, the deemed values should not be viewed as an accurate reflection of the fair market value of those properties, nor do they represent the amount of net proceeds that would result from an immediate sale of those properties.
Stock Repurchase Program
Our board of directors intends to adopthas adopted a sharestock repurchase planprogram that would enableenables our stockholders to sell their stock to us in limited circumstances. Our board of directors may amend, suspend or terminate the program at any time upon thirty days prior notice to our stockholders.
As long as our common stock is not listed on a national securities exchange or the Nasdaq National Market, our stockholders who have held their stock for at least one year may be able to have all or any portion of their shares of stock redeemed. At that time, we may, subject to the conditions and limitations described below, redeem the shares of stock presented for redemption for cash to the extent that we have sufficient funds available to us to fund such redemption. Currently, amount that we may pay to redeem stock will be the redemption price set forth in the following table which is based upon the number of years the stock is held:
Number Years Held | Redemption Price | ||
Less than 1 | No Redemption Allowed | ||
1 or more but less than 2 | 90% of your purchase price | ||
2 or more but less than 3 | 95% of your purchase price | ||
Less than 3 in the event of death | 100% of your purchase price | ||
3 or more but less than 5 | 100% of your purchase price | ||
5 or more | Estimated liquidation value |
The planestimated liquidation value for the repurchase of shares of stock held for 5 or more years will not be adopted untildetermined by our advisor or another person selected for such purpose and will be approved by our board of directors. The stock repurchase price is subject to adjustment as determined from time to time by our board of directors. At no time will the earlierstock repurchase price exceed the price at which we are offering our common stock for sale at the time of the completion ofrepurchase.
During our initial public offering whichand each of the first five years following the closing of the offering, we do not intend to redeem more than the lesser of (i) the number of shares that could be redeemed using the proceeds from our distribution reinvestment plan or (ii) 5% of the number of shares outstanding at the end of the prior calendar year.
24
We have adopted a share redemption program for investors who have held their shares for at lease one year, unless the shares are being redeemed in connection with a stockholder’s death. Under our current stock repurchase program, the repurchase price will vary depending on the purchase price paid by the stockholder and the number of years the shares were held.
During the year ended December 31, 2007, we redeemed shares pursuant to our stock repurchase program follows (in thousands, except per-share amounts):
Period |
| Total Number of |
| Average Price Paid per Share |
| Approximate Dollar Value of Shares |
| |
|
|
|
|
|
|
|
|
|
January 2007 |
| — |
| $ | — |
|
| (1) |
February 2007 |
| — |
|
| — |
|
| (1) |
March 2007 |
| — |
|
| — |
|
| (1) |
April 2007 |
| 2,500 |
|
| 8.00 |
|
| (1) |
May 2007 |
| — |
|
| — |
|
| (1) |
June 2007 |
| — |
|
| — |
|
| (1) |
July 2007 |
| — |
|
| — |
|
| (1) |
August 2007 |
| 12,500 |
|
| 7.20 |
|
| (1) |
September 2007 |
| — |
|
| — |
|
| (1) |
October 2007 |
| 7,255 |
|
| 7.44 |
|
| (1) |
November 2007 |
| 35,180 |
|
| 7.19 |
|
| (1) |
December 2007 |
| — |
| $ | — |
|
| (1) |
|
| 57,435 |
|
|
|
|
|
|
(1) As long as our common stock is not listed on a national securities exchange or traded on an other-the-counter market, our stockholders who have held their stock for at least one year may last until Septemberbe able to have all or any portion of 2007,their shares redeemed in accordance with the procedures outlined in the prospectus relating to the shares they purchased. Under our current stock repurchase program, the repurchase price will vary depending on the purchase price paid by the stockholder and the number of years the shares were held. During our offering and each of the first five years following the closing of our offering, we do not intend to redeem more than the lesser of (i) the number of shares that could be redeemed using the proceeds from our distribution reinvestment plan or (ii) 5% of the receipt by usnumber of SEC exemptive reliefshares outstanding at the end of the prior calendar year. Beginning five years after termination of this offering, the number of shares that we redeem under the stock repurchase program is not expected to exceed 10% of the number outstanding at the end of the prior year.
Our board of directors may modify our stock repurchase program so that we can redeem stock using the proceeds from rules restricting issuer purchases during distributions.the sale of our real estate investments or other sources.
Stockholders
As of March 17, 2006,7, 2008, we had 58approximately 11.0 million shares of common stock outstanding held by approximately 2,851 stockholders of record.
Distributions
ForIn order to meet the periodsrequirements for being treated as a REIT under the Internal Revenue Code, we must pay distributions to our shareholders each taxable year equal to at least 90% of our net ordinary taxable income. Until proceeds from our offerings are invested and generating operating cash flow sufficient to make distributions to stockholders, we intend to pay all or a substantial portion of our distributions from the proceeds of our offering and or from borrowings in anticipation of future cash flow. Our board generally declares distributions on a quarterly basis, portions of which are paid on a monthly basis. Monthly distributions are paid based on daily record and distribution declaration dates so our investor will be entitled to be paid distributions beginning on the day that they purchase shares.
25
During the years ended December 31, 20052007 and 2004,2006, we declared no distributions.paid distributions, including any distributions reinvested, aggregating approximately $3.0 million and $0.4 million , respectively to our stockholders. The following table shows the distributions paid for the fiscal years ended December 31, 2007 and 2006. We paid distributions based on daily record dates for each day during the period commencing January 1, 2006 through December 31, 2007, aggregated by quarter as follows:
|
| Distribution Declared (1) |
| |||||||
Period |
| Cash |
| Reinvested |
| Total |
| |||
First quarter 2006 |
| $ | 8,000 |
| $ | 6,000 |
| $ | 14,000 |
|
Second quarter 2006 |
| 45,000 |
| 35,000 |
| 80,000 |
| |||
Third quarter 2006 |
| 88,000 |
| 77,000 |
| 165,000 |
| |||
Fourth quarter 2006 |
| 150,000 |
| 177,000 |
| 327,000 |
| |||
|
| $ | 291,000 |
| $ | 295,000 |
| $ | 586,000 |
|
|
|
|
|
|
|
|
| |||
First quarter 2007 |
| $ | 223,000 |
| $ | 283,000 |
| $ | 506,000 |
|
Second quarter 2007 |
| 322,000 |
| 422,000 |
| 744,000 |
| |||
Third quarter 2007 |
| 385,000 |
| 523,000 |
| 908,000 |
| |||
Fourth quarter 2007 |
| 423,000 |
| 615,000 |
| 1,038,000 |
| |||
|
| $ | 1,353,000 |
| $ | 1,843,000 |
| $ | 3,196,000 |
|
(1) | 100% of the distributions declared during 2007 represented a return of capital for tax purposes. |
The declaration of distributions is at the discretion of our board of directors and our board will determine the amount of distributions on a regular basis. The amount of distributions will depend on our funds from operations, financial condition, capital requirements, annual distribution requirements under the REIT provisions of the Internal Revenue Code and other factors our board of directors deems relevant.
Following our election of REIT status for federal income tax purposes beginning for the tax year ending December 31, 2006, we would be required to distribute 90% of our REIT taxable income on an annual basis.
19
Recent Sales of Unregistered Sale of Securities
In connection withOn August 8, 2007, we granted our incorporation, on November 9, 2004 we issued 125non-employee directors nonqualified stock options to purchase an aggregate of 20,000 shares of our common stock to Terry G. Roussel,at an affiliate ofexercise price at $8.00 per share under our advisor, for $1,000 cash in a private offering exempt from the registration requirementsEmployee and Director Incentive Stock Plan pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933, as amended.1933.
Use of Proceeds from Registered Securities
Our registration statement (SEC File No. 333-121238) for our initial public offering of up to 44,400,000 shares of our common stock at $8.00 per share and up to 11,000,000 additional shares at $7.60 per share pursuant to our distribution reinvestment plan was declared effective on September 22, 2005. The aggregate offering amount of the shares registered for sale in our initial public offering, assuming the maximum number of shares is sold, is $438,800,000. The offering commenced on January 13, 2006 and has not terminated. We
As of December 31, 2007, excluding issuance of 253,266 shares under our distribution reinvestment plan, we had not sold anyapproximately 9.7 million shares of common stock in our initial publicongoing offering, and had not received anyraising gross offering proceeds of approximately $77.7 million. From this amount, we incurred approximately $7.7 million in selling commissions and dealer manager fees payable to our dealer manager and approximately $1.6 million in acquisition fees payable to our advisor. We used approximately $52.3 million of the net offering proceeds to acquire properties as of December 31, 2005.2007.
From September 22, 2005 through December 31, 2005, we incurred no sales commissions or dealer manager expensesEquity Compensation Plans
Information about securities authorized for issuance under our equity compensation plans required for this Item is incorporated by reference from our definitive Proxy Statement to be filed in connection with the issuance and distributionour 2008 annual meeting of the securities registered in our initial public offering.stockholders.
26
ITEM 6. SELECTED FINANCIAL DATA
The following should be read with the sections titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the notes thereto.
|
| December 31, |
| ||||
|
| 2005 |
| 2004 |
| ||
Balance Sheet Data: |
|
|
|
|
| ||
Total assets |
| $ | 224,399 |
| $ | 1,000 |
|
Stockholders’ equity (deficit) |
| $ | (93,330 | ) | $ | 1,000 |
|
|
|
|
|
|
| ||
Operating Data: |
|
|
|
|
| ||
Revenues |
| $ | — |
| $ | — |
|
General and administrative expense |
| $ | 95,134 |
| $ | — |
|
Net loss |
| $ | (94,330 | ) | $ | — |
|
Net loss per common share, basic and diluted (1) |
| $ | (755 | ) | $ | — |
|
Distributions declared |
| $ | — |
| $ | — |
|
Distributions per common share (1) |
| $ | — |
| $ | — |
|
Weighted average number of shares outstanding (1): |
|
|
|
|
| ||
Basic and diluted |
| 125 |
| 125 |
| ||
|
|
|
|
|
| ||
Other Data: |
|
|
|
|
| ||
Cash flows used in operating activities |
| $ | (83,658 | ) | $ | — |
|
Cash flows provided by (used in) investing activities |
| $ | — |
| $ | — |
|
Cash flows provided by financing activities |
| $ | 200,000 |
| $ | 1,000 |
|
|
| As of December 31, |
| |||||||
|
| 2007 |
| 2006 |
| 2005 |
| |||
Balance Sheet Data: |
|
|
|
|
|
|
| |||
Total assets |
| $ | 129,922,000 |
| $ | 50,012,000 |
| $ | 224,000 |
|
Investments in real estate, net |
| $ | 120,994,000 |
| $ | 36,057,000 |
| $ | — |
|
Stockholders’ equity (deficit) |
| $ | 60,248,000 |
| $ | 26,719,000 |
| $ | (93,000 | ) |
|
| Year Ended December 31, |
| |||||||
|
| 2007 |
| 2006 |
| 2005 |
| |||
Operating Data: |
|
|
|
|
|
|
| |||
Revenues |
| $ | 5,865,000 |
| $ | 404,000 |
| $ | — |
|
General and administrative expense |
| $ | 2,359,000 |
| $ | 1,294,000 |
| $ | 95,000 |
|
Net loss |
| $ | (2,601,000 | ) | $ | (1,306,000 | ) | $ | (94,000 | ) |
Net loss per common share, basic and diluted (1) |
| $ | (0.40 | ) | $ | (1.58 | ) | $ | (752.00 | ) |
Distributions declared |
| $ | 3,196,000 |
| $ | 586,000 |
| $ | — |
|
Distributions per common share (1) |
| $ | 0.50 |
| $ | 0.71 |
| $ | — |
|
Weighted average number of shares outstanding (1): |
|
|
|
|
|
|
| |||
Basic and diluted |
| 6,429,323 |
| 827,147 |
| 125 |
| |||
|
|
|
|
|
|
|
| |||
Other Data: |
|
|
|
|
|
|
| |||
Cash flows used in operating activities |
| $ | (1,156,000 | ) | $ | (139,000 | ) | $ | (84,000 | ) |
Cash flows used in investing activities |
| $ | (84,799,000 | ) | $ | (37,447,000 | ) | $ | — |
|
Cash flows provided by financing activities |
| $ | 81,562,000 |
| $ | 48,510,000 |
| $ | 200,000 |
|
(1) |
|
2027
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated financial statements and notes appearing elsewhere in this Form 10-K.
Overview
We were incorporated on October 22, 2004 for the purpose of engaging in the business of investing in and owning commercial real estate. SincePrior to commencing our inception throughinitial public offering on January 6, 2006, we had approximately $200,000 in assets and no real estate operations. In February 2006, we received the yearminimum offering amount of $1.0 million and in June 2006, we began acquiring real estate assets. As of December 31, 2007, we raised approximately $77.7 million of gross proceeds from the sale of 9.7 million shares of our common stock, and we acquired eleven real estate properties.
Accordingly, our results of operations for the years ended December 31, 2005, our business activity primarily consisted2007 and 2006 reflect growing operational revenues and expenses resulting from the acquisition of our formationproperties and interest expense resulting from the registrationuse of our initial offeringacquisition financing.
Results of shares toOperations
Our results of operations are not indicative of those expected in future periods as we expect that rental income, tenant reimbursements, operating expenses, asset management fees, depreciation, amortization, and net income will each increase in future periods as a result of owning the public, which was declared effective on September 22, 2005.assets acquired during 2007 for an entire year and as a result of anticipated future acquisitions of real estate assets.
As of December 31, 2005,2007, we had not received any proceeds from our initial public offeringacquired eleven properties, including one portfolio which consisted of our common stockfour properties. During 2006, we acquired a total of four properties, two in June 2006 and had nottwo in December 2006. During 2007, we acquired any real estate assets.seven properties. The properties were acquired in January 2007, April 2007, October 2007 and November 2007, respectively. Accordingly, the results of our operations for the year ended December 31, 2005 and the period from inception to December 31, 20042007 are indicative of an early-stage enterprise. We have no paid employees and are externally advised and managed by Cornerstone Realty Advisors, LLC.
Election as a REIT
We intend to elect to be taxed as a REIT fornot directly comparable with the year ended December 31, 2006 under the Internal Revenue Code of 1986, as amended. If we qualify as a REIT, we generally will not be subject to federal income tax on income that we distribute toand 2005. In 2005, our stockholders. Under the Internal Revenue Code, REITs are subject to numerous organizational and operational requirements in order to avoid taxation as a regular corporation, including a requirement that they generally distribute at least 90% of their annual taxable income to their stockholders. If we fail to qualify for taxation as a REIT in any year, our income will be taxed at regular corporate rates, and we may be precluded from qualifying for treatment as a REIT for the four-year period following our failure to qualify. Our failure to qualify as a REIT could result in us having a significant liability for taxes.
Results of Operations
We did not commence real estate operations during the period from inception (October 22, 2004) to December 31, 2005, as we had not received and accepted the minimum subscription of $1,000,000 before the end of the period. We had no revenue or expenses during the period from inception (October 22, 2004) to December 31, 2004. Our operating results for the twelve months ended December 31, 2005 consisted primarily of general and administrative expenses associated with insurance and third party professional, legal and accounting fees related to our periodic reporting requirements under the Securities Act of 1934. General
We have no paid employees and administrative expenses were $95,134 during the year endedare externally advised and managed by Cornerstone Realty Advisors, LLC.
Year Ended December 31, 2005 and consisted primarily of insurance and professional and directors fees associated with activities of our board of directors. During 2005 certain third party legal and accounting fees were incurred but are accounted for by the manager of our advisor, as deferred organization and offering expenses. These expenses will be reimbursed2007 Compared to our advisor from the gross proceeds of our initial public offering.Year Ended December 31, 2006
InterestRental income, was $1,154 during the year ended December 31, 2005, which amount is primarily attributabletenant reimbursements and other income increased to the increased balance of cash in an interest bearing account resulting from the investment in our operating partnership by our advisor during 2005.
As a result of the above items, net lossapproximately $4,723,000 and $1,142,000, respectively, for the year ended December 31, 2005 was ($94,330), or ($755) per basic2007 from approximately $359,000 and diluted share compared with net income of $0 per basic and dilutive share$45,000, respectively, for the period from inception throughyear ended December 31, 2004.2006.
Property operating and maintenance costs increased to approximately $1,332,000 for the year ended December 31, 2007 from approximately $102,000 and $38,000, respectively, for the year ended December 31, 2006.
Depreciation of real estate and amortization of lease costs increased to approximately $1,529,000 for the year ended December 31, 2007 from approximately $99,000 for the year ended December 31, 2006.
The increases in rental income and tenant reimbursements and other income as well as the increases in operating costs, asset management fees and depreciation and amortization are primarily due to the acquisition of properties during 2007 and owning the properties acquired in 2006 for a full year.
General and administrative expenses and asset management fees increased to approximately $2,359,000 and $707,000, respectively for the year ended December 31, 2007 from approximately $1,294,000 and $38,000, respectively for the year ended December 31, 2006 as a result of costs incurred with respect to abandoned acquisitions costs of approximately $838,000 and higher fees incurred to the advisor because we owned more properties in 2007 versus 2006.
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Interest income increased to approximately $605,000 for the year ended December 31, 2007 from approximately $203,000 for the year ended December 31, 2006 primarily due to higher cash available for investment from the net proceeds of our public offering.
Interest expense increased to approximately $3,147,000 for the year ended December 31, 2007 from approximately $391,000 for the year ended December 31, 2006 primarily due to increased financing used to facilitate the acquisition of eight properties versus two properties in the prior year.
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
Rental revenues increased to $404,000, property operating and maintenance expense increased to $102,000 and depreciation and amortization expense increased to $99,000 in 2006. We earned no rental revenue and incurred no property operating and maintenance or depreciation and amortization expense in 2005.
General and administrative expenses and asset management fees increased to $1,294,000 and $38,000, respectively in 2006 from $95,000 and $0, respectively in 2005. The increase is primarily attributable to higher professional fees and advisor administrative expense reimbursement associated with a full year of operations and regulatory reporting, and the addition of lender reporting obligations in 2006.
Interest income increased to $203,000 in 2006 from $1,000 in 2005 due to higher cash available for investment from the net proceeds of our public offering, which commenced in 2006.
Interest expense increased to $391,000 in 2006 from $0 in 2005 due primarily to temporary financing used to facilitate the acquisition of two of our real estate investments.
Liquidity and Capital Resources
We expect that primary sources of capital over the long term will include net proceeds from the sale of our common stock and net cash flows from operations. We expect that our primary uses of capital will be for property acquisitions, for the payment of tenant improvements and leasing commissions, for the payment of operating expenses, including interest expense on any outstanding indebtedness, and for the payment of distributions.
As of December 31, 2005,2007, excluding shares issued under the distribution reinvestment plan, approximately 9.7 million shares of our common stock had been sold in the Offering for aggregate gross proceeds of approximately $77.7 million. At that date, we had $117,342approximately $6.6 million in cash and cash equivalents.equivalents on hand and approximately $6.7 million available under our acquisition credit facility with HSH Nordbank. Our primary sourceliquidity will increase as additional subscriptions are accepted and decrease as net offering proceeds are expended in connection with the acquisition and operation of future capital is anticipated toproperties.
There may be froma delay between the sale of common stockour shares and the purchase of properties. During this period, net offering proceeds will be temporarily invested in our initial public offering, whichshort-term, liquid investments that could yield lower returns than investment in real estate.
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commenced in January 2006. We had not received any offering proceeds asGenerally, cash needs for items other than property acquisitions will be met from operations, and cash needs for property acquisitions will be met from public offerings of December 31, 2005. As of March 17, 2006, we had sold 250,948our shares of common stock for gross proceeds of $$2 million,.or from borrowings on our credit facility.
The primary use ofUntil proceeds from our offering are invested and generating operating cash isflow sufficient to fund capital investment in new acquisitions. We may also regularly require capitalmake distributions to invest in routine capital improvements, deferred maintenance on any properties acquired and leasing activities, including funding tenant improvements, allowances and leasing commissions. The amounts of the leasing-related expenditures can vary significantly depending on negotiations with tenants and the willingness of tenantsstockholders, we intend to pay higher base rents overall or a substantial portion of our distributions from the lifeproceeds of the leases.our offering or from borrowings in anticipation of future cash flow.
We are currently dependent on our advisor to fund a portion of our organization and offering activities. As of the date of this report, we are relying on our advisor because we have not raised sufficient capital to pay these expenses andactivities because the amount we can spend on organization and offering expenses is limited by our charter. OrganizationAt December 31, 2007, our advisor had incurred $3.5 million of organization and offering costs on our behalf. Of this amount, $2.8 million had been reimbursed to our advisor. Organization and offering expenses (other than sales commissions and dealer manager fees) consist of all expenses incurred by us or on our behalf in connection with our initial public offering, including our legal, accounting, printing, mailing and filing fees, charges of our escrow holder and other accountable offering expenses, including, but not limited to: (i) amounts to reimburse our advisor for all marketing related costs and expenses such as salaries and direct expenses of employees of or advisor and its affiliates in connection with registering and marketing our shares (ii) technology costs associated with the offering of our shares; (iii) our costs of conducting our training and education meetings; (iv) our
29
costs of attending retail seminars conducted by participating broker-dealers; and (v) payment or reimbursement of bona fide due diligence expenses. Our advisor will advance us money for these organization and offering expenses or pay those expenses on our behalf. Our advisor will not charge us interest on these advances. We will repay these advances and reimburse our advisor for expenses paid on our behalf using the gross proceeds of our initial public offering, but in no event will we have any obligation to reimburse our advisor for these costs totaling in excess of 3.5% of the gross proceeds from our primary offering. Our advisor will pay all of our organization and offering expenses described above that are in excess this 3.5% limitation. In addition, our advisor will pay all of our organization and offering expenses that, when combined with the sales commissions and dealer manager fees that we incur, exceed 13.5% of the gross proceeds from our initial public offering.
Organization and offering costs incurred by our advisor as of December 31, 2005, but not reflected in our consolidated financial statements, were $1.5 million which includes approximately $110,000 of organizational costs which will be expensed as incurred and approximately $1,390,000 of offering costs which will reduce the net proceeds of our offering. These costs are not recorded in our accompanying consolidated financial statements because we had not raised the $1,000,000 minimum offering amount as of December 31, 2005 and therefore we were not obligated to reimburse the advisor for organization and offering expenses as of such date. We raised the minimum offering amount and closed escrow in February 2006. Because our obligation to reimburse our advisor is limited as a percentage of the gross offering proceeds that we raise, the amount of such costs in excess of these limitations is not a liability of the company. Costs currently in excess of these limitations may become a liability of the company in the future as the amount of our gross offering proceeds increases, which would result in a corresponding increase in the dollar amount of the limitation, thereby creating a reimbursement obligation on our part. When recorded by the company, organizational costs will be expensed as incurred, and offering costs will be deferred and charged to stockholders’ equity as such amounts are reimbursed to the advisor from the gross proceeds of our initial public offering.
We will not rely on advances from our advisor to acquire properties but our advisor and its affiliates may loan funds to special purposes entities that may acquire properties on our behalf pending our raising sufficient proceeds from our initial public offering to purchase the properties from the special purpose entity.
Our advisor is newly formed, has limited capitalization, has incurred losses since its inception and is continuing to incur significant losses. Our advisor must obtain financial support from its affiliates or sole member or raise funds through the sale of its own debt or equity securities to obtain the cash necessary to provide these advances. There can be no assurance as to the amount or timing of our advisor’s receipt of funds. Adverse changes in the financial condition of our advisor could adversely affect us. If our advisor’s financial condition affects the amount of funds available to us for offering and organizational activities, our
22
ability to raise funds in our initial public offering could be adversely affected. Cornerstone Industrial Properties, LLC, the sole member of our advisor, has limited capitalization, has incurred significant losses since its inception and is continuing to incur significant losses.
We will require funds for property acquisitions, either directly or through investment interests, for paying operating expenses and distributions, and for paying interest on our outstanding indebtedness, if any. Generally, cash from operations will be used to pay for items other than property acquisitions, and the proceeds from the public offerings of our stock and debt financings, if any, will be used to fund property acquisitions.
We intend to own our properties all-cash, with no permanent financing by paying the entire purchase price of each property in cash, or with our equity securities, or equity securities of our operating partnership, or a combination thereof. During the offering period, we may use temporary debt financing to facilitate our acquisitions of properties in anticipation of receipt of offering proceeds. We will endeavor to repay any temporary acquisition debt financing promptly upon receipt of proceeds in our initial public offering. To the extent sufficient proceeds from our offering are unavailable to repay such debt financing within a reasonable time as determined by our board of directors, we will endeavor to raise additional equity or sell properties to repay such debt so that we will own our properties all-cash with no permanent financing. In the event that our initial public offering is not fully sold, our ability to diversify our investments may be diminished.
At certain times duringWe are not aware of any material trends or uncertainties, favorable or unfavorable, other than national or regional economic conditions affecting real estate generally, which we anticipate may have a material impact on either capital resources or the revenues or income to be derived from the operation of real estate properties
Election as a REIT
We elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, for the year ended December 31, 2007. Under the Internal Revenue Code of 1986, we are not be subject to federal income tax on income that we distribute to our initial public offering, therestockholders. REITs are subject to numerous organizational and operational requirements in order to avoid taxation as a regular corporation, including a requirement that they generally distribute at least 90% of their annual taxable income to their stockholders. If we fail to qualify for taxation as a REIT in any year, our income will be taxed at regular corporate rates, and we may be precluded from qualifying for treatment as a delay betweenREIT for the sale offour-year period following our stock and our purchase of properties, whichfailure to qualify. Our failure to qualify as a REIT could result in us having a delay in our stockholders receiving distributions generated from our investment operations. To avoid this delay, we may arrange interim bridge financing to facilitate acquisitions.
During the period between the execution of the purchase contract and the satisfaction of any closing conditions, such as completion of financing arrangements, if any, review of the title insurance commitment, an appraisal, an environmental analysis and other due diligence, we may decide to temporarily invest any unused proceeds from the offering in certain investments that could yield lower returns than the properties. These lower returns may affect our ability to make distributions. Additionally, we may invest excess cash in interest-bearing accounts and short-term interest-bearing securities. Such investments may include,significant liability for example, investments in marketable securities of publicly traded REITs, certificates of deposit and interest-bearing bank deposits.
Potential future sources of capital include proceeds from future equity offerings, 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 at the discretion of our board of directors.taxes.
Other Liquidity Needs
REIT Requirements
As of December 31, 2005, we have not elected to qualify as a REIT for federal income tax purposes, and accordingly, we are not required to make distributions of 90% of our REIT taxable income. In future periods, following our election to qualify as a REIT for federal income tax purposes, the amount of distributions will depend on our funds from operations, financial condition, capital requirements, annual distribution requirements under the REIT provisions of the Internal Revenue Code and other factors our board of directors deem relevant. We have not made distributions during the year ended December 31, 2005 or during the period from inception through December 31, 2004.
Property Acquisitions
We expect to purchase properties and have expenditures for capital improvements, tenant improvements and lease commissions in the next twelve months, however, those amounts cannot be
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estimated at this time. We cannot assure, however, that we will have sufficient funds to make any acquisitions or related capital expenditures at all.
Debt Service Requirements
On June 30, 2006, we entered into a Credit Agreement with HSH Nordbank AG, New York Branch, for a temporary credit facility that we will use during the offering period to facilitate our acquisitions of properties in anticipation of the receipt of offering proceeds. The Credit Agreement permits us to borrow up to $50,000,000 secured by real property at a borrowing rate based on LIBOR plus a margin ranging from 1.15% to 1.35% and requires payment of a usage premium of up to 0.15% and an annual administrative fee. We may use the entire credit facility to acquire real estate investments and we may use up to 10% of
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the credit facility for working capital. We are entitled to prepay the obligations at any time without penalty. The principal balance is due on June 30, 2008 with two one-year extensions at the option of the borrower. The obligations under the Credit Agreement may be accelerated in the event of a default as defined in the Credit Agreement. In connection with documentation and closing the Credit Agreement, we have paid fees and expenses totaling approximately $1.0 million. As of December 31, 2005,March 1, 2008, the outstanding balance of borrowings under this credit facility was approximately $40.9 million.
The loan agreement entered with Wachovia Bank, National Association was to facilitate the acquisition of Orlando Small Bay portfolio. Pursuant to the terms of the loan agreement, we were not subject to any long term debt arrangements nor didmay borrow $22.4 million at an interest rate 140 basis points over 30-day LIBOR, secured by specified real estate properties. The loan agreement has a maturity date of November 13, 2009, and may be prepaid without penalty. As of March 1, 2008, we have commitments from any financial institutionsan outstanding balance of approximately $22.4 million loan payable due to provide debt financing to us.Wachovia Bank, National Association.
Contractual Obligations
None.The following table reflects our contractual obligations as December 31, 2007, specifically our obligations under long-term debt agreements and purchase obligations:
Currently, we are not considering any specific potential property acquisitions.
|
| Payment due by period |
| |||||||||||
Contractual Obligations |
| Total |
| Less than |
| 1-3 years |
| 3-5 years |
| More than |
| |||
Long-Term Debt Obligations |
| $ | 65,699,000 |
| $ | 43,278,000 |
| $ | 22,421,000 |
| — |
| — |
|
Interest Expense related to long term debt (1) |
| $ | 3,806,000 |
| $ | 2,603,000 |
| $ | 1,203,000 |
| — |
| — |
|
(1) Interest expense is calculated based on the loan balance outstanding at December 31, 2007, one month LIBOR at December 31, 2007 plus appropriate margin ranging from 1.15% to 1.40%.
Off-Balance Sheet Arrangements
There are no off-balance sheet transactions, arrangements or obligations (including contingent obligations) that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in the financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources other than organizational and offering costs which are described above.resources.
Inflation
Although the real estate market has not been affected significantly by inflation in the recent past due to the relatively low inflation rate, we expect that the majority of our tenant leases will include provisions that would protect us to some extent from the impact of inflation. Where possible, our leases will include provisions for rent escalations and partial reimbursement to us of expenses. Our ability to include provisions in the leases that protect us against inflation is subject to competitive conditions that vary from market to market.
Subsequent Events
In January 2006, we began selling sharesDeclaration of our common stock through our affiliated dealer manager, Pacific Cornerstone Capital, Inc. Distributions
On February 28, 2006 offering proceeds exceeded8, 2008, the $1,000,000 offering minimum. The numberboard of sharesdirectors of Cornerstone Core Properties REIT, Inc. solddeclared a daily distribution on its common stock in the amount of $0.001315 per share to each stockholder of record as of the close of business on each day of March, 17, 2006 totaled 250,948, for aggregate gross proceedsApril, May and June 2008 to be paid in cumulative amounts on or before April 15, 2008, May 15, 2008, June 15, 2008 and July 15, 2008, respectively. The amount of $2 million.daily distributions, if paid each day over a 365-day period, would equal a 6.0% annualized rate based on a share price of $8.00 per share.
Sale of Shares of Common Stock
From January 1, 2008 through March 7, 2008, we raised approximately $8.1 million through the issuance of approximately 1.0 million shares of our common stock under our Offering.
Long Term Debt Obligation
On January 16, 2006February 29, 2008, we dismissed BDO Seidman, LLP and appointed Deloitte & Touche LLP as our independent registered public accounting firm.made a payment approximately in the amount of $2.3 million to HSH Nordbank, AG.
Potential Property Acquisitions31
We currently are not considering any specific potential property acquisitions.
Critical Accounting Policies
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, or GAAP, requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We believe that our critical accounting policies are those that require significant judgments and estimates such as those related to real estate purchase price allocation, evaluation of possible impairment of real property assets, revenue recognition and valuation of receivables, and income taxes. These estimates are made and evaluated on an on-going basis using information that is currently available as well as various other assumptions believed to be reasonable under the circumstances. Actual results could vary from those estimates, perhaps in material adverse ways, and those estimates could be different under different assumptions or conditions.
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Real Estate Purchase Price Allocation
We will account for all acquisitions in accordance with Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 141, “Business Combinations” (“FAS 141”). The results of operations of acquired properties are included in our Consolidated Statements of Operation after the date of acquisition. Upon acquisition of a property, we will allocate the purchase price of the property based upon the fair value of the assets acquired and liabilities assumed, which generally consist of land, buildings, site improvements, tenant improvements, leasing commissions and intangible assets including in-place leases and above market and below market leases. We will allocate the purchase price to the fair value of the tangible assets of an acquired property by valuing the property as if it were vacant. The value of the building is depreciated over an estimated useful life of 39 years. The value of site improvements is depreciated over an estimated useful life of 15-20 years. The value of tenants improvements is depreciated generally the shorter of lease term or useful life.
The purchase price is further allocated to in-place lease values based on management’s evaluation of the specific characteristics of each tenant’s lease and our overall relationship with the respective tenant. The value of in-place lease intangibles, which is included as a component of investments in real estate, is amortized to expense over the remaining lease term.
Acquired above and below market leases will beare valued based on the present value of the difference between prevailing market rates and the in-place rates over the remaining lease term.
The purchase price will be allocated to in-place lease values based on management’s evaluation of the specific characteristics of each tenant’s lease and the our overall relationship with the respective tenant. The value of acquired above and below market leases will beis amortized over the remaining non-cancelable terms of the respective leases as an adjustment to rental revenue on our consolidated statements of operations. TheShould a tenant terminate its lease, the unamortized portion of the above or below market lease value of in-place lease intangibles, which will be included as a component of other assets, will be amortizedcharged to expense over the remaining lease term of the respective lease.revenue. If a lease is terminated prior to its expiration, the unamortized portion of the tenant improvements, leasing commissions, above and below market leasesintangible lease assets or liabilities and the in-place lease value will be immediately charged to expense.
The estimated useful lives for lease intangibles range from 1 month to 10 years.
Evaluation of Possible Impairment of Real Property Assets
Management will continually monitor events and changes in circumstances that could indicate that the carrying amounts of the our real estate assets, including those held through joint ventures, may not be recoverable. When indicators of potential impairment are present that indicate that the carrying amounts of real estate assets may not be recoverable, we will assess the recoverability of the real estate assets by determining whether the carrying value of the real estate assets will be recovered through the undiscounted future operating cash flows expected from the use of the asset and its eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying value, we will adjust the real estate assets to the fair value and recognize an impairment loss.
Projections of expected future cash flows require us 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 re-lease the property and the number of years the property is held for investment. The use of certain assumptions in the future cash flows analysis would result in an incorrect assessment of the property’s future cash flows and fair value and could result in the overstatement of the carrying value of our real estate assets and net income if those assumptions ultimately prove to be incorrect.
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Revenue Recognition and Valuation of Receivables
Our revenues, which will beare comprised largely of rental income, will include rents reported on a straight-line basis over the initial term of the lease. Since our leases may provide for free rent, lease incentives or rental increases at specified intervals, we will be required to straight-line the recognition of revenue, which will result in the recording of a receivable for rent not yet due under the lease terms. Accordingly, our management will be required to determine, in its judgment, to what extent the unbilled rent receivable applicable to each specific tenant is collectible. Management will review unbilled rent receivable on a quarterly basis and take into consideration the tenant’s payment history, the financial condition of the tenant, business conditions in the industry in which the tenant operates and economic conditions in the area in which the property is located. In the event that the collectability of unbilled rent with respect to any given tenant is in doubt, we will record an increase in our allowance for doubtful accounts or record a direct write-off of the specific rent receivable.
Income Taxes
We expect to make an electionhave elected to be taxed as a REIT for federal income tax purposes beginning with itsour taxable year ending December 31, 2006. To qualify as a REIT, we must meet certain organizational and
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operational requirements, including a requirement to currently distribute at least 90% of the REIT’s ordinary taxable income to stockholders. As a REIT, we generally will not be subject to federal income tax on taxable income that it distributes to its stockholders. If we fail to qualify as a REIT in any taxable year, we will then be subject to federal income taxes 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 during which qualification is lost unless the Internal Revenue Service granted us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cash available for distribution to stockholders. However, we believe that we will be organized and operate in such a manner as to qualify for treatment as a REIT, beginning with our taxable year ending December 31, 2006,2007, and intend to operate in the foreseeable future in such a manner so that we will remain qualified as a REIT in subsequent tax years for federal income tax purposes. Due to the early stage of our operations, during 2007, all distributions constituted a return of capital.
Recently Issued Accounting Pronouncements
In June 2005,July 2006, the Emerging Issues Task ForceFinancial Accounting Standards Board (“EITF”FASB”) reached a consensus on EITF 04-05, “Investor’sissued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Investment in a Limited Partnership Wheninterpretation of FASB Statement No. 109, (“FIN 48”), which clarifies the Investor Isrelevant criteria and approach for the Sole General Partnerrecognition, derecognition, and the Limited Partners Have Certain Rights” (“EITF 04-05”) which provides guidance on when a sole general partner should consolidate a limited partnership. A sole general partner in a limited partnership is presumed to control that limited partnership and therefore should include the limited partnership in its consolidated financial statements, regardlessmeasurement of the sole general partner’s ownership interest in the limited partnership. The control presumption may be overcome if the limited partners have the ability to remove the sole general partner or otherwise dissolve the limited partnership. Other substantive participating rights by the limited partners may also overcome the control presumption. This consensusuncertain tax positions. FIN 48 is effective for general partners of all newly formed limited partnerships and existing limited partnerships for which the partnership agreements are modified. For general partners in all other limited partnerships, this consensus would be effective no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005.2006. The Company doesadoption of FIN 48 on January 1, 2007 did not expect EITF 04-05 to have a significantmaterial impact on itsour consolidated financial statements.
In March 2005,September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements to increase consistency and comparability of fair value measurements. In February 2008, the FASB issued FASB InterpretationStaff Position SFAS 157-1, Application of FASB Statement No. 47,157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 (“FSP FAS 157-1”). FSP FAS 157-1 defers the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. FSP FAS 157-1 also excludes from the scope of SFAS 157 certain leasing transactions accounted for under Statement of Financial Accounting Standards No. 13, Accounting for Conditional Asset Retirement Obligations, (FIN 47)Leases. FIN 47 is an interpretationThe Company adopted SFAS 157 and FSP FAS 157-1 on a prospective basis effective January 1, 2008. The adoption of SFAS No. 143, Asset Retirement Obligations, which was issued in June 2001. FIN 47 was issued to address diverse accounting practices that have developed with regard to the timing of liability recognition for legal obligations associated with the retirement of a tangible long-lived asset in which the timing and/or method of settlement are conditional on a future event that may or may157 and FSP FAS 157-1 is not be within the control of the entity. According to FIN 47, uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than December 31, 2005 for the Company. The Company does not expect the adoption of FIN 47expected to have a material impact on itsour consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for fiscal years begining after November 15, 2007. The adoption of SFAS No. 159 on January 1, 2008 did not have a material effect on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (R), “Business Combinations” (“SFAS 141(R)”). In summary, SFAS 141(R) requires the acquirer of a business combination to measure at fair value the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, with limited exceptions. The standard is effective for fiscal years beginning after December 15, 2008, and is to be applied prospectively, with no earlier adoption permitted. The adoption of this standard may have an impact on the accounting for certain costs related to our future acquisitions.
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In December 2007, FASB issued Statements No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” an amendment to Accounting Research Board No. 51 (“SFAS 160”). SFAS 160 objective is to improve the relevance, comparability and transparency of financial information that a reporting entity provides in its consolidated financial statements. The key aspects of SFAS 160 are (i) the minority interests in subsidiaries should be presented in the consolidated balance sheet within equity of the consolidated group, separate from the parent’s shareholders’ equity, (ii) acquisitions or dispositions of noncontrolling interests in a subsidiary that do not result in a change of control should be accounted for as equity transactions, (iii) a parent recognizes a gain or loss in net income when a subsidiary is deconsolidated, measured using the fair value of the non-controlling equity investment, (iv) the acquirer should attribute net income and each component of other comprehensive income between controlling and noncontrolling interests based on any contractual arrangements or relative ownership interests, and (v) a reconciliation of beginning to ending total equity is required for both controlling and noncontrolling interests. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008 and should be applied prospectively. We are currently evaluating the provisions for SFAS 160 to determine the potential impact, if any, the adoption will have on our consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk includes risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. We invest our cash and cash equivalents in angovernment backed securities and FDIC insured savings account which, by its nature, isare subject to interest rate fluctuations. However, we expect that the primary market risk to which we will be exposed is interest rate risk relating to our credit facility.
Our credit facility with HSH Nordbank AG, permits us to borrow up to $50,000,000 secured by real property at a borrowing rate based on LIBOR plus a margin ranging from 1.15% to 1.35% and requires payment of a usage premium of up to 0.15% and an annual administrative fee. We may use the entire credit facility to acquire real estate investments and we may use up to 10% of the credit facility for working capital. We are entitled to prepay the obligations at any time without penalty. The principal balance is due on June 30, 2008. We have a one time option to extend the maturity date by one year to June 30, 2009. Upon acceptance of the one year extension by HSH Nordbank AG, we will have an additional one time option to extend the maturity date for another year to June 30, 2010. As of March 1, 2008, we have an outstanding balance of approximately $40.9 million loan payable due to HSH Nordbank AG, New York Branch.
The loan agreement entered with Wachovia Bank, National Association was to facilitate the acquisition of Orlando Small Bay portfolio. Pursuant to the terms of the loan agreement, we may borrow $22.4 million at an interest rate 140 basis points over 30-day LIBOR, secured by specified real estate properties. The loan agreement has a maturity date of November 13, 2009, and may be prepaid without penalty. As of March 1, 2008, we have an outstanding balance of approximately $22.4 million loan payable due to Wachovia Bank, National Association.
We may be exposed to the effects of interest rate changes primarily as a result of debt under our credit facilities used to maintain liquidity and fund expansion of our real estate investment portfolio and operations. Our interest rate risk management objectives will be to monitor and manage the impact of interest rate changes on earnings and cash flows by considering using certain derivative financial instruments such as interest rate swaps and caps in order to mitigate our interest rate risk on variable rate debt. We will not enter into derivative or interest rate transactions for speculative purposes.
As of December 31, 2007, we had borrowed approximately $65.7 million under our credit facility and loan agreement. The credit facility with HSH Nordbank and future borrowing on the credit facility is subject to a variable rate through its maturity date of June 30, 2008. The loan agreement with Wachovia Bank, National Association is subject to a variable rate through its maturity date of November 13, 2009. An increase in the variable interest rate on the facilities constitutes a market risk as a change in rates would increase or decrease interest incurred and therefore cash flows available for distribution to shareholders. Based on the debt outstanding as of December 31, 2007, a 1% change in interest rates would result in a change in interest expense of approximately $657,000 per year.
On September 7, 2007, we entered into a swap transaction with HSH NordBank AG which capped our interest rate at 6% LIBOR through June 30, 2008.
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In addition to changes in interest rates, the value of our real estate is subject to fluctuations based on changes in the real estate capital markets, market rental rates for office space, local, regional and national economic conditions and changes in the creditworthiness of tenants. All of these factors may also affect our ability to refinance our debt if necessary.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index included at Item 15. Exhibits, Financial Statement Schedules.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
BDO Seidman, LLP, the registrant’s independent registered public accounting firm, was dismissed on January 16, 2006. The registrant was formed on October 22, 2004. The reports of BDO Seidman, LLP on the registrant’s financial statements since inception did not contain an adverse opinion or a disclaimer ofNot applicable.
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opinion and was not qualified or modified as to uncertainty, audit scope, or accounting principles. During the period from registrant’s inception through such dismissal, there were no disagreements with BDO Seidman, LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of BDO Seidman, LLP, would have caused it to make reference to the subject matter of the disagreements in connection with its report. During the same period, there have been no reportable events, as that term is defined in Item 304(a)(1)(v) of Regulation S-K.
On January 16, 2006, the registrant engaged Deloitte & Touche LLP as its new independent registered public accounting firm. The decision to change accountants was recommended by the audit committee of the board of directors of the registrant and approved by the board of directors.
ITEM 9A.9A(T). CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our senior management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Our Chief Executive Officer and our Chief Financial Officer have reviewed the effectiveness of our disclosure controls and procedures and have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report.
In designing and evaluating the 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, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
WeOur Chief Executive Officer and Chief Financial Officer are in the process of developingresponsible for establishing and implementing a formal set ofmaintaining internal controls and procedures forcontrol over financial reporting, as requiredsuch term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Sarbanes-Oxley ActCommittee of 2002. The efficacySponsoring Organizations of the steps we have takenTreadway Commission (COSO). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to date and steps wefuture periods are still in the process of completing is subject to continued management review supportedthe risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Based on their evaluation as of the end of the period covered by confirmationthis report, our Chief Executive Officer and testing by management and by our auditors. We anticipateChief Financial Officer have concluded that additionalwe maintained effective internal control over financial reporting as of December 31, 2007.
There have been no changes may be made to our internal controls and procedures. Other than the foregoing initiatives, no change in our internal control over financial reporting occurred during the periodour most recent fiscal quarter ended December 31,2005 that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.
Subject to the limitations notes above, our management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectivenessThis annual report does not include an attestation report of the design and operation of our disclosure controls and procedures ascompany’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the end ofSecurities and Exchange Commission that permit the fiscal year covered by this Annual Report on Form 10-K. Based on this evaluation, the chief executive officer and chief financial officer have concluded that, as of such date, our disclosure controls and procedures were effectivecompany to meet the objective for which they were designed and operate at a reasonable assurance level.
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is basedmanagement’s report in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.this annual report.
None.
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ITEM 10. DIRECTORS, AND EXECUTIVE OFFICERS OF THE REGISTRANTAND CORPORATE GOVERNANCE
The following table and biographical descriptions set forth information with respectrequired by this Item is incorporated by reference from our definitive Proxy Statement to our executive officers and directors. Our directors serve for a term of one year or until their successors are duly elected and qualified. Our executive officers serve at the pleasure of our board of directors and have no fixed term of office.
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There are no family relationships between any directors, executive officers, or managers.
Executive Officers and Directors
Terry G. Roussel is one of the founding stockholders of the Cornerstone-related entities that commenced operations in 1989. Mr. Roussel has been our President and Chief Executive Officer and a director since 2004 and is the promoter of the company by initiating the founding and organizing of our business. Mr. Roussel is the Chief Executive Officer and a Director of Cornerstone Realty Advisors, LLC, our Advisor. Mr. Roussel is also the President, Chief Executive Officer, a Director and the majority shareholder of Cornerstone Ventures, Inc., an affiliate of our advisor. Mr. Roussel is also a principal and the majority shareholder of Pacific Cornerstone Capital, Inc., the dealer-manager for this offering. Under Mr. Roussel’s direction, Cornerstone and its affiliates formed nine separate real estate investment funds and joint ventures. In 1993, Cornerstone and its affiliates became managing joint venture partner with Koll Capital Markets Group, Inc., a wholly owned subsidiary of Koll Management Services, Inc. (now owned by CB Richard Ellis).
As managing partner of the above-described funds and joint ventures, Cornerstone and its affiliates were responsible for the acquisition, operation, leasing, and disposition of all jointly owned properties between Cornerstone and Koll. In connection with acquiring properties for the account of these joint ventures, Mr. Roussel personally supervised the acquisition of each property, initiated and directed the business plan for each property, and arranged debt and equity financing for the acquisition of each property.
In 1985, Mr. Roussel started the Special Investments Group, a new division within Bank of America’s Capital Markets Group which provided real estate investment opportunities to the bank’s wealthiest private banking clients. Between 1980 and 1985, Mr. Roussel was employed by Bateman Eichler, Hill Richards, Inc., a regional securities firm headquartered in Los Angeles, California. In this capacity, Mr. Roussel was promoted to First Vice President and Manager of the partnership finance department where he was responsible for the due diligence and marketing of all publicly registered real estate funds offered by the firm.
Mr. Roussel graduated with honors from California State University at Fullerton in 1976 with a B.A. in Business Administration with a concentration in Accounting. Subsequent to graduation, Mr. Roussel joined the accounting firm of Arthur Andersen & Co. as an auditor and later transferred to the tax department of Arthur Young & Co., the predecessor firm to Ernst & Young. Mr. Roussel became a Certified Public Accountant in 1979.
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Sharon C. Kaiser joined Cornerstone in July 2005 as our Chief Financial Officer and in August 2005, she became the Chief Financial Officer of our advisor. Ms. Kaiser is responsible for our finance and accounting, MIS, human resources and administrative functions.
Prior to joining Cornerstone, Ms. Kaiser was Director of Financial Operations for Westfield America, Inc., an owner, manager and developer of regional shopping centers with approximately $9 billion in assets and the American subsidiary of one of the largest listed retail REITs in the world with approximately $25 billion in assets. From 1999 to 2002, Ms. Kaiser served as Chief Financial Officer of The StayWell Company, a subsidiary of Vivendi Universal, and from 1995 to 1999, she served as Chief Financial Officer and Senior Vice President of HemaCare Corporation, a publicly-traded biomedical company. Her responsibilities included financial accounting and reporting, information technology, investor relations and human resources, as well as strategic planning and acquisition due diligence and integration.
Before joining HemaCare Corporation, Ms. Kaiser served as the Chief Financial Officer of a publicly-traded (AMEX) REIT sponsored by The Koll Company. She started her career with Arthur Andersen and Co., leaving as a senior manager.
Ms. Kaiser holds a Bachelor of Science degree in Business Administration from the University of Southern California and has been a Certified Public Accountant since 1981.
Dominic J. Petrucci has been our Chief Operating Officer since 2004 and is also the Chief Operating Officer of our advisor and Cornerstone Ventures, Inc. Mr. Petrucci is responsible for overseeing all our operations.
Prior to joining Cornerstone Ventures in 2002, Mr. Petrucci served since 1998 as Division President of Koll Development Company. In this capacity he managed the commercial real estate development activities for a 2.8 million square foot portfolio. Mr. Petrucci’s responsibilities included business development, divisional oversight of operations and administration, and participation on Koll Development Company’s Executive Committee and Investment Committee.
Mr. Petrucci was a Vice President for Kitchell Development Company and Kitchell Corporation from 1996 to 1998. As Vice President for Kitchell Development Company, he oversaw Kitchell’s real estate development operations throughout the western United States. As Vice President — Finance for Kitchell Corporation, Mr. Petrucci provided total financial oversight of their domestic and international construction activities and managed the property management, financial services, human resources, and risk management departments for Kitchell ($300 million annual revenues).
From 1990 until early 1996, Mr. Petrucci workedbe filed with the Koll organization in various capacities. He was Chief Financial OfficerSecurities and Corporate Secretary for Koll Construction, Vice President — Finance for Koll International, and Group Controller for Koll Development. In his capacities with Kitchell and Koll, Mr. Petrucci was involved in the origination and restructuring of nearly $1 billion in debt and equity investments in addition to participation in the marketing and selling of nearly $300 million of property.
Mr. Petrucci began his career in the real estate group at KPMG Peat Marwick in Los Angeles where he earned a Certified Public Accountant designation. Mr. Petrucci earned his Bachelor of Science degree in Commerce, with an accounting major from Rider University in Lawrenceville, New Jersey.
Robert C. Peterson has been our Chief Investment Officer since 2004 and is also the Chief Investment Officer and a Director of our advisor. Mr. Peterson was previously Executive Vice President of Acquisitions and Dispositions for Koll Bren Schreiber Realty Advisors (“KBS”). KBS is one of the largest institutional real estate fund managers in the United States. KBS has acquired over $5 billion of commercial real estate on behalf of many of the largest private and public institutional investors in the United States. In his capacity, Mr. Peterson was the individual responsible for identifying, underwriting, acquiring and disposing of real estate opportunities in the western half of the United States for KBS. Mr. Peterson was with KBS since its inception in 1992 until 2003.
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From 1990 to 1992, he was an officer of Koll Management Services, Inc. (“Koll”), one of the largest managers and operators of commercial real estate in the United States. Mr. Peterson was instrumental in the formation of both the first joint venture between Koll and Cornerstone in 1993 and the second joint venture between Koll and Cornerstone in 1995.
Mr. Peterson has 24 years of real estate investment experience, including a diverse background in acquisitions, financing, and leasing through previous affiliations with Koll Management Services, Meyer Real Estate Advisors, VMS Realty, Inc. and Peat Marwick in Chicago.
Mr. Peterson earned a Certified Public Accountant (CPA) designation and is a Certified Commercial Investment Member (CCIM), Certified Property Manager (CPM) and a licensed Real Estate Broker in the state of California. Mr. Peterson also holds a Bachelor’s Degree in Accounting from the University of Illinois.
Alfred J. Pizzurro has been our Senior Vice President and Secretary since 2004. Mr. Pizzurro is also a Senior Vice President and Director of our advisor and a Senior Vice President, a Director and a principal of Cornerstone Ventures, Inc. and Pacific Cornerstone Capital, Inc., the dealer manager for this offering. Mr. Pizzurro joined Cornerstone Ventures, Inc. inExchange Commission no later than April 1998 and has been the individual primarily responsible for Cornerstone Venture’s marketing and new business development activities since that time.29, 2008.
Between 1993 and 1998, Mr. Pizzurro was responsible for business development both domestically and internationally for The Joseph Company, a research and development company. From 1986 to 1992, he was the Director of Marketing for a regional real estate company. Mr. Pizzurro served as a helicopter pilot in the United States Marine Corps between 1979 and 1986 where he attained the rank of Captain.
Mr. Pizzurro received his Bachelor of Science Degree in Communications from Clarion University in 1978.
Paul Danchik retired in 2003 as Senior Vice President of Warner Media Services, a division of Time Warner Inc. Mr. Danchik was a member of the Executive Management Team of Warner Media Services and was responsible for their Consumer Products Business unit. Mr. Danchik began his career with Ivy Hill Packaging in 1973 which was acquired by Time Warner, Inc. in 1989. Mr. Danchik also serves as a director of Acres of Love, a non-profit organization currently operating eight homes licensed in the Republic of South Africa for care of abandoned children living with or affected by HIV/ AIDS. Mr. Danchik earned a Bachelor of Science Degree in Business Administration from the University of LaVerne.
Joseph H. Holland is a Director of Cornerstone Realty Advisors, LLC. Mr. Holland is currently the managing member of Uptown Partners, LLC, a real estate group developing market-rate, multi-family housing in New York City. He is also of counsel with the law firm of Van Lierop, Burns & Bassett, where he handles a wide-ranging real estate law practice focused on the development of affordable housing projects in the New York City metropolitan area. Mr. Holland is Director, New York State Urban Development Corporation, gubernatorial appointee since 2000, Director, Municipal Assistance Corporation of the City of New York, gubernatorial appointee since 1998 and a Member, Board of Trustees, Cornell University since 1998.
Mr. Holland is the former Commissioner of the New York State Division of Housing and Community Renewal. In this capacity, Mr. Holland headed the New York State Agency with more than two thousand employees. Mr. Holland was responsible for administering programs in the areas of community development, supervision of State-assisted housing developments and rent regulation in New York City and other municipalities. Mr. Holland held this position between 1995 and 1996. Between 1985 and 1987, Mr. Holland was Chief Counsel for the New York Standing Committee on Housing and Community Development. Mr. Holland is the 1991 recipient of the Volunteer Action Award, presented by President George Bush and the 1991 Entrepreneur of the Year Award, presented by New York Mayor David Dinkins.
Mr. Holland is a 1982 Graduate of Harvard Law School. Mr. Holland received his Bachelor of Arts Degree from Cornell University in 1978 and his Master of Arts Degree from Cornell University in 1979 where his fields of concentration were U.S. Diplomatic History and African-American History.
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Daniel L. Johnson is a founder and since 2003 has been the Senior Vice President of Sales for InfoSpan, Inc., a developer and operator of customer interaction centers for United States based corporations with operations in Latin America. From 2000 to 2003, Mr. Johnson was the President of Rutilus Software, Inc. a developer of disk-based storage software. Prior to 2000, Mr. Johnson spent fourteen years with Toshiba America where he was Vice President of OEM Sales. In this capacity he was responsible for worldwide sales for products within his Division of Toshiba America. Mr. Johnson holds a Bachelor’s degree from Southern Illinois University.
Lee Powell Stedman is the founder and Chief Executive Officer of Realty Development Advisors, LLC (“RDA”) which he formed in 1996. RDA is a full service commercial real estate company specializing in development, leasing and real estate consulting. Since 1995, Mr. Stedman has been involved in the development, financing and leasing of twenty-two commercial properties in five states. Prior thereto, Mr. Stedman was employed in the real estate acquisition department of a real estate firm and was Manager, REO/ Commercial Sales Specialist for the Resolution Trust Corporation. Mr. Stedman received his Bachelor of Science Degree from the University of Minnesota.
Code of Business Conduct and Ethics
We do not have an audit committee financial expert. Because we are not exchange listed, we are not required to have one.
Code of Business Conduct and Ethics
Our board of directors has adopted a Code of Business Conduct and Ethics, which applies to all of our directors and officers. We have filed the Code of Business Conduct and Ethics as an exhibit to this report.
ITEM 11. EXECUTIVE COMPENSATION
Compensation of Executive Officers
We haveThe information required by this Item is incorporated by reference from our definitive Proxy Statement to be filed with the Securities and Exchange Commission no employees and our executive officers are all employees of our advisor and/or its affiliates. These executive officers are compensated by our advisor and/or its affiliates and will not receive any compensation from us for their services. See Item 13 below for discussion of the fees paid by us to our advisor and its affiliates.later than April 29, 2008.
Director Compensation
We pay each of our directors who are not employees of our advisor or its affiliates for attending board and committee meetings as follows:
• $3,000 per regularly scheduled board meeting attended in person or by teleconference;
• $1,000 per regularly scheduled committee meeting attended in person or by teleconference ($1,500 for the audit committee chairperson and $1,250 for other committee chairpersons); and
• $750 per special board meeting attended, whether held in person or by teleconference.
All directors receive reimbursement of reasonable out-of-pocket expenses incurred in connection with attendance at meetings of the board of directors and committees.
In addition, we will issue stock options to the directors pursuant to our Employee and Director Incentive Stock Plan.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table shows, as of March 17, 2006, the number and percentage of shares ofinformation required by this Item is incorporated by reference from our common stock owned by (1) any person who is known by usdefinitive Proxy Statement to be filed with the beneficial owner of moreSecurities and Exchange Commission no later than 5% of our outstanding shares of common stock, (2) our chief executive officer, (3) each director and (4) all directors and executive officers as a group.
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* Represents less than 1% of the outstanding common stock.April 29, 2008.
Equity Compensation Plan Information
Our equity compensation plan information as of December 31, 2005 is as follows:
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(1) Our Employee and Director Incentive Stock Plan was approved by our security holders and provides that the total number of shares issuable under the plan is a number of shares equal to ten percent (10%) of our outstanding common stock. The maximum number of shares that may be granted under the plan with respect to “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code is 5,000,000. As of December 31, 2005, there were only 125 shares of our common stock issued and outstanding.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
We will incur substantial fees and expenses in our organization and offering stage, our acquisition and operating stage and our property disposition stage. In most cases, these fees and expenses will be paid to our advisor or its affiliates, including our dealer manager for our initial public offering.
All of the membership interests in our advisor, Cornerstone Realty Advisors, LLC, are ownedThe information required by Cornerstone Industrial Properties, LLC, which also serves as the managing member of our advisor. Cornerstone Ventures, Inc.this Item is the managing member of Cornerstone Industrial Properties, LLC. Terry G. Roussel, our Chairman, Chief Executive Officer and President, is the Chief Executive Officer and a Director of our advisor, as well as the President, Chief Executive Officer, a Director and the majority
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shareholder of Cornerstone Ventures, Inc. Mr. Roussel is also a principal and the majority shareholder of Pacific Cornerstone Capital, Inc., the dealer-manager for our initial public offering. Alfred J. Pizzurro, our Senior Vice President and Secretary is also a shareholder of Pacific Cornerstone Capital, Inc. and Cornerstone Ventures, Inc. We will pay fees to our advisor for services provided to us pursuant to an advisory agreement and will pay fees and commissions to Pacific Cornerstone Capital, Inc. the dealer-manager for our initial public offering pursuant to a Dealer Manager Agreement. The advisory agreement and dealer manager agreement are included as exhibits to this report. The fees that we will pay to our advisory and dealer manager are summarized below.
Offering Stage
• Sales commissions (payable to our dealer manager) up to 7% of gross offering proceedsincorporated by reference from our primary offering, some or all of which maydefinitive Proxy Statement to be re-allowed to participating brokers.
• Dealer manager fees (payable to our dealer manager) up to 3% of gross offering proceeds from our primary offering, some or all of which may be re-allowed to participating brokers.
• Reimbursements to our advisor or its affiliates for organizationfiled with the Securities and offering expenses (including bona fide due diligence expenses) expected to average between 2% and 3% of gross offering proceeds from our initial public offering, but which could be as much as 3.5%.
Acquisition and Operating Stage
• Property acquisition fees (payable to our advisor or its affiliates) equal to 2% of gross offering proceeds from our primary offering.
• Reimbursement of acquisition expenses to our advisor and its affiliates.
• Monthly asset management fees (payable to our advisor) equal to one-twelfth of 1% of the book values of our assets invested, directly or indirectly, in real estate before non-cash reserves, plus direct and indirect costs and expenses incurred by our advisor in providing asset management services.
• Reimbursement of operating expenses including our advisor’s direct and indirect cost of providing administrative services.
Listing/ Liquidation Stage
• Property disposition fees (payable to our advisor or its affiliates), if our advisor or its affiliates perform substantial services in connection with property sales, up to 3% of the price of the properties sold.
• After stockholders have received cumulative distributions equal to $8 per share (less any returns of capital) plus cumulative, non-compounded annual returns on net invested capital, our advisor will be paid a subordinated participation in net sale proceeds ranging from a low of 5% of net sales provided investors have earned annualized returns of 6% to a high of 15% of net sales proceeds if investors have earned annualized returns of 10% or more.
• Upon termination of the advisory agreement, our advisor will receive the subordinated performance fee due upon termination. This fee ranges from a low of 5% of the amount by which the sum of the appraised value of our assets minus our liabilities on the date the advisory agreement is terminated plus total dividends (otherExchange Commission no later than stock dividends) paid prior to termination of the advisory agreement exceeds the amount of invested capital plus annualized returns of 6%, to a high of 15% of the amount by which the sum of the appraised value of our assets minus our liabilities plus all prior dividends (other than stock dividends) exceeds the amount of invested capital plus annualized returns of 10% or more.April 29, 2008.
• In the event we list our stock for trading, our advisor will receive a subordinated incentive listing fee instead of a subordinated participation in net sales proceeds. This fee ranges from a low of 5% of the amount by which the market value of our common stock plus all prior dividends (other than
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stock dividends) exceeds the amount of invested capital plus annualized returns of 6%, to a high of 15% of the amount by which the sum of the market value of our stock plus all prior dividends (other than stock dividends) exceeds the amount of invested capital plus annualized returns of 10% or more.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
BDO Seidman, LLP served as our independent registered public accounting firm from inception until they were dismissed by us on January 16, 2006. Deloitte and Touche LLP, the member firms of Deloitte Touche Tohmatsu, and their respective affiliates (collectively, “Deloitte & Touche”), has served as our independent registered public accounting firm from January 16, 2006 and has audited our financial statements for the years ended December 31, 2005 and 2004.
The following table lists the fees for services renderedinformation required by the independent registered public accounting firms for 2005 and 2004:
Services |
| 2005 |
| 2004 |
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Audit Fees (1) |
| $ | 45,300 |
| $ | — |
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Audit-Related Fees (2) |
| 56,300 |
| 88,933 |
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Tax Fees (3) |
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All Other Fees |
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Total |
| $ | 101,638 |
| $ | 88,933 |
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(1) Audit fees billed in 2005 and 2004 consisted of the audit ofthis Item is incorporated by reference from our annual financial statements, reviews of our quarterly financial statements, and statutory and regulatory audits, consents and other services relateddefinitive Proxy Statement to filingsbe filed with the SEC. These amounts include fees paid by our advisorSecurities and its affiliates for costs in connections with our initial public offering that are not included within our consolidated financial statements, as they are subject to the accounting policy described under Organizational and Offering Costs in the notes to the financial statements.Exchange Commission no later than April 29, 2008.
(2) Audit-related fees billed in 2005 and 2004 consisted of financial accounting and reporting consultations.36
(3) Tax services billed in 2005 and 2004 consisted of tax compliance and tax planning and advice.
The Audit Committee preapproves all auditing services and permitted non-audit services (including the fees and terms thereof) to be performed for us by our independent auditor, subject to the de minims exceptions for non-audit services described in Section 10A(i)(1)(B) of the Exchange Act and the rules and regulations of the SEC which are approved by the Audit Committee prior to the completion of the audit.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements
The financial statements are contained on pages F-2 through F-14of this Annual Report on Form 10-K, and the list of the financial statements contained herein is set forth on page F-1, which is hereby incorporated by reference.
The following financial statements are included in a separate section of this Annual Report on Form 10-K commencing on the page numbers specified below: | ||
Report of Independent Registered Public Accounting Firm | ||
Consolidated Balance Sheets as of December 31, 2007 and 2006 | ||
Consolidated Statements of Operations for the Years Ended December 31, 2007, 2006 and 2005 | ||
Consolidated Statements of Stockholders’ Equity (Deficit) for the Years Ended December 31, 2007, 2006, and 2005 | ||
Consolidated Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and 2005 | ||
Notes to Financial Statements |
(2) Financial Statement SchedulesSchedule
All schedules have been omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes.Schedule III - Real Estate and Accumulated Depreciation
(3) Exhibits
The exhibits listed on the Exhibit Index (following the signatures section of this report) are included, or incorporated by reference, in this annual report.report
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-2 | |
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F-3 | |
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F-4 | |
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Consolidated Statements of Stockholders’ Equity (Deficit) | F-5 |
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F-6 | |
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F-7 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Cornerstone Core Properties REIT, Inc.
We have audited the accompanying consolidated balance sheets of Cornerstone Core Properties REIT, Inc. and subsidiaries (the “Company”) as of December 31, 20052007 and 2004,2006, and the related consolidated statements of operations, stockholder’sstockholders’ equity (deficit) equity and cash flows for the yearyears ended December 31, 20052007, 2006 and for2005. Our audit also included the period from October 22, 2004 (date of inception) through December 31, 2004.financial statement schedule listed in the index at item 15. These financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such 2005 and 2004 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cornerstone Core Properties REIT, Inc. and subsidiaries as of December 31, 20052007 and 2004,2006, and the results of their operations and their cash flows for the yearyears ended December 31, 20052007, 2006 and the period from October 22, 2004 (date of inception) through December 31, 20042005 in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.
/s/ DELOITTE & TOUCHE LLP | |
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Costa Mesa, California | |
March |
F-2
CORNERSTONE CORE PROPERTIES REIT, INC. AND SUBSIDIARYSUBSIDIARIES
December 31, 20052007 and 20042006
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| December 31, |
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| December 31, |
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Cash and cash equivalents |
| $ | 117,342 |
| $ | 1,000 |
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| $ | 6,648,000 |
| $ | 11,041,000 |
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| 14,500 |
| — |
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Prepaids and other assets |
| 92,557 |
| — |
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Investments in real estate |
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Land |
| 36,762,000 |
| 16,310,000 |
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Buildings and improvements, net |
| 81,441,000 |
| 18,416,000 |
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Intangible lease assets, net |
| 2,791,000 |
| 1,331,000 |
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| 120,994,000 |
| 36,057,000 |
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Deferred acquisition costs and deposits |
| 633,000 |
| 1,599,000 |
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Deferred financing costs, net |
| 412,000 |
| 697,000 |
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Tenant and other receivables, net |
| 540,000 |
| 206,000 |
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Other assets, net |
| 695,000 |
| 412,000 |
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Total assets |
| $ | 224,399 |
| $ | 1,000 |
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| $ | 129,922,000 |
| $ | 50,012,000 |
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LIABILITIES AND STOCKHOLDER’S (DEFICIT) EQUITY |
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LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’ EQUITY |
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Liabilities: |
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Notes payable |
| $ | 65,699,000 |
| $ | 20,180,000 |
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Accounts payable and accrued liabilities |
| $ | 113,592 |
| $ | — |
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| 1,062,000 |
| 505,000 |
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Accounts payable to related parties |
| 3,787 |
| — |
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Payable to related parties |
| 899,000 |
| 1,955,000 |
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Prepaid rent and security deposits |
| 766,000 |
| 202,000 |
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Property taxes payable |
| 126,000 |
| 13,000 |
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Intangible lease liabilities, net |
| 446,000 |
| 111,000 |
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Distributions payable |
| 367,000 |
| 146,000 |
| |||||||||
Total liabilities |
| 117,379 |
| — |
|
| 69,365,000 |
| 23,112,000 |
| ||||
|
|
|
|
|
| |||||||||
Minority interest |
| 200,350 |
| — |
|
| 309,000 |
| 181,000 |
| ||||
Commitments and contingencies (Note 8) |
|
|
|
|
| |||||||||
Stockholder’s (deficit) equity: |
|
|
|
|
| |||||||||
Common stock, $.01 par value; 290,000,000 shares authorized; 125 shares issued and outstanding at December 31, 2005 and 2004 |
| — |
| — |
| |||||||||
|
|
|
|
|
| |||||||||
Commitments and contingencies (Note 10) |
|
|
|
|
| |||||||||
|
|
|
|
|
| |||||||||
Stockholders’ equity |
|
|
|
|
| |||||||||
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares were issued or outstanding at December 31, 2007 and 2006 |
| — |
| — |
| |||||||||
Common stock, $0.001 par value; 290,000,000 shares authorized; 9,908,551 and 4,328,186 shares issued and outstanding at December 31, 2007 and 2006, respectively |
| 10,000 |
| 4,000 |
| |||||||||
Additional paid-in capital |
| 1,000 |
| 1,000 |
|
| 64,239,000 |
| 28,115,000 |
| ||||
Accumulated deficit |
| (94,330 | ) | — |
|
| (4,001,000 | ) | (1,400,000 | ) | ||||
Total stockholder’s (deficit) equity |
| (93,330 | ) | 1,000 |
| |||||||||
Total liabilities and stockholder’s (deficit) equity |
| $ | 224,399 |
| $ | 1,000 |
| |||||||
Total stockholders’ equity |
| 60,248,000 |
| 26,719,000 |
| |||||||||
Total liabilities, minority interest and stockholders’ equity |
| $ | 129,922,000 |
| $ | 50,012,000 |
| |||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
CORNERSTONE CORE PROPERTIES REIT, INC. AND SUBSIDIARYSUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the YearYears Ended December 31, 20052007, 2006 and Period From October 22, 2004 (date of inception) toDecember 31, 20042005
|
| Year ended December 31, |
| ||||||||||||||
|
| 2007 |
| 2006 |
| 2005 |
| ||||||||||
Revenues: |
|
|
|
|
|
|
| ||||||||||
Rental revenues |
| $ | 4,723,000 |
| $ | 359,000 |
| $ | — |
| |||||||
Tenant reimbursements & other income |
| 1,142,000 |
| 45,000 |
| — |
| ||||||||||
|
| 2005 |
| 2004 |
|
| 5,865,000 |
| 404,000 |
| — |
| |||||
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
| |||||
Property operating and maintenance |
| 1,332,000 |
| 102,000 |
| — |
| ||||||||||
General and administrative |
| $ | 95,134 |
| $ | — |
|
| 2,359,000 |
| 1,294,000 |
| 95,000 |
| |||
Asset management fees |
| 707,000 |
| 38,000 |
|
|
| ||||||||||
Depreciation and amortization |
| 1,529,000 |
| 99,000 |
| — |
| ||||||||||
|
| 5,927,000 |
| 1,533,000 |
| 95,000 |
| ||||||||||
|
|
|
|
|
|
|
| ||||||||||
Operating loss |
| (95,134 | ) | — |
|
| (62,000 | ) | (1,129,000 | ) | (95,000 | ) | |||||
Other income: |
|
|
|
|
| ||||||||||||
Interest and dividend income |
| 1,154 |
| — |
| ||||||||||||
|
|
|
|
|
|
|
| ||||||||||
Interest income |
| 605,000 |
| 203,000 |
| 1,000 |
| ||||||||||
Interest expense |
| (3,147,000 | ) | (391,000 | ) | — |
| ||||||||||
Loss before minority interest |
| (93,980 | ) | — |
|
| (2,604,000 | ) | (1,317,000 | ) | (94,000 | ) | |||||
|
|
|
|
|
|
|
| ||||||||||
Minority interest |
| (350 | ) | — |
|
| (3,000 | ) | (11,000 | ) | — |
| |||||
Net loss |
| $ | (94,330 | ) | $ | — |
|
| $ | (2,601,000 | ) | $ | (1,306,000 | ) | $ | (94,000 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Loss per share - basic and diluted |
| $ | (755 | ) | $ | — |
|
| $ | (0.40 | ) | $ | (1.58 | ) | $ | (752.00 | ) |
Weighted average number of common shares outstanding - basic and diluted |
| 125 |
| 125 |
| ||||||||||||
Weighted average number of common shares |
| 6,429,323 |
| 827,147 |
| 125 |
| ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-4
CORNERSTONE CORE PROPERTIES REIT, INC. AND SUBSIDIARYSUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY (DEFICIT) EQUITY
For the YearYears Ended December 31, 20052007, 2006 and Period From October 22, 2004 (date of inception) to December 31, 20042005
|
| Common Stock |
|
|
|
|
| ||||||||
|
| Number of |
| Common Stock |
| Additional |
| Accumulated |
| Total |
| ||||
BALANCE – Octover 22, 2004 (date of inception) |
| — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
Issuance of common stock |
| 125 |
| — |
| 1,000 |
| — |
| 1,000 |
| ||||
BALANCE – December 31, 2004 |
| 125 |
| — |
| 1,000 |
| — |
| 1,000 |
| ||||
Net loss |
| — |
| — |
| — |
| (94,330 | ) | (94,330 | ) | ||||
BALANCE – December 31, 2005 |
| 125 |
| $ | — |
| $ | 1,000 |
| $ | (94,330 | ) | $ | (93,330 | ) |
|
| Preferred Stock |
| Common Stock |
|
|
|
|
| ||||||||||||||
|
| Number of |
| Preferred |
| Number of |
| Common |
| Additional |
| Accumulated |
| Total |
| ||||||||
BALANCE — December 31, 2004 |
| — |
| — |
| 125 |
| $ | — |
| $ | 1,000 |
| $ | — |
| $ | 1,000 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Net loss |
| — |
| — |
| — |
| — |
| — |
| (94,000 | ) | (94,000 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
BALANCE — December 31, 2005 |
| — |
| — |
| 125 |
| — |
| 1,000 |
| (94,000 | ) | (93,000 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Issuance of common stock |
| — |
| — |
| 4,328,061 |
| 4,000 |
| 34,609,000 |
| — |
| 34,613,000 |
| ||||||||
Stock-based compensation expense |
| — |
| — |
| — |
| — |
| 2,000 |
| — |
| 2,000 |
| ||||||||
Offering costs |
| — |
| — |
| — |
| — |
| (5,911,000 | ) | — |
| (5,911,000 | ) | ||||||||
Distributions declared |
| — |
| — |
| — |
| — |
| (586,000 | ) | — |
| (586,000 | ) | ||||||||
Net loss |
| — |
| — |
| — |
| — |
| — |
| (1,306,000 | ) | (1,306,000 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
BALANCE — December 31, 2006 |
| — |
| — |
| 4,328,186 |
| 4,000 |
| 28,115,000 |
| (1,400,000 | ) | 26,719,000 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Issuance of common stock |
| — |
| — |
| 5,637,800 |
| 6,000 |
| 45,008,000 |
| — |
| 45,014,000 |
| ||||||||
Redeemed shares |
| — |
| — |
| (57,435 | ) | — |
| (417,000 | ) | — |
| (417,000 | ) | ||||||||
Offering costs |
| — |
| — |
| — |
| — |
| (5,271,000 | ) | — |
| (5,271,000 | ) | ||||||||
Distributions declared |
| — |
| — |
| — |
| — |
| (3,196,000 | ) | — |
| (3,196,000 | ) | ||||||||
Net loss |
| — |
| — |
| — |
| — |
| — |
| (2,601,000 | ) | (2,601,000 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
BALANCE — December 31, 2007 |
| — |
| $ | — |
| 9,908,551 |
| $ | 10,000 |
| $ | 64,239,000 |
| $ | (4,001,000 | ) | $ | 60,248,000 |
| |||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
CORNERSTONE CORE PROPERTIES REIT, INC. AND SUBSIDIARYSUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2007, 2006 and 2005
|
| Year Ended |
| October 22, |
| ||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
| ||
Net loss |
| $ | (94,330 | ) | $ | — |
|
Adjustments to reconcile net loss to net cash used in operating activities |
|
|
|
|
| ||
Minority interest expense |
| 350 |
|
|
| ||
Change in operating assets and liabilities: |
|
|
|
|
| ||
Accounts receivable from related parties |
| (14,500 | ) | — |
| ||
Prepaids and other assets |
| (92,557 | ) | — |
| ||
Accounts payable and accrued expenses |
| 113,592 |
| — |
| ||
Accounts payable to related parties |
| 3,787 |
| — |
| ||
Net cash used in operating activities |
| (83,658 | ) | — |
| ||
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
| ||
Proceeds from issuance of common stock, net |
| — |
| 1,000 |
| ||
Minority interest contribution |
| 200,000 |
| — |
| ||
Net cash provided by financing activities |
| 200,000 |
| 1,000 |
| ||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
| 116,342 |
| 1,000 |
| ||
CASH AND CASH EQUIVALENTS – beginning of period |
| 1,000 |
| — |
| ||
CASH AND CASH EQUIVALENTS – end of period |
| $ | 117,342 |
| $ | 1,000 |
|
|
| Year Ended December 31, |
| |||||||
|
| 2007 |
| 2006 |
| 2005 |
| |||
Cash flows from operating activities: |
|
|
|
|
|
|
| |||
Net loss |
| $ | (2,601,000 | ) | $ | (1,306,000 | ) | $ | (94,000 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
| |||
Amortization of deferred financing costs |
| 505,000 |
| 238,000 |
| — |
| |||
Depreciation and amortization |
| 1,529,000 |
| 99,000 |
| — |
| |||
Straight line rents and amortization of acquired above/below market lease intangibles |
| (41,000 | ) | (5,000 | ) | — |
| |||
Stock-based compensation expense |
| — |
| 2,000 |
| — |
| |||
Minority interest |
| (3,000 | ) | (11,000 | ) | — |
| |||
Change in operating assets and liabilities: |
|
|
|
|
|
|
| |||
Tenant and other receivables |
| (299,000 | ) | (73,000 | ) | — |
| |||
Payable to related parties |
| (532,000 | ) | 621,000 |
| (11,000 | ) | |||
Other assets |
| (443,000 | ) | (101,000 | ) | (93,000 | ) | |||
Accounts payable, accrued expenses and other |
| 729,000 |
| 397,000 |
| 114,000 |
| |||
Net cash used in operating activities |
| (1,156,000 | ) | (139,000 | ) | (84,000 | ) | |||
|
|
|
|
|
|
|
| |||
Cash flows from investing activities: |
|
|
|
|
|
|
| |||
Real estate acquisitions |
| (83,645,000 | ) | (35,763,000 | ) | — |
| |||
Additions to real estate |
| (36,000 | ) | (85,000 | ) | — |
| |||
Deferred acquisition costs and fees |
| (868,000 | ) | (349,000 | ) | — |
| |||
Escrow deposits |
| (250,000 | ) | (1,250,000 | ) | — |
| |||
Net cash used in investing activities |
| (84,799,000 | ) | (37,447,000 | ) | — |
| |||
|
|
|
|
|
|
|
| |||
Cash flows from financing activities |
|
|
|
|
|
|
| |||
Issuance of common stock |
| 43,309,000 |
| 34,391,000 |
| — |
| |||
Issuance of operating partnership units |
| — |
| — |
| 200,000 |
| |||
Redeemed shares |
| (417,000 | ) | — |
| — |
| |||
Minority interest contributions |
| 145,000 |
| — |
| — |
| |||
Proceeds from notes payable |
| 49,809,000 |
| 20,180,000 |
| — |
| |||
Repayment of notes payable |
| (4,161,000 | ) | — |
| — |
| |||
Other receivables |
| 211,000 |
| (341,000 | ) | — |
| |||
Offering costs |
| (5,828,000 | ) | (4,567,000 | ) | — |
| |||
Distributions paid to stockholders |
| (1,272,000 | ) | (219,000 | ) | — |
| |||
Distributions paid to minority interest |
| (14,000 | ) | — |
| — |
| |||
Deferred financing costs |
| (220,000 | ) | (934,000 | ) | — |
| |||
Net cash provided by financing activities |
| 81,562,000 |
| 48,510,000 |
| 200,000 |
| |||
|
|
|
|
|
|
|
| |||
Net (decrease) increase in cash and cash equivalents |
| (4,393,000 | ) | 10,924,000 |
| 116,000 |
| |||
Cash and cash equivalents - beginning of period |
| 11,041,000 |
| 117,000 |
| 1,000 |
| |||
Cash and cash equivalents - end of period |
| $ | 6,648,000 |
| $ | 11,041,000 |
| $ | 117,000 |
|
|
|
|
|
|
|
|
| |||
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
| |||
Cash paid for interest |
| $ | 2,215,000 |
| $ | 117,000 |
| $ | — |
|
Supplemental disclosure of noncash activities: |
|
|
|
|
|
|
| |||
Distributions declared not paid |
| $ | 364,000 |
| $ | 137,000 |
| $ | — |
|
Distributions reinvested |
| $ | 1,703,000 |
| $ | 219,000 |
| $ | — |
|
Payables to related parties |
| $ | 854,000 |
| $ | 1,344,000 |
| $ | — |
|
Accrued distribution to minority interest |
| $ | 3,000 |
| $ | 8,000 |
| $ | — |
|
Accrued additions to real estate |
| $ | 25,000 |
| $ | — |
| $ | — |
|
Receivable from seller |
| $ | 96,000 |
| $ | — |
| $ | — |
|
Security deposits assumed upon acquisition of real estate |
| $ | 503,000 |
| $ | 202,000 |
| $ | — |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
CORNERSTONE CORE PROPERTIES REIT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the YearYears Ended December 31, 2007, 2005 and Period From October 22, 2004 (date of inception) ToDecember 31, 20042006
1. Organization
Cornerstone Core Properties REIT, Inc., a Maryland corporation (the “Company”), was formed on October 22, 2004 under the General Corporation Law of Maryland for the purpose of engaging in the business of investing in and owning commercial real estate. The Company isAs used in this report, “we,” “us” and “our” refer to Cornerstone Core Properties REIT, Inc. and its consolidated subsidiaries except where the context otherwise requires. We are newly formed and isare subject to the general risks associated with a start-up enterprise, including the risk of business failure. Subject to certain restrictions and limitations, theour business of the Company will beis managed by an affiliate, Cornerstone Realty Advisors, LLC, a Delaware limited liability company that was formed on November 30, 2004 (the “advisor”) pursuant to an advisory agreement. The advisor is an affiliate of the Company.
On November 9, 2004, the sole stockholder, Terry G. Roussel, an affiliate of the advisor, purchased 125 shares of common stock for $1,000 and became theour initial stockholder of the Company. The Company’sstockholder. Our articles of incorporation authorize 290,000,000 shares of common stock with a par value of $.001$0.001 and 10,000,000 shares of preferred stock with a par value of $.001. $0.001.
Cornerstone Operating Partnership, L.P., a Delaware limited partnership (the “Operating Partnership”) was formed on November 30, 2004. At December 31, 2007, we owned 99.74% general partner interest in the Operating Partnership while the advisor owned a 0.26% limited partnership interest. We anticipate that we will conduct all or a portion of our operations through the Operating Partnership. Our financial statements and the financial statements substantial of the Operating Partnership are consolidated in the accompanying condensed consolidated financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation.
2.Public Offering
On September 22, 2005, the CompanyJanuary 6, 2006, we commenced a public offering on a best efforts basis, of a minimum of 125,000 (the “Minimum Number of Shares”)shares and a maximum of 55,400,000 shares of our common stock, consisting of 44,400,000 shares for sale to the public (the Primary“Primary Offering”) and 11,000,000 shares for sale pursuant to the Company’s dividendour distribution reinvestment plan (collectively, the “Offering”). The Company hasWe retained Pacific Cornerstone Capital, Inc. (“PCC”), an affiliate of the advisor, to serve as the dealer manager for the Offering. PCC is responsible for marketing the Company’sour shares being offered pursuant to the Offering. As of March 17, 2006, a total of 250,948 shares of our common stock had been sold for aggregate gross proceeds of $2 million. through our affiliated dealer manager. On February 28, 2006, Offeringoffering proceeds exceeded the $1,000,000 offering minimum and the proceeds were released to the Companyus from escrow. The Company intends
We intend to invest the net proceeds from the Offering primarily in investment real estate including multi-tenant industrial real estate located in major metropolitan markets in the United States. As of December 31, 2005, the Company has neither purchased nor contracted to purchase any properties, nor has the advisor identified any properties in which there is2007, a reasonable probability that the Company will invest.
Cornerstone Operating Partnership, L.P., a Delaware limited partnership (the “Operating Partnership”) was formed on November 30, 2004. On July 15, 2005, the advisor purchased a 99% limited partnership interest in the Operating Partnershiptotal of 9.7 million shares of our common stock had been sold for $200,000 and the Company purchased a 1% general partner interest for $1,000. The Company anticipates that it will conduct all or a portionaggregate gross proceeds of its operations through the Operating Partnership. The Company’s financial statements and the financial statements of the Operating Partnership are consolidated in the accompanying condensed consolidated financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation.$77.7 million.
2.3. Summary of Significant Accounting Policies
The summary of significant accounting policies presented below is designed to assist in understanding our consolidated financial statements. Such financial statements and accompanying notes are the representations of our management, who is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America, or GAAP, in all material respects, and have been consistently applied in preparing the accompanying consolidated financial statements.
Cash and Cash Equivalents
The Company considersWe consider all short-term, highly liquid investments that are readily convertible to cash with a maturity of three months or less at the time of purchase to be cash equivalents.
F-7
Real Estate Purchase Price Allocation.Allocation
The Company willWe account for all acquisitions in accordance with Financial Accounting Standards Board’s (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 141, “Business Combinations” (“FAS 141”). The results of operations of acquired properties are included in our Consolidated Statements of Operation after the date of acquisition. Upon acquisition of a property, the Company willwe allocate the purchase price of the property based upon the fair value of the assets acquired and liabilities
F-7
assumed, which generally consist of land, buildings, site improvements, tenant improvements, leasing commissions and intangible assets including in-place leases and above market and below market leases. The Company willWe allocate the purchase price to the fair value of the tangible assets of an acquired property by valuing the property as if it were vacant. The value of the building is depreciated over an estimated useful life of 39 years. The value of site improvements is depreciated over an estimated useful life of 15-20 years. The value of tenants improvements is depreciated generally the shorter of lease term or useful life.
The purchase price is further allocated to in-place lease values based on management’s evaluation of the specific characteristics of each tenant’s lease and our overall relationship with the respective tenant. The value of in-place lease intangibles, which is included as a component of investments in real estate, is amortized to expense over the remaining lease term.
Acquired above and below market leases will beare valued based on the present value of the difference between prevailing market rates and the in-place rates over the remaining lease term.
The purchase price will be further allocated to in-place lease values based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with the respective tenant. The value of acquired above and below market leases will beis amortized over the remaining non-cancelable terms of the respective leases as an adjustment to rental revenue on the Company’sour consolidated statements of operations. TheShould a tenant terminate its lease, the unamortized portion of the above or below market lease value of in-place lease intangibles, which will be included as a component of Other Assets, will be amortizedcharged to expense over the remaining lease term and expected renewal periods of the respective lease.revenue. If a lease is terminated prior to its expiration, the unamortized portion of the tenant improvements, leasing commissions, above and below market leasesintangible lease assets or liabilities and the in-place lease value will be immediately charged to expense.
The estimated useful lives for lease intangibles range from 1 month to 10 years. The weighted-average amortization period for in-place lease, acquired above market leases and acquired below market leases are 4.2 years, 5.0 years and 3.5 years, respectively.
Amortization associated with the lease intangible assets and liabilities for the years ended December 31, 2007, 2006 and 2005 were $434,000, $28,000 and $0, respectively.
Anticipated amortization for each of the five following years ended December 31, 2007 is as follows:
|
| Lease |
| |
2008 |
| $ | 602,000 |
|
2009 |
| $ | 599,000 |
|
2010 |
| $ | 558,000 |
|
2011 |
| $ | 414,000 |
|
2012 |
| $ | 104,000 |
|
As of December 31, 2007, cost and accumulated depreciation and amortization related to real estate assets and related lease intangibles were as follows:
|
| Buildings and Improvements |
| Site |
| In-Place Lease |
| Acquired Above Market Leases |
| Acquired Below |
| |||||
Cost |
| $ | 74,587,000 |
| $ | 8,127,000 |
| $ | 1,779,000 |
| $ | 1,613,000 |
| $ | (586,000 | ) |
Accumulated depreciation and amortization |
| (1,177,000 | ) | (96,000 | ) | (326,000 | ) | (275,000 | ) | 140,000 |
| |||||
Net |
| $ | 73,410,000 |
| $ | 8,031,000 |
| $ | 1,453,000 |
| $ | 1,338,000 |
| $ | (446,000 | ) |
As of December 31, 2006, cost and accumulated depreciation and amortization related to real estate assets and related lease intangibles were as follows:
|
| Buildings and |
| In-Place Lease |
| Acquired Above |
| Acquired Below |
| ||||
Cost |
| $ | 18,492,000 |
| $ | 397,000 |
| $ | 972,000 |
| $ | (121,000 | ) |
Accumulated depreciation and amortization |
| (76,000 | ) | (21,000 | ) | (17,000 | ) | 10,000 |
| ||||
Net |
| $ | 18,416,000 |
| $ | 376,000 |
| $ | 955,000 |
| $ | (111,000 | ) |
Depreciation expense associated with buildings and improvements and site improvements the years ended December 31, 2007, 2006 and 2005 were $1,197,000, $76,000 and $0, respectively.
F-8
Impairment of Real Estate Assets
Management continually monitors events and changes in circumstances that could indicate that the carrying amounts of our real estate assets, including those held through joint ventures may not be recoverable. When indicators of potential impairment are present that indicate that the carrying amounts of real estate assets may not be recoverable, we will assess the recoverability of the real estate assets by determining whether the carrying value of the real estate assets will be recovered through the undiscounted future operating cash flows expected from the use of the asset and its eventual disposition. In the event that such expected undiscounted future cash flows do not exceed the carrying value, we will adjust the real estate assets to the fair value and recognize an impairment loss.
Tenant and Other Receivables, net
Tenant and other receivables are comprised of rental and reimbursement billings due from tenants and the cumulative amount of future adjustments necessary to present rental income on a straight-line basis. Tenant receivables are recorded at the original amount earned, less an allowance for any doubtful accounts, which approximates fair value. Management assesses the realizability of tenant receivables on an ongoing basis and provides for allowances as such balances, or portions thereof, become uncollectible. Provisions for bad debts amounts to approximately $2,000 for the year ended December 31, 2007 which is included in property operating and maintenance expenses in the accompanying consolidated statements of operations. No bad debt expenses were recorded during the years ended December 31, 2006 and 2005.
Other Assets
Other assets consist primarily of leasing commissions and prepaid insurance. Additionally, other assets will be amortized to expense over their service in future periods. Balances without future economic benefit are expensed as they are identified.
Deferred Financing Costs
Costs incurred in connection with debt financing are recorded as deferred financing costs. Deferred financing costs are amortized using the straight-line method of accounting, over the contractual terms of the respective financings.
Consolidation Considerations for the Company’sOur Investments in Joint Ventures
The FASB issued Interpretation No. 46 (“FIN 46R”) (revised December 2003), “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51” (“ARB 51”), which addresses how a business enterprise should evaluate whether it has a controlling interest in an entity through means other than voting rights and accordingly should consolidate the entity. Before concluding that it is appropriate to apply the ARB 51 voting interest consolidation model to an entity, an enterprise must first determine that the entity is not a variable interest entity (VIE). The Company willWe evaluate, as appropriate, itsour interests, if any, in joint ventures and other arrangements to determine if consolidation is appropriate.
Revenue Recognition and Valuation of Receivables
The Company’sOur revenues, which will beare comprised largely of rental income, will include rents reported on a straight-line basis over the initial term of the lease. Since the Company’sWhen our leases may provide for free rent, lease incentives or other rental increases at specified intervals, the Company will bewe are required to straight-line the recognition of revenue, which will resultresults in the recording of a receivable for rent not yet due under the lease terms.
Depreciation of Real Property Assets
The Company will beWe are required to make subjective assessments as to the useful lives of the Company’sour depreciable assets. The Company willWe consider the period of future benefit of the asset to determine the appropriate useful lives.
F-9
Depreciation of the Company’sour assets is expected to bebeing charged to expense on a straight-line basis over the assigned useful lives.
Organizational and Offering Costs
The advisor funds organization and offering costs on our behalf. We are required to reimburse the advisor for such organization and offering costs up to 3.5% of the cumulative capital raised in the Primary Offering. Organization and offering costs include items such as legal and accounting fees, marketing, due diligence, promotional and printing costs and amounts to reimburse our advisor for all costs and expenses such as salaries and direct expenses of employees of our advisor and its affiliates in connection with registering and marketing our shares. All offering costs are recorded as an offset to additional paid-in capital, and all organization costs are recorded as an expense at the time we become liable for the payment of these amounts.
Minority Interest in Consolidated Subsidiary
DueMinority interests relate to the Company’s control through its general partnership interest in the Operating Partnership and the limited rights of the limited partners, the Operating Partnership is consolidated with the Company and the limited partner interest is reflected as minority interest in the accompanying balance sheets.entities that are not wholly-owned by us.
F-8
Income Taxes
The Company expects to make an electionWe have elected to be taxed as a REIT, under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”) and expects to be taxed as such“Code) beginning with itsour taxable year ending December 31, 2006. To qualify as a REIT, the Companywe must meet certain organizational and operational requirements, including a requirement to currently distribute at least 90% of the REIT’s ordinary taxable income to stockholders. As a REIT, the Companywe generally will not be subject to federal income tax on taxable income that it distributeswe distribute to itsour stockholders. If the Company failswe fail to qualify as a REIT in any taxable year, itwe will then be subject to federal income taxes on itsour 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 during which qualification is lost unless the Internal Revenue Service granted the Companyus relief under certain statutory provisions. Such an event could materially adversely affect the Company’sour net income and net cash available for distribution to stockholders. However, the Company believeswe believe that itwe will be organized and operate in such a manner as to qualify for treatment as a REIT and intendsintend to operate in the foreseeable future in such a manner so that the Companywe will remain qualified as a REIT for federal income tax purposes.
DuringDue to the year ended December 31, 2005, the Company generatedearly stage of our operations, during 2007, all distributions constituted a deferred tax assetreturn of approximately $20,300. Because the Company intends to qualify as a REIT in 2006 which would not allow for the realization of the deferred tax asset, a valuation allowance of a like amount was recorded.capital.
Concentration of Credit Risk
Financial instruments that potentially subject the Companyus to a concentration of credit risk are primarily cash investments; cashinvestments. Cash is generally invested in government backed securities and investment-grade short-term instruments and the amount of credit exposure to any one commercial issuer is limited. We have cash in financial institutions which is insured by the Federal Deposit Insurance Corporation, or FDIC, up to $100,000 per institution. At December 31, 2005,2007, we had cash accounts in excess of FDIC insured limits.
As of December 31, 2007, we owned three properties in state of California, three properties in the state of Arizona and five properties in the state of Florida. Accordingly, there is a geographic concentration of risk subject to fluctuations in each State’s economy.
Fair Value of Financial Instruments
The SFAS No. 107, Disclosures About Fair Value of Financial Instruments, requires the disclosure of fair value information about financial instruments whether or not recognized on the face of the balance sheet, for which it is practical to estimate that value. SFAS No. 107 defines fair value as the quoted market prices for those instruments that are actively traded in financial markets. In cases where quoted market prices are not available, fair values are estimated using present value or other valuation techniques such as discounted cash flow analysis. The fair value estimates are made at the end of each year based on available market information and judgments about the financial instrument, such as estimates of timing and amount of expected future cash flows. Such estimates do not reflect any premium or discount that could result from offering for sale at one time our entire holdings of a particular financial instrument, nor do they consider that tax impact of the realization of unrealized gains or losses. In many cases, the fair value estimates cannot be substantiated by comparison to independent markets, nor can the disclosed value be realized in immediate settlement of the instrument.
The Company’sF-10
Our consolidated balance sheets include the following financial instruments: cash and cash equivalents, deferred acquisition costs and deposits, other assets, prepaid rent, security deposits, amounts due from affiliate,from/to related parties, accounts payable and accrued expenses. The Company considersexpenses and notes payable. We consider the carrying values of cash and cash equivalents, deferred acquisition costs and deposits, other assets, due from affiliate,from/to related parties, accounts payable, and accrued expenses, prepaid rent and security deposits, and notes payable to approximate fair value for these financial instruments because of the short period of time between origination of the instruments and their expected realization.realization as well as the variable interest rate for notes payable.
Per Share Data
The Company reportsWe report earnings per share pursuant to SFAS No. 128, “Earnings Per Share.” Basic earnings per share attributable for all periods presented are computed by dividing the net loss by the weighted average number of shares outstanding during the period. Diluted earnings per share are computed based on the weighted average number of shares and all potentially dilutive securities, if any. Currently, the Company has no potentially dilutive securities.
F-9
Net loss per share is calculated as follows:
|
| Year Ended |
| Inception Through |
|
| Year Ended |
| Year Ended |
| Year Ended |
| |||||
Net loss |
| $ | (94,330 | ) | $ | — |
|
| $ | (2,601,000 | ) | $ | (1,306,000 | ) | $ | (94,000 | ) |
Net loss per share — basic and diluted |
| $ | (755 | ) | $ | — |
|
| $ | (0.40 | ) | $ | (1.58 | ) | $ | (752.00 | ) |
Weighted average number of shares outstanding — basic and diluted |
| 125 |
| 125 |
|
| 6,429,323 |
| 827,147 |
| 125 |
| |||||
We follow SFAS No. 123(R), Share-Based Payment, to account for our stock compensation pursuant to our 2007 Employee and Director Incentive Stock Plan. See Note 7, Stockholders’ Equity.
Use of Estimates
The preparation of the Company’sour financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could materially differ from those estimates.
Stock OptionsSegment Disclosure
The Company hasWe internally evaluate all of our properties as one industry segment and, accordingly, do not issued any options under the Plan as of December 31, 2005.report segment information.
Recently Issued Accounting Pronouncements
In June 2005,July 2006, the Emerging Issues Task ForceFinancial Accounting Standards Board (“EITF”FASB”) reached a consensus on EITF 04-05, “Investor’sissued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Investment in a Limited Partnership Wheninterpretation of FASB Statement No. 109, (“FIN 48”), which clarifies the Investor Isrelevant criteria and approach for the Sole General Partnerrecognition, derecognition, and the Limited Partners Have Certain Rights” (“EITF 04-05”) which provides guidance on when a sole general partner should consolidate a limited partnership. A sole general partner in a limited partnership is presumed to control that limited partnership and therefore should include the limited partnership in its consolidated financial statements, regardlessmeasurement of the sole general partner’s ownership interest in the limited partnership. The control presumption may be overcome if the limited partners have the ability to remove the sole general partner or otherwise dissolve the limited partnership. Other substantive participating rights by the limited partners may also overcome the control presumption. This consensusuncertain tax positions. FIN 48 is effective for general partners of all newly formed limited partnerships and existing limited partnerships for which the partnership agreements are modified. For general partners in all other limited partnerships, this consensus would be effective no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005.2006. The Company doesadoption of FIN 48 on January 1, 2007 did not expect EITF 04-05 to have a significantmaterial impact on itsour consolidated financial statements.
In March 2005,September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements to increase consistency and comparability of fair value measurements. In February 2008, the FASB issued FASB InterpretationStaff Position SFAS 157-1, Application of FASB Statement No. 47,157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 (“FSP FAS 157-1”). FSP FAS 157-1 defers the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. FSP FAS 157-1 also excludes from the scope of SFAS 157 certain leasing transactions accounted for under Statement of Financial Accounting Standards No. 13, Accounting for Conditional Asset Retirement Obligations, (FIN 47)Leases. FIN 47 is an interpretationThe Company adopted SFAS 157 and FSP FAS 157-1 on a prospective basis effective January 1, 2008. The adoption of SFAS No. 143, Asset Retirement Obligations, which was issued in June 2001. FIN 47 was issued to address diverse accounting practices that have developed with regard to the timing of liability recognition for legal obligations associated with the retirement of a tangible long-lived asset in which the timing and/or method of settlement are conditional on a future event that may or may157 and FSP FAS 157-1 is not be within the control of the entity. According to FIN 47, uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than December 31, 2005 for the Company. The Company does not expect the adoption of FIN 47expected to have a material impact on itsour consolidated financial statements.
3.Accounts Receivable From and Accounts Payable to Related Party
Accounts receivable from related parties results from payments made by the Company for services received that were accounted for as deferred organization and offering costs by an affiliate of the Advisor. Accordingly, these amounts paid for by the Company are to be reimbursed by the Advisor’s affiliate for the outstanding balance of $14,500 as of December 31, 2005.
F-10F-11
Accounts payableIn February 2007, the FASB issued SFAS No. 159, “Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related parties results from payments made byassets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for fiscal years begining after November 15, 2007. The adoption of SFAS No. 159 on January 1, 2008 did not have a material effect on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (R), “Business Combinations” (“SFAS 141(R)”). In summary, SFAS 141(R) requires the acquirer of a business combination to measure at fair value the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, with limited exceptions. The standard is effective for fiscal years beginning after December 15, 2008, and is to be applied prospectively, with no earlier adoption permitted. The adoption of this standard may have an affiliateimpact on the accounting for certain costs related to our future acquisitions.
In December 2007, the FASB issued Statements No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment to Accounting Research Board No. 51 (“SFAS 160”)”. SFAS 160 objective is to improve the relevance, comparability and transparency of financial information that a reporting entity provides in its consolidated financial statements. The key aspects of SFAS 160 are (i) the minority interests in subsidiaries should be presented in the consolidated balance sheet within equity of the Advisorconsolidated group, separate from the parent’s shareholders’ equity, (ii) acquisitions or dispositions of noncontrolling interests in a subsidiary that do not result in a change of control should be accounted for services received that related to operating expensesas equity transactions, (iii) a parent recognizes a gain or loss in net income when a subsidiary is deconsolidated, measured using the fair value of the Company. Accordingly,non-controlling equity investment, (iv) the Company shall reimburse its Advisor’s affiliateacquirer should attribute net income and each component of other comprehensive income between controlling and noncontrolling interests based on any contractual arrangements or relative ownership interests, and (v) a reconciliation of beginning to ending total equity is required for both controlling and noncontrolling interests. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008 and should be applied prospectively. We are currently evaluating the outstanding balance of $3,787 as of December 31, 2005.provisions for SFAS 160 to determine the potential impact, if any, the adoption will have on our consolidated financial statements.
4. Prepaids and Other AssetsInvestments in Real Estate
Other assets consistedOn January 22, 2007, we purchased Mack Deer Valley, a multi-tenant industrial property located in Phoenix, Arizona, for approximately $23.2 million. The purchase price of prepaid insurance expensethe property was funded with net proceeds raised from our public offering and $16.4 million of $92,557,borrowings under our credit agreement with HSH Nordbank AG, New York Branch.
On April 2, 2007, we acquired an existing multi-tenant industrial property known as Marathon Center located near Tampa Bay, Florida for a purchase price of December 31, 2005.$4.5 million. We acquired the property in a joint venture with JBK Capital, LLC. We are the managing partner of the venture and own a 97% interest in the venture. The property was purchased with no debt financing.
On October 2, 2007, we purchased an existing multi-tenant industrial property known as Pinnacle Park Business Center for approximately $20.1 million. The purchase price of was funded with net proceeds raised from our public offering and approximately $11.0 million of borrowings under our credit agreement with HSH Nordbank AG, New York Branch.
On November 15, 2007, we purchased an existing portfolio of properties known as Orlando Small Bay for approximately $37.1 million funded with our net proceeds raised from our public offering and approximately $22.4 million of borrowings under an agreement with Wachovia Bank, National Association.
5. Payable to Related Parties
Payable to related parties at December 31, 2007 consists of a leasing commission payable to a company owned by an employee of an affiliate of our Advisor. Payable to related parites at December 31, 2006 consists organizational and offering costs and acquisition fees payable to our advisor, broker dealer management fees payable to PCC and expense reimbursements payable to our advisor.
F-12
6.Minority Interests
Minority interests relate to our advisor’s equitythe interest in the earnings/losses of the Operating Partnership.consolidated entities that are not wholly-owned by us.
6.7. Stockholders’ Equity
Common Stock
The Company’sOur articles of incorporation authorize 290,000,000 additional shares of common stock with a par value of $.001$0.01 and 10,000,000 shares of preferred stock with a par value of $.001.$0.01. As of December 31, 2005,2007, we have cumulatively issued 125approximately 9.7 million shares of common stock for a total of $1,000 to Terry G. Roussel, an affiliateapproximately $77.7 million of the advisor.gross proceeds. As of December 31, 2006, we have issued approximately 4.3 million shares of common stock for a total of approximately $34.4 million of gross proceeds.
DividendDistribution Reinvestment Plan
The Company hasWe have adopted a dividenddistribution reinvestment plan that will allow itsour stockholders to have dividendsdistributions and other distributions otherwise distributable to them invested in additional shares of the Company’sour common stock. The Company hasWe have registered 11,000,000 shares of itsour common stock for sale pursuant to the dividenddistribution reinvestment plan. The purchase price per share is to be 95% of the price paid by the purchaser for the Company’sour common stock, but not less than $7.60 per share. The CompanyAs of December 31, 2007, approximately 253,000 shares had been issued under the distribution reinvestment plan. As of December 31, 2006, approximately 29,000 shares had been issued under the distribution reinvestment plan. We may amend or terminate the dividenddistribution reinvestment plan for any reason at any time upon 10 days prior written notice to participants.
Stock Repurchase Program
We have adopted a share redemption program for investors who have held their shares for at lease one year, unless the shares are being redeemed in connection with a stockholder’s death. Under our current stock repurchase program, the repurchase price will vary depending on the purchase price paid by the stockholder and the number of years the shares were held.
During the year ended December 31, 2007, we redeemed shares pursuant to our stock repurchase program follows (in thousands, except per-share amounts):
Period |
| Total Number of |
| Average Price Paid per Share |
| Approximate Dollar Value of Shares |
| |
|
|
|
|
|
|
|
|
|
January 2007 |
| — |
| $ | — |
|
| (1) |
February 2007 |
| — |
|
| — |
|
| (1) |
March 2007 |
| — |
|
| — |
|
| (1) |
April 2007 |
| 2,500 |
|
| 8.00 |
|
| (1) |
May 2007 |
| — |
|
| — |
|
| (1) |
June 2007 |
| — |
|
| — |
|
| (1) |
July 2007 |
| — |
|
| — |
|
| (1) |
August 2007 |
| 12,500 |
|
| 7.20 |
|
| (1) |
September 2007 |
| — |
|
| — |
|
| (1) |
October 2007 |
| 7,255 |
|
| 7.44 |
|
| (1) |
November 2007 |
| 35,180 |
|
| 7.19 |
|
| (1) |
December 2007 |
| — |
| $ | — |
|
| (1) |
|
| 57,435 |
|
|
|
|
|
|
(1) As long as our common stock is not listed on a national securities exchange or traded on an other-the-counter market, our stockholders who have held their stock for at least one year may be able to have all or any portion of their shares redeemed in accordance with the procedures outlined in the prospectus relating to the shares they purchased. Under our current stock repurchase program, the repurchase price will vary depending on the purchase price paid by the stockholder and the number of years the shares were held. During our offering and each of the first five years following the closing of our offering, we do not intend to redeem more than the lesser of (i) the number of shares that could be redeemed using the proceeds from our distribution reinvestment plan or (ii) 5% of the number of shares outstanding at the end of the prior calendar year. Beginning five years after termination of this offering, the number of shares that we redeem under the stock repurchase program is not expected to exceed 10% of the number outstanding at the end of the prior year.
Our board of directors may modify our stock repurchase program so that we can redeem stock using the proceeds from the sale of our real estate investments or other sources.
F-13
Employee and Director Incentive Stock Plan
The Company hasWe have adopted an Employee and Director Incentive Stock Plan (“the Plan”) which provides for the grant of awards to the Company’sour directors and full-time employees, directors and full-time employees of the advisor, entities and full-time employees of entitiesas well as other eligible participants that provide services to us. We have no employees, and we do not intend to grant awards under the Company, and certain consultantsPlan to the Company and to the advisor or to entities that provide services to the Company.persons who are not directors of ours. Awards granted under the Plan may consist of nonqualified stock options, incentive stock options, restricted stock, share appreciation rights, and dividenddistribution equivalent rights. The term of the Plan is 10 years. The total number of shares of common stock reserved for issuance under the Plan is equal to 10% of the Company’sour outstanding shares of stock at any time.
Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards No. 123R (“SFAS 123R”), “Share-Based Payment,” which requires the measurement and recognition of compensation expense for all share-based payment awards to employees and directors based on estimated fair values. On August 8, 2007 and May 10, 2006, we granted our nonemployee directors nonqualified stock options to purchase an aggregate of 20,000 and 40,000 shares of common stock, respectively, at an exercise price of $8.00 per share. Outstanding stock options became immediately exercisable in full on the grant date, expire in ten years after the grant date, and have no intrinsic value as of December 31, 2007. We amortized approximately $0 and $2,200 of non-cash compensation expense for years ended December 31, 2007 and 2006, respectively. There was no related compensation expense for the years ended December 31, 2005. Such amounts are included in general and administrative expenses in the accompanying condensed consolidated statements of operations.
We record compensation expense for nonemployee stock options based on the estimated fair value of the options on the date of grant using the Black-Scholes option-pricing model. These assumptions include the risk-free interest rate, the expected life of the options, the expected stock price volatility over the expected life of the options, and the expected distribution yield. Compensation expense for employee stock options is recognized ratably over the vesting term. The assumptions used to estimate the fair value of options granted during the year ended December 31, 2006 using the Black-Scholes option-pricing model were 5% distribution yield, a 4.99% risk-free interest rate based on the 10-year U.S. Treasury Bond, an expected life of 5 years, and a volatility rate of 1.02%. The assumptions used to estimate the fair value of options granted during the year ended December 30, 2007 using the Black-Scholes option-pricing model were 5.5% distribution yield, a 4.86% risk-free interest rate based on the 10-year U.S. Treasury Bond, an expected life of 5 years and a volatility rate of 1.02%. No awards have beenstock options were exercised or canceled during the year ended December 31, 2007.
The expected life of the options is based on evaluations of expected future exercise behavior. The risk free interest rate is based on the U.S. Treasury yield curve at the date of grant with maturity dates approximately equal to the expected term of the options at the date of the grant. Volatility is based on historical volatility of our stock. The valuation model applied in this calculation utilizes highly subjective assumptions that could potentially change over time, including the expected stock price volatility and the expected life of an option. Therefore, the estimated fair value of an option does not necessarily represent the value that will ultimately be realized by a nonemployee director.
Equity Compensation Plan Information
Our equity compensation plan information as of December 31, 2007 is as follows:
Plan Category |
| Number of Securities to be |
| Weighted Average |
| Number of Securities |
| |
Equity compensation plans approved by security holders |
| 60,000 |
| $ | 8.00 |
| See footnote | (1) |
Equity compensation plans not approved by security holders |
| — |
| — |
| — |
| |
Total |
| 60,000 |
| $ | 8.00 |
| See footnote | (1) |
(1) Our Employee and Director Incentive Stock Plan was approved by our security holders and provides that the total number of shares issuable under the plan is a number of shares equal to ten percent (10%) of our outstanding common stock. The maximum number of shares that may be granted under the Plan.plan with respect to “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code is 5,000,000. As of December 31, 2007, there were approximately 9.9 million shares of our common stock issued and outstanding.
F-14
Our equity compensation plan information as of December 31, 2006 is as follows:
Plan Category |
| Number of Securities to be |
| Weighted Average |
| Number of Securities |
| |
Equity compensation plans approved by security holders |
| 40,000 |
| $ | 8.00 |
| See footnote | (1) |
Equity compensation plans not approved by security holders |
| — |
| — |
| — |
| |
Total |
| 40,000 |
| $ | 8.00 |
| See footnote | (1) |
(1) Our Employee and Director Incentive Stock Plan was approved by our security holders and provides that the total number of shares issuable under the plan is a number of shares equal to ten percent (10%) of our outstanding common stock. The maximum number of shares that may be granted under the plan with respect to “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code is 5,000,000. As of December 31, 2006, there were approximately 4.3 million shares of our common stock issued and outstanding.
7.8. Related Party Transactions
For the year ended December 31, 2007, we incurred approximately $65,000 of leasing consulting to a company owned by an employee of an affiliate of our Advisor.
Our company has no employees. Our advisor is primarily responsible for managing our business affairs and carrying out the directives of our board of directors. The Company hasWe have an advisory agreement with the advisor and a dealer manager agreement with PCC which entitle the advisor and PCC to specified fees upon the provision of certain services with regard to the Offering and investment of funds in real estate projects, among other services, as well as reimbursement for organizational and offering costs incurred by the advisor and PCC on our behalf of the Company and reimbursement of certain costs and expenses incurred by the advisor in providing services to the Company.us.
Advisory Agreement
Under the terms of the advisory agreement, our advisor will use commercially reasonable efforts to present to us investment opportunities to provide a continuing and suitable investment program consistent
F-11
with the investment policies and objectives adopted by our board of directors. The advisory agreement calls for our advisor to provide for our day-to-day management and to retain property managers and leasing agents, subject to the authority of our board of directors, and to perform other duties.
The fees and expense reimbursements payable to our advisor under the advisory agreement are described below.
Organizational and Offering Costs. Organizational and offering costs of the Offering are being paid by the advisor on our behalf of the Company and will be reimbursed to the advisor from the proceeds of the Offering. Organizational and offering costs consist of all expenses (other than sales commissions and the dealer manager fee) to be paid by us in connection with the offering, including our legal, accounting, printing, mailing and filing fees, charges of our escrow holder and other accountable offering expenses, including, but not limited to, (i) amounts to reimburse our advisor for all marketing related costs and expenses such as salaries and direct expenses of employees of or advisor and its affiliates in connection with registering and marketing our shares (ii) technology costs associated with the offering of our shares; (iii) our costs of conducting our training and education meetings; (iv) our costs of attending retail seminars conducted by participating broker-dealers; and (v) payment or reimbursement of bona fide due diligence expenses. In no event will the Companywe have any obligation to reimburse the advisor for organizational and offering costs totaling in excess of 3.5% of the gross proceeds from the Primary Offering. As of December 31, 2005 and 2004,2007, the advisor and its affiliates had incurred on our behalf of the Company organizational and offering costs oftotaling approximately $1.5$3.5 million, (unaudited) and $1.0 million (unaudited), respectively. The $1.5 million at December 31, 2005 includesincluding approximately $110,000 of organizational costs which will bethat have been expensed as incurred and approximately $1,390,000$3.4 million of offering costs which will reduce net proceeds of our offering. These costs are not recorded in the accompanying consolidated financial statements because the Company had not raised the $1,000,000 minimum offering amount asAs of December 31, 2005 and therefore the Company was not obligated to reimburse2006, the advisor for organization and offering expenses as of such date. The Company raised the minimum offering amount and closed escrow in February 2006. Because the Company’s obligation to reimburseits affiliates had incurred on our advisor is limited as a percentage of the gross offering proceeds raise by the Company, the amount of such costs in excess of these limitations is not a liability of the Company. Costs currently in excess of these limitations may become a liability of the Company in the future as the amount of the Company’s gross offering proceeds increases, which would result in a corresponding increase in the dollar amount of the limitation, thereby creating a reimbursement obligation on the Company’s part. When recorded by the Company,behalf organizational costs will be expensed as incurred and offering costs will be deferredtotaling approximately $2.6 million, including approximately $110,000 of organizational costs that have been expensed and charged to stockholders’ equity as such amounts are reimbursed to the advisor from the grossapproximately $2.5 million of offering costs which reduce net proceeds of the Offering.our offering.
Acquisition Fees and Expenses. The advisory agreement requires the Companyus to pay the advisor acquisition fees in an amount equal to 2% of the gross proceeds of the Primary Offering. The CompanyWe will pay the acquisition fees upon receipt of the gross proceeds from the Offering. However, if the advisory agreement is terminated or not renewed, the advisor must return
F-15
acquisition fees not yet allocated to one of the Company’sour investments. In addition, the Company iswe are required to reimburse the advisor for direct costs the advisor incurs and amounts the advisor pays to third parties in connection with the selection and acquisition of a property, whether or not ultimately acquired. As of December 31, 2007 and 2006, the advisor earned approximately $1.6 million and $0.7 million of acquisition fees, respectively, which are to be capitalized as part of the cost of real estate investment. No acquisition fees were earned in 2005.
Management Fees. The advisory agreement requires the Companyus to pay the advisor a monthly asset management fee of one-twelfth of 1.0% of the sum of the aggregate basis book carrying values of the Company’sour assets invested, directly or indirectly, in equity interests in and loans secured by real estate before reserves for depreciation or bad debts or other similar non-cash reserves, calculated in accordance with generally accepted accounting principals in the United States of America (GAAP). In addition, the Companywe will reimburse the advisor for the direct costs and expenses incurred by the advisor in providing asset management services to the Company.us. These fees and expenses are in addition to management fees that the Company expectswe expect to pay to third party property managers. For the years ended 2007 and 2006, the advisor earned approximately $707,000 and $38,000 of asset management fees, respectively, which were expensed. No asset management fees were paid to the advisor in 2005.
Operating Expenses. The advisory agreement provides for reimbursement of our advisor’s direct and indirect costs of providing administrative and management services to us. For years ended December 31, 2007 and 2006, approximately $517,000 and $529,000 of such costs, respectively, were reimbursed. No such costs were reimbursed in 2005. The advisor must pay or reimburse the Companyus the amount by which the Company’sour aggregate annual operating expenses exceed the greater of 2% of Company’sour average invested assets or 25% of the Company’sour net income unless a majority of the Company’sour independent directors determine that such excess expenses were justified based on unusual and non-recurring factors.
F-12
Disposition Fee. The advisory agreement provides that if the advisor or its affiliate provides a substantial amount of the services (as determined by a majority of theour directors, of the Company, including a majority of theour independent directors of the Company)directors) in connection with the sale of one or more properties, the Companywe will pay the advisor or such affiliate shall receive at closing a disposition fee up to 3% of the sales price of such property or properties. This disposition fee may be paid in addition to real estate commissions paid to non-affiliates, provided that the total real estate commissions (including such disposition fee) paid to all persons by the companyus for each property shall not exceed an amount equal to the lesser of (i) 6% of the aggregate contract sales price of each property or (ii) the competitive real estate commission for each property. The CompanyWe will pay the disposition fees for a property at the time the property is sold.
Subordinated Participation Provisions. The advisor is entitled to receive a subordinated participation upon the sale of the Company’sour properties, listing of the Company’sour common stock or termination of the advisor, as follows:
•· After stockholders have received cumulative distributions equal to $8 per share (less any returns of capital) plus cumulative, non-compounded annual returns on net invested capital, the advisor will be paid a subordinated participation in net sale proceeds ranging from a low of 5% of net sales provided investors have earned annualized returns of 6% to a high of 15% of net sales proceeds if investors have earned annualized returns of 10% or more.
•· Upon termination of the advisory agreement, the advisor will receive the subordinated performance fee due upon termination. This fee ranges from a low of 5% of the amount by which the sum of the appraised value of the Company’sour assets minus itsour liabilities on the date the advisory agreement is terminated plus total dividendsdistributions (other than stock dividends)distributions) paid prior to termination of the advisory agreement exceeds the amount of invested capital plus annualized returns of 6%, to a high of 15% of the amount by which the sum of the appraised value of the Company’sour assets minus its liabilities plus all prior dividendsdistributions (other than stock dividends)distributions) exceeds the amount of invested capital plus annualized returns of 10% or more.
•· In the event the Company lists itswe list our stock for trading, the advisor will receive a subordinated incentive listing fee instead of a subordinated participation in net sales proceeds. This fee ranges from a low of 5% of the amount by which the market value of the Company’sour common stock plus all prior dividendsdistributions (other than stock dividends)distributions) exceeds the amount of invested capital plus annualized returns of 6%, to a high of 15% of the amount by which the sum of the market value of the Company’sour stock plus all prior dividendsdistributions (other than stock dividends)distributions) exceeds the amount of invested capital plus annualized returns of 10% or more.
F-16
Dealer Manager Agreement
PCC, as dealer manager, is entitled to receive a sales commission of up to 7% of gross proceeds from sales in the Primary Offering. PCC, as Dealer Manager, is also entitled to receive a dealer manager fee equal to up to 3% of gross proceeds from sales in the Primary Offering. The Dealer Manager is also entitled to receive a reimbursement of bona fide due diligence expenses up to 0.5% of the gross proceeds from sales in the Primary Offering. The advisory agreement requires the advisor to reimburse us to the extent that offering expenses including sales commissions, dealer manager fees and organization and offering expenses (but excluding acquisition fees and acquisition expenses discussed below)above) to the extent are in excess of 13.5% of gross proceeds from the Offering. As of December 31, 2007 and 2006, we incurred approximately $7.7 million and $3.4 million, respectively, payable to PCC for dealer manager fees and sales commissions. Much of this amount was reallowed by PCC to third party broker dealers. No such dealer manager fees or sales commissions were incurred in 2005. Dealer manager fees and sales commissions paid to PCC are a cost of capital raised and, as such, are included as a reduction of additional paid in capital in the accompanying consolidated balance sheets.
8.9. Credit Facilities
On June 30, 2006, we entered into a Credit Agreement with HSH Nordbank AG, New York Branch, for a temporary credit facility that we will use during the offering period to facilitate our acquisitions of properties in anticipation of the receipt of offering proceeds. As of December 31, 2007and 2006, we had net borrowings of approximately $43.3 million and $20.2 million, respectively, under the Credit Agreement.
The Credit Agreement permits us to borrow up to $50,000,000 secured by real property at a borrowing rate based on LIBOR plus a margin ranging from 1.15% to 1.35% and requires payment of a usage premium of up to 0.15% and an annual administrative fee. We may use the entire credit facility to acquire real estate investments and we may use up to 10% of the credit facility for working capital. We are entitled to prepay the borrowings under the credit facility at any time without penalty. The principal balance is due on June 30, 2008 with two one-year extensions at the option of the borrower. The repayment of obligations under the Credit Agreement may be accelerated in the event of a default, as defined in the Credit Agreement. The facility contains various covenants including financial covenants with respect to consolidated interest and fixed charge coverage and secured debt to secured asset value. As of December 31, 2007, we were in compliance with all these financial covenants. During years ended 2007, 2006 and 2005, we incurred approximately $2,455,000, $153,000 and $0, respectively, of interest expense related to the Credit Agreement.
On November 13, 2007, we entered into a loan agreement with Wachovia Bank, National Association to facilitate the acquisition of properties during our offering period. Pursuant to the terms of the loan agreement, we may borrow $22.4 million at an interest rate of 140 basis points over 30-day LIBOR, secured by specified real estate properties. The loan agreement has a maturity date of November 13, 2009, and may be prepaid without penalty. The entire $22.4 million available under the terms of the Loan was used to finance an acquisition of properties that closed on November 15, 2007. During 2007, we incurred approximately $187,000 of interest expense related to the loan agreement.
In connection with documentation and closing the credit agreement with HSH Nordbank and loan agreement with Wachovia Bank, during the years ended December 31, 2007 and 2006, we incurred financing costs totaling approximately $1.2 million and $0.9 million, respectively. These financing costs have been capitalized and are being amortized over the life of the agreement. For the years ended December 31, 2007, 2006 and 2005, approximately $505,000, $238,000 and $0, respectively, of deferred financing costs were amortized and included in interest expense in the consolidated statements of operations.
Consistent with our borrowing policies, during our Primary Offering, we will borrow periodically to acquire properties and for working capital. We will determine whether to use the proceeds of our Offering to repay amounts borrowed under the Credit Agreement depending on a number of factors, including the investments that are available to us for purchase at the time and the cost of the credit facility. Following the closing of our Primary Offering, we will endeavor to repay all amounts owing under the Credit Agreement or that are secured by our properties and which have not previously been paid. To the extent sufficient proceeds from our Offering are unavailable to repay the indebtedness secured by properties within a reasonable time following the closing of our Primary Offering as determined by our board of directors, we may sell properties or raise equity capital to repay the secured debt, so that we will own our properties with no permanent acquisition financing.
10. Commitments and Contingencies
LitigationWe monitor our properties for the presence of hazardous or toxic substances. While there can be no assurance that a material environment liability does not exist, we are not currently aware of any environmental liability with respect to the properties that would have a material effect on our financial condition, results of operations and cash flows. Further, we are not aware of any environmental liability or any unasserted claim or assessment with respect to an environmental liability that we believe would require additional disclosure or the recording of a loss contingency.
The Company isF-17
Our commitments and contingencies include the usual obligations of real estate owners and operators in the normal course of business. In the opinion of management, these matters are not expected to have a material impact on our consolidated financial position and results of operations. We are not presently subject to any material litigation nor, to the Company’sour knowledge, is any material litigation threatened against the Company which if determined unfavorably to the Companyus would have a material adverse effect on the Company’sour cash flows, financial condition or results of operations.
F-13Our Advisor has informed us that the Financial Industry Regulatory Authority (“FINRA”, formerly, NASD) is conducting a non-public investigation of Pacific Cornerstone Capital, Inc. (“PCC”), our affiliated dealer manager, that is, we understand, focused on the private placements conducted by PCC during the period from January 1, 2004 through October 31, 2007. The investigation is in the preliminary stage. FINRA’s correspondence requesting document production states, “This inquiry should not be construed as an indication that the Enforcement Department or its staff has determined that any violations of federal securities laws or NASD, NYSE or MSRB rules have occurred.” We have been advised that PCC is responding to FINRA’s request for information and intends to continue to cooperate in the investigation. Although we cannot, at this time, assess either the duration or the likely outcome or consequences of this investigation, FINRA has the authority to impose sanctions on PCC that could adversely affect its effectiveness and ability to raise funds in this offering.
Other commitments and contingencies include the usual obligations of real estate owners and operators in the normal course of business. In the opinion of management, these matters are not expected to have a material impact on our consolidated financial position and results of operations.
9.11. Selected Quarterly Data (unaudited)
Set forth below is certain unaudited quarterly financial information. The Company believesWe believe that all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly, and in accordance with generally accepted accounting principles, the selected quarterly information when read in conjunction with the consolidated financial statementsstatements.
|
| Quarters Ended |
| |||||||||||||
|
| December 31, |
| September 30, |
| June 30, |
| March 31, |
| December 31, |
| |||||
Expenses |
| $ | 89,679 |
| $ | 5,455 |
| $ | — |
| $ | — |
| $ | — |
|
Operating loss |
| $ | (89,679 | ) | $ | (5,455 | ) | $ | — |
| $ | — |
| $ | — |
|
Income (loss) before minority interest |
| $ | (88,863 | ) | $ | (5,117 | ) | $ | — |
| $ | — |
| $ | — |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net income (loss) |
| $ | (89,213 | ) | $ | (5,117 | ) | $ | — |
| $ | — |
| $ | — |
|
Earnings (loss) per share – basic and diluted |
| $ | 714 |
| $ | 41 |
| $ | — |
| $ | — |
| $ | — |
|
|
| Quarters Ended |
| ||||||||||
|
| December 31, |
| September 30, |
| June 30, |
| March 31, |
| ||||
Revenues |
| $ | 2,184,000 |
| $ | 1,376,000 |
| $ | 1,234,000 |
| $ | 1,071,000 |
|
Expenses |
| 2,408,000 |
| 1,233,000 |
| 1,247,000 |
| 1,039,000 |
| ||||
Operating loss |
| (224,000 | ) | 143,000 |
| (13,000 | ) | 32,000 |
| ||||
Net loss |
| $ | (1,164,000 | ) | $ | (330,000 | ) | $ | (581,000 | ) | $ | (526,000 | ) |
Loss per share — basic and diluted |
| $ | (0.13 | ) | $ | (0.04 | ) | $ | (0.09 | ) | $ | (0.11 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Weighted average shares |
| 9,212,369 |
| 8,057,934 |
| 6,482,651 |
| 4,814,342 |
| ||||
|
| Quarters Ended |
| ||||||||||
|
| December 31, |
| September 30, |
| June 30, |
| March 31, |
| ||||
Revenues |
| $ | 291,000 |
| $ | 96,000 |
| $ | 17,000 |
| $ | — |
|
Expenses |
| 521,000 |
| 391,000 |
| 305,000 |
| 316,000 |
| ||||
Operating loss |
| (230,000 | ) | (295,000 | ) | (288,000 | ) | (316,000 | ) | ||||
Net loss |
| $ | (385,000 | ) | $ | (360,000 | ) | $ | (250,000 | ) | $ | (311,000 | ) |
Loss per share — basic and diluted |
| $ | (0.13 | ) | $ | (0.23 | ) | $ | (0.36 | ) | $ | (3.29 | ) |
|
|
|
|
|
|
|
|
|
| ||||
Weighted average shares |
| 2,963,521 |
| 1,556,451 |
| 693,711 |
| 94,396 |
| ||||
F-1412. Pro Forma Financial Information (Unaudited)
During the years ended December 31, 2007 and 2006 we acquired seven and four properties, for total investments of approximately $84.8 million and $36.0 million , respectively, plus closing costs. The following unaudited pro forma information for the years ended December 31, 2007 and 2006 has been prepared to reflect the incremental effect of the acquisitions as if such transactions had occurred on January 1, 2006. As these acquisitions are assumed to have been made
F-18
on January 1, 2006, the shares outstanding as of December 31, 2007 and 2006 are assumed to have been sold and outstanding as of January 1, 2006 for purposes of calculating per share data.
|
| Year Ended |
| Year Ended |
| ||
Revenues |
| $ | 9,845,000 |
| $ | 6,942,000 |
|
Depreciation and amortization |
| 2,918,000 |
| 2,754,000 |
| ||
Net loss |
| $ | (2,877,000 | ) | $ | (2,368,000 | ) |
Loss per share — basic and diluted |
| $ | (0.37 | ) | $ | (0.31 | ) |
Shares outstanding — Basic and diluted |
| 7,760,445 |
| 7,760,445 |
| ||
13. Subsequent Events
Declaration of Distributions
On February 8, 2008, the board of directors of Cornerstone Core Properties REIT, Inc. declared a daily distribution on its common stock in the amount of $0.001315 per share to each stockholder of record as of the close of business on each day of March, April, May and June 2008 to be paid in cumulative amounts on or before April 15, 2008, May 15, 2008, June 15, 2008 and July 15, 2008, respectively. The amount of daily distributions, if paid each day over a 365-day period, would equal a 6.0% annualized rate based on a share price of $8.00 per share.
Sale of Shares of Common Stock
From January 1, 2008 through March 7, 2008, we raised approximately $8.1 million through the issuance of approximately 1.0 million shares of our common stock under our Offering.
Long Term Debt Obligation
On February 29, 2008, we made a principle payment approximately in the amount of $2.3 million to HSH Nordbank, AG.
F-19
CORNERSTONE CORE PROPERTIES REIT, INC. AND SUBSIDIARY
Schedule III
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 2007
|
|
|
| Initial Cost |
| Costs |
| Gross Amount Invested |
|
|
|
|
|
|
| Life on which |
| |||||||||||||
|
|
|
|
|
| Building & |
| Subsequent to |
|
|
| Building and |
|
|
| Accumulated |
| Date of |
| Date |
| Statement is |
| |||||||
Description |
| Emcumbrance |
| Land |
| Improv. |
| Acquisition |
| Land |
| Improv. |
| Total |
| Depreciation |
| Construct |
| Acquired |
| Computed |
| |||||||
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|
|
|
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|
|
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|
|
|
|
|
|
| |||||||
2111 S. Industrial Park, Tempe, AZ |
| — |
| $ | 590,000 |
| $ | 1,482,000 |
| $ | 24,000 |
| $ | 590,000 |
| $ | 1,506,000 |
| $ | 2,096,000 |
| $ | 63,000 |
| 1974 |
| 06/01/06 |
| 39 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Shoemaker Industrial Building Santa Fe Spring, CA |
| — |
| 950,000 |
| 1,518,000 |
| — |
| 950,000 |
| 1,518,000 |
| 2,468,000 |
| 59,000 |
| 2001 |
| 06/30/06 |
| 39 years |
| |||||||
|
|
|
|
|
|
|
|
|
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|
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|
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|
|
|
|
|
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| |||||||
15172 Goldenwest CircleWestminister, CA |
| — |
| 7,100,000 |
| 4,282,000 |
| 5,000 |
| 7,100,000 |
| 4,287,000 |
| 11,387,000 |
| 118,000 |
| 1968 |
| 12/01/06 |
| 39 years |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
20100 Western Avenue Torrance, CA |
| — |
| 7,670,000 |
| 11,096,000 |
| 118,000 |
| 7,670,000 |
| 11,214,000 |
| 18,884,000 |
| 328,000 |
| 2001 |
| 12/1/06 |
| 39 years |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Mack Deer Valley Phoenix, AZ |
| — |
| 6,216,000 |
| 16,810,000 |
|
|
| 6,216,000 |
| 16,810,000 |
| 23,026,000 |
| 411,000 |
| 2005 |
| 01/21/07 |
| 39 years |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Marathon Tampa Bay, FL |
| — |
| 980,000 |
| 3,561,000 |
| 12,000 |
| 980,000 |
| 3,573,000 |
| 4,553,000 |
| 68,000 |
| 1989-1994 |
| 04/02/07 |
| 39 years |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Pinnacle Peak Phoenix, AZ |
| — |
| 6,717,000 |
| 13,198,000 |
| — |
| 6,717,000 |
| 13,198,000 |
| 19,915,000 |
| 92,000 |
| 2006 |
| 10/02/07 |
| 39 years |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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| |||||||
Orlando Small Bay Portfolio Orlando, FL |
| — |
| 6,539,000 |
| 30,608,000 |
| — |
| 6,539,000 |
| 30,608,000 |
| 37,147,000 |
| 134,000 |
| 2002-2005 |
| 11/15/07 |
| 39 years |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Totals |
| — |
| $ | 36,762,000 |
| $ | 82,555,000 |
| $ | 159,000 |
| $ | 36,762,000 |
| $ | 82,714,000 |
| $ | 119,476,000 |
| $ | 1,273,000 |
|
|
|
|
|
|
|
|
| Cost |
| Accumulated |
| ||
Balance at December 31, 2004 |
| $ | — |
| $ | — |
|
|
|
|
|
|
| ||
2005 Additions |
| — |
| — |
| ||
|
|
|
|
|
| ||
Balance at December 31, 2005 |
| $ | — |
| $ | — |
|
|
|
|
|
|
| ||
2006 Additions |
| 34,802,000 |
| 76,000 |
| ||
|
|
|
|
|
| ||
Balance at December 31, 2006 |
| $ | 34,802,000 |
| $ | 76,000 |
|
|
|
|
|
|
| ||
2007 Additions |
| 84,674,000 |
| 1,197,000 |
| ||
|
|
|
|
|
| ||
Balance at December 31, 2007 |
| $ | 119,476,000 |
| $ | 1,273,000 |
|
F-20
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) 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.
CORNERSTONE CORE PROPERTIES REIT, INC. | ||
| ||
| By: | /s/ TERRY G. ROUSSEL |
|
| TERRY G. |
Chief Executive Officer, President and | ||
Chairman of the Board of Directors | ||
Date: March | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 24, 2006.14, 2008.
Name | Title | |||
| Chief Executive Officer and Director | |||
|
| (Principal Executive Officer) | ||
Terry G. Roussel |
| |||
| ||||
| Chief Financial Officer (Principal | |||
|
| Financial and Accounting Officer) | ||
Sharon C. Kaiser |
| |||
|
| |||
|
| Director | ||
Paul Danchik |
| |||
|
| |||
|
| Director | ||
Joseph H. Holland |
| |||
|
| |||
|
| Director | ||
Daniel L. Johnson |
| |||
|
| |||
|
| Director | ||
Lee Powell Stedman |
| |||
EXHIBIT INDEX
Ex. |
| Description |
1.1 |
| Amended and Restated Dealer Manager Agreement (incorporated by reference to Exhibit 1.1 to Post-Effective Amendment No. 1 to the Registration Statement on Form S-11 (No. 333-121238) filed on December 23, 2005 (“Post-Effective Amendment No. 1”) |
|
|
|
1.2 |
| Form of Participating Broker Agreement (incorporated by reference to Exhibit 1.2 to Post-Effective Amendment No. 1) |
|
|
|
3.1 |
| Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to Pre-Effective Amendment No. 2 to the Registration Statement on Form S-11 (No. 333-121238) filed on May 25, 2005) |
|
|
|
3.2 |
| Amendment and Restatement of Articles of Incorporation |
|
|
|
3.3 |
| Amended and Restated Bylaws (incorporated by reference to Exhibit 3.3 to Post-Effective Amendment No. 1) |
|
|
|
4.1 |
| Subscription Agreement (incorporated by reference to Appendix A to the prospectus included on Post-Effective Amendment No. |
|
|
|
4.2 |
| Statement regarding restrictions on transferability of shares of common stock (to appear on stock certificate or to be sent upon request and without charge to stockholders issued shares without certificates) (incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-11 (No. 333-121238) filed on December 14, 2004) |
|
|
|
4.3 |
|
|
|
|
|
4.4 |
| Escrow Agreement between registrant and U.S. Bank, N.A. (incorporated by reference to Exhibit 4.4 to Pre-Effective Amendment No. 2 to the Registration Statement on Form S-11 (No. 333-121238) filed on May 25, 2005) |
|
|
|
10.1 |
| Amended and Restated Advisory Agreement (incorporated by reference to Exhibit 10.1 to Post-Effective Amendment No. 1) |
|
|
|
10.2 |
| Agreement of Limited Partnership of Cornerstone Operating Partnership, L.P. (incorporated by reference to Exhibit 10.2 to Pre-Effective Amendment No. 4 to the Registration Statement on Form S-11 (No. 333-121238) filed on August 30, 2005) |
|
|
|
10.3 |
| Form of Employee and Director Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to Pre-Effective Amendment No. 2 to the Registration Statement on Form S-11 (No. 333-121238) filed on May 25, 2005) |
|
|
|
10.4 | Purchase and Sale Agreement, dated April 28, 2006, by and between Cornerstone Operating Partnership, L.P. and Mack Deer Valley Phase II, LLC (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed on May 18, 2006) | |
10.5 | Purchase and Sale Agreement, dated April 6, 2006, as amended as of May 23, 2006, by and between Cornerstone Operating Partnership, L.P., Squamar Limited Partnership and IPM, Inc. (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed on May 26, 2006) | |
10.6 | Purchase and Sale Agreement, dated June 16, 2006, by and between Cornerstone Operating Partnership, L.P. and First Industrial Harrisburg, LP (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed on June 29, 2006) | |
10.7 | Amendment to Agreement of Purchase and Sale, dated June 19, 2006, by and between Cornerstone Operating Partnership, L.P. and First Industrial Harrisburg, LP (incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K filed on June 29, 2006) |
Ex. | Description | |
10.8 | Credit Agreement, dated as of June 30, 2006, among Cornerstone Operating Partnership, L.P., Cornerstone Core Properties REIT, Inc., Cornerstone Realty Advisors, LLC, and HSH Nordbank AG, New York Branch (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed on July 7, 2006) | |
10.9 | Purchase and Sale Agreement by and between Cornerstone Operating Partnership, L.P. and See Myin & Ock Ja Kymm Family Trust dated August 17, 2006 (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed on October 13, 2006) | |
10.10 | Amendment to Agreement of Purchase and Sale by and between Cornerstone Operating Partnership, L.P. and Myin & Ock Ja Kymm Family Trust, dated September 18, 2006 (incorporated by reference to Exhibit 99.2 to the Registrant’s Current Report on Form 8-K filed on October 13, 2006) | |
10.11 | Purchase and Sale Agreement by and between the registrant and WESCO Harbor Gateway, L.P. dated November 1, 2006 (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed on November 21, 2006) | |
10.12 | 15172 Goldenwest Circle Lease (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report on Form 8-K filed on December 1, 2006) | |
14.1 |
| Code of Business Conduct and Ethics (incorporated by reference to Exhibit 14.1 to the Registrant’s Annual Report on Form 10-K filed on March 24, 2006) |
21.1 | List of Subsidiaries (filed herewith) | |
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31.1 |
| Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
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31.2 |
| Certification of Interim Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
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32.1 |
| Certification of Chief Executive Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith) |