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Amendment No. 1
G REIT, Inc.
1551 N. Tustin Avenue
Anthony W. Thompson
With a Copy to:
Louis J. Rogers, Esquire
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. o
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. o
CALCULATION OF REGISTRATION FEE
| Proposed Maximum | Proposed Maximum | |||||||
| Amount being | Offering Price Per | Aggregate Offering | Amount of | |||||
| Title of Securities being Registered | Registered(1) | Share(2) | Price(2) | Registration Fee(3) | ||||
| Common Stock, par value $.01 per share | 27,000,000 shares | $10.00 | $270,000,000 | $21,843.00 | ||||
| Common Stock, par value $.01 per share | 1,500,000 shares | $ 9.50 | $ 14,250,000 | $ 1,152.83 | ||||
| (1) | Includes 27,000,000 shares offered to the public and 1,500,000 shares offered to shareholders pursuant to our dividend reinvestment plan, all of which are being offered pursuant to the prospectus contained in this registration statement. |
| (2) | Estimated solely for the purpose of determining the registration fee. |
| (3) | Previously paid in connection with the Registrant’s initial filing on October 10, 2003. |
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
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| Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. This Prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state. |
Subject to Completion, Dated November 21, 2003.
Common Stock
28,500,000 Shares
G REIT, Inc. is a real estate investment trust or REIT. We are offering and selling to the public up to 27,000,000 shares for $10.00 per share and up to 1,500,000 shares to be issued pursuant to our dividend reinvestment plan under which our shareholders may elect to have dividends reinvested in additional shares at $9.50 per share.
This investment involves a high degree of risk. You should purchase shares only if you can afford a complete loss. You should carefully consider the information set forth in the “Risk Factors” section beginning on page 14 for a discussion of material risk factors relevant to an investment in our common stock, including but not limited to the following:
| • | there is no market for our common stock and you may not be able to resell your common stock at the offering price or at all; | |
| • | we are totally reliant on our advisor, which is an affiliate of several of our officers and directors, to select our properties and to manage our business and assets; | |
| • | we pay substantial fees to our advisor and its affiliates; | |
| • | our officers and directors are subject to substantial conflicts of interest; and | |
| • | we may incur substantial debt, which could hinder our ability to pay dividends to our shareholders. |
| This Offering | Per Share | Total Maximum | ||||||
| Public Price | $ | 10.00 | $ | 270,000,000 | ||||
| Selling Commissions | $ | .70 | $ | 18,900,000 | ||||
| Marketing and Due Diligence Expenses | $ | .25 | $ | 6,750,000 | ||||
| Proceeds to G REIT, Inc. | $ | 9.05 | $ | 244,350,000 | ||||
After payment of offering and acquisition expenses, we estimate that 87.5% of the offering proceeds will be available for investments.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
The use of forecasts in this offering is prohibited. Any representation to the contrary and any prediction, written or oral, as to the amount or certainty of any present or future cash benefit or tax consequence which may flow from your investment in our shares is prohibited.
The securities dealers in this offering are required only to use their best efforts to sell the maximum number of securities offered, 27,000,000 shares. A securities dealer may not complete a sale of our shares to you until at least five business days after the date you receive a copy of the final prospectus. That securities dealer must also send you a confirmation of your purchase. NNN Capital Corp., the dealer manager, is an affiliate of our company and of our advisor. The dealer manager is owned by Anthony W. Thompson who is President and CEO of our company and Triple Net Properties, LLC, our advisor.
| • | We will sell shares until the earlier of , 200 , or the date on which the maximum offering has been sold. | |
| • | We have established an escrow account in which we will place all subscriber funds received pending their use for the specific purposes described in our registration statement (for example, acquisition of interests in real estate and repayment of debt). All monies in the escrow account shall be held in trust for the benefit of the subscribers, and shall not be commingled with the funds of, or become an asset of, our company until such time as they are released from the escrow account for the purposes stated in the prospectus. Funds in the escrow account shall not be subject to attachment, levy or other encumbrance in any legal action by a third party against our company. In the event any funds are not released from the escrow account in consummation of the transactions and purposes stated in the prospectus, such monies shall be returned to subscribers pro rata. The escrow account will be maintained at PriVest Bank in South Coast Metro, California. Funds in the escrow will be invested in money market accounts prior to their use. |
The date of this Prospectus is , 200
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TABLE OF CONTENTS
| Page | |||||
| QUESTIONS AND ANSWERS ABOUT THIS OFFERING | 1 | ||||
| PROSPECTUS SUMMARY | 6 | ||||
| About Our Company | 6 | ||||
| About Our Business | 6 | ||||
| Our Advisor and the Dealer Manager | 7 | ||||
| Summary Risk Factors | 7 | ||||
| Prior Offering | 8 | ||||
| This Offering | 8 | ||||
| Use of Proceeds | 8 | ||||
| Distributions | 9 | ||||
| Selected Financial Data | 10 | ||||
| Compensation to Our Advisor and the Dealer Manager | 12 | ||||
| RISK FACTORS | 14 | ||||
| Selection of Properties | 14 | ||||
| Limited Experience in Managing a REIT | 14 | ||||
| No Market for Our Common Stock | 14 | ||||
| Restrictions on Share Repurchase Plan | 15 | ||||
| Federal Income Tax Requirements | 15 | ||||
| Total Reliance on Our Advisor | 16 | ||||
| Advisor’s Broad Discretion in Allocating Proceeds | 16 | ||||
| Limited Operating History | 16 | ||||
| Conflicts of Interest | 17 | ||||
| Acquisition Risks | 18 | ||||
| Joint Venture Arrangements | 18 | ||||
| Insufficient Reserves | 19 | ||||
| Borrowings May Increase Our Business Risks | 19 | ||||
| Our Ability to Change Policies Without a Shareholder Vote; Limitation on Debt | 20 | ||||
| Possible Adverse Consequences of Limits on Ownership and Transfer of Our Shares | 20 | ||||
| Potential Anti-Takeover Effects | 21 | ||||
| Dilution | 21 | ||||
| Dilution and the Operating Partnership | 22 | ||||
| Negative Characteristics of Certain Government Leases | 22 | ||||
| Negative Characteristics of Certain “Gross” Leases | 22 | ||||
| Seller Financing by Our Company May Delay Liquidation or Reinvestment | 23 | ||||
| Negative Characteristics of Real Estate Investments | 23 | ||||
| Effects of ERISA Regulations | 26 | ||||
| INVESTOR SUITABILITY STANDARDS | 27 | ||||
| Ensuring Our Suitability Standards Are Adhered To | 28 | ||||
| Escrow Account | 28 | ||||
| ESTIMATED USE OF PROCEEDS OF THIS OFFERING | 29 | ||||
| OUR COMPANY | 30 | ||||
| Overview | 30 | ||||
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| �� | |||||
| Page | |||||
| INVESTMENT OBJECTIVES AND POLICIES | 30 | ||||
| General | 30 | ||||
| Investing in Government Oriented Property | 31 | ||||
| Types of Investments | 32 | ||||
| Our Acquisition Standards | 33 | ||||
| Property Acquisition | 34 | ||||
| Joint Ventures | 34 | ||||
| Description of Our Leases | 35 | ||||
| Our Operating Partnership | 35 | ||||
| Our Policies With Respect to Borrowing | 36 | ||||
| Sale or Disposition of Properties | 36 | ||||
| Our Long Term Investment Objective | 37 | ||||
| Changes in Our Investment Objectives | 38 | ||||
| Investment Limitations | 38 | ||||
| Making Loans and Investments in Mortgages | 39 | ||||
| Investment in Securities | 39 | ||||
| Appraisals | 39 | ||||
| Other Policies | 40 | ||||
| Dividend Policy | 40 | ||||
| DESCRIPTION OF REAL ESTATE INVESTMENTS | 42 | ||||
| Physical Occupancy Table | 43 | ||||
| Average Effective Annual Rent Per Square Foot | 43 | ||||
| Lease Expiration Table | 44 | ||||
| Concentration of Tenants | 44 | ||||
| Geographic Diversification Table | 45 | ||||
| Description of Real Estate Management | 46 | ||||
| MANAGEMENT OF OUR COMPANY | 49 | ||||
| General | 49 | ||||
| The Directors and Executive Officers | 50 | ||||
| Committees of Our Board of Directors | 52 | ||||
| Director Compensation | 52 | ||||
| Independent Director Stock Option Plan | 53 | ||||
| Officer and Employee Stock Option Plan | 53 | ||||
| Characteristics of Both Stock Option Plans | 53 | ||||
| EXECUTIVE COMPENSATION | 56 | ||||
| Compensation of Executive Officer | 56 | ||||
| Option/ SAR Grants in Last Fiscal Year | 56 | ||||
| Aggregated Option/ SAR Exercises and Fiscal Year-End Option/ SAR Value Table | 56 | ||||
| Compensation Committee Interlocks and Insider Participation | 56 | ||||
| Board Compensation Committee Report on Executive Compensation | 56 | ||||
| CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS | 57 | ||||
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| Page | |||||
| OUR ADVISOR | 58 | ||||
| Management | 58 | ||||
| The Advisory Agreement | 60 | ||||
| COMPENSATION TABLE | 63 | ||||
| Offering Stage | 63 | ||||
| Acquisition Stage | 65 | ||||
| Operating Stage | 66 | ||||
| Liquidation Stage | 67 | ||||
| Subordinated Payments | 68 | ||||
| Additional Payments for Additional Services | 69 | ||||
| Limitations on Reimbursements | 70 | ||||
| Limitation on Acquisition-Related Compensation | 70 | ||||
| Limitation on Operating Expenses | 70 | ||||
| Additional Important Information on Compensation to Our Affiliates | 71 | ||||
| PRIOR PERFORMANCE SUMMARY | 72 | ||||
| Public Programs | 72 | ||||
| G REIT, Inc. | 72 | ||||
| T REIT, Inc. | 72 | ||||
| Private Programs | 74 | ||||
| Western Real Estate Investment Trust, Inc. | 74 | ||||
| Other Private Placements | 75 | ||||
| CONFLICTS OF INTEREST | 84 | ||||
| Competition for the Time and Service of Our Advisor and Affiliates | 84 | ||||
| Process for Resolution of Conflicting Opportunities | 84 | ||||
| Acquisitions From Our Advisor and Its Affiliates | 85 | ||||
| We May Purchase Properties From Persons With Whom Affiliates of Our Advisor Have Prior Business Relationships | 85 | ||||
| Our Advisor May Have Conflicting Fiduciary Obligations in the Event Our Company Acquires Properties with Our Advisor or Affiliates | 85 | ||||
| Property Management Services will be Rendered by Our Advisor | 85 | ||||
| Receipt of Commissions, Fees and Other Compensation by Our Advisor | 85 | ||||
| Non-Arm’s-Length Agreements; Conflicts; Competition | 86 | ||||
| Legal Counsel for Our Company and Our Advisor is the Same Law Firm | 86 | ||||
| NNN Capital Corp. is Participating as Dealer Manager in the Sale of Our Shares | 86 | ||||
| SUMMARY OF AMENDED AND RESTATED DIVIDEND REINVESTMENT PLAN | 87 | ||||
| General | 87 | ||||
| Investment of Dividends | 87 | ||||
| Participant Accounts, Fee, and Allocation of Shares | 87 | ||||
| Administration | 87 | ||||
| Reports to Participants | 88 | ||||
| Election to Participate or Terminate Participation | 88 | ||||
| Federal Income Tax Considerations | 88 | ||||
| Amendments and Termination | 89 | ||||
| SUMMARY OF AMENDED AND RESTATED REPURCHASE PLAN | 90 | ||||
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| MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 91 | ||||
| Forward-Looking Statements | 91 | ||||
| Overview and Background | 91 | ||||
| Public Offering of Equity Securities/Use of Proceeds | 92 | ||||
| Critical Accounting Policies | 92 | ||||
| Description of Real Estate Investments | 93 | ||||
| Results of Operations — Three Months and Nine Months Ended September 30, 2003 and 2002 | 95 | ||||
| Results of Operations — Years Ended December 31, 2002 and 2001 | 97 | ||||
| Liquidity and Capital Resources — September 30, 2003 | 98 | ||||
| Subsequent Events | 100 | ||||
| Commitments and Contingencies | 101 | ||||
| Funds From Operations | 102 | ||||
| Liquidity and Capital Resources — December 31, 2002 | 102 | ||||
| Contractual Obligations and Commercial Commitments as of December 31, 2002 | 104 | ||||
| Inflation | 104 | ||||
| Impact of Recently Issued Accounting Pronouncements | 104 | ||||
| MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS | 107 | ||||
| Market Information | 107 | ||||
| Shareholders | 107 | ||||
| Dividends | 107 | ||||
| Equity Compensation Plan Information | 107 | ||||
| PRINCIPAL SHAREHOLDERS | 108 | ||||
| DESCRIPTION OF CAPITAL STOCK | 109 | ||||
| General | 109 | ||||
| Common Stock | 109 | ||||
| Shareholder Voting | 109 | ||||
| Preferred Stock | 110 | ||||
| Issuance of Additional Securities and Debt Instruments | 110 | ||||
| Restrictions on Ownership and Transfer | 110 | ||||
| IMPORTANT PROVISIONS OF VIRGINIA CORPORATE LAW AND OUR ARTICLES OF INCORPORATION AND BYLAWS | 113 | ||||
| Our Articles of Incorporation and Bylaws | 113 | ||||
| Shareholders’ Meetings | 113 | ||||
| Our Board of Directors | 113 | ||||
| Fiduciary Duties | 113 | ||||
| Limitation of Liability and Indemnification | 114 | ||||
| Defenses Available | 115 | ||||
| Inspection of Books and Records | 115 | ||||
| Restrictions on Roll-Up Transactions | 116 | ||||
| Anti-Takeover Provisions of the Virginia Stock Corporation Act | 117 | ||||
| Dissolution or Termination of Our Company | 118 | ||||
| Transactions with Affiliates | 118 | ||||
| SHARES AVAILABLE FOR FUTURE SALE | 119 | ||||
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| Page | |||||
| AGREEMENT OF LIMITED PARTNERSHIP | 119 | ||||
| Management | 119 | ||||
| Transferability of Interests | 119 | ||||
| Capital Contribution | 119 | ||||
| Redemption Rights | 120 | ||||
| Incentive Units | 120 | ||||
| Operations | 122 | ||||
| Distributions | 122 | ||||
| Allocations | 123 | ||||
| Term | 124 | ||||
| Tax Matters | 124 | ||||
| FEDERAL INCOME TAX CONSEQUENCES OF OUR STATUS AS A REIT | 125 | ||||
| Taxation of Our Company | 125 | ||||
| Requirements for Qualification | 126 | ||||
| Income Tests | 127 | ||||
| Rents and Interest | 128 | ||||
| Failure to Satisfy Income Tests | 129 | ||||
| Prohibited Transaction Rules | 129 | ||||
| Asset Tests | 130 | ||||
| Distribution Requirements | 131 | ||||
| Record Keeping Requirements | 131 | ||||
| Failure to Qualify | 131 | ||||
| Taxation of Taxable U.S. Shareholders | 132 | ||||
| Taxation of U.S. Shareholders on the Disposition of the Common Stock | 133 | ||||
| Capital Gains and Losses | 133 | ||||
| Information Reporting Requirements and Backup Withholding | 133 | ||||
| Taxation of Tax-Exempt Shareholders | 133 | ||||
| Taxation of Non-U.S. Shareholders | 134 | ||||
| Other Tax Consequences | 136 | ||||
| ERISA CONSIDERATIONS | 137 | ||||
| PLAN OF DISTRIBUTION | 139 | ||||
| Shares Issued Publicly to Residents of Our Sales States | 139 | ||||
| Shares Issued Under Dividend Reinvestment Plan | 142 | ||||
| SALES LITERATURE | 142 | ||||
| EXPERTS | 143 | ||||
| REPORTS TO SHAREHOLDERS | 143 | ||||
| LEGAL MATTERS | 143 | ||||
| LEGAL PROCEEDINGS | 143 | ||||
| ADDITIONAL INFORMATION | 144 | ||||
| INDEX TO CONSOLIDATED FINANCIAL STATEMENTS | F-1 | ||||
| EXHIBIT A Prior Performance Tables | A-1 | ||||
| EXHIBIT B Subscription Agreement | B-1 | ||||
| EXHIBIT C Amended and Restated Dividend Reinvestment Plan | C-1 | ||||
| EXHIBIT D Amended and Restated Repurchase Plan | D-1 | ||||
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QUESTIONS AND ANSWERS ABOUT THIS OFFERING
Below are some of the more frequently asked questions and answers related to REIT offerings of this type. Please see the Prospectus Summary and the remainder of this prospectus for more comprehensive information about our offering.
| Q: | What is a REIT? |
| A: | A REIT is a real estate investment trust. In general, a REIT is a company that: |
| • | combines the capital of many investors to acquire or provide financing for real estate properties; | |
| • | allows individual investors to invest in a diversified real estate portfolio managed by a professional management team; | |
| • | is required to pay dividends to investors of at least 90% of its taxable income each year; and | |
| • | avoids the federal “double taxation” treatment of income that results from investments in a corporation because a REIT is not generally subject to federal corporate incomes taxes on its taxable income, if it complies with certain income tax requirements. |
| Q: | What is G REIT, Inc.? |
| A: | G REIT, Inc. is a real estate investment trust that was formed in December 2001 as a Virginia corporation to acquire and operate high quality commercial real estate properties, primarily consisting of multi-tenant office, service and industrial buildings anchored by government-oriented tenants comprised of federal, state and local government tenants, government contractors and/or government service providers. |
| Q: | Who will choose and manage your real estate investments? |
| A: | Triple Net Properties, LLC, our advisor, makes recommendations on all property acquisitions to our board of directors. Our board of directors, including a majority of our independent directors, must approve all of our property acquisitions. In addition, an affiliate of our advisor will manage and operate properties that we acquire on our behalf. |
| Q: | Who is Triple Net Properties? |
| A: | Triple Net Properties, LLC, a Virginia limited liability company formed in 1998, manages a growing portfolio of over 12 million square feet of commercial properties with a market value of more than $1 billion. Triple Net Properties currently manages one other public REIT program, one private REIT program, and as of September 30, 2003, has sponsored and advised more than 65 other private real estate programs. |
| Q: | What criteria will our advisor use to select potential properties for acquisition? |
| A: | Our advisor will generally seek to acquire high quality office, industrial and service properties that have a government orientation. Our advisor’s acquisition team will try to acquire properties in those states we have designated as our focus states: California, Colorado, the District of Columbia, Florida, Illinois, Maryland, Nevada, Oklahoma, Texas, Virginia and Washington. Our advisor will generally look for properties that are at least 80% leased on the acquisition date. |
| Q: | How many real estate properties do we currently own? |
| A: | As of September 30, 2003, we own interests in nine office properties with an aggregate gross leaseable area of approximately 1.5 million square feet. |
| Q: | Where are our properties located? |
| A: | We have 3 properties located in Texas, 2 properties in California, and 1 property each in Florida, Illinois, Nebraska and Nevada. |
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| Q: | Who are some of our major tenants at these properties? |
| A: | Our major tenants by percentage of aggregate annual revenue are: General Services Administration (19.2%), the Internal Revenue Service(10.3%), North American Life and Health Insurance Co. (7.6%) USA Space Alliance (a joint venture between Lockheed Martin and Boeing)(6.1%), Department of Children and Family Services (5.9%) and Employers Reinsurance Corp.(5.6%). |
| Q: | Why do we intend to focus our acquisitions on government-oriented properties? |
| A: | Our strategy is to focus on properties with government tenants because: |
| • | government services are essential to the country; | |
| • | government-oriented tenants provide for stable income; and | |
| • | the federal government leases over 300 million square feet of property in the United States. |
| Q: | What percentage of our properties are occupied by government tenants. |
| A: | As of September 30, 2003, approximately 48% of our aggregate leaseable space is leased to government-oriented tenants. |
| Q: | What steps will we take to make sure we purchase environmentally compliant properties? |
| A: | We obtain a Phase I environmental assessment of each property prior to purchase. In addition, we obtain a contractual representation from the seller that, to its knowledge, the property is not contaminated with hazardous materials. |
| Q: | What will be the terms of our leases? |
| A: | We will seek to enter into leases with creditworthy tenants prior to or at the time of the acquisition of a property. These leases may be either “net” or “gross” leases. We expect that most of our non-governmental leases will be net leases with terms of 10 to 15 years, but generally not less than 5 years. Net leases typically require that tenants pay all or a majority of the operating expenses, including real estate taxes, special assessments and sales and use taxes, utilities, insurance and building repairs related to the property, in addition to the lease payments. We anticipate that our governmental leases are likely to be gross leases and may have a shorter term generally ranging from 5 to 10 years. Gross leases typically require that the landlord pay all or a majority of the operating expenses, including real estate taxes, special assessments, and sales and use taxes, utilities, insurance and building repairs related to the property. |
| Q: | How will we own our real estate properties? |
| A: | We expect to own all of our real estate properties through our operating partnership, G REIT, L.P., or subsidiaries of our operating partnership in what is known as an UPREIT structure. We organized G REIT, L.P. to own, operate and manage real estate properties on our behalf. G REIT, Inc. is the sole general partner of G REIT, L.P. |
| Q: | What is an UPREIT? |
| A: | UPREIT stands for Umbrella Partnership Real Estate Investment Trust. An UPREIT is a REIT that holds all or substantially all of its properties through a partnership in which the REIT holds an interest. Using an UPREIT structure may give us an advantage in acquiring properties from persons who may not otherwise sell their properties because of unfavorable tax results. Generally, a sale of property directly to a REIT is a taxable transaction to the selling property owner. In an UPREIT structure, a seller of a property who desires to defer taxable gain on the sale of his property may transfer the property to an UPREIT in exchange for limited partnership units in the UPREIT and defer taxation of gain until the seller later exchanges his UPREIT units on a one-for-one basis for REIT shares. |
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| Q: | If you buy shares of G REIT common stock, will you receive dividends and how often? |
| A: | To maintain our qualification as a REIT, we are required to make aggregate annual distributions to our shareholders of at least 90% of our taxable income. We currently declare and make dividend payments to our shareholders on a monthly basis and intend to continue to make monthly dividend payments. |
| Q: | What is our current dividend rate? |
| A: | We currently pay dividends at an annual rate of $0.750 per share (7.50% based on a $10.00 purchase price). |
| Q: | Has our dividend rate increased? |
| A: | Yes. On September 1, 2002, we began paying monthly dividends to shareholders at an annual rate of $0.700 per share (7.00% based on a $10.00 purchase price). Effective with the January 1, 2003 dividend payment, the annual rate was increased to $0.725 per share (7.25% based on a $10.00 purchase price) and effective with the June 1, 2003 dividend payment, the annual rate was increased to $0.750 per share (7.50% based on a $10.00 purchase price). |
| Q: | How do we calculate the payment of dividends to shareholders? |
| A: | We calculate our monthly dividends on a daily basis to shareholders of record so your dividend benefits will begin to accrue immediately upon becoming a shareholder. |
| Q: | Will the dividends you receive be taxable as ordinary income? |
| A: | Generally, dividends that you receive, including dividends reinvested pursuant to our dividend reinvestment plan, will be taxed as ordinary income to the extent that they are from current or accumulated earnings and profits. We expect that some portion of your dividends may not be subject to tax in the year in which they are received because depreciation expense reduces the amount of taxable income but does not reduce cash available for distribution. The portion of your distribution which is not subject to tax immediately is considered a return of capital for tax purposes and will reduce the tax basis of your investment. This, in effect, defers a portion of your tax until your investment is sold or G REIT is liquidated, at which time you will be taxed at capital gains rates. However, because each investor’s tax considerations are different, we suggest that you consult with your tax advisor as well as review the section of the prospectus entitled “Federal Income Tax Considerations.” |
| Q: | Can you reinvest your dividends in shares of G REIT? |
| A: | Yes, you may elect to participate in our dividend reinvestment plan by checking the appropriate box on the Subscription Agreement, included as Exhibit B, or by filling out an enrollment form we will provide to you at your request. The purchase price for shares purchased under our dividend reinvestment plan is $9.50. |
| Q: | What will we do with the money raised in this offering? |
| A: | We intend to use substantially all of the proceeds from this offering to acquire and operate commercial real estate primarily consisting of high quality income-generating multi-tenant office, industrial and service properties with a government orientation and to repay debt that we may assume when acquiring such properties. We intend to invest a minimum of 87.5% of the gross offering proceeds to acquire such properties. The remainder of the gross offering proceeds will be used to pay fees and expenses of this offering and acquisition-related expenses. |
| Q: | How will the payment of fees and expenses affect your invested capital? |
| A: | The payment of fees and expenses will not reduce your invested capital. Your initial invested capital amount will remain $10.00 per share and your dividend yield will be based on your $10.00 per share investment. |
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| Q: | What kind of offering is this? |
| A: | We are offering the public up to 27,000,000 shares of our common stock on a “best efforts” basis. |
| Q: | How does a “best efforts” offering work? |
| A: | When common stock is offered to the public on a “best efforts” basis, the securities dealers participating in the offering are only required to use their best efforts to sell the common stock and have no firm commitment or obligation to purchase any common stock. Therefore, no specified dollar amount is guaranteed to be raised. |
| Q: | How long will this offering last? |
| A: | The offering will not last beyond , 200 , two years from the date of this prospectus. |
| Q: | Have we had other offerings of our common stock? |
| A: | Yes. We had one prior “best efforts” public offering of 20,000,000 shares of our common stock at a purchase price of $10.00 per share and up to 1,000,000 additional shares under our dividend reinvestment plan. These shares were offered pursuant to our registration statement on Form S-11/A, which was declared effective by the Securities and Exchange Commission on July 22, 2002. As of September 30, 2003, we have sold 12,008,464 shares of our common stock and issued an additional 137,536 shares to shareholders participating in our dividend reinvestment plan, resulting in gross offering proceeds of approximately $119,477,000. We intend to terminate this prior offering at or about the same time this offering goes effective with the SEC. |
| Q: | Who can buy shares of our common stock? |
| A: | You can buy shares of our common stock pursuant to this prospectus provided that you have either (1) a net worth of at least $45,000 and an annual gross income of at least $45,000, or (2) a net worth of at least $150,000. For this purpose, net worth does not include your home, home furnishings or personal automobiles. Please note that these minimum levels may be higher in certain states, so you should read the more detailed description in the “Suitability Standards” section of this prospectus. |
| Q: | Is there any minimum investment required? |
| A: | Yes. Generally, the minimum purchase is 100 shares of our common stock, or $1,000, except in Minnesota, which requires a minimum investment of 250 shares, or $2,500, and North Carolina, which requires a minimum investment of 500 shares, or $5,000. |
| Q: | How do you subscribe for shares of G REIT common stock? |
| A: | In order to purchase shares of our common stock in this offering, you must complete a Subscription Agreement in the form contained in this prospectus as Exhibit B for a specific number of shares. You will need to pay for the shares at the time you subscribe. |
| Q: | If you buy shares of common stock in the offering, how can you sell them? |
| A: | At the time you purchase the shares of common stock, they will not be listed for trading on any national securities exchange or over-the-counter market. In fact, there will not be any public market for the shares when you purchase them and we cannot be sure if one will ever develop. As a result, it may be difficult to find a buyer for your shares and realize a return on your investment. You may sell your shares to any buyer unless such sale would cause any person or entity to directly or indirectly own more than 9.9% of our outstanding stock. |
| Q: | Does G REIT have a share repurchase plan? |
| A: | Yes, after you have held your shares for at least one year, you may be able to have your shares repurchased by us in accordance with our share repurchase plan. Under the plan, purchases are made at our sole discretion. However, shares repurchased under the plan will be purchased at prices lower than the $10.00 offering price: $9.05 during the offering period, between $9.25 and $9.75 for the three years following the offering period and $10.00 thereafter. |
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| Q: | Does the company intend to list its shares of common stock? If not, is there any other planned liquidity event? |
| A: | We anticipate that by July 1, 2008, our board of directors will determine when, and if, to apply to have our shares of common stock traded on a national securities exchange or quoted on a national market system. If we do not list our shares on a national securities exchange or include them on a national market system before July 22, 2012, we intend to submit a proposal to our shareholders at the next annual meeting to liquidate all of our properties in an orderly fashion and distribute the proceeds to our shareholders. |
| Q: | What is the experience of our officers and directors? |
| A: | Our management team has extensive experience in the acquisition, financing and management of commercial real estate. Below is a short description of some of the key members of our management team. See the “Management-Executive Officers and Directors” section for a more detailed description of each of our executive officers and directors. |
| • | Anthony W. “Tony” Thompson, our Chairman of the Board of Directors, Chief Executive Officer and President, also is the President of our advisor and our dealer manager, NNN Capital Corp. He has organized and managed various real estate investment and brokerage firms for over 30 years. | |
| • | Richard T. Hutton, Jr., our Interim Chief Financial Officer, and Chief Investment Officer of our advisor, has over 15 years of real estate accounting, finance and property operations experience. | |
| • | Talle A. Voorhies, our Vice President and Secretary, also is the Executive Vice President of our advisor and Executive Vice President and Secretary of our dealer manager. She is responsible for communications with the broker dealer network and is a registered financial principal with the NASD. | |
| • | Jack R. Maurer, our Executive Vice President, has over 29 years of real estate financial management experience and is a registered financial principal with the NASD. |
| Q: | Will you receive notification as to how your investment is doing? |
| A: | You will receive periodic reports on the performance of your investment with us, including: |
| • | an annual report that updates and details your investment holding; | |
| • | an annual report, including audited financial statements, as filed with the SEC; | |
| • | an annual IRS Form 1099-DIV; and | |
| • | supplements to the prospectus. |
| In addition, you may go to our advisor’s website at www.1031nnn.com at any time and access your current investment information. |
| Q: | When will you get your tax information? |
| A: | We intend to mail your Form 1099-DIV tax information by January 31 of each year. |
| Q: | Who can you contact to answer your questions? |
| A: | If you have any questions regarding the offering or if you would like additional copies of this prospectus, you should contact your registered representative or: |
| Investor Services Department | |
| Triple Net Properties, LLC | |
| 1551 N. Tustin Avenue — Suite 200 | |
| Santa Ana, CA 92705 | |
| Telephone: 877-477-1031 or 714-667-8252 | |
| Facsimile: 714-667-6843 |
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PROSPECTUS SUMMARY
This summary highlights selected information from this prospectus and does not contain all the information that is important to you. You should carefully read this entire prospectus, including the “Risk Factors” section beginning on page 14.
About Our Company
We are a Virginia corporation that has qualified as and elected to be treated as a REIT for federal income tax purposes. We invest in properties with a government orientation. As of September 30, 2003, we owned interests in nine real estate properties located in six states with an aggregate gross leaseable area of approximately 1.5 million square feet.
We operate in an umbrella partnership REIT structure, in which our subsidiary operating partnership (or entities wholly owned by our operating partnership) own substantially all of the properties that we acquire. Our operating partnership is G REIT, L.P., a Virginia limited partnership, and we are its sole general partner. We own 100% of the ownership interests in our operating partnership, other than the incentive limited partnership interest owned by our advisor, Triple Net Properties, LLC. Our advisor’s incentive limited partnership interest entitles our advisor to receive an incentive distribution equal to 15% of the partnership’s cash flow from operations after our company receives and pays to our shareholders a threshold annual return of 8% on their investments in our company. In addition, the incentive limited partnership interest entitles our advisor to receive an additional incentive distribution equal to 15% of the net proceeds from the sale of properties after our company receives and pays to our shareholders their invested capital plus the annual return of 8% on their investments in our company. However, there is no assurance we will be able to pay an annual 8% return to our shareholders. References in this prospectus to “us,” “we” or “our company” mean G REIT, Inc. and our operating partnership combined, unless the context otherwise requires.
The benefits of our umbrella partnership REIT structure include the following:
| • | We believe our structure provides us with access to capital for refinancing and growth. Sources of capital include the common stock sold in this offering and possible future issuances of debt or equity through public offerings or private placements. | |
| • | Our structure allows shareholders through their ownership of common stock, and the limited partners through their ownership of limited partnership units, an opportunity to participate in the growth of the real estate market through an ongoing business enterprise. | |
| • | The umbrella partnership REIT structure provides property owners who transfer their real properties to us in exchange for limited partnership units the opportunity to defer the tax consequences that otherwise would arise from a sale of their real properties and other assets to us or to a third party. This allows us to acquire assets without using as much of our cash and may allow us to acquire assets that the owner would otherwise be unwilling to sell because of tax considerations. |
Our principal executive offices are located at 1551 N. Tustin Avenue, Suite 200, Santa Ana, California 92705.
About Our Business
We generally intend to acquire existing multi-tenant office, industrial and service properties which have a government orientation as a result of substantial space being leased to government tenants. As of September 30, 2003, we own interests in nine properties. See the “Description of Real Estate Investments” section of this prospectus for a description of the properties we have purchased to date. We intend to acquire additional properties with the net proceeds of this offering.
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As we acquire new properties, we will provide supplements to this prospectus to describe those properties.
We generally intend to acquire properties in California, Colorado, the District of Columbia, Florida, Illinois, Maryland, Nevada, Oklahoma, Texas, Virginia and Washington, which we refer to as our focus states. Some of our properties will be located in state capitals. A majority of our properties will be at least 80% leased on the acquisition date.
The purchase price of properties will vary widely depending on a number of factors, including size, class and location. In addition, the cost to our company will vary based on the amount of debt we incur in connection with financing the acquisition.
Our Advisor and the Dealer Manager
Triple Net Properties, LLC is our advisor and will generally manage our business and assets. Our advisor is affiliated with our company in that several of our officers and directors serve as officers and directors of our advisor and own interests in our advisor. The President of our company and our advisor, Anthony W. Thompson, beneficially owns approximately 36% of our advisor, and officers and directors as a group beneficially own approximately 40% of our advisor. Our advisor and its affiliated real estate brokerage and management company were formed in 1998 to serve as an asset and property manager for syndicated real estate investment trusts, real estate limited partnerships, limited liability companies and similar real estate entities. As of September 30, 2003, in addition to our company, our advisor has advised more than 65 other entities that invest in various types of real estate with respect to the acquisition, management and disposition of their properties. These entities may compete with us for acquisition opportunities. Our advisor’s principal offices are located at 1551 N. Tustin Avenue, Suite 200, Santa Ana, California 92705.
An affiliate of our advisor, NNN Capital Corp., will assist us in selling our common stock under this prospectus by serving as the dealer manager of this offering. Since August of 1986, the dealer manager has helped various syndicated real estate investment trusts, limited partnerships, limited liability companies and other real estate entities raise money to invest in real estate. Mr. Thompson currently owns 100% of the outstanding capital stock of the dealer manager.
Summary Risk Factors
An investment in our common stock involves a number of risks. We urge you to carefully consider the matters discussed under “Risk Factors” beginning on page 14 before investing in our company. Such risks include, among several others, those described below. However, not all important risks are listed in this Summary, and you should consider carefully all of the other information included in this prospectus before you decide to purchase any shares of our common stock.
| • | There is no public market for our common stock and it will not be listed on a national exchange or market system. It is not likely that there will be an active trading market for our common stock. You may not be able to easily resell your shares or to resell your shares at a price that is equal to or greater than the price you paid for them. | |
| • | We rely on our advisor to select our properties and to manage our business and properties and the success of our business depends on the ability of our advisor to manage our day-to-day operations. Any adversity experienced by our advisor or in our relationship with our advisor could disrupt the operation of our properties and materially decrease our earnings. | |
| • | Our officers and directors may experience conflicts between the interests of our company and the interests of our advisor, the dealer manager and their affiliates. Many of the same persons who serve as our officers, directors and employees are also officers, directors, employees or owners of our advisor, the dealer manager and their affiliates. Any existing or future agreements between us and our advisor, the dealer manager and their affiliates, including agreements relating to their |
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| compensation, were not and will not be reached through arm’s-length negotiations. Such agreements may not solely reflect your interests as a shareholder of our company. | ||
| • | Our advisor also serves as an advisor to T REIT, Inc., a public REIT which is engaged in businesses substantially similar to ours. Our advisor does and will serve in similar capacities for a number of entities and properties. These relationships result in further conflicts of interest between our company and our officers and directors who work for our advisor. These and other conflicts may result in such officers and directors taking actions and making decisions that do not solely reflect your interests as a shareholder of our company. | |
| • | Because the dealer manager is an affiliate of our company and our advisor, you cannot consider the dealer manager’s due diligence investigation of our company to be an independent review of our company. That due diligence review may not be as meaningful as a review conducted by an unaffiliated broker-dealer. | |
| • | Our board of directors’ ability to issue and set the terms of up to 10 million shares of preferred stock, without your approval, may deter or prevent a sale of our company in which you could profit. |
If we are unable to effectively manage the impact of these and other risks, our ability to meet our investment objectives will be substantially impaired. In turn, the value of your common stock and our distributions to you will be materially reduced.
Prior Offering
We had one prior public offering of shares of our common stock. Pursuant to our registration statement on Form S-11/A, which was declared effective by the Securities and Exchange Commission on July 22, 2002, we offered for sale to the public on a “best efforts” basis 20,000,000 shares of our common stock at a purchase price of $10.00 per share and up to an additional 1,000,000 additional shares pursuant to our dividend reinvestment plan. As of September 30, 2003, we have sold 12,008,464 shares of our common stock under the prior offering and issued an additional 137,536 shares to shareholders participating in our dividend reinvestment plan, resulting in gross proceeds of approximately $119,477,000. We intend to terminate this prior offering at or about the same time this offering goes effective with the SEC.
This Offering
We are offering for sale to the residents of the states listed in this prospectus a maximum of 27,000,000 shares of our common stock. The minimum number of shares you may purchase is 100, except in states which require a higher minimum purchase. This offering is being conducted on a “best efforts” basis, which means that the securities dealers participating in this offering are under no obligation to purchase any of the shares and, therefore, no specified dollar amount is guaranteed to be raised. In addition, we expect to issue up to 1,500,000 shares to shareholders who elect to participate in our dividend reinvestment plan.
Use of Proceeds
We will contribute the net proceeds of the sale of any common stock under this prospectus to our operating partnership in return for 100% of the general partnership interests in our operating partnership. No proceeds are allocated to the incentive limited partnership interest owned by our advisor; however, our advisor is entitled to certain incentive distributions which are described under “Agreement of Limited Partnership — Incentive Units.” Our operating partnership will use the net proceeds to purchase suitable properties, to repay debt that we may assume when acquiring properties in exchange for units of limited partnership interest in our operating partnership and to pay the amounts due to our advisor and the dealer manager.
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Distributions
In order to remain qualified as a REIT, we must distribute at least 90% of our annual taxable income to our shareholders. We have paid dividends to our shareholders monthly beginning September 2002 the month we made our first property acquisition and commenced our planned principal operations. We intend to pay regular monthly dividends to our shareholders out of our cash available for distribution, in an amount determined by our board of directors. The continuation and amount of dividend payments depend upon a variety of factors, including:
| • | our cash available for distribution; | |
| • | our overall financial condition; | |
| • | our capital requirements; | |
| • | the annual distribution requirements applicable to REITs under the federal income tax laws; and | |
| • | such other considerations as our board of directors may deem relevant. |
Our company provides the following programs to facilitate investment in our shares and to provide limited liquidity for shareholders:
| • | the dividend reinvestment plan; and | |
| • | the share repurchase plan. |
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SELECTED FINANCIAL DATA
G REIT, INC.
| September 30, | December 31, | |||||||
| Selected Financial Data(1) | 2003 | 2002 | ||||||
| (Unaudited) | ||||||||
| BALANCE SHEET DATA: | ||||||||
| Total assets | $ | 119,354,883 | $ | 36,461,309 | ||||
| Mortgage loans payable | 10,072,474 | 16,860,000 | ||||||
| Line of credit | 1,135,000 | — | ||||||
| Shareholders’ equity | 103,252,958 | 18,350,358 | ||||||
| Nine Months | Year Ended | ||||||||
| Ended | December 31, | ||||||||
| September 30, 2003 | 2002 | ||||||||
| (Unaudited) | |||||||||
| OPERATING DATA: | |||||||||
| Total revenues | $ | 6,961,976 | $ | 750,501 | |||||
| Net income | 1,099,051 | 25,650 | |||||||
| Net income per common share, basic and diluted(2) | 0.18 | 0.06 | |||||||
| Dividends declared | 3,411,586 | 279,462 | |||||||
| Dividends per common share(2) | 0.52 | 0.70 | |||||||
| Funds from operations(2)(3) | 2,580,095 | 127,799 | |||||||
| Funds available for distribution(3) | 2,412,023 | 96,675 | |||||||
| Cash flow provided by (used in) operating activities | 4,489,306 | (608,907 | ) | ||||||
| Cash flows used in investing activities | (80,825,748 | ) | (26,101,496 | ) | |||||
| Cash flows provided by financing activities | 77,207,846 | 35,089,194 | |||||||
| Weighted average number of shares outstanding(2): | |||||||||
| Basic | 6,067,049 | 405,481 | |||||||
| Diluted | 6,110,859 | — | |||||||
| (1) | The above selected financial data should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this prospectus. |
| (2) | Net income and dividends per share are based upon the weighted average number of common shares outstanding. See Footnote (3) below for information regarding our calculation of FFO. Dividends by the company of our current and accumulated earnings and profits for federal income tax purposes are taxable to shareholders as ordinary income. Dividends in excess of these earnings and profits generally are treated as a non-taxable reduction of the shareholder’s basis in the shares to the extent thereof (a return of capital for tax purposes), and thereafter as taxable gain. These dividends in excess of earnings and profits will have the effect of deferring taxation of the dividends until the sale of the shareholder’s shares. For the year ended December 31, 2002, approximately 71% represented a return of capital for tax purposes. In order to maintain our qualification as a REIT, we must make annual distributions to shareholders of at least 90% of our REIT taxable income. REIT taxable income does not include net capital gains. Under certain circumstances, we may be required to make distributions in excess of cash available for distribution in order to meet the REIT distribution requirements. Dividends are determined by our board of directors and are dependent on a number of factors, including the amount of funds available for distribution, our financial condition, any decision by the board of directors to reinvest funds rather than to distribute the funds, our capital expenditures, the annual distribution required to maintain REIT status under the Internal Revenue Code and other factors the board of directors may deem relevant. |
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| (3) | One of our objectives is to provide cash dividends to our shareholders from cash generated by our operations. Cash generated from operations is not equivalent to our net operating income or loss as determined under accounting principles generally accepted in the United States, or GAAP. Due to certain unique operating characteristics of real estate companies, the National Association of Real Estate Investment Trusts, or NAREIT, an industry trade group, has promulgated a standard known as “Funds from Operations” or “FFO,” which it believes more accurately reflects the operating performance of a REIT such as our company. As defined by NAREIT, FFO means net income or loss computed in accordance with GAAP, less extraordinary, unusual and non-recurring items, excluding gains (or losses) from debt restructuring and sales of property plus depreciation on real property and amortization and after adjustments for unconsolidated partnerships and joint ventures in which the REIT holds an interest. We have adopted the NAREIT definition for computing FFO because management believes that, subject to the following limitations, FFO provides a basis for comparing the performance and operations of our company to those of other REITs. The calculation of FFO may vary from entity to entity since capitalization and expense policies tend to vary from entity to entity. Items which are capitalized do not impact FFO, whereas items that are expensed reduce FFO. Consequently, the presentation of FFO by our company may not be comparable to other similarly titled measures presented by other REITs. FFO is not intended to be an alternative to “Net Income” as an indicator of our performance nor to “Cash Flows from Operating Activities” as determined by GAAP as a measure of our capacity to pay dividends. |
FFO and funds available for distribution are calculated as follows:
| Nine Months | Year | ||||||||
| Ended | Ended | ||||||||
| September 30, 2003 | December 31, 2002 | ||||||||
| (Unaudited) | |||||||||
| Net income | $ | 1,099,051 | $ | 25,650 | |||||
| Add: | |||||||||
| Depreciation — Wholly-owned operating properties | 821,848 | 102,149 | |||||||
| Depreciation — Unconsolidated real estate operating properties | 659,196 | — | |||||||
| Funds from operations | 2,580,095 | 127,799 | |||||||
| Principal amortization of debt | (77,256 | ) | (10,270 | ) | |||||
| Straight lining of rents(a) | (90,816 | ) | (20,854 | ) | |||||
| Funds available for distribution(b) | $ | 2,412,023 | $ | 96,675 | |||||
| (a) | Certain tenant leases contain provisions providing for stepped rent increases. GAAP requires us to record rental income for the period of occupancy using the straight line method, which is the average monthly rent for the entire period of occupancy during the term of the lease. |
| (b) | Approximately 71% of dividends distributed during 2002 are deemed a return of capital for federal income tax purposes as our dividends exceeded taxable income. |
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Compensation to Our Advisor and the Dealer Manager
We will pay our advisor, the dealer manager and their affiliates substantial amounts for assisting us in this offering and sale of our common stock and for managing our business and assets.
In connection with the sale of our common stock in this offering, the dealer manager will receive the following fees:
| Description of Fee | Calculation of Fee | Amount if Maximum Sold | ||
| • Selling Commission | 7.0% of gross offering proceeds | $18,900,000 | ||
| • Marketing Support and Due Diligence Expense Reimbursement | 2.5% of gross offering proceeds | $6,750,000 |
In connection with the management of our business and properties, we will pay our advisor or an affiliate the following fees:
| Description of Fee | Calculation of Fee | Amount if Maximum Sold | ||
| • Reimbursement of acquisition expenses | Not to exceed 0.5% of gross offering proceeds | $1,350,000 | ||
| • Real estate commission or acquisition fee | Triple Net Properties Realty, Inc., an affiliate of our advisor, will serve as our broker in property acquisitions and may receive a real estate commission or acquisition fee from the seller of a property or our company equal to up to 3% of the purchase price of the property. The reimbursement of acquisition expenses, real estate commissions and acquisition fees for one property cannot exceed 6% of the purchase price for that property. | Actual amounts depend on the purchase price of properties acquired and, therefore, cannot be determined at the present time. | ||
| • Return on incentive units of limited partnership interest in our operating partnership | Equal to 15% of the cash flow of our operating partnership after we have received, and paid to our shareholders, the sum of: | Actual amounts depend upon results of operations and the actual amounts that we invest in properties and, therefore, cannot be determined at the present time. | ||
| • an 8% annual cumulative non- compounded return on the capital we invested in the operating partnership; and | ||||
| • any shortfall in the recovery of the capital we invested in the operating partnership allocable to sold properties. | ||||
| • Property management fee | 5% of gross income generated by our properties, some of which may be re-allowed to third-party property manager | Actual amounts depend upon the gross income of the properties and, therefore, cannot be determined at the present time. |
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Upon the disposition of any property, we will pay our advisor the following fees:
| Description of Fee | Calculation of Fee | Amount if Minimum Sold | ||
| • Property disposition fee | Equal to the lesser of 3% of sale price or 50% of sales commission that would have been paid to third-party sales broker | Actual amounts depend upon the sale price of properties and, therefore, cannot be determined at the present time. | ||
| • Incentive distribution on the advisor’s incentive limited partnership interest | Equal to 15% of the net proceeds of the sale of the property after we have received, and paid to our shareholders, the sum of: | Actual amounts depend upon the sale price of properties and, therefore, cannot be determined at the present time. | ||
| • the amount of capital we invested in our operating partnership allocable to such property; | ||||
| • any shortfall in the recovery of our invested capital with respect to prior sales of properties; and | ||||
| • any shortfall in our 8% annual cumulative, non-compounded return on the capital we invested in our operating partnership. |
All of this compensation is more fully described under “Compensation Table.”
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RISK FACTORS
Before you invest in our common stock, you should be aware that your investment is subject to various risks, including those described below. You should carefully consider these risks together with all of the other information included in this prospectus before you decide to purchase any of our common stock.
Selection of Properties
| You must rely on Triple Net Properties, our advisor, for selection of properties; you will have no opportunity to evaluate these transactions. |
Our ability to achieve our investment objectives and to pay dividends is dependent upon the performance of our advisor, including the quality and timeliness of our acquisitions of properties and the determination of financing arrangements. Except for the investments described in this prospectus, you will have no opportunity to evaluate the terms of transactions or other financial or economic data concerning our investments. We cannot give you any information as to the identification, location, operating histories, lease terms or other relevant economic and financial data regarding the properties that we will purchase with the net proceeds of this offering.
Our success is totally dependent on our ability to acquire properties. Thus, your investment is subject to the risks attendant to real estate acquisitions, such as:
| • | the risk that properties may not perform in accordance with expectations, including projected occupancy and rental rates; | |
| • | the risk that we may have overpaid for properties; and | |
| • | the risk that we may have underestimated the cost of improvements required to bring an acquired property up to standards established for its intended use or its intended market position. |
Limited Experience in Managing a Public REIT
| Your investment in our company may not perform as well as an investment in a company with a management team that has more experience in managing a public REIT. |
Our officers and directors, and the officers and directors of our advisor, have limited experience in managing the affairs of a public REIT, which include complicated operations and tax issues. Our management and our advisor have managed only two other REITs over the last five years, only one of which was a public REIT. Your investment in our company may not perform as well as an investment in similar companies with management teams that have greater experience in operating public REITs.
No Market for Our Common Stock
| The absence of a public market for our common stock will make it difficult for you to sell your shares. |
There is no public market for our common stock and we have no plans to list our common stock on a stock exchange or market. You may not be able to resell your shares promptly or at a price that is at or above the price at which you purchased them. It is likely that there will not be an active trading market for our common stock. It may be difficult for you to find a buyer for your shares if you decide to sell them. The purchase price you pay for your shares may not be indicative of either the price at which the shares may trade if they were publicly traded on an exchange or the proceeds that you would receive if our company were liquidated or dissolved.
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Restrictions on Share Repurchase Plan
| You are limited in your ability to sell your shares pursuant to the share repurchase plan and repurchases are made at our sole discretion. |
You will not be able to sell your shares at a profit for at least three years under our share repurchase plan. Even though our share repurchase plan provides you with the opportunity to redeem your shares (at per share prices of $9.05 during this offering, between $9.25 and $9.75 during the three years immediately after this offering and at least $10.00 thereafter) after you have held them for a period of one year, and provided you are presenting for redemption at least 25% of the total number of shares you own, you should be fully aware that our share repurchase plan contains certain restrictions and limitations. Shares will be redeemed quarterly, on a first-come, first-served basis, and will be limited to the lesser of (1) during any calendar year, five percent (5%) of the weighted average number of shares outstanding during the prior calendar year, and (2) the proceeds we receive from the sale of shares under our dividend reinvestment plan and such other operating funds, if any, that our board of directors, in its sole discretion, may reserve. In addition, our board of directors reserves the right to amend or terminate our share repurchase plan or to disapprove repurchase requests, at its sole discretion, at any time. Therefore, in making a decision to purchase shares of our company, you should not assume that you will be able to sell any of your shares back to us pursuant to our share repurchase plan, and you also should understand that the repurchase prices during the first three years following this offering will not correlate to the value of our real estate holdings or other assets. If our board of directors terminates our share repurchase plan, you may not be able to sell your shares if you deem it necessary or desirable to do so.
Federal Income Tax Requirements
| Generally |
There are various federal income tax risks associated with an investment in our company. In order to maintain our qualification as a REIT, we must satisfy certain requirements set forth in the Internal Revenue Code and Treasury Regulations and various factual tests regarding the nature of our assets and income on an ongoing basis which are not entirely within our control. Failure to qualify as a REIT would subject our company to specific risks described in the section of this prospectus entitled “Federal Income Tax Consequences of Our Status as a REIT,” including two levels of income taxation. The provisions of the federal income tax laws relevant to an investment in our company are described generally in the above-mentioned section. You are urged to consult your tax advisor concerning the impact on your tax situation of an investment in our company.
In order to qualify as a REIT, we must distribute each calendar year to our shareholders at least 90% of our taxable income, other than any net capital gain. To the extent that we distribute at least the required amount, but less than 100%, of our taxable income in a calendar year, we will incur federal corporate income tax on our undistributed taxable income. In addition, we will incur a 4% nondeductible exercise tax if the actual amount we distribute to our shareholders in a calendar year is less than a minimum amount specified under federal income tax law. We intend to distribute at least 90% of our taxable income to our shareholders each year so that we will satisfy the distribution requirement and avoid corporate income tax and the 4% excise tax. However, we could be required to include earnings in our taxable income before we actually receive the related cash. That timing difference could require us to borrow funds to meet the distribution requirement and avoid corporate income tax and the 4% excise tax in a particular year.
| Our failure to qualify as a REIT would subject us to corporate income tax and would materially impact our earnings. |
If we fail to qualify as a REIT in any year, we would pay federal income tax on our taxable income. We might need to borrow money or sell assets to pay that tax. Our payment of income tax would decrease the amount of our income available to be distributed to our shareholders. In addition, we no longer would be required to distribute substantially all of our taxable income to our shareholders. Under current law,
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Total Reliance on Our Advisor
| Our ability to operate profitably will depend upon the ability of our advisor and its management team. |
We rely on our advisor to manage our business and assets. Our advisor makes all decisions with respect to the management of our company. Thus, the success of our business depends in large part on the ability of our advisor to manage our day-to-day operations. Any adversity experienced by our advisor or problems in our relationship with our advisor could adversely impact the operation of our properties and, consequently, our cash flow and ability to make distributions to our shareholders.
Either we or our advisor can terminate the advisory agreement upon 60 days written notice to the other party, in which case no termination or other fee will be payable to our advisor. However, if the advisory agreement is terminated as a result of the advisor’s merger into our company in connection with the listing of our shares on a national securities market or exchange, we may redeem the advisor’s incentive units in our operating partnership for cash or, if agreed by both parties, shares of common stock of our company. Our cost to redeem the incentive units will be the amount that would be payable to the advisor pursuant to the “incentive distribution” and “incentive distribution upon dispositions” described under the heading “Compensation Table” if we liquidated all of our assets for their fair market value.
| If our advisor cannot retain the services of its current key employees, their replacements may not manage our company as effectively as we anticipate the current key employees will. |
We depend on our advisor to retain its key officers and employees, but most of such individuals do not have an employment agreement with our advisor or its affiliates. Our advisor’s key employees are Mr. Thompson, Mr. Maurer, Ms. Voorhies, Mr. Hutton and Mr. Burnett. The loss of any of these individuals and our inability to find, or any delay in finding, replacements with equivalent skill and experience could adversely impact our ability to acquire properties and the operation of our properties.
Advisor’s Broad Discretion in Allocating Proceeds
| Shareholders will have little, if any, control over how the proceeds from this offering are spent. |
Our advisor is responsible for the day-to-day operations of our company and has broad discretion over the use of proceeds from this offering. Accordingly, you should not purchase shares unless you are willing to entrust all aspects of the day-to-day management to our advisor, who will manage our company in accordance with the advisory agreement. You should carefully evaluate the professional experience and business performance of our advisor and its principals as described in this prospectus. In addition, our advisor may retain independent contractors to provide various services for our company, and you should note that such contractors will have no fiduciary duty to you or the other shareholders and may not perform as expected or desired.
Limited Operating History
| Our company was recently formed and has a limited operating history to evaluate its performance. |
Our company was incorporated in December 2001 and commenced principal operations in September 2002 following the acquisition of our first property. Our business is subject to the risks inherent in the establishment of a new business enterprise. Because our company was only recently formed and has only recently engaged in operations, we have a limited history of operations, and, accordingly, cannot provide you with the type of information that would be available from an institution with a history of operations. There is no assurance that we will continue to operate profitably.
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Conflicts of Interest
Throughout this section and other sections of this prospectus, references to affiliates of a person generally mean:
| • | any person directly or indirectly owning, controlling or holding, with the power to vote, 10% or more of the outstanding voting securities of such other person; | |
| • | any person 10% or more of whose outstanding voting securities are directly or indirectly owned, controlled or held, with the power to vote, by such other person; | |
| • | any person directly or indirectly controlling, controlled by or under common control with such other person; | |
| • | any executive officer, director, trustee or general partner of such other person; and | |
| • | any legal entity for which such person acts as an executive officer, director, manager, trustee or general partner. |
| The conflicts of interest described below may mean our company will not be managed solely in your best interests as a shareholder. |
Many of our officers and directors and our advisor’s officers have conflicts of interest in managing our business and properties. Thus, they may make decisions or take actions that do not solely reflect your interests as a shareholder.
Our advisor also advises T REIT, Inc., a public REIT, and other entities that may compete with our company or otherwise have similar business interests. Some of our officers are also officers of our advisor and T REIT, Inc. Our Chairman, Chief Executive Officer and President, Mr. Thompson, also serves as an officer of our advisor and T REIT, Inc. In addition, several of our officers and directors own an interest in our advisor, the dealer manager or T REIT, Inc. Mr. Thompson currently owns 100% of our dealer manager, and Mr. Thompson, Mr. Maurer, Ms. Voorhies, Mr. Hutton and Mr. Burnett collectively own approximately 40% of our advisor.
As officers, directors and partial owners of entities with which we do business or with interests in competition with our own interests, our officers and directors experience conflicts between their fiduciary obligations to our company and their fiduciary obligations to, and pecuniary interests in, our advisor, the dealer manager and their affiliated entities. These conflicts of interest could:
| • | limit the time and services that our officers and our advisor devote to our company, because they will be providing similar services to T REIT, Inc. and other real estate entities, and | |
| • | impair our ability to compete for acquisition of properties with other real estate entities that are also advised by our advisor and its affiliates, including T REIT, Inc. |
If our advisor or its affiliates breach their fiduciary obligations to our company, or do not resolve conflicts of interest in the manner described in the section of this prospectus entitled “Conflicts of Interest — Process for Resolution of Conflicting Opportunities,” we may not meet our investment objectives, which could reduce our expected cash available for distribution to our shareholders.
| The absence of arm’s-length bargaining may mean that our agreements are not as favorable to you as a shareholder as they otherwise would have been. |
Any existing or future agreements between us and our advisor, the dealer manager or their affiliates were not and will not be reached through arm’s-length negotiations. Thus, such agreements may not solely reflect your interests as a shareholder. For example, the advisory agreement, our agreement with the dealer manager and the terms of the compensation to our advisor and the dealer manager were not arrived at through arm’s-length negotiations. The terms of such agreements and compensation may not solely reflect your interests as a shareholder and may be overly favorable to the other party to such agreements.
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| The business and financial due diligence investigation of our company was conducted by an affiliate. That investigation might not have been as thorough as an investigation conducted by an unaffiliated third party and might not have uncovered facts that would be important to a potential investor. |
Because the dealer manager is an affiliate of our advisor and several of our officers and directors are officers, directors or owners of the dealer manager, you cannot consider the dealer manager’s due diligence investigation of our company to be an independent review. The dealer manager’s due diligence review may not be as meaningful as a review conducted by an unaffiliated broker-dealer.
Acquisition Risks
| Our potential ownership of properties with special modifications could cause us to incur substantial costs in remodeling, remarketing and re-leasing such properties. |
We may acquire properties that are designed or built primarily for a particular tenant or a specific type of use. If we are holding such a property on the termination of the lease and the tenant fails to renew or if the tenant defaults on its lease obligations, the property may not be readily marketable to a new tenant at all or without substantial capital improvements or remodeling. Such improvements may require us to sell such property at a below-market price or spend funds that would otherwise be available for distribution to you as a shareholder. Competing for the acquisition of properties with others with superior financial resources could make it more difficult for us to acquire attractive properties and achieve our investment objectives.
| Competition with entities that have greater financial resources may limit our investment opportunities. |
We compete for investment opportunities with entities with substantially greater financial resources. These entities may be able to accept more risk than we can manage wisely. This competition may limit the number of suitable investment opportunities offered to us. This competition also may increase the bargaining power of property owners seeking to sell to us, making it more difficult for us to acquire properties. In addition, we believe that competition from entities organized for purposes similar to ours has increased and is likely to increase in the future.
Joint Venture Arrangements
| Any joint venture arrangements may not reflect solely our shareholders’ best interests. |
The terms of any joint venture arrangements in which we acquire or hold properties or other investments may not solely reflect your interests as a shareholder. We may acquire an interest in a property through a joint venture or co-ownership arrangement with our advisor, one or more of our advisor’s affiliates or unaffiliated third parties. In joint venture arrangements with our advisor or its affiliates, our advisor will have fiduciary duties to both our company and its affiliate participating in the joint venture. The terms of such joint venture or co-ownership arrangement may be more favorable to the co-owner than to you as a shareholder of our company.
| Investing in properties through joint ventures subjects that investment to increased risk. |
Joint venture investments may involve risks not otherwise present. For example, we purchased a 30% undivided tenant in common interest in the Congress Center property. Affiliates of our company simultaneously purchased undivided tenant in common interests totaling 70% ownership of the property. While our proportionate share of the mortgage debt is $28,785,000, we are jointly and severally liable with our affiliates for the total debt of $95,950,000 and any subsequent increases in the total debt. If either of our affiliates defaults on their debt payments, we would be liable for their debt payment; such liability would negatively impact our revenues and results of operations.
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Other risks related to joint venture investments include:
| • | the risk that our co-venturer, co-tenant or partner in an investment might become bankrupt; | |
| • | the risk that such co-venturer, co-tenant or partner may at any time have economic or business interests or goals which are inconsistent with our business interests or goals; or | |
| • | the risk that such co-venturer, co-tenant or partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives. |
Actions by such a co-venturer, co-tenant or partner might have the result of subjecting the applicable property to liabilities in excess of those otherwise contemplated and may have the effect of reducing our cash available for distribution. It also may be difficult for us to sell our interest in any such joint venture or partnership or as a co-tenant in such property.
Insufficient Reserves
| Insufficient reserves may adversely impact our ability to fund our working capital needs. |
We may not be able to fund our working capital needs. As a REIT, we are required to distribute at least 90% of our capital taxable income to our shareholders in each taxable year. However, depending on the size of our operations, we will require a minimum amount of capital to fund our daily operations. We have not established any reserves to fund our working capital needs. We may have to obtain financing from either affiliated or unaffiliated sources to meet such cash needs. There is no assurance that this financing will be available or, if available, that the terms will be acceptable to us.
Borrowings May Increase Our Business Risks
| As we incur indebtedness, the risk associated with your investment in our company will increase. |
The risk associated with your investment in our company depends on, among other factors, the amount of debt we incur. We intend to incur indebtedness in connection with our acquisition of properties. We may also borrow for the purpose of maintaining our operations or funding our working capital needs. Lenders may require restrictions on future borrowings, distributions and operating policies. We also may incur indebtedness if necessary to satisfy the federal income tax requirement that we distribute at least 90% of our taxable income to our shareholders in each taxable year. Borrowing increases our business risks.
Debt service increases the expense of operations since we will be responsible for retiring the debt and paying the attendant interest, which may result in decreased cash available for distribution to you as a shareholder. In the event the fair market value of our properties were to increase, we could incur more debt without a commensurate increase in cash flow to service the debt. In addition, our directors can change our debt policy at any time without shareholder approval.
| We may incur indebtedness secured by our properties, which may subject our properties to foreclosure. |
Incurring mortgage indebtedness increases the risk of possible loss. Most of our borrowings to acquire properties will be secured by mortgages on our properties. If we default on our secured indebtedness, the lender may foreclose and we could lose our entire investment in the properties securing such loan. For federal tax purposes, any such foreclosure 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 and, if the outstanding balance of the debt secured by the mortgage exceeds the basis of the property to our company, there could be taxable income upon a foreclosure. To the extent lenders require our company to cross-collateralize its properties, or its loan agreements contain cross-default provisions, a default under a single loan agreement could subject multiple properties to foreclosures.
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| Increases in interest rates could increase the amount of our debt payments and adversely affect our ability to make cash distributions to our shareholders. |
Adverse economic conditions could result in higher interest rates which could increase debt service requirements on variable rate debt and could reduce the amounts available for distribution to you as a shareholder. Adverse economic conditions could cause the terms on which borrowings become available to be unfavorable. In such circumstances, if we are in need of capital to repay indebtedness in accordance with its terms or otherwise, 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.
Our Ability to Change Policies Without a Shareholder Vote; Limitation on Debt
| Most of our policies described in this prospectus, including the limits on debt, may be changed or removed by our board of directors at any time without a vote of the shareholders. |
Most of our major policies, including policies intended to protect you as a shareholder and the policies described in this prospectus with respect to acquisitions, financing, limitations on debt and investment limitations, have been determined by our board of directors and can be changed at any time without a vote of our shareholders or notice to you as a shareholder. Therefore, these policies and limitations may not be meaningful to protect your interests as a shareholder.
Possible Adverse Consequences of Limits on Ownership and Transfer of Our Shares
| The limitation on ownership of our common stock will prevent you from acquiring more than 9.9% of our stock and may force you to sell stock back to us. |
As a REIT, our articles of incorporation limit direct and indirect ownership of our capital stock by any single shareholder to 9.9% of the number of outstanding shares of our common stock and 9.9% of the number of outstanding shares of our preferred stock of any class or series. We refer to this limitation as the ownership limit. This ownership limit does not apply to our advisor. Our articles of incorporation also prohibit transfers of our stock that would result in (1) our capital stock being beneficially owned by fewer than 100 persons, (2) five or fewer individuals, including natural persons, private foundations, specified employee benefit plans and trusts, and charitable trusts, owning more than 50% of our capital stock, applying broad attribution rules imposed by the federal income tax laws, or (3) our company owning 10% or more of one of our tenants. If you acquire shares in excess of the ownership limit or the restrictions on transfer, we:
| • | will consider the transfer to be null and void; | |
| • | will not reflect the transaction on our books; | |
| • | may institute legal action to enjoin the transaction; | |
| • | will not pay dividends or other distributions to you with respect to those excess shares; | |
| • | will not recognize your voting rights for those excess shares; and | |
| • | will consider the excess shares held in trust for the benefit of a charitable beneficiary. |
You will be paid for such excess shares a price per share equal to the lesser of the price you paid or the “market price” of our stock. Unless our shares are then traded on a national securities exchange or trading system, the market price of such shares will be a price determined by our board of directors in good faith. If our shares are traded on a national securities exchange or trading system, the market price will be the average of the last sales prices or the average of the last bid and ask prices for the five trading days immediately preceding the date of determination.
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If you acquire our stock in violation of the ownership limit or the restrictions on transfer described above:
| • | you may lose your power to dispose of the stock; | |
| • | you may not recognize profit from the sale of such stock if the “market price” of the stock increases; and | |
| • | you may incur a loss from the sale of such stock if the “market price” decreases. |
Potential Anti-Takeover Effects
| Limitations on share ownership and transfer may deter a sale of our company in which you could profit. |
The limits on ownership and transfer of our equity securities in our articles of incorporation may have the effect of delaying, deferring or preventing a transaction or a change in control of our company that might involve a premium price for your common stock or otherwise be in your best interest as a shareholder. The ownership limit and restrictions on transferability will continue to apply until our board of directors determines that it is no longer in our best interest to continue to qualify as a REIT and there is an affirmative vote of a majority of the votes entitled to be cast on such matter at a regular or special meeting of our shareholders to terminate our qualification as a REIT.
| Our ability to issue preferred stock also may deter or prevent a sale of our company in which you could profit. |
Our ability to issue preferred stock and other securities without your approval also could deter or prevent someone from acquiring our company, even if a change in control were in your best interests as a shareholder. Our articles of incorporation authorize our board of directors to issue up to 10 million shares of preferred stock. Our board of directors may establish the preferences and rights of any issued preferred shares designed to prevent, or with the effect of preventing, someone from acquiring control of our company.
| Virginia anti-takeover statutes may deter others from seeking to acquire our company and prevent you from making a profit in such transaction. |
Virginia law contains many provisions that are designed to prevent, or with the effect of preventing, someone from acquiring control of our company. These laws may delay or prevent offers to acquire our company and increase the difficulty of consummating any such offers, even if such a transaction would be in our shareholders’ best interests.
Dilution
| Your investment in our company will be diluted immediately by $0.95 per share. |
The offering price is $10.00 per share. After the payment of selling commission and marketing and due diligence expenses, we will receive $9.05 per share. As a result of these expenses, you will experience immediate dilution of $0.95 in book value per share or 9.5% of the offering price not including other organizational and offering expenses. To the extent that you do not participate in any future issuance of our securities, you also will experience dilution of your ownership percentage in our company.
| Several potential events could cause the fair market and book value of your investment in our company to decline. |
Your investment in our company could be diluted by a number of factors, including:
| • | future offerings of our securities, including issuances under our dividend reinvestment plan and up to 10 million shares of any preferred stock that our board may authorize; | |
| • | private issuances of our securities to other investors, including institutional investors; |
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| • | issuances of our securities upon the exercise of options issued by our company, including the officer, employee and director stock options; or | |
| • | redemptions of units of limited partnership interest in our operating partnership in exchange for shares of common stock. |
Dilution and the Operating Partnership
| Our advisor may receive economic benefits from the incentive limited partnership interest without bearing any of the investment risk. |
Our operating partnership will issue incentive limited partnership interests to our advisor. The incentive units will entitle our advisor to receive an incentive distribution of operating cash flow after we have received and paid to our shareholders the threshold return. We will bear all of the risk associated with the properties but, as a result of the incentive distributions to our advisor, we will not be entitled to all of the operating partnership’s operating cash flow or proceeds from a property sale. Further, our advisor’s key employees, Mr. Thompson, Mr. Maurer, Ms. Voorhies, Mr. Hutton, and Mr. Burnett, in the aggregate, own approximately 40% of our advisor.
Negative Characteristics of Certain Governmental Leases
| Our governmental tenants may have the right to terminate their leases under certain circumstances. |
Leases with certain governmental authorities may contain a so-called “appropriations clause,” which means that under certain circumstances the governmental tenant may have the right to terminate their lease if funds are not appropriated by the governmental authority. In addition, certain other governmental tenants, for example, government contractors, may have the right to terminate their lease if material contracts are terminated or not renewed.
Termination rights of our tenants include, for example:
| • | Lockheed Martin has the right to terminate its lease in Two Corporate Plaza from December 31, 2003 through December 31, 2004 if certain government contracts have been terminated without replacement contracts or there is a 40% or larger reduction in the combined personnel requirements of such contracts. | |
| • | The FAA has the right to cancel its lease in Two Corporate Plaza at any time with 120 days written notice and payment of a termination fee if it does not have funding appropriated to pay for this lease. | |
| • | The Florida Department of Children and Families has a termination clause in its lease at the Department of Children and Families Campus that allows it to terminate with six months notice if another state-owned building becomes available. |
Termination of any of these leases or leases of our other governmental tenants would result in the loss of rental income and an increase in our operating expenses no longer paid for by the tenant. In addition, the presence of such appropriations or material contract provisions in leases may make it more difficult to obtain satisfactory financing. If any of these events were to occur, our revenues and our ability to make expected distributions to you could be materially and adversely affected.
In addition, a number of our leases, particularly leases with government tenants, may have strict default provisions permitting the tenants to terminate upon certain defaults by our company. In some cases, our government tenants may have the right to terminate their leases without giving us written notice of defaults and an opportunity to cure.
Negative Characteristics of Certain “Gross” Leases
Leases with certain governmental authorities (and others) are likely to be made on a “gross” basis. This means that our company will be required to pay some or all of the operating costs associated with the
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Seller Financing by Our Company May Delay Liquidation or Reinvestment
| You may not receive any profits resulting from the sale of one of our properties, or receive such profits in a timely manner, because we may provide financing for the purchaser of such property. |
If we liquidate our company, you may experience a delay before receiving your share of the proceeds of such liquidation. In a forced or voluntary liquidation, we may sell our properties either subject to or upon the assumption of any then outstanding mortgage debt or, alternatively, may provide financing to purchasers. We may take a purchase money obligation secured by a mortgage as part payment. We do not have any limitations or restrictions on our taking such purchase money obligations. To the extent we receive promissory notes or other property in lieu of cash from sales, such proceeds, other than any interest payable on those proceeds, will not be included in net sale proceeds until and to the extent the promissory notes or other property are actually paid, sold, refinanced or otherwise disposed of. In many cases, we will receive initial down payments in the year of sale in an amount less than the selling price and subsequent payments will be spread over a number of years. Therefore, you may experience a delay in the distribution of the proceeds of a sale until such time.
Negative Characteristics of Real Estate Investments
| We depend on our tenants to pay rent, and their inability to pay rent may substantially reduce our revenues and cash available for distribution to our shareholders. |
Our investments in office, industrial and service properties will be subject to varying degrees of risk that generally arise from the ownership of real estate. The underlying value of our properties and the income and ability to make distributions to you depend on the ability of the tenants of our properties to generate enough income in excess of their operating expenses to make their lease payments to us. Changes beyond our control may adversely affect our tenants’ ability to make lease payments and consequently would substantially reduce both our income from operations and our ability to make distributions to you. These changes include, among others, the following:
| • | changes in national, regional or local economic conditions; | |
| • | changes in local market conditions; and | |
| • | changes in federal, state or local regulations and controls affecting rents, prices of goods, interest rates, fuel and energy consumption. |
Due to these changes or others, tenants and lease guarantors, if any, may be unable to make their lease payments. A default by a tenant, the failure of a tenant’s guarantor to fulfill its obligations or other premature termination of a lease could, depending on the size of the leased premises and our advisor’s ability to successfully find a substitute tenant, have a materially adverse effect on our revenues and the value of our common stock or our cash available for distribution to our shareholders.
If we are unable to find tenants for our properties, or find replacement tenants when leases expire and are not renewed by the tenants, our revenues and cash available for distribution to our shareholders will be substantially reduced.
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| Increased construction of similar properties that compete with our properties in any particular location could adversely affect the operating results of our properties and our cash available for distribution to our shareholders. |
We may acquire properties in locations which experience increases in construction of properties that compete with our properties. This increased competition and construction could:
| • | make it more difficult for us to find tenants to lease our space; | |
| • | force us to lower our rental prices in order to lease space; and | |
| • | substantially reduce our revenues and cash available for distribution to our shareholders. |
| Lack of liquidity of real estate may make it difficult for us to sell underperforming properties or recover our investment in one or more properties. |
Our business is subject to risks associated with investment solely in real estate. Real estate investments are relatively illiquid. Our ability to vary our portfolio in response to changes in economic and other conditions will be limited. We cannot assure you that we will be able to dispose of a property when we want or need to. Consequently, the sale price for any property may not recoup or exceed the amount of our investment.
| Lack of geographic diversity exposes us to regional economic downturns that could adversely impact our operations or our ability to recover our investment in one or more properties. |
As of September 30, 2003, we owned properties in 6 states. The percentage of our total GLA in each of these states is as follows: California, 16.9%; Florida, 8.4%; Illinois, 39.5%; Nebraska, 6.0%; Nevada, 8.0%; and Texas, 21.2%. This geographic concentration of properties exposes us to economic downturns in these areas. A regional recession in any of these areas could adversely affect our ability to maintain or increase operating revenues, attract new tenants or dispose of unproductive properties. In addition, delays in the approval of state or federal budgets could result in delays in rental payments by related state and federal government tenants.
| Dependence on certain tenants may have a negative impact on our financial condition if these tenants are unable to meet their rental obligations to our company. |
As of September 30, 2003, our tenants accounting for 10% or more of the aggregate annual rental income of all our properties are the General Services Administration located in Congress Center (19.2%) and the Internal Revenue Service (GSA) located in North Pointe Corporate Center (10.3%). The revenues generated by the properties these tenants occupy are substantially dependent on the financial condition of these tenants and, accordingly, any event of bankruptcy, insolvency or a general downturn in the business of any of these tenants may result in the failure or delay of such tenant’s rental payments which may have an adverse impact on our financial performance. In addition, our Gemini Plaza property is occupied by a single tenant, the United Space Alliance, a joint venture between Lockheed Martin and Boeing Corporation. Termination of this lease or the tenant’s inability to timely pay rental obligations could adversely affect our operating revenues and our ability to pay dividends.
| We may have increased exposure to liabilities from litigation as a result of our advisor’s participation in Section 1031 exchange transactions in properties where we hold a tenant in common interest. |
We have purchased tenant in common interests in the Bay View, Congress Center and Park Sahara properties and may purchase tenant in common interests in other properties where our advisor engages in the formation of single member limited liability companies to be owned as tenant in common interests for the purpose of facilitating like-kind exchange treatment under Section 1031 of the Internal Revenue Code. There may be significant tax and securities disclosure risks associated with the offerings of tenant in common interests by our advisor to 1031 participants. For example, in the event the Internal Revenue Service conducts an audit of the purchasers of tenant in common interests and successfully challenges the
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| Environmental laws governing properties we acquire may cause us to incur additional costs to comply with such laws. |
We may acquire properties that have unknown environmental problems or develop environmental problems after acquisition that could require substantial expenditures to remedy. Often, federal and state laws impose liability on property owners or operators for the clean-up or removal of hazardous substances on their properties even if the present owner did not know of, or was not responsible for, the contamination caused by the substances. In addition to the costs of clean-up, contamination can affect the value of a property, our ability to lease and sell the property, and our ability to borrow funds using the property as collateral. Environmental laws typically allow the government to place liens for such liabilities against affected properties, which liens would be senior in priority to other liens. Costs that we incur to remedy environmental problems would reduce our cash available for distribution to you as a shareholder.
| Compliance with the Americans with Disabilities Act at our properties may cause us to incur additional costs. |
We may acquire properties that are not in compliance with the Americans with Disabilities Act of 1990. We would be required to pay for improvement to the properties to effect compliance with the ADA. Under the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. The ADA requirements could require removal of access barriers and could result in the imposition of fines by the federal government or an award of damages to private litigants. We could be liable for violations of such laws and regulations by us or our tenants. State and federal laws in this area are constantly evolving, and could evolve to place a greater cost or burden on us as landlord of the properties we acquire.
| Losses for which we either could not or did not obtain insurance will adversely affect our earnings. |
We could suffer a loss due to the cost to repair any damage to properties that are not insured or are underinsured. There are types of losses, generally of a catastrophic nature, such as losses due to terrorism, wars, earthquakes or acts of God, that are either uninsurable or not economically insurable. We may acquire properties that are located in areas where there exists a risk of earthquakes, floods or other acts of God. Generally, we will not obtain insurance for earthquakes, floods or other acts of God unless required by a lender or our advisor determines that such insurance is necessary and may be obtained on a cost-effective basis. If such a catastrophic event were to occur, or cause the destruction of one or more of our properties, we could lose both our invested capital and anticipated profits from such property.
| The recharacterization of any sale and leaseback transactions could cause us to lose properties without full compensation. |
If a seller/ lessee in a sale and leaseback transaction in which we are the buyer/ lessor declares bankruptcy, we could suffer a material loss due to recharacterization of our ownership of that property as financing. We intend to enter into sale and leaseback transactions, in which we will purchase a property from an entity and lease such property back to that same entity. In the event of the bankruptcy of a lessee in a sale leaseback transaction, the trustee in bankruptcy may seek to recharacterize the transaction as either a financing or as a joint venture. To the extent the sale and leaseback is treated as a financing, the
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| Softness in the regional and national economies. |
Softness in the regional and national economies could materially and adversely impact the non-governmental tenants in our properties and their business operations. If a substantial number of our tenants were unable to pay the rent, our revenue and our ability to make expected distributions to you could be materially and adversely affected.
| Economic impact of the war with Iraq, September 11, 2001 terrorist attack and other world and political events. |
The war with Iraq, the terrorist attacks committed in the United States on September 11, 2001 and other world and political events may have an adverse affect on both the regional and national economies and may adversely impact both the governmental and non-governmental tenants in our properties.
| Our investments in unimproved real property will take longer to produce returns and will be riskier than investments in developed property. |
Our board of directors has the discretion to invest up to 10% of our total assets in other types of property, including land, apartments or other residential property. In addition to the risks of real estate investments in general, an investment in unimproved real property is subject to additional risks, including the expense and delay which may be associated with rezoning the land for a higher use and the development and environmental concerns of governmental entities and/or community groups.
Effects of ERISA Regulations
| Our common stock may not be a suitable investment for qualified pension and profit-sharing trusts. |
When considering an investment in our company with a portion of the assets of a qualified pension or profit-sharing trust, you should consider:
| • | whether the investment satisfies the diversification requirements of the Employee Retirement Income Security Act of 1974; | |
| • | or other applicable restrictions imposed by ERISA; and | |
| • | whether the investment is prudent and suitable, since we anticipate that initially there will be no market in which you can sell or otherwise dispose of our shares. |
We have not evaluated, and will not evaluate, whether an investment in our company is suitable for any particular employee benefit plan, but, subject to restrictions described in “ERISA Considerations,” we will accept such entities as shareholders if an entity otherwise meets the suitability standards.
If we are considered a “pension-held REIT,” an investment in our company may produce unrelated business taxable income for a qualified pension or profit sharing trust, which may cause a qualified pension or profit sharing trust holding 10% or more of our stock to pay federal income tax on a portion of the distributions it receives from us.
In addition to considering their fiduciary responsibilities under ERISA and the prohibited transaction rules of ERISA and the federal tax laws, advisors to employee benefit plans also should consider the effect of the “plan asset” regulations issued by the Department of Labor. To avoid being subject to those regulations, our articles of incorporation prohibit ERISA investors from owning 25% or more of our
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INVESTOR SUITABILITY STANDARDS
An investment in our company involves significant risk. An investment in our common stock is suitable only for persons who have adequate financial means and desire a relatively long-term investment with respect to which they do not anticipate any need for immediate liquidity.
We intend to offer our shares for sale to the residents of the District of Columbia and all 50 states except for Alaska and South Carolina. We refer to these states as the sales states.
Some of our sales states may have established suitability standards that are less rigorous than those described in this prospectus. We reserve the right to sell to investors in those states that meet such state’s suitability standards but may not necessarily meet our suitability standards described in this prospectus. On the other hand, some of our sales states have established suitability standards for individual investors and subsequent transferees that are more rigorous than those set by our company. We must adhere to those state standards when selling to investors in such states.
If you are an individual, including an individual beneficiary of a purchasing Individual Retirement Account, or if you are a fiduciary, such as a trustee of a trust or corporate pension or profit sharing plan, or other tax-exempt organization, or a custodian under a Uniform Gifts to Minors Act, you must represent that you meet our investor suitability standards, as set forth in the Subscription Agreement attached as Exhibit B to this prospectus, including the following:
| • | that you or, in the case of a fiduciary, that the fiduciary account or the donor who directly or indirectly supplies the funds to purchase our common stock have a minimum annual gross income of $45,000 and a net worth of not less than $45,000; or | |
| • | that you or, in the case of a fiduciary, that the fiduciary account or the donor who directly or indirectly supplies the funds to purchase our common stock have a net worth of not less than $150,000. |
Net worth in all cases excludes home, home furnishings and automobiles.
Several states have established suitability standards different from those we have established. In these states, shares will be sold only to investors who meet the special suitability standards set forth below:
| California: Investors must have either (1) a minimum net worth of at least $60,000 and a gross income of at least $60,000 or (2) a minimum net worth of at least $250,000. | |
| Indiana, Iowa, Massachusetts, Michigan, North Carolina and Oregon: Investors must have either (1) a net worth of at least $225,000 or (2) gross annual income of $60,000 and a net worth of at least $60,000. | |
| Maine: Investors must have either (1) a minimum net worth of at least $50,000 and gross annual income of at least $50,000 or (2) a minimum net worth of at least $200,000. | |
| Missouri, Ohio and Pennsylvania: An investor’s investment in our common stock cannot exceed 10% of that investor’s net worth. | |
| Tennessee: Investors must have (1) a minimum net worth of at least $250,000 and to have had during the last tax year and be expected to have during the current tax year a gross income of at least $65,000 or (2) a minimum net worth of at least $500,000. |
The minimum purchase is 100 shares of our common stock, or $1,000, except in Minnesota, which requires a minimum investment of 250 shares, or $2,500, and North Carolina, which requires a minimum investment of 500 shares, or $5,000. We will not permit transfers of less than the minimum required purchase. Only in very limited circumstances may you transfer, fractionalize or subdivide such shares so as
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Ensuring Our Suitability Standards Are Adhered To
In order to assure adherence to the suitability standards described above, requisite suitability standards must be met as set forth in the Subscription Agreement, including the Subscription Agreement Signature Page, which is attached as Exhibit B to this prospectus. We and each person selling common stock on our behalf are required to (1) make reasonable efforts to assure that each person purchasing our common stock is suitable in light of such person’s age, educational level, knowledge of investments, financial means and other pertinent factors and (2) maintain records for at least six years of the information used to determine that an investment in our common stock is suitable and appropriate for each investor. Our agreements with the selling broker-dealers require such broker-dealers to (1) make inquiries diligently as required by law of all prospective investors in order to ascertain whether an investment in our company is suitable for the investor and (2) transmit promptly to us all fully completed and duly executed Subscription Agreements.
In addition, by signing the Subscription Agreement Signature Page, you are representing and warranting to us that you have received a copy of this prospectus, that you agree to be bound by our articles of incorporation, that you meet the net worth and annual gross income requirements described above and, if applicable, that you will comply with requirements of California law summarized in that Exhibit with respect to resale of shares of common stock. These representations and warranties help us to ensure that you are fully informed about an investment in our company and that we adhere to our suitability standards. In the event you or another shareholder or a regulatory authority attempted to hold our company liable because shareholders did not receive copies of this prospectus, were not adequately informed of the requirements of our articles of incorporation or because we failed to adhere to each state’s investor suitability requirements, we will assert these representations and warranties made by you in any proceeding in which such potential liability is disputed in an attempt to avoid any such liability. By making these representations, you will not waive any rights that you may have under federal or state securities laws.
Escrow Account
We have established an escrow account in which we will place all subscriber funds received pending their use for the specific purposes described in our registration statement (for example, acquisition of interests in real estate and repayment of debt). All monies in the escrow account shall be held in trust for the benefit of the subscribers, and shall not be commingled with the funds of, or become an asset of, our company until such time as they are released from the escrow account for the purposes stated in the prospectus. Funds in the escrow account shall not be subject to attachment, levy or other encumbrance in any legal action by a third party against our company. In the event any funds are not released from the escrow account in consummation of the transactions and purposes stated in the prospectus, such monies shall be returned to subscribers pro rata. The escrow account will be maintained at PriVest Bank in South Coast Metro, California. Funds in the escrow will be invested in money market accounts prior to their use.
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ESTIMATED USE OF PROCEEDS OF THIS OFFERING
We will contribute the net proceeds of the sale of any common stock we offer under this prospectus to our operating partnership in return for 100% of the initial interests in our operating partnership, other than our advisor’s incentive limited partnership interest. Our operating partnership will use the net proceeds to purchase suitable properties and to repay debt that we may assume when acquiring properties in exchange for units of limited partnership interest in our operating partnership and to pay the amounts due to our advisor and the dealer manager.
The following table sets forth information concerning the estimated use of the gross proceeds of this offering. Many of the figures set forth below represent our best estimate since they cannot be precisely calculated at this time. Please note that in this table, the Maximum Offering column does not include up to 1,500,000 shares that may be issued under our dividend reinvestment plan. The amounts shown for Gross Offering Proceeds do not reflect the possible discounts in commissions and other fees in connection with volume purchases.
| Maximum Offering | |||||||||
| Amount | Percent | ||||||||
| Gross Offering Proceeds | $ | 270,000,000 | 100% | ||||||
| Less Organizational and Public Offering Expenses: | |||||||||
| Selling Commissions | 18,900,000 | 7.0% | |||||||
| Marketing Support and Due Diligence Reimbursement Fee | 6,750,000 | 2.5% | |||||||
| Other Organizational and Offering Expenses(1) | 6,750,000 | 2.5% | |||||||
| Total Organizational and Offering Expenses | 32,400,000 | 12% | |||||||
| Net Proceeds to Company | $ | 237,600,000 | 88% | ||||||
| Miscellaneous Acquisition Expenses(2) | 1,350,000 | 0.5% | |||||||
| Amount Available for Investment in Properties | $ | 236,250,000 | 87.5% | ||||||
| (1) | This is an estimate of the costs and expenses expected to be incurred over the life of the offering, including fees for legal counsel, accountants, printers and subsequent state registration renewal fees, etc. The total amount is variable depending upon the term of the offering and the number of jurisdictions in which the offering is registered. |
| (2) | This does not include real estate commissions or acquisitions fees of up to 3% of the purchase price of the properties we acquire which may be paid by the seller or our company to independent third-party real estate brokers or to Triple Net Properties Realty, Inc., an affiliate of our advisor, who may serve as our real estate broker in some or all of our acquisitions. |
The dealer manager may seek the assistance of other broker-dealers in selling our common stock and may reallow the selling commissions it receives to such broker-dealers.
The total organizational and offering expenses that we will pay in connection with our company’s formation and the offering and sale of shares of our common stock will be reasonable and will not exceed an amount equal to 14% of the proceeds raised in this offering.
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OUR COMPANY
Overview
G REIT, Inc. was formed as a Virginia corporation in December of 2001 and has qualified and elected to be taxed as a real estate investment trust for federal income tax purposes. As of September 30, 2003, we owned interests in 9 properties aggregating to a total gross leasable area, or GLA, of approximately 1.5 million square feet. Tenants with a government orientation occupied approximately 48% of the total GLA of these properties. As of September 30, 2003, approximately 90% of the total GLA in these properties was leased. We anticipate acquiring additional properties with the net proceeds of this offering. We intend to invest in office, industrial and service properties throughout the United States, including properties that have a government orientation. We may lease our properties to tenants under net or gross leases. We may acquire office properties in sale and leaseback transactions in which creditworthy tenants enter into net leases with our company.
We conduct business and own properties through our operating partnership, G REIT, L.P., which was formed as a Virginia limited partnership in December of 2001. We are the sole general partner of our operating partnership and have control over the affairs of our operating partnership. We will contribute the net proceeds of this offering to our operating partnership in exchange for 100% of the initial capital and profits interests in our operating partnership, other than the incentive limited partnership interest owned by our advisor. In the future, our operating partnership may issue units of limited partnership interest in exchange for suitable properties. Our operating partnership will use the net proceeds of this offering to purchase suitable properties and to repay debt secured by properties contributed to it in exchange for units of limited partnership interest.
Our day to day operations are managed by our advisor, Triple Net Properties, LLC, under an advisory agreement. Our advisor engages affiliated entities, including Triple Net Properties Realty, Inc., or Realty, a real estate brokerage and management company, to provide various services for the properties. Our advisor and its affiliated property manager were formed in 1998 to serve as an asset and property manager for real estate investment trusts, syndicated real estate limited partnerships, limited liability companies and similar real estate entities.
INVESTMENT OBJECTIVES AND POLICIES
General
Our company’s primary investment objective is to obtain current income through the purchase of real estate, including real estate that has a government orientation. Additionally, we intend to:
| • | invest in income producing real property generally through equity investments in a manner which permits us to continue to qualify as a REIT for federal income tax purposes; | |
| • | generate cash available for distribution to our shareholders; | |
| • | preserve and protect your capital; and | |
| • | realize capital appreciation upon the ultimate sale of our properties. |
We cannot assure you that we will attain these objectives or that our capital will not decrease. Our investment objectives will not be altered if less than the maximum offering amount is raised.
Decisions relating to the purchase or sale of properties will be made by our advisor subject to approval by our board of directors. Our board of directors has established written policies on investment objectives and borrowing. Our board is responsible for monitoring the administrative procedures, investment operations and performance of our company and our advisor to assure such policies are carried out. Our board generally may change our policies or investment objectives at any time without a vote of our shareholders. The independent directors will review our investment policies at least annually to determine
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The sheltering from tax of income from other sources is not an objective of our company.
Investing in Government Oriented Property
Government Orientation. Our company will invest in real estate, including real estate that has a government orientation. By government orientation, we mean that a portion of our properties will include one or more of the following types of government tenants:
| • | United States federal government and governmental authorities; | |
| • | state, local and other governments and governmental authorities; | |
| • | quasi-governmental authorities; | |
| • | government contractors and service providers; | |
| • | governmental licensees; and | |
| • | health care, medical insurance, grant research and similar companies. |
These categories of government tenants are described below:
| United States Federal Government and Governmental Authorities include the United States federal government, federal governmental agencies, for example, defense agencies and civil agencies (including by way of illustration, the General Services Administration, Departments of Defense, Interior, Transportation, Agriculture, United States Postal Service, Energy, National Science Foundation, Labor, Health and Human Services, Treasury, Environmental Protection Agency, General Accounting Office, Central Intelligence Agency, Federal Bureau of Investigation, National Aeronautics and Space Administration, Secret Service and Customs) and other federal governmental authorities. | |
| State, Local and Other Governments and Governmental Authorities include the 50 states and the District of Columbia, the various departments of government, state and local colleges and universities, governmental authorities, boards and commissions (for example, water and sewer districts, industrial bond authorities, school boards, parks and recreation authorities). | |
| Quasi-Governmental Authorities include Ginnie Mae (a wholly owned corporation within the Department of Housing and Urban Development), Fannie Mae (the nation’s largest private nonprofit foundation devoted to affordable housing) and certain tax-exempt entities. | |
| Government Contractors and Service Providers are parties who provide services to the government and governmental authorities. | |
| Government Licensees are parties who operate under the authority of licenses issued by a government, governmental authority or quasi-governmental authority, for example, banks, credit unions and insurance companies. | |
| Health Care, Medical Insurance, Grant Research and Similar Companies, including tax-exempt and for-profit firms that are recipients, directly or indirectly, of government funding, grants, reimbursements or subsidies. |
Focus States. We intend that a significant portion of our properties will be in the following focus states: California, Colorado, District of Columbia, Florida, Illinois, Maryland, Nevada, Oklahoma, Texas, Virginia and Washington. Some of our properties will be located in state capitals. Our board of directors has the right to modify our focus states from time-to-time based on their determination of what is in the best interest of our company.
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Types of Investments
Our company, through entities that we own or control directly or indirectly, acquires office, industrial and service properties, including properties that have a government orientation as a result of space being leased to government tenants.
We will seek to invest in properties that will satisfy the primary objective of providing cash dividends to our shareholders. However, because a significant factor in the valuation of income-producing real estate is their potential for future income, we anticipate that the majority of properties we acquire will have both the potential for growth in value and providing cash dividends to shareholders. To the extent feasible, we will strive to invest in a diversified portfolio of properties, in terms of geography, type of property and types of tenants (governmental and non-governmental), that will satisfy our investment objectives of maximizing cash available for payment of dividends, preserving our capital and realizing growth in value upon the ultimate sale of our properties.
We anticipate that 87.5% of the offering proceeds will be used to acquire real estate and the balance will be used to pay various fees and expenses described in “Estimated Use of Proceeds.”
We may enter into sale and leaseback transactions, under which we will purchase a property from an entity and lease the property back to such entity under a net lease.
Our properties are leased by generally creditworthy tenants. We consider a tenant to be creditworthy when it has:
| • | a minimum tangible net worth equal to ten times one year’s rental payments required under the terms of the lease; | |
| • | a guaranty for its payments under the lease by a guarantor with a minimum tangible net worth of $10 million; or | |
| • | a corporate debt rating by Moody’s of Baa (or better) or by Standard & Poor’s of BBB (or better). |
Debt obligations of companies rated by Moody’s as Baa are considered medium-grade obligations (i.e., they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but are more unreliable over any great length of time. Debt obligations of companies rated by Standard & Poor’s as BBB are considered to have adequate protection parameters, but susceptible to adverse economic conditions or changing circumstances. Standard & Poor’s ratings of less than BBB are regarded as having significant speculative characteristics.
A majority of properties acquired will be at least 80% leased on the acquisition date. We typically acquire properties with cash and mortgage or other debt, but we may acquire properties free and clear of permanent mortgage indebtedness by paying the entire purchase price for such property in cash or in units of limited partnership interest in our operating partnership. On properties purchased on an all-cash basis we may later incur mortgage indebtedness by obtaining loans secured by selected properties, if favorable financing terms are available. The proceeds from such loans would be used to acquire additional properties and increase our cash flow. We do not intend to incur indebtedness in excess of 60% of the aggregate fair market value of all our properties as determined at the end of each calendar year beginning with our first full year of operations. Fair market value will be determined each year by an internal or independent certified appraiser and in a similar manner as the fair market determination at the time of purchase.
Our advisor and its affiliates may purchase properties in their own name, assume loans in connection with the purchase of properties and temporarily hold title to such properties for the purpose of facilitating the acquisition of such property, borrowing money or obtaining financing, completing construction of the property or for any other purpose related to our business. We may also acquire properties from our advisor, affiliates of our advisor and entities advised or managed by our advisor. Such acquisitions must be approved by a majority of our directors, including a majority of our independent directors, and supported by an independent appraisal prepared by an appraiser who is a member in good standing of the American Institute of Real Estate Appraisers or similar national organization selected by the independent directors.
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Our Acquisition Standards
We believe, based on our advisor’s prior real estate experience, that we have the ability to identify quality properties capable of meeting our investment objectives. In evaluating potential acquisitions, the primary factor we will consider is the property’s current and projected cash flow. We will also consider a number of other factors, including a property’s:
| • | geographic location and type; | |
| • | construction quality and condition; | |
| • | potential for capital appreciation; | |
| • | ability of tenants to pay scheduled rent; | |
| • | lease terms and rent roll, including the potential for rent increases; | |
| • | potential for economic growth in the tax and regulatory environment of the community in which the property is located; | |
| • | potential for expanding the physical layout of the property; | |
| • | occupancy and demand by tenants for properties of a similar type in the same geographic vicinity; | |
| • | prospects for liquidity through sale, financing or refinancing of the property; | |
| • | competition from existing properties and the potential for the construction of new properties in the area; and | |
| • | treatment under applicable federal, state and local tax and other laws and regulations. |
Our advisor will have substantial discretion with respect to the selection of specific properties.
We will not close the purchase of any property unless and until we obtain an environmental assessment, a minimum of Phase I review, for each property purchased and are generally satisfied with the environmental status of the property.
We may also enter into arrangements with the seller or developer of a property whereby the seller or developer agrees that if, during a stated period, the property does not generate a specified cash flow, the seller or developer will pay in cash to our company a sum necessary to reach the specified cash flow level, subject in some cases to negotiated dollar limitations.
In determining whether to purchase a particular property, we may, in accordance with customary practices, obtain an option on such property. The amount paid for an option, if any, is normally surrendered if the property is not purchased, and is normally credited against the purchase price if the property is purchased.
In purchasing properties, we will be subject to risks generally incident to the ownership of real estate, including:
| • | changes in general economic or local conditions; | |
| • | changes in supply of or demand for similar competing properties in an area; | |
| • | changes in interest rates and availability of permanent mortgage funds which may render the sale of a property difficult or unattractive; | |
| • | changes in tax, real estate, environmental and zoning laws; | |
| • | periods of high interest rates and tight money supply which may make the sale of properties more difficult; |
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| • | tenant turnover; and | |
| • | general overbuilding or excess supply in the market area. |
Property Acquisition
We anticipate acquiring fee simple and tenancy-in-common interests in real property and real property subject to long-term ground leases, although other methods of acquiring a property may be used when we consider it to be advantageous. For example, we may acquire properties through a joint venture or the acquisition of substantially all of the interests of an entity which in turn owns the real property. We may also use wholly-owned subsidiaries of our operating partnership to acquire properties. Such wholly-owned subsidiaries will be formed solely for the purpose of acquiring and/or financing a property or properties.
We may commit to purchase properties subject to completion of construction in accordance with terms and conditions specified by our advisor. In such cases, we will be obligated to purchase the property at the completion of construction, provided that (1) the construction conforms to definitive plans, specifications and costs approved by us in advance and embodied in the construction contract and (2) agreed upon percentages of the property are leased. We will receive a certificate of an architect, engineer or other appropriate party stating that the property complies with all plans and specifications. We currently do not intend to construct or develop properties, or render any services in connection with such development or construction.
If remodeling is required prior to the purchase of a property, we will pay a negotiated maximum amount either upon completion or in installments commencing prior to completion. Such amount will be based on the estimated cost of such remodeling. In such instances, we will also have the right to review the lessee’s books during and following completion of the remodeling to verify actual costs. In the event of substantial disparity between estimated and actual costs, an adjustment in purchase price may be negotiated. If remodeling is required after the purchase of a property, our advisor or an affiliate may serve as construction manager for a fee no greater than the fee a third party would charge for such services.
Although we are not limited as to the geographic area where we may conduct our operations, we intend to emphasize properties located in our focus states.
We are not specifically limited in the number or size of properties we may acquire or on the percentage of net proceeds of this offering which we may invest in a single property. The number and mix of properties we acquire will depend upon real estate and market conditions and other circumstances existing at the time we are acquiring our properties and the amount of proceeds we raise in this offering.
Joint Ventures
We may invest in general partnership, co-ownership and joint venture arrangements with other real estate programs formed by, sponsored by or affiliated with our advisor or an affiliate of our advisor if a majority of our independent directors who are not otherwise interested in the transaction approve the transaction as being fair and reasonable to our company and our shareholders and on substantially the same terms and conditions as those received by the other joint venturers. We may so invest with nonaffiliated third parties by following the general procedures to obtain approval of an acquisition.
We will invest in general partnerships, co-ownership or joint venture arrangements with our advisor and its affiliates only when:
| • | there are no duplicate property management or other fees; | |
| • | the investment of each entity is on substantially the same terms and conditions; and | |
| • | we have a right of first refusal if our advisor or its affiliates wish to sell its interest in the property held in such arrangement. |
We may invest in general partnerships or joint venture arrangements with our advisor and its affiliates as co-owners of a property to allow us to increase our equity participation in such venture as additional
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You should note that there is a potential risk that our company and the co-owner or its joint venture partner will be unable to agree on a matter material to the joint venture on joint venture decisions and we may not control the decision. Furthermore, we cannot assure you that we will have sufficient financial resources to exercise any right of first refusal.
Description of Our Leases
We enter into either “net” or “gross” leases with our tenants. “Net” leases typically require that tenants pay all or a majority of the operating expenses, including real estate taxes, special assessments and sales and use taxes, utilities, insurance and building repairs related to the property, in addition to the lease payments. We generally will require that each net lease tenant pay its share of the cost of the liability insurance covering the properties owned by our operating partnership or provide such coverage. The third party liability coverage will insure, among others, our operating partnership and our advisor. We will also require that each tenant obtain, at its own expense, property insurance naming our operating partnership as the insured party for fire and other casualty losses in an amount equal to the full value of such property. All such insurance must be approved by our advisor.
We expect that most of our non-governmental leases will be net leases with terms of 10 to 15 years, but generally not less than 5 years, usually providing for a base minimum annual rent with periodic increases during the lease term.
“Gross” leases typically require that the landlord pay all or a majority of the operating expenses, including real estate taxes, special assessments, and sales and use taxes, utilities, insurance and building repairs related to the property.
We anticipate that our governmental leases are likely to be gross leases and may have a shorter term. In addition, our governmental leases may permit the tenants to terminate under certain circumstances, including failure to obtain appropriations or termination or non-renewal of a material government contract.
In general, our leases may be assigned or subleased with our operating partnership’s prior written consent, but the original tenant generally will remain fully liable under the lease unless the assignee meets our income and net worth tests.
Our board of directors controls our policies with respect to the terms of leases into which we may enter and may change those policies at any time without shareholder approval.
Our Operating Partnership
We will conduct our business and own properties through our operating partnership and its wholly owned subsidiaries. Our operating partnership will be governed by its Agreement of Limited Partnership, a copy of which may be obtained from us. As the sole general partner of our operating partnership, we will have control over the affairs of our operating partnership. We will delegate to our advisor the management of the day-to-day affairs of our operating partnership. We will contribute the net proceeds of this offering to our operating partnership in return for 100% of the initial capital and profits interest in our operating partnership, other than our advisor’s incentive limited partnership interest that entitles it to share in operating cash flow and property sale proceeds above a threshold return to our company. Our advisor has no voting rights by virtue of its incentive limited partnership interest. Our operating partnership may issue additional units of limited partnership interest in the future in exchange for properties. The holders of these units may have the right to redeem their units for cash or shares of common stock on terms set forth in the Agreement of Limited Partnership. Under certain circumstances, holders of these units may exercise their redemption rights by delivering a written notice of redemption to both the operating partnership and our company, as general partner of the operating partnership. Upon receipt of the redemption notice, our company may elect to purchase those units of limited partnership interest for either cash or shares in
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Our Policies With Respect to Borrowing
When we think it is appropriate, we will borrow funds to acquire or finance properties. We may later refinance or increase mortgage indebtedness by obtaining additional loans secured by selected properties, if favorable financing terms are available. We will use the proceeds from such loans to acquire additional properties for the purpose of increasing our cash flow and providing further diversification. We anticipate that aggregate borrowings, both secured and unsecured, will not exceed 60% of all of our properties’ combined fair market values, as determined at the end of each calendar year beginning with the first full year of operation. In addition, we anticipate that no property will be encumbered by secured indebtedness or financed by unsecured indebtedness in excess of 80% of its fair market value. Our board of directors will review our aggregate borrowings at least quarterly to ensure that such borrowings are reasonable in relation to our net assets. The maximum amount of such borrowings in relation to our net assets will not exceed 300%. We may also incur indebtedness to finance improvements to properties and, if necessary, for working capital needs or to meet the distribution requirements applicable to REITs under the federal income tax laws.
When incurring secured debt, we generally intend to incur only nonrecourse indebtedness, which means that the lenders’ rights on our default generally will be limited to foreclosure on the property that secured the obligation. If we incur mortgage indebtedness, we will endeavor to obtain level payment financing, meaning that the amount of debt service payable would be substantially the same each year, although some mortgages are likely to provide for one large payment and we may incur floating or adjustable rate financing when our board of directors determines it to be in our best interest.
Our board of directors controls our policies with respect to borrowing and may change such policies at any time without a vote of the shareholders.
Sale or Disposition of Properties
Our advisor and our board of directors will determine whether a particular property should be sold or otherwise disposed of after consideration of relevant factors, including performance or projected performance of the property and market conditions, with a view toward achieving our principal investment objectives.
In general, we intend to hold properties, prior to sale, for a minimum of four years. When appropriate to minimize our tax liabilities, we may structure the sale of a property as a “like-kind exchange” under the federal income tax laws so that we may acquire qualifying like-kind replacement property meeting our investment objectives without recognizing taxable gain on the sale. Furthermore, our general policy will be to reinvest into additional properties proceeds from the sale, financing, refinancing or other disposition of our properties that represent our initial investment in such property or, secondarily, to use such proceeds for the maintenance or repair of existing properties or to increase our reserves for such purposes. The objective of reinvesting such portion of the sale, financing and refinancing proceeds is to increase the total value of real estate assets that we own, and the cash flow derived from such assets.
Despite this policy, our board of directors, in its discretion, may distribute to our shareholders all or a portion of the proceeds from the sale, financing, refinancing or other disposition of properties. In determining whether any of such proceeds should be distributed to our shareholders, our board of directors will consider, among other factors, the desirability of properties available for purchase, real estate market conditions and compliance with the REIT distribution requirements. Because we may reinvest such portion of the proceeds from the sale, financing or refinancing of our properties, we could hold our shareholders’
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In connection with a sale of a property, our general preference will be to obtain an all-cash sale price. However, we may take a purchase money obligation secured by a mortgage on the property as partial payment. There are no limitations or restrictions on our taking such purchase money obligations. The terms of payment upon sale will be affected by custom in the area in which the property being sold is located and the then prevailing economic conditions. To the extent we receive notes, securities or other property instead of cash from sales, such proceeds, other than any interest payable on such proceeds, will not be included in net sale proceeds available for distribution until and to the extent the notes or other property are actually paid, sold, refinanced or otherwise disposed of. Thus, the distribution of the proceeds of a sale to you as a shareholder, to the extent contemplated by our board of directors, may be delayed until such time. In such cases, we will receive payments in the year of sale in an amount less than the selling price and subsequent payments will be spread over a number of years.
We are not a mortgage bank or portfolio lender. We do not intend to engage in the business of originating, warehousing or servicing mortgages. If we engage in such activities, it will be only as an ancillary result of our main business of investing in real estate properties. We may provide seller financing on certain properties if, in our judgment, it is prudent to do so. However, our main business is not investment in mortgages or mortgage-backed securities. If we do invest directly in mortgages, they will be mortgages on office buildings or other commercial properties. We may, however, when and if we deem it prudent to do so, invest in mortgage-backed securities with a minimum rating of BBB by Standard & Poor’s or Baa by Moody’s, which may be collateralized by 1-4 family mortgages, apartments, or other properties.
While it is our intention to hold each property we acquire for a minimum of four years, circumstances might arise which could result in the early sale of some properties. A property may be sold before the end of the expected holding period if:
| • | the tenant has involuntarily liquidated; | |
| • | in the judgment of our advisor, the value of a property might decline substantially; | |
| • | an opportunity has arisen to improve other properties; | |
| • | we can increase cash flow through the disposition of the property; | |
| • | the tenant is in default under the lease; or | |
| • | in our judgment, the sale of the property is in our best interests. |
The determination of whether a particular property should be sold or otherwise disposed of will be made after consideration of relevant factors, including prevailing economic conditions, with a view to achieving maximum capital appreciation. We cannot assure you that this objective will be realized. The selling price of a property will be determined in large part by the amount of rent payable under the lease. If a tenant has a repurchase option at a formula price or if operating expenses increase without a commensurate increase in rent under our gross leases, we may be limited in realizing any appreciation. In connection with our sales of properties, we may lend the purchaser all or a portion of the purchase price. In these instances, our taxable income may exceed the cash received in the sale. The terms of payment will be affected by custom in the area in which the property being sold is located and the then-prevailing economic conditions.
Our Long Term Investment Objective
Our long term investment objective is to invest in properties that satisfy the primary objectives of providing (1) cash dividends to shareholders and (2) capital appreciation. Since a significant factor in the valuation of income-producing real estate is cash flow, management anticipates that the majority of properties purchased will meet both investment objectives by generating sufficient cash flow to pay current
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We anticipate that by July 1, 2008, our board of directors will determine when, and if, to apply to have our shares of common stock listed for trading on a national stock exchange or included for quotation on a national market system, if we meet the then applicable listing requirements. We believe that an exchange listing or inclusion of our shares in a national market system may allow us to increase our size, portfolio diversity, shareholder liquidity, access to capital and stability, and to decrease our operating costs. However, there is no assurance that such listing or inclusion will ever occur. If it is not feasible or desirable to list our shares or include them on a national market system by July 1, 2008, our board of directors may decide to sell our assets individually, list our shares at a future date or liquidate us within four years of such date.
Changes in Our Investment Objectives
Our principal investment objectives are generally to invest, through our operating partnership, in office, industrial, and service properties with a government orientation. Our shareholders have no voting rights with respect to implementing our investment objectives and policies, all of which are the responsibility of our board of directors and may be changed at any time.
Investment Limitations
We do not intend to:
| • | invest more than 10% of our total assets in unimproved real property, apartments, other residential property and real estate investments not contemplated herein; | |
| • | invest in commodities or commodity future contracts, except for interest rate futures contracts used solely for purposes of hedging against changes in interest rates; or | |
| • | operate in such a manner as to be classified as an “investment company” for purposes of the Investment Company Act of 1940. |
As used above, “unimproved real property” means any investment with the following characteristics:
| • | an equity interest in real property which was not acquired for the purpose of producing rental or other operating income; | |
| • | has no development or construction in process on such land; and | |
| • | no development or construction on such land is planned in good faith to commence within one year. |
| In addition, we have adopted the following investment policies: | |
| We will not issue redeemable equity securities. | |
| We will not issue our shares on a deferred payment basis or other similar arrangement. |
| We will not issue debt securities unless the historical debt service coverage in the most recently completed fiscal year as adjusted for known charges is sufficient to properly service that higher level of debt. |
| We will not engage in trading, as opposed to investment, activities. | |
| We will not engage in underwriting or the agency distribution of securities issued by others. |
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Making Loans and Investments in Mortgages
We will not make loans to other entities or persons unless secured by mortgages, and we will not make any mortgage loans to our advisor or any of its affiliates. We will not make or invest in mortgage loans unless we obtain an appraisal concerning the underlying property from a certified independent appraiser. We will maintain their appraisal in our records for at least five years, and will make it available during normal business hours for inspection and duplication by any shareholder at such shareholder’s expense. In addition to the appraisal, we will seek to obtain a customary lender’s title insurance policy or commitment as to the priority of the mortgage or condition of the title.
We will not make or invest in mortgage loans on any one property if the aggregate amount of all mortgage loans outstanding on the property, including the loans of our company, would exceed an amount equal to 85% of the appraised value of the property as determined by an appraisal from a certified independent appraiser, unless we find substantial justification due to the presence of other underwriting criteria. In no event will we invest in mortgage loans that exceed the appraised value of the property as of the date of the loans.
All of our mortgage loans must provide for at least one of the following:
| • | except for differences attributable to adjustable rate loans, equal periodic payments on a schedule that would be sufficient to fully amortize the loan over a 20 to 40 year period; | |
| • | payments of interest only for a period of not greater than ten years with the remaining balance payable in equal periodic payments on a schedule that would fully amortize the loan over a 20 to 30 year period; or | |
| • | payment of a portion of the stated interest currently and deferral of the remaining interest for a period not greater than five years, with the remaining principal and interest payable in equal periodic payments on a schedule that would fully amortize the loan over a 20 to 35 year period. |
We will not invest in real estate contracts of sale otherwise known as land sale contracts.
We will not make or invest in any mortgage loans that are subordinate to any mortgage or equity interest of our advisor, any director, officer or any of their affiliates.
We will not invest in subordinated secured indebtedness except where the amount of total indebtedness secured by that property does not exceed 85% of the appraised value of such property. In addition, the value of all such investments, as shown on their books in accordance with generally accepted accounting principles, after all reasonable reserves but before provision for depreciation, will not exceed 5% of our total assets.
Investment in Securities
We will not invest in equity securities of another entity, other than our operating partnership or a wholly owned subsidiary, unless a majority of the directors, including a majority of the independent directors, not otherwise interested in such transaction approves the investment as being fair, competitive and commercially reasonable. Investments in entities affiliated with our advisor, any officer, director or affiliates must be approved by a majority of the independent directors. We may purchase our own securities, when traded on a secondary market or on a national securities exchange or market, if a majority of the directors determine such purchase to be in our best interests. We will not invest in the securities of other entities for the purpose of exercising control over that entity.
Appraisals
The purchase price for each property that we acquire must be approved by a majority of our independent directors and be based on the fair market value of the property. We will support the determination of the purchase price with an appraisal from an appraiser who is a member-in-good-standing of the American Institute of Real Estate Appraisers or similar national or regional organization. In cases in
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Other Policies
In determining whether to purchase a particular property, we may first obtain an option to purchase such property. We may forfeit the amount paid for the option, if any, if the property is not purchased.
Assuming the maximum offering is sold, we generally do not intend to invest more than 20% of the gross proceeds of this offering in any one property, although we may do so with the approval of a majority of our board of directors.
We will hold all funds, other than funds raised in the offering that are held in the escrow account at PriVest Bank, pending investment in properties, in readily marketable, interest-bearing securities which will allow us to continue to qualify as a REIT. Such investments will be highly liquid and provide for appropriate safety of principal and may include, but will not be limited to, investments such as Government National Mortgage Association certificates, U.S. government bonds, CDs, time deposits and other government securities.
We do not intend to make distributions-in-kind, except for:
| • | distributions of beneficial interest in a liquidating trust established for the dissolution of our company and the liquidation of our assets in accordance with the terms of the Virginia Stock Corporation Act; or | |
| • | distributions of property which meet all of the following conditions: |
| • | our board of directors advises each shareholder of the risks associated with direct ownership of the property; | |
| • | our board of directors offers each shareholder the election of receiving in-kind property distributions; and | |
| • | our board of directors distributes in-kind property only to those shareholders who accept the directors’ offer. |
Dividend Policy
In order to continue to qualify as a REIT for federal income tax purposes, among other things, we must distribute each taxable year at least 90% of our taxable income, other than net capital gain.
We have a policy of avoiding, to the extent possible, the fluctuations in dividends that might result if dividends were based on actual cash received during the distribution period. To implement this policy, we may use cash received during prior periods or cash received subsequent to the distribution period and prior to the payment date for such dividend to pay annualized dividends consistent with the dividend level established from time to time by our board of directors. Our ability to maintain this policy will depend upon the availability of cash flow and applicable requirements for qualification as a REIT under the federal income tax laws. Therefore, we cannot assure you that there will be cash flow available to pay dividends or that dividends will not fluctuate. If cash available for distribution is insufficient to pay dividends to you as a shareholder, we may obtain the necessary funds by borrowing, issuing new securities or selling assets. These methods of obtaining funds could affect future dividends by increasing operating costs.
To the extent that dividends paid to our shareholders are made out of our current or accumulated earnings and profits, such dividends will be taxable as ordinary dividend income. To the extent that our dividends exceed our current and accumulated earnings and profits, such amounts will constitute a return
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Beginning September 1, 2002, the Company began paying monthly dividends to shareholders of record as of the end of the preceding month at an annul rate of $0.700 per share (7.00% based on a $10.00 purchase price). On November 25, 2003, our board of directors approved an increase in the annual dividend to $0.725 per share (7.25% based on $10.00 purchase price) effective January 1, 2003. On March 22, 2003, our board of directors approved an increase in the annual dividend to $0.750 per share (7.50% based on a $10.00 purchase price) effective June 1, 2003. However, we cannot assure you that we will continue to pay dividends at the current rate or at all.
Monthly dividends will be calculated with daily record and dividend declaration dates. However, our board of directors could, at any time, elect to pay dividends quarterly to reduce administrative costs. It will be our general policy, subject to applicable REIT rules, to reinvest proceeds from the sale, financing, refinancing or other disposition of our properties through the purchase of additional properties, although we cannot assure you that we will be able to do so.
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DESCRIPTION OF REAL ESTATE INVESTMENTS
As of September 30, 2003, we owned interests in nine properties located in 6 states with an aggregate GLA of approximately 1.5 million square feet. In addition, at that date, approximately 48% of our aggregate GLA was leased to government-oriented tenants.
The following table presents certain additional information about our properties.
| Purchase Price | |||||||||||||||||||||||||||||
| % | Date | Our | |||||||||||||||||||||||||||
| Property | Property Location | GLA (Sq Ft) | Owned | Acquired | Total | Investment | Annual Rent(1) | ||||||||||||||||||||||
| 5508 Highway 290 West Building | Austin, TX | 74,089 | 100.0 | % | 9/13/02 | $ | 10,225,000 | $ | 10,225,000 | $ | 1,049,527 | ||||||||||||||||||
| Two Corporate Plaza | Clear Lake, TX | 161,331 | 100.0 | % | 11/27/02 | 13,580,000 | 13,580,000 | 2,606,345 | |||||||||||||||||||||
| Congress Center | Chicago, IL | 525,000 | 30.0 | % | 1/09/03 | 136,108,000 | 40,832,000 | 9,562,537 | |||||||||||||||||||||
| Atrium Building | Lincoln, NE | 166,868 | 100.0 | % | 1/31/03 | 4,532,000 | 4,532,000 | 1,440,411 | |||||||||||||||||||||
| Park Sahara | Las Vegas, NV | 123,709 | 4.75 | % | 3/18/03 | 12,200,000 | 579,500 | 1,935,788 | |||||||||||||||||||||
| Department of Children and Families Campus | Plantation, FL | 124,037 | 100.0 | % | 4/25/03 | 11,580,000 | 11,580,000 | 2,041,614 | |||||||||||||||||||||
| Gemini Plaza | Houston, TX | 158,627 | 100.0 | % | 5/02/03 | 15,000,000 | 15,000,000 | 1,467,300 | |||||||||||||||||||||
| Bay View Plaza | Alameda, CA | 61,463 | 97.68 | % | 7/31/03 | 11,655,000 | 11,329,000 | 1,207,545 | |||||||||||||||||||||
| North Pointe Corporate Center | Sacramento, CA | 130,805 | 100 | % | 8/11/03 | 24,205,000 | 24,205,000 | 2,876,001 | |||||||||||||||||||||
| Total | 1,525,929 | $ | 239,085,000 | $ | 131,862,500 | $ | 24,187,068 | ||||||||||||||||||||||
| (1) | Annualized rental income based on rent due from tenants at September 30, 2003. |
The following information generally applies to our properties:
| • | We believe all of the properties are adequately covered by insurance and are suitable for their intended purposes. | |
| • | We have no plans for any material renovations, improvements or development of the properties. | |
| • | Our properties are located in urban markets where we are subject to competition for attracting new and retaining current tenants. | |
| • | Depreciation is provided on a straight-line basis over the estimated useful lives of the buildings and improvements, ranging primarily from 39 to 15 years, respectively. |
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Physical Occupancy Table
The following schedule lists the approximate physical occupancy levels for our properties as of the end of each quarter (we commenced operations in the third quarter 2002 upon our first property acquisition).
| Property | 9/30/02 | 12/31/02 | 3/31/03 | 6/30/03 | 9/30/03 | |||||||||||||||
| 5508 Highway 290 West Building | 99 | % | 99 | % | 99 | % | 100 | % | 92 | % | ||||||||||
| Two Corporate Plaza | — | 94 | % | 94 | % | 96 | % | 91 | % | |||||||||||
| Congress Center | — | — | 86 | % | 86 | % | 89 | % | ||||||||||||
| Atrium Building | — | — | 84 | % | 84 | % | 84 | % | ||||||||||||
| Park Sahara | — | — | 92 | % | 88 | % | 89 | % | ||||||||||||
| Department of Children and Families Campus | — | — | — | 92 | % | 94 | % | |||||||||||||
| Gemini Plaza | — | — | — | 100 | % | 100 | % | |||||||||||||
| Bay View Plaza | — | — | — | — | 93 | % | ||||||||||||||
| North Pointe Corporate Center | — | — | — | — | 82 | % | ||||||||||||||
As of September 30, 2003, approximately 90% of the total GLA in our properties was leased.
Average Effective Annual Rent Per Square Foot
The following table presents the average effective annual rent per square foot for our properties as of the end of each quarter (we commenced our principal operations in the third quarter of 2002 upon our first property acquisition).
| Property | 9/30/02 | 12/31/02 | 3/31/03 | 6/30/03 | 9/30/03 | |||||||||||||||
| 5508 Highway 290 West Building | $ | 14.76 | $ | 14.88 | $ | 15.12 | $ | 15.36 | $ | 15.36 | ||||||||||
| Two Corporate Plaza | — | $ | 16.44 | $ | 17.04 | $ | 17.04 | $ | 16.92 | |||||||||||
| Congress Center | — | — | $ | 17.88 | $ | 21.24 | $ | 20.40 | ||||||||||||
| Atrium Building | — | — | $ | 10.20 | $ | 10.20 | $ | 10.20 | ||||||||||||
| Park Sahara | — | — | $ | 17.76 | $ | 17.64 | $ | 17.64 | ||||||||||||
| Department of Children and Families Campus | — | — | — | $ | 16.92 | $ | 17.52 | |||||||||||||
| Gemini Plaza | — | — | — | $ | 9.24 | $ | 9.24 | |||||||||||||
| Bay View Plaza | — | — | — | — | $ | 21.12 | ||||||||||||||
| North Pointe Corporate Center | — | — | — | — | $ | 26.76 | ||||||||||||||
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Lease Expiration Table
The following schedule presents the sensitivity of our annual base rent due to lease expirations for the next 10 years at our properties as of September 30, 2003, by number, percentage of total aggregate GLA and annual base rent.
| % of | |||||||||||||||||
| Number of | Total Sq. | Total GLA | Annual Base | ||||||||||||||
| Leases | Ft. of | Represented by | Rent Under | ||||||||||||||
| Year Ending December 31, | Expiring | Expiring Leases | Expiring Leases | Expiring Leases | |||||||||||||
| 2003 | 14 | 18,518 | 1.21 | % | $ | 305,763 | |||||||||||
| 2004 | 17 | 108,266 | 7.10 | 1,449,522 | |||||||||||||
| 2005 | 23 | 131,379 | 8.61 | 2,398,603 | |||||||||||||
| 2006 | 24 | 191,432 | 12.55 | 3,238,115 | |||||||||||||
| 2007 | 17 | 218,974 | 14.36 | 4,285,272 | |||||||||||||
| 2008 | 1 | 6,594 | 0.43 | 112,090 | |||||||||||||
| 2009 | 1 | 3,991 | 0.26 | 83,811 | |||||||||||||
| 2010 | 2 | 14,230 | 0.93 | 325,857 | |||||||||||||
| 2011 | 5 | 258,438 | 16.94 | 3,523,559 | |||||||||||||
| 2012 | 3 | 243,610 | 15.97 | 6,330,627 | |||||||||||||
| Thereafter | 6 | 172,157 | 11.29 | 2,133,849 | |||||||||||||
| Total | 113 | 1,367,589 | 89.66 | % | $ | 24,187,068 | |||||||||||
Concentration of Tenants
As of September 30, 2003, the following tenants accounted for 5% or more of our aggregate annual rental income:
| Current | ||||||||||
| Base Annual | % of Total | |||||||||
| Tenant | Property | Rent | Rental Income | |||||||
| General Services Administration | Congress Center | $ | 4,636,313 | 19.2 | % | |||||
| Internal Revenue Service (GSA) | North Pointe Corporate Center | $ | 2,490,000 | 10.3 | % | |||||
| North American Company for Life and Health Insurance | Congress Center | $ | 1,834,251 | 7.6 | % | |||||
| United Space Alliance | Gemini Plaza | $ | 1,467,300 | 6.1 | % | |||||
| Department of Children and Family Services | Department of Children and Families Campus | $ | 1,415,921 | 5.9 | % | |||||
| Employers Reinsurance Corp. | Congress Center | $ | 1,347,030 | 5.6 | % | |||||
The following table provides certain information with respect to the leases of those tenants that occupy 10% or more of the rentable square footage in each of our material properties as of September 30, 2003. We consider a property to be material if its book value amounts to 10% or more of our total assets or if its gross revenues for the last fiscal year amounted to 10% or more of our aggregate gross revenues for that fiscal year.
| Rentable | Percentage of | Current | |||||||||||||||||
| Square | Lease | Property | Base Annual | Renewal | |||||||||||||||
| Property and Lessee | Feet | Ends | Leased | Rent | Options | ||||||||||||||
5508 Highway 290 West Building | |||||||||||||||||||
| Air Products and Chemicals, Inc. | 12,647 | 9/30/06 | 17.1 | % | $ | 194,258 | One 5-year | ||||||||||||
| SAM, Inc.(1) | 12,406 | 2/14/07 | 16.7 | 147,011 | One 2-year | ||||||||||||||
| Epic Edge | 11,146 | 12/31/05 | 15.0 | 163,035 | One 5-year | ||||||||||||||
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| Rentable | Percentage of | Current | |||||||||||||||||
| Square | Lease | Property | Base Annual | Renewal | |||||||||||||||
| Property and Lessee | Feet | Ends | Leased | Rent | Options | ||||||||||||||
Two Corporate Plaza | |||||||||||||||||||
| Lockheed Engineering(1) | 55,021 | 6/30/06 | 34.1 | 957,956 | Two 3-year | ||||||||||||||
| FAA(1) | 17,958 | 9/30/07 | 11.1 | 323,244 | Two 5-year | ||||||||||||||
| Akzo Chemical | 16,390 | 12/31/05 | 10.2 | 299,937 | None | ||||||||||||||
Congress Center | |||||||||||||||||||
| GSA(1) | 113,458 | 4/25/12 | 21.6 | 4,636,313 | None | ||||||||||||||
| North American Life & Health Insurance Co. | 100,890 | 2/28/12 | 19.2 | 1,834,251 | Two 5-year | ||||||||||||||
| AKZO Nobel(2) | 90,138 | 12/31/13 | 17.1 | — | Two 5-year | ||||||||||||||
| GE Employers Reinsurance Corp. | 66,520 | 12/31/12 | 12.7 | 1,347,030 | Two 5-year | ||||||||||||||
Atrium Building | |||||||||||||||||||
| Nebraska Dept of Environmental Quality(1) | 62,357 | 7/15/04 | 37.4 | 636,041 | One 5-year | ||||||||||||||
| Nebraska Library Commission(1) | 42,353 | 8/31/07 | 25.1 | 437,850 | None | ||||||||||||||
Dept. of Children & Families Campus | |||||||||||||||||||
| Dept. of Children & Families(1) | 69,571 | 02/28/05 | 56.1 | 1,328,806 | Two 5-year | ||||||||||||||
| Sheriff of Broward County(1) | 23,514 | 07/31/06 | 19.0 | 401,246 | Three 5-year | ||||||||||||||
Gemini Plaza | |||||||||||||||||||
| United Space Alliance(1) | 158,627 | 05/31/11 | 100.0 | 1,467,300 | Two 5-year | ||||||||||||||
Bay View Plaza | |||||||||||||||||||
| Good Guys | 31,579 | 03/02/11 | 51.4 | 663,348 | One 5-year | ||||||||||||||
| State of CA (Employment Development Dept.)(1) | 12,129 | 12/31/10 | 19.7 | 289,614 | None | ||||||||||||||
| National Medical Services | 11,146 | 10/15/11 | 18.1 | 218,390 | One 5-year | ||||||||||||||
North Pointe Corporate Center | |||||||||||||||||||
| IRS (GSA)(1) | 89,179 | 08/17/07 | 68.2 | 2,490,000 | None | ||||||||||||||
| Quest Educational Corp. | 18,381 | 11/30/06 | 14.1 | 386,001 | None | ||||||||||||||
| (1) | Government entity or government contractor. |
| (2) | Rental payments begin January 1, 2004; base annual rent as of such date will be $1,892,898. |
Geographic Diversification Table
The following table shows a list of properties we owned as of September 30, 2003, grouped by the state where each of our investments is located.
| Current | Approximate % | ||||||||||||||||||||
| No. of | Aggregate | Approximate % | Base Annual | of Aggregate | |||||||||||||||||
| State | Properties | Square Feet | of Square Feet | Rent | Annual Rent | ||||||||||||||||
| California | 2 | 192,268 | 12.6 | $ | 4,083,546 | 16.9 | |||||||||||||||
| Florida | 1 | 124,037 | 8.1 | 2,041,614 | 8.4 | ||||||||||||||||
| Illinois | 1 | 525,000 | 34.4 | 9,562,537 | 39.5 | ||||||||||||||||
| Nebraska | 1 | 166,868 | 11.0 | 1,440,411 | 6.0 | ||||||||||||||||
| Nevada | 1 | 123,709 | 8.1 | 1,935,788 | 8.0 | ||||||||||||||||
| Texas | 3 | 394,047 | 25.8 | 5,123,172 | 21.2 | ||||||||||||||||
| Total | 9 | 1,525,929 | 100.0 | % | $ | 24,187,068 | 100.0 | % | |||||||||||||
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Description of Real Estate Investments
| 5508 Highway 290 West — Austin, Texas |
On September 13, 2002, through our wholly-owned subsidiary, GREIT — 5508 Highway 290 West, LP, a Texas limited partnership, we purchased a 100% fee simple interest in the 5508 Highway 290 West Building, a 74,089 square foot property located in Austin, Texas. The property was built in 2001 and consists of two three-story office buildings, a main building and a back building of approximately 61,089 and 13,000 square feet, respectively, on 6.5 acres. The property was purchased from an unaffiliated third party for a purchase price of $10,225,000. The seller of the property paid a sales commission to Realty of $300,000, or 3.0% of the purchase price. The purchase was financed by Greenwich Capital Financial Products, Inc., which provided a $6,700,000 first mortgage loan with an interest rate at 400 basis points over LIBOR under which we were required to make interest-only payments until the due date of September 1, 2003, at which time the loan had to be paid in full or refinanced.
On March 31, 2003, we paid in full the $6,700,000 loan outstanding on the 5508 Highway 290 West Building. On April 1, 2003, we refinanced the property in the amount of $5,250,000 under our credit facility with LaSalle Bank National Association. Under the terms of the credit facility, we are required to make interest-only payments until the due date of January 30, 2006, at which time the loan must be paid in full or refinanced. On May 6, 2003, LaSalle advanced additional funds of $1,545,000 collateralized by this property. On September 20, 2003, we paid $5,590,600 to LaSalle, reducing the amount drawn on the line collateralized by this property to $1,105,000.
| Two Corporate Plaza — Clear Lake, Texas |
On November 27, 2002, through our wholly-owned subsidiary, GREIT — Two Corporate Plaza, LP, a Texas limited partnership, we purchased a 100% fee simple interest in the Two Corporate Plaza, a 161,331 square foot property located in Clear Lake, Texas. The property was built in 1989 and consists of an eight-story office building and a three-story parking garage. The property includes approximately 137,731 and 23,600 square feet of office and retail space, respectively, on 5.1 acres. The property was purchased from an unaffiliated third party for a purchase price of $13,580,000. The seller of the property paid a sales commission to Realty of $380,000, or 2.8% of the purchase price. The purchase was financed with a $10,160,000 loan from Nomura Credit & Capital, Inc., bearing interest at a fixed rate of 5.92% per annum. We are required to make monthly principal and interest payments on a 30-year amortization schedule until the due date of December 31, 2007, at which time the loan must be paid in full or refinanced. As of September 30, 2003, the outstanding debt balance related to the property was $10,090,428.
| Congress Center — Chicago, Illinois |
On January 9, 2003, through our wholly owned subsidiary, GREIT — Congress Center, LLC, a Delaware limited liability company, we purchased an approximately 30% undivided tenant in common interest in Congress Center, a 16-story Class A office building of approximately 525,000 square feet built in 2001 and located in Chicago, Illinois. Our affiliates, NNN Congress Center, LLC and WREIT — Congress Center, LLC, simultaneously purchased undivided tenant in common interests totaling approximately 70% ownership of the property. The seller was an unaffiliated third-party. The total purchase price for Congress Center was $136,108,000. The seller of the property paid a sales commission to Realty of $2,000,000, or approximately 1.5% of the sales price. Our total investment consisted of our proportionate share of the purchase price (approximately $40,832,000 including $12,047,000 in cash and $28,785,000 in debt), plus $2,294,000 for our proportionate share of closing costs, loan fees and reserves. We are jointly and severally liable with the other tenants in common for the total debt of $95,950,000 and any subsequent increases in the total debt.
The purchase of Congress Center was financed by Fleet National Bank which provided an $80,950,000, 36-month senior first mortgage bridge loan bearing interest at a stated rate equal to the 30-day London Interbank Offered Rate, or LIBOR, plus 1.75% per annum (3.09% at date of acquisition), declining to LIBOR plus 1.50% per annum upon certain conditions. The bridge loan requires interest-only
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| Atrium Building — Lincoln, Nebraska |
On January 31, 2003, through our wholly owned subsidiary, GREIT — Atrium Building, LLC, a Delaware limited liability company, we purchased a 100% fee simple interest in the Atrium Building in Lincoln, Nebraska. The property, which was originally built in 1917 and extensively renovated with the most recent renovations completed in 1995, consists of a 6-story Class B office building containing 166,868 square feet. The property was purchased from an unaffiliated third party for a purchase price of approximately $4,532,000. The property is encumbered by two ground leases under parts of the office building, which expire in 2054 and 2055, respectively, including renewal options. We financed the purchase price with $2,200,000 in borrowings under our credit facility with LaSalle. We are required to make interest only payments until the due date of January 30, 2006, at which time the loan must be paid in full or refinanced. The lender advanced an additional $100,000 post-closing subject to the same terms. The seller of the property paid a sales commission to Realty of $132,000, or approximately 2.9% of the purchase price. On May 6, 2003, LaSalle advanced additional funds of $690,000 collateralized by this property. On September 20, 2003, we paid $2,990,000 to LaSalle, reducing the amount drawn on the line collateralized by this property to zero.
| Park Sahara — Las Vegas, Nevada |
On March 18, 2003, through our wholly owned subsidiary, GREIT — Park Sahara, LLC, a Delaware limited liability company, we purchased an approximately 4.75% undivided tenant in common interest in Park Sahara, a five-building Class B office park containing a total of approximately 123,709 square feet on an approximately 6.95 acre site located in Las Vegas, Nevada. The remaining undivided tenant in common interest was purchased by NNN Park Sahara, LLC, an affiliate of our company. The property was purchased from an unaffiliated third party. The total purchase price for the property was approximately $12,200,000. The purchase was financed through (1) the assumption of a $5,040,000, 8.00% fixed rate loan on a 25-year amortization schedule due September, 2007 from IDS American Express, (2) a new approximately $2,260,000, 6.92% fixed rate loan on a 25-year amortization schedule due September 2007 from IDS American Express and (3) a $1,100,000, 7.00% fixed rate interest-only loan also due September 2007 from the seller. Our proportionate share of the total purchase price was approximately $579,500 consisting of $180,500 in cash and $399,000 in debt, plus approximately $30,695 for our proportionate share of loan fees, closing and carrying costs and reserves. Our liability for the property’s debt is limited to the amount of our investment in the property. The seller of the property paid a sales commission to Realty of $320,000, or approximately 2.6% of the purchase price.
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| Department of Children and Families Campus — Plantation, Florida |
On April 25, 2003, through our wholly owned subsidiary, GREIT — Department of DCF, LLC, a Delaware limited liability company, we purchased a 100% fee simple interest in the Department of Children and Families Campus. The property, which was built in 1973 and remodeled in the early to mid-1990s, consists of one one-story and two three-story Class B buildings with a total of approximately 124,037 square feet located on a 9.4 acre site in Plantation, Florida. The property was purchased from an unaffiliated third party for a purchase price of $11,580,000. At closing, we received credits from the seller in the amount of $346,206. We financed the purchase price with $7,605,000 in borrowings under our credit facility arranged through LaSalle. We are required to make interest-only payments until the due date of January 30, 2006, at which time the loan must be paid in full or refinanced. The seller of the property paid a sales commission to Realty of $300,000, or approximately 2.6% of the purchase price. On September 20, 2003, we paid $7,605,000 to LaSalle, reducing the amount drawn on the line collateralized by this property to zero.
| Gemini Plaza — Houston, Texas |
On April 25, 2003, through our wholly-owned subsidiary, GREIT — Gemini Plaza, LLC, a Delaware limited liability company, we purchased a 100% fee simple interest in Gemini Plaza in Houston. The property was built in 1983 and consists of a six-story Class A office building with approximately 158,627 square feet on an approximately 7.02 acre site in Houston, Texas. The property was purchased from an unaffiliated third party for a purchase price of $15,000,000. We financed the purchase price with $9,815,000 in borrowings under our credit facility arranged through LaSalle. We are required to make interest-only payments until the due date of January 30, 2006, at which time the loan must be paid in full or refinanced. The seller of the property paid a sales commission to Realty of $325,000, or approximately 2.2% of the sales price. On August 8, 2003, we paid $6,000,000 to LaSalle, reducing the amount drawn on the line collateralized by this property to $3,815,000. On September 20, 2003, we paid $3,815,000 to LaSalle, reducing the amount drawn on the line collateralized by this property to zero.
| Bay View Plaza — Alameda, California |
On July 31, 2003, through our wholly-owned subsidiary, GREIT — Bay View, LP, a California limited partnership, we purchased an approximately 97.68% majority tenant in common interest in Bay View Plaza in Alameda, California. The property was built in 2001 and consists of a two-story Class A office building with approximately 61,463 square feet on a 3.01 acre site in the master-planned Harbor Bay Office Park. The remaining minority tenant-in-common interest was purchased by an unaffiliated third party, NNN Bay View 1, LLC. The property was purchased from an unaffiliated third party for a purchase price of $11,655,000 in cash. Our proportionate share of the total purchase price was approximately $11,329,000. The seller of the property paid a sales commission to Realty of $380,000, or approximately 3.0% of the purchase price.
| North Pointe Corporate Center — Sacramento, California |
On August 11, 2003, through our wholly-owned subsidiary, GREIT — North Pointe, LP, a California limited partnership, we purchased North Pointe Corporate Center in Sacramento, California. North Pointe is a 130,805 square foot four-story Class A office building on 5.6 acres built in 1988. The property was purchased from an unaffiliated third party for a purchase price of $24,205,000 in cash. The seller of the property paid a sales commission to Realty of $705,000, or approximately 2.9% of the purchase price.
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MANAGEMENT OF OUR COMPANY
General
We operate under the direction of our board of directors, which is responsible for the overall management and control of our affairs. However, our board of directors has retained our advisor to manage our day-to-day affairs, subject to our board of directors’ supervision.
Under the Virginia Stock Corporation Act, each director is required to discharge his duties in accordance with his good faith business judgment of our best interest. Our board of directors currently is comprised of five individuals, three of whom are independent directors. We consider a director to be independent if in the last two years he or she is not associated, directly or indirectly, with our company or our advisor. All of the directors serve one-year terms or until the next annual meeting of the shareholders, whichever occurs first.
Our independent directors determine, from time to time but at least quarterly, that the total fees and expenses of our company are reasonable in light of our investment performance, our net assets, our net income and the fees and expenses of other comparable unaffiliated REITs. This determination is reflected in the minutes of the meetings of our board of directors. For purposes of this determination, net assets are our company’s total assets, other than intangibles, calculated at cost before depreciation or other non-cash reserves, less total liabilities and computed at least quarterly on a constantly-applied basis. In addition, the independent directors determine from time to time, but at least annually, that the compensation that we contract to pay to our advisor is reasonable in relation to the nature and quality of the services performed and that such compensation is within the limits prescribed by any applicable state regulatory authorities. The independent directors also supervise the performance of our advisor and the compensation paid to it to determine that the provisions of the advisory agreement are being carried out. The independent directors base each determination on the factors set forth below and other factors that they deem relevant. Such factors include:
| • | the size of the advisory fee in relation to the size, composition and profitability of our portfolio of properties; | |
| • | the success of our advisor in generating opportunities that meet our investment objectives; | |
| • | the rates charged to similar REITs and to investors other than REITs by advisors performing similar services; | |
| • | additional revenues realized by our advisor and any affiliate through their relationship with us, including real estate commissions, servicing, and other fees, whether paid by us or by others with whom we do business; | |
| • | the quality and extent of service and advice furnished by our advisor; | |
| • | the performance of our portfolio of properties, including income, conservation or appreciation of capital, frequency of problem investments and competence in dealing with distress situations; and | |
| • | the quality of our portfolio of properties in relationship to the investments generated by our advisor for its own account or for the account of other entities it advises. |
Each determination is reflected in the minutes of the meetings of our board of directors.
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The Directors and Executive Officers
The following table and biographical descriptions set forth information with respect to our officers and directors.
| Name | Age | Position | Term of Office | |||||||
| Anthony W. Thompson | 56 | Chairman of the Board of Directors, Chief Executive Officer, President and Director | Since 2001 | |||||||
| Gary T. Wescombe | 60 | Director | Since 2001 | |||||||
| Edward A. Johnson | 50 | Independent Director | Since 2001 | |||||||
| D. Fleet Wallace | 35 | Independent Director | Since 2002 | |||||||
| W. Brand Inlow | 47 | Independent Director | Since 2002 | |||||||
| Richard T. Hutton, Jr. | 51 | Interim Chief Financial Officer | Since 2003 | |||||||
| Talle A. Voorhies | 56 | Vice President and Secretary | Since 2001 | |||||||
| Jack R. Maurer | 59 | Executive Vice President | Since 2001 | |||||||
Anthony W. (“Tony”) Thompson has served as Chairman of our Board of Directors, Chief Executive Officer, President and a director of our company since December 2001. He is a co-founder of our advisor, Triple Net Properties, LLC, and has been its President since inception in April of 1998. He is also President and 100% owner of Triple Net Properties Realty, Inc., an affiliated real estate brokerage and management company that will provide certain real estate brokerage and management services to our company. Prior to April of 1998, Mr. Thompson was co-founder, co-owner, director and officer of a number of real estate investment entities trading under the name The TMP Companies, including the TMP Group, Inc., a full-service real estate investment firm founded in 1978. Mr. Thompson has been the President and 100% owner of our dealer manager, NNN Capital Corp., since 1986 and is a registered securities principal with the NASD. He is a 1969 graduate of Sterling College with a BS in Economics. He is a member of the Sterling College Board of Trustees and various other charitable and civic organizations.
Gary T. Wescombe, C.P.A. has served as a director of our company since December 2001. Mr. Wescombe is a partner in Wescombe & Johnson in Newport Beach, California. From October 1999 to December 2001 he was a partner in Warmingon Wescombe Realty Partners in Costa Mesa, California. At both companies his focus was on real estate investments and financing strategies. Prior to retiring in 1999, Mr. Wescombe was a Partner with Ernst & Young, LLP (previously Kenneth Leventhal & Company) from 1970 to 1999. As an Audit Partner in a national accounting firm, Mr. Wescombe has developed extensive SEC expertise and is recognized as an authority on many aspects of real estate. Mr. Wescombe received a BS in Accounting and Finance from San Jose State University in 1965 and is a member of the American Institute of Certified Public Accountants and California Society of Certified Public Accountants.
Edward A. Johnson, Ph.D. has served as an independent director of our company since December 2001. Dr. Johnson has served as President of Sterling College, a small liberal arts college affiliated with the Presbyterian Church (USA), in Sterling, Kansas, since 1997 where his major accomplishments include development of strategic and business plans, initiation of the nation’s first undergraduate program in social entrepreneurship and selection as the first leadership college by Habitat for Humanity. Dr. Johnson received a BS in History and Political Science from Morningside College, Sioux City, Iowa in 1973, a JD from Creighton University School of Law, Omaha, Nebraska in 1976, and a Ph.D. in Higher Education Administration — Law and Education Specialization from Arizona State University, Tempe, Arizona in 1984.
D. Fleet Wallace has served as an independent director of our company since April 2002. He is a principal and co-founder of Greystone Fund, L.P. and Greystone Capital Management, LLC, Greystone Fund’s general partner. Greystone Fund, L.P. is a professionally managed opportunity fund formed in September 2001 that invests primarily in promising venture capital opportunities and distressed assets in the form of real estate, notes and accounts receivable, inventory and other assets. Prior to founding
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W. Brand Inlow has served as an independent director of our company since April 2002. Mr. Inlow currently provides professional consulting services to the multifamily industry on matters related to acquisitions, dispositions, asset management and property management operations. Mr. Inlow also is President of Jessie’s Wish, Inc., a Virginia non-profit corporation dedicated to awareness, education and financial assistance for patients and families dealing with eating disorders. Mr. Inlow served as President of Summit Realty Group, Inc. in Richmond, Virginia, from September 2001 through October 2003. Prior to joining Summit Realty, from November 1999 to September 2001 he was Vice President of Acquisitions for EEA Realty, LLC in Alexandria, Virginia where he was responsible for acquisition, disposition, and financing of company assets, which were primarily garden apartment properties. Prior to joining EEA Realty, from November 1991 to November 1999, Mr. Inlow worked for United Dominion Realty Trust, Inc. a publicly-traded real estate investment trust, as Assistant Vice President and Senior Acquisition Analyst, where he was responsible for the acquisition of garden apartment communities.
Richard T. Hutton, Jr. has served as our Interim Chief Financial Officer and Treasurer since September 2003. He has also served as our advisor’s Chief Investment Officer since August 2003, overseeing all financial operations of our advisor. From April 1999 to August 2003, Mr. Hutton served as Senior Vice President — Real Estate Acquisitions and Vice President Property Management for our advisor. In that position, Mr. Hutton oversaw the management of the real estate portfolios and property management staff of our advisor and its affiliates. Mr. Hutton has over 15 years experience in real estate accounting, finance and property operations, including construction, development, acquisitions, dispositions, and management of shopping centers, industrial parks, office buildings and apartment complexes. Mr. Hutton’s previous experience includes serving as Controller for the TMP Group, a predecessor to our advisor, from November 1997 to April 1999, and as Controller for Summit Commercial, a Highbridge Company that owned and acquired retail real estate from May 1996 to November 1997. Mr. Hutton has a BA in psychology from Claremont McKenna College and has been licensed as a Certified Public Accountant in California since 1984.
Talle A. Voorhies has served as Vice President and Secretary of our company since December 2001. She has served as Executive Vice President of our advisor from April 1998 to December 2001, when she became Chief Operating Officer of our advisor. Ms. Voorhies is President and Financial Principal of NNN Capital Corp., our dealer manager. From December 1987 to January 1999, Ms. Voorhies worked with the TMP Group, Inc., where she served as Chief Administrative Officer and Vice President of Broker/Dealer Relations. She is responsible for communications with the broker dealer network, due diligence activities, marketing and compliance, and investor services. Ms. Voorhies is a registered financial principal with the NASD.
Jack R. Maurer, CPA, has served as Executive Vice President of our company since December 2001. He has served as Chief Financial Officer of our advisor from April 1998 to December 2001, when he became Financial Principal of NNN Capital Corp., our dealer manager. Mr. Maurer has over 29 years of real estate financial management experience, including Chief Financial Officer and Controller positions in residential and commercial development and the banking industry. From 1986 to April 1998, he was a General Partner and CEO of Wescon Properties, where he was involved in finance, accounting and forecasting. His previous experience also includes the national accounting firm of Kenneth Leventhal & Company. Mr. Maurer received a BS from California University at Northridge in 1973 and is a Registered Operations and Financial Principal with the NASD.
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Committees of Our Board of Directors
| Acquisition Committee |
Each of our acquisitions must be approved by the acquisition committee, a majority of whom are independent directors, or a majority of our board of directors, including a majority of the independent directors, as being fair and reasonable to our company and consistent with our investment objectives. Currently our acquisition committee is comprised of all members of our board of directors. Our board of directors may establish additional acquisition committees from time to time based on property type or other relevant factors. Our advisor will recommend suitable properties for consideration by the appropriate acquisition committee or our board of directors from time to time. If the members of the acquisition committee unanimously approve a given acquisition, then our advisor will be directed to acquire the property on our behalf, if such acquisition can be completed on terms approved by the committee. In the event we appoint an acquisition committee in the future, and if the acquisition committee does not approve a proposed acquisition, then the property may be presented to our full board of directors for consideration, who, by majority vote, may elect to acquire or reject the property. Properties may be acquired from our advisor or its affiliates or our officers and directors, provided that any interested or affiliated directors shall not vote on such an acquisition.
| Audit Committee |
Our audit committee, consisting of a majority of independent directors, is comprised of Messrs. Inlow, Wallace and Wescombe. The audit committee:
| • | makes recommendations to our board of directors concerning the engagement of independent public accountants; | |
| • | reviews the plans and results of the audit engagement with the independent public accountants; | |
| • | approves professional services provided by, and the independence of, the independent public accountants; | |
| • | considers the range of audit and non-audit fees; and | |
| • | consults with the independent public accountants regarding the adequacy of our internal accounting controls. |
| Executive Compensation Committee |
Our board of directors has established an executive compensation committee consisting of up to three directors, including at least two independent directors, to establish compensation policies and programs for our directors and executive officers. The members of our executive compensation committee are Messrs. Thompson, Wallace and Inlow. At present, our executive compensation committee serves only to determine the stock option grants under our two stock option plans. However, at a later date, the executive compensation committee may exercise all powers of our board of directors in connection with establishing and implementing compensation matters, including incentive compensation and benefit plans, except for those which require actions by all of the directors under our articles of incorporation, bylaws or applicable law. Stock-based compensation plans will be administered by the board of directors if the members of the executive compensation committee do not qualify as “non-employee directors” within the meaning of the Exchange Act.
Director Compensation
We pay each independent director a fee of $1,000 for attending, in person or by telephone, each meeting of the board or committee thereof; however, such compensation, including fees for attending meetings, may not exceed $7,500 annually. Our independent and outside directors also qualify for the independent director stock option plan.
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Independent Director Stock Option Plan
On July 22, 2002, we adopted the independent director stock option plan. Only outside and independent directors are eligible to participate in the independent director stock option plan. We have authorized and reserved a total of 100,000 shares of common stock for issuance under the independent director stock option plan.
The independent director stock option plan provides for the grant of initial and subsequent options. Initial options are non-qualified stock options to purchase 5,000 shares of common stock at the applicable option exercise price described below granted to each independent director and each outside director as of the date such individual becomes an independent or outside director. Subsequent options to purchase 5,000 shares of common stock at the applicable option exercise price may be granted on the date of each annual shareholders’ meeting to each independent and outside director so long as the individual is still in office. To date we have granted options to purchase 40,000 shares at $9.05 per share to the independent and outside directors. The plan was approved at our annual shareholder meeting on June 28, 2003.
Officer and Employee Stock Option Plan
On July 22, 2002, we adopted the officer and employee stock option plan. All of our officers and employees are eligible to participate in the officer and employee stock option plan.
We have authorized and reserved a total of 400,000 shares of common stock for issuance under the officer and employee stock option plan. Our board of directors, acting on the recommendation of the compensation committee, has discretion to grant options to officers and employees effective as of each annual meeting of our shareholders. To date we have granted options to purchase 90,000 shares at $9.05 per share to officers of our company. The plan was approved at our annual shareholder meeting on June 28, 2003.
Characteristics of Both Stock Option Plans
Exercise Price: We will determine the option price, meaning the purchase price of our common stock under the options, as follows:
| • | The option price under each option granted on or before the commencement of our initial public offering was the price per share in that offering less the dealer manager’s selling commission and marketing support and due diligence reimbursement fee. | |
| • | The option price under each option granted during this offering will be the greater of the price per share in this offering less the dealer manager’s selling commission and marketing support and due diligence reimbursement fee and the fair market value of our common stock as of the date of grant. | |
| • | The option price under each option granted after the completion of this offering will be the fair market value of our common stock as of the date of grant. |
We will not grant options under either plan with exercise prices less than the fair market value for such options as of the date of the grant or in consideration for services rendered to our company that in the judgment of the independent directors has a fair market value less than the value of such option as of the date of the grant.
Unless our shares are then traded on a national securities exchange or trading system, the fair market value of shares of our common stock will be a price determined by our board of directors in good faith. In determining the fair market value of our stock, the directors will consider several factors, including the price per share at which our shares are then being sold to the public, the price per share of common stock of comparable companies, our company’s earnings and the value of our assets. If our common stock is traded on a national securities exchange or quotation system, the fair market value will be the average of the last sales price or the average of the last bid and ask prices for the five trading days immediately preceding the date of determination.
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Vesting: Both of our stock option plans provide that persons holding options can exercise them as follows:
| • | Options granted on or before the commencement of our initial public offering are exercisable for one-third of the shares subject to the option on the date of grant, and will become exercisable for an additional one-third of such shares on each of the first and second anniversaries of the date of grant. | |
| • | Options granted after the commencement of this offering will become exercisable in whole or in part on the second anniversary of the date of grant. | |
| • | If an option holder dies or becomes disabled while an officer, director or member of the board, his options will be exercisable for one year after death or the disabling event. | |
| • | Both of our stock option plans provide that if the vesting of any stock option would cause the aggregate of all vested stock options owned by our advisor, our dealer manager, their affiliates and our officers and directors to exceed ten percent of the total outstanding shares of our common stock, then such vesting will be delayed until the first date on which the vesting will not cause us to exceed this ten percent limit. | |
| • | If options under more than one grant will vest on the same day, and the vesting of all of such options would cause us to exceed our ten percent limit, then such options will vest pro rata according to the total number of options scheduled to vest. | |
| • | If an option holder ceases to serve the company in his or her capacity for any reason except death or disability, his or her options will be exercisable only for three months after the last date of service to our company. | |
| • | No option granted under either stock option plan may be exercised after the tenth anniversary of the date of grant. | |
| • | The option price for the options can be paid in cash or the surrender of common stock. |
Notwithstanding any other provisions of either stock option plan to the contrary, we will not permit an option holder to exercise any option or options if the exercise thereof would jeopardize our status as a REIT under the federal income tax laws.
Approval of Plans: Each of the stock option plans provides that options granted under the plan are not excerciseable unless the plan is approved by a majority of our shareholders. Each plan was approved at our annual shareholder meeting on June 28, 2003.
Transferability: An option holder may not sell, pledge, assign or transfer any option in any manner otherwise than by will or the laws of descent or distribution.
Change of Control or Dissolution: If a transaction, such as a reorganization or merger in which our company is the surviving entity, or a combination, recapitalization, reclassification, stock split, stock dividend or stock consolidation, occurs causing the outstanding shares of our common stock to be increased, decreased or changed into, or exchanged for, a different number or kind of our shares or securities, then we will make an appropriate adjustment in the number and kind of shares that may be issued in connection with the options. We also will make a corresponding adjustment to the option exercise price with respect to options granted prior to any such change.
Upon the dissolution or liquidation of our company, or upon a reorganization, merger or consolidation of our company with one or more corporations as a result of which we are not the surviving corporation or upon sale of all or substantially all of our property, both stock option plans will terminate and any outstanding options will terminate and be forfeited. Notwithstanding the foregoing, our board of directors
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| • | the assumption by the successor corporation of the options already granted or the substitution by such corporation for such options of options covering the stock of the successor corporation, or a parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares and option prices; | |
| • | the continuation of either stock option plan by such successor corporation in which event such stock option plan and the options will continue in the manner and under the terms so provided; or | |
| • | the payment in cash or shares in lieu of and in complete satisfaction of such options. |
Taxation: All options granted under both stock option plans are intended to be “non-qualified options,” meaning that they are options not intended to qualify as incentive stock options under the federal income tax laws. For federal income tax purposes, an option recipient will not recognize ordinary income at the time an initial option or subsequent option is granted. The exercise of an option is a taxable event that will require an option holder to recognize, as ordinary income, the difference between the common stock’s fair market value and the option price.
We will be entitled to a federal income tax deduction on account of the exercise of an option equal to the ordinary income recognized by an option holder.
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EXECUTIVE COMPENSATION
Compensation of Executive Officers
Our company’s executive officers are all employees of our advisor and/or its affiliates.
Option/SAR Grants in Last Fiscal Year
| Individual Grants | ||||||||||||||||||||
| Alternative to (f) | ||||||||||||||||||||
| (b) | (c) | and (g): | ||||||||||||||||||
| Number of | % of Total | Grant Date Value | ||||||||||||||||||
| Securities | Options/SARs | |||||||||||||||||||
| Underlying | Granted to | (d) | (f) | |||||||||||||||||
| (a) | Options/SARs | Employees in | Exercise or Base | (e) | Grant Date Present | |||||||||||||||
| Name | Granted # | Fiscal Year | Price Per Share | Expiration Date | Value ($) | |||||||||||||||
| Anthony Thompson | 45,000 | (1)(2) | 50% | $ | 9.05 | 10/29/12 | $ | 43,989 | (3) | |||||||||||
| (1) | Options granted under our officer and employee stock option plan. |
| (2) | The options were granted prior to the effective date of our initial public offering, but were deemed effective as of October 29, 2002. |
| (3) | The fair value of options at date of grant was estimated using the Black-Scholes model using the following weighted average assumptions: a 3.53% risk-free interest rate based on the 10-year U.S. Treasury Bond, an expected life of 9.32 years and a volatility rate of 0%. |
Aggregated Option/SAR Exercises and Fiscal Year-End Option/ SAR Value Table
| (d) | (e) | |||||||||||||||
| Number of Securities | Value of Unexercised In- | |||||||||||||||
| (b) | (c) | Underlying Unexercised | the-Money Options/SARs | |||||||||||||
| (a) | Shares Acquired on | Value Realized | Options/SARs at FY-End | at FY-End ($) | ||||||||||||
| Name | Exercise ($) | ($) | Exercisable/Unexercisable | Exercisable/Unexercisable | ||||||||||||
| Anthony Thompson | -0- | -0- | 0/45,000 | 0/$ | 43,989 | |||||||||||
Compensation Committee Interlocks and Insider Participation
During 2002, the following directors served on our Compensation Committee: Messrs. Thompson, Wallace and Inlow. Mr. Thompson also served as Chief Executive Officer and President.
Board Compensation Committee Report on Executive Compensation
The Compensation Committee may recommend awards of stock options to officers and other employees under our officer and employee stock option plan.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Triple Net Properties, LLC, our advisor, is primarily responsible for managing our day-to-day business affairs and assets and carrying out the directives of our board of directors. Several of our company’s officers and directors serve in that same capacity for our advisor, and own approximately 40% of the equity interest in our advisor.
Before the commencement of our initial public offering, our advisor purchased 22,100 shares of our common stock at a price of $9.05 per share for approximately $200,005 in cash. Our advisor intends to retain such shares while serving as the advisor to our company.
Our advisor bears the expenses incurred in connection with supervising, monitoring and inspecting real property or other assets owned by our company (excluding proposed acquisitions) or otherwise relating to its duties under the Advisory Agreement. Such expenses include employing its personnel, rent, telephone, equipment and other administrative expenses. We reimburse our advisor for certain expenses incurred, including those related to proposed acquisitions and travel expenses. However, we will not reimburse our advisor for any operating expenses that, in any four consecutive fiscal quarters, exceed the greater of 2% of Average Invested Assets or 25% of net income for such year. If our advisor receives an incentive distribution, net income (for purposes of calculating operating expenses) excludes any gain from the sale of assets. Any amount exceeding the greater of 2% of Average Invested Assets or 25% of net income paid to our advisor during a fiscal quarter will be repaid to our company within 60 days after the end of the fiscal year. We bear our own expenses for functions not required to be performed by our advisor under the Advisory Agreement, which generally include capital raising and financing activities, corporate governance matters, and other activities not directly related to real estate properties and other assets. To date, no reimbursements have been made to our advisor pursuant to the provisions of the Advisory Agreement.
Our advisor is compensated by us for its services through a series of fees pursuant to the Advisory Agreement with our company. In addition to fee compensation, our advisor is reimbursed for organizational and offering costs and expenses it incurs on behalf of our company. For the nine months ended September 30, 2003, reimbursements of offering expenses of approximately $1,518,000 have been paid by us to our advisor from offering proceeds and no amounts are currently due our advisor. These reimbursements do not exceed the limitation disclosed in our initial public offering prospectus (2.5% of gross offering proceeds).
For the nine months ended September 30, 2003, approximately $2,400,000 has been earned by our advisor and affiliates of our advisor in connection with our acquisition of properties.
For the nine months ended September 30, 2003, we paid approximately $9,314,000 of selling commissions, due diligence and certain fees paid to NNN Capital Corp., the dealer manager of the offering, which is wholly owned by Anthony W. Thompson, the CEO of our company.
We pay Realty a property management fee equal to 5% of the gross income from our properties; however, a portion of this fee may be re-allowed to a third-party property manager. These fees are paid monthly. For the nine months ended September 30, 2003, we have incurred approximately $321,000 in property management fees for our properties payable to Realty.
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OUR ADVISOR
Our advisor, Triple Net Properties, LLC, is primarily responsible for managing our day-to-day business affairs and assets and carrying out our board of directors’ directives. Our advisor is a Virginia limited liability company that was formed in April 1998 to advise syndicated real estate investment trusts, real estate limited partnerships, limited liability companies and other entities with respect to the acquisition, management and disposition of real estate assets. As of September 30, 2003, our advisor advised more than 65 entities that invest or have invested in properties located in California, Colorado, Florida, Hawaii, Illinois, Kansas, Nebraska, Nevada, North Dakota, South Dakota, Tennessee and Texas. The advisor is affiliated with our company in that several of our officers and directors also serve as officers and directors of the advisor and own interests in the advisor. Our advisor has engaged Realty to provide a number of services in connection with our properties.
Before the commencement of our initial public offering, our advisor purchased 22,100 shares of our common stock at a price of $9.05 per share, which equals a total of $200,005. The advisor purchased those shares for cash and may not sell such shares for as long as it serves as the advisor to our company; however, the advisor may transfer all or a portion of such shares to affiliates.
Management
The following table sets forth information with respect to our advisor’s executive officers, senior management and key employees:
| Name | Position | |
| Anthony W. Thompson | President, Chief Executive Officer and Chairman, Board of Managers | |
| Talle A. Voorhies | Chief Operating Officer and Board of Managers | |
| Jack R. Maurer | Executive Vice President and Board of Managers | |
| Daniel R. Baker | Board of Managers | |
| Robert W. MacDonald | Board of Managers | |
| Richard T. Hutton, Jr. | Chief Investment Officer | |
| Andrea R. Biller | General Counsel | |
| Shannon Alter | Senior Vice President — Director of Operations | |
| David Bornstein | Managing Director of Tax — Principal Accounting Officer | |
| H. Michael Schwartz | Managing Director — Private Structured Offerings | |
| Alexander Vellandi | Associate General Counsel |
Anthony W. (“Tony”) Thompson. Mr. Thompson’s background is described under “Management of Our Company — The Directors and Executive Officers.”
Talle A. Voorhies. Ms. Voorhies’ background is described under “Management of Our Company — The Directors and Executive Officers.”
Jack R. Maurer. Mr. Maurer’s background is described under “Management of Our Company — The Directors and Executive Officers.”
Daniel R. (“Dan”) Baker is President and sole stockholder of Sugar Oak Corporation, a 23-employee firm which provides asset management, construction management, property management, real estate development, and through its subsidiary Sugar Oak Realty, commercial real estate brokerage, leasing, and consulting services. Mr. Baker is also Director, President and CEO of Union Land and Management Company and Director and Vice President of Coastal American Corporation. As principal, Mr. Baker has developed office buildings, retail centers, and residential subdivisions with a total market value in excess of $100 million. In addition, Mr. Baker is a Founding Director of the Bank of the Potomac and a Director of
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Robert W. MacDonald has had a 35-year career in the financial services industry, beginning as a life insurance agent in 1965 for New England Mutual Life. Mr. MacDonald built a successful sales agency for Jefferson-Pilot, served as head of marketing support for State Mutual of America, and president and CEO of ITT Life. Mr. MacDonald later formed his own life insurance company, LifeUSA which was acquired by Allianz AG in 1999 in a transaction valued at $540 million, Mr. MacDonald became the CEO and led the merger of the two companies. Mr. MacDonald has been profiled in many publications including The Wall Street Journal, USAToday, Forbes, Business Week, American Banker and Institutional Investor and was the first person to be twice recognized as “Entrepreneur of the Year” in Minnesota.
Richard T. Hutton, Jr. Mr. Hutton’s background is described under “Management of Our Company — The Directors and Executive Officers.”
Richard G. Burnett has served as our advisor’s Vice President of Asset Management since December 1999 to November 2001, and since November 2001 has served as the Executive Vice President-Chief Operating Officer of Triple Net Properties Realty, Inc., our advisor’s affiliated real estate brokerage and management company. Mr. Burnett has 23 years of real estate experience. His prior positions include Manager at PM Real Estate Group from December 1998 to December 1999; Western Region Executive Director at USAA Realty Company from 1996 to 1998, where he was responsible for operations and leasing for that company’s commercial real estate assets; and Vice President, Corporate Properties Division, at Great Western Bank, where he was in charge of acquiring branch bank sites from 1992 to 1996. Mr. Burnett received a BSBA from the University of Phoenix, possesses both a California and an Arizona Real Estate Broker’s license, holds four real estate professional designations, and served as the 1998 President of the Institute of Real Estate Management’s (IREM) Greater Los Angeles Chapter
Andrea R. Biller has served as our advisor’s General Counsel since March 2003. Ms. Biller oversees all legal functions for our advisor and coordinates with outside counsel. Ms. Biller practiced as a private attorney specializing in securities and corporate law from 1990 to 1995 and 2000 to 2002. She served as Special Counsel at the Securities and Exchange Commission from 1995 to 2000. Ms. Biller earned a JD from George Mason University School of Law in 1990, where she graduated 1st in her class “With Distinction.” She has a BA in Psychology from Washington University and an MA in Psychology from Glassboro State University. Ms. Biller is a member of the California, Virginia and District of Columbia bar associations.
Shannon Alter has served as our advisor’s Senior Vice President — Director of Operations since June 2002. Ms. Alter oversees our advisors portfolio, managers the property management staff and is in charge of third party property managers. Ms. Alter’s experience includes working as Manager of Property Management for The Vons Companies, Inc. A Certified Property Manager since 1990, Ms. Alter also was Director of Property Management for Diversified Shopping Centers. As a national instructor for IREM, Ms. Alter teaches IREM courses on a national and local basis and was named as the Orange County chapter’s 1997 CPM of the Year. Ms. Alter is widely published, contributing the chapter “Retailing” to ICSC’s recent books Shopping Center Management and Shopping Center Leasing and was awarded the Journal of Property Management Article of the Year award for 1998 and 1999. She holds a BA from the University of Southern California.
David Bornstein has served as our advisor’s Managing Director of Tax — Principal Accounting Officer since August 2003 and as Chief Accounting Officer from April 2002 to August 2003. Prior to joining Triple Net, Mr. Bornstein served in financial and accounting management positions for various developers and operators of commercial, industrial and residential properties. He has nine years experience at the CPA firm of Kenneth Leventhal & Company. Mr. Bornstein is a Certified Public Accountant and a member of the American Institute of CPAs and California Society of CPAs. He received a BA in Economics and an MBA from UCLA.
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H. Michael Schwartz has served as our advisor’s Managing Director — Private Structured Offerings since May 2002 and has over twelve years of securities and corporate financial management experience. Mr. Schwartz was the Chief Financial Officer of Futurist Entertainment, Inc., a diversified entertainment company, from 2000 to 2002. He also was President and Chief Financial Officer of Spider Securities, an online NASD registered broker/ dealer that developed one of the first online distribution outlets for fixed and variable annuity products, from 1995 to 2000. Mr. Schwartz also held the position of Vice President and Chief Financial Officer of Western Capital Financial, which distributes tax-advantaged investment products to members of association and affinity market groups, from 1990 to 1995. He is NASD Series 7, 24, 27 and 63 licensed. He graduated from the University of Southern California School of Business with a BS in Business Administration and a specialized emphasis in Finance.
Alexander Vellandi has served as our Associate General Counsel since August 2003. Mr. Vellandi oversees all real estate related legal transactions and coordinating with outside counsel. Mr. Vellandi practiced as a private attorney from August 1999 to August 2003, specializing in real estate related transactions. He received his BA from the University of California at Irvine and obtained his JD from UCLA School of Law in May 1999. He is a California licensed real estate broker and member of the State Bar of California, American Bar Association and Orange County Bar Association.
The Advisory Agreement
The advisory agreement was initially approved by the board of directors on July 22, 2002 for a one-year period effective that date and is subject to successive one-year renewals. On July 28, 2003, the board of directors approved the renewal of the advisory agreement for a one-year period effective July 22, 2003.
Under the terms of the advisory agreement, our advisor generally:
| • | has responsibility for day-to-day operations of our company; | |
| • | administers our bookkeeping and accounting functions; | |
| • | serves as our consultant in connection with policy decisions to be made by our board of directors; | |
| • | manages or causes to be managed our properties and other assets; and | |
| • | renders other services as our board of directors deems appropriate. |
Our advisor is subject to the supervision of our board of directors and, except as expressly provided in the advisory agreement, has only such additional functions as are delegated to it. In addition, our advisor will have a fiduciary duty to our company’s shareholders. A copy of the advisory agreement has been filed as an exhibit to the registration statement of which this prospectus is a part and you may obtain a copy from us.
Expenses. Our advisor bears the expenses incurred by it in connection with performance of its duties under the advisory agreement, including employment expenses of its personnel, rent, telephone and equipment expenses and miscellaneous administrative expenses incurred in supervising, monitoring and inspecting real property or other assets owned by us, excluding proposed acquisitions, or relating to its performance under the advisory agreement. We will reimburse our advisor for some expenses it incurs, including expenses related to proposed acquisitions and travel expenses. We will not reimburse our advisor at the end of any fiscal quarter for operating expenses that, in the four consecutive fiscal quarters then ended exceed the greater of 2% of average invested assets or 25% of net income for such year. If our advisor receives an incentive distribution, net income, for purposes of calculating operating expenses, will exclude any gain from the sale of our assets. Any amount exceeding the greater of 2% of average invested assets or 25% of net income paid to our advisor during a fiscal quarter will be repaid to us within 60 days after the end of the fiscal year. We bear our own expenses for functions not required to be performed by our advisor under the advisory agreement, which generally include capital raising and financing activities, corporate governance matters and other activities not directly related to our properties and assets.
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Term. The advisory agreement was entered into by our company on July 22, 2002, concurrent with the commencement of our initial public offering. The term of the advisory agreement was one year subject to successive one-year renewals upon the mutual consent of the parties. In determining whether to renew the advisory agreement, our board of directors reevaluates the performance of our advisor. The criteria used in such evaluation will be reflected in the minutes of our board of director’s meetings. On July 28, 2003, after our board of directors reviewed and evaluated the performance of our advisor and with the approval of a majority of independent directors, the board of directors approved a one-year renewal of the advisory agreement effective July 22, 2003.
The advisory agreement may be terminated by our advisor or a majority of the independent directors upon 60 days’ prior written notice without cause or penalty, in which case we will not be required to pay any termination fee.
If the advisory agreement is terminated, the advisory agreement requires our advisor to cooperate with us and take all reasonable steps requested to assist the directors in making an orderly transition of all advisory functions. If the advisory agreement is terminated, our board of directors, including a majority of the independent directors, will determine that any successor advisor possesses sufficient qualifications to:
| • | perform the advisory function for our company; and | |
| • | justify the compensation provided for in the contract with our company. |
If the advisory agreement is terminated as a result of the merger of our advisor into our company in connection with the listing of our shares on a national exchange or market, our advisor’s incentive limited partnership interest will be redeemed for cash, or if agreed by both parties, shares of common stock of our company. Our cost to redeem the incentive units will be the amount that would be payable to the advisor pursuant to the “incentive distribution” and “incentive distribution upon dispositions” described under the heading “Compensation Table” if we liquidated all of our assets for their fair market value.
Our Right of First Opportunity. The advisory agreement gives us the first opportunity to purchase any income-producing governmental properties located in our focus states placed under contract by our advisor, provided that:
| • | we have funds available to make the purchase; | |
| • | our acquisition committee or board of directors votes to make the purchase within fourteen days of being offered such property by our advisor; and | |
| • | the property meets our acquisition criteria. |
Possible Merger. Many REITs that are listed on a national stock exchange or included for quotation on a national market system are considered “self-administered” because the employees of the REIT perform all significant management functions. In contrast, REITs that are not self-administered, like our company, typically engage a third party to perform management functions on its behalf. Accordingly, if we apply to have our shares listed for trading on a national stock exchange or included for quotation on a national market system, it may be in our best interest to become self-administered. If the independent directors determine that we should become self-administered, the advisory agreement contemplates the merger of our advisor and our company and the termination of the advisory agreement, with the consideration in such merger and for such termination to be determined by our company and our advisor. In the event our advisor is merged into our company, many of our advisor’s key employees will become employees of our company. While we would then be relieved of paying fees to our advisor under the advisory agreement, we would be required to pay the salaries of our advisor’s employees, the rent and “overhead” associated with our advisor’s office and related costs and expenses formerly absorbed by our advisor under the advisory agreement.
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Indemnification. We have agreed to indemnify our advisor, its managers, members and employees and pay or reimburse reasonable expenses in advance of final disposition of a proceeding with respect to acts or omissions of our advisor, provided that:
| • | the indemnified person determined, in good faith, that the course of conduct which caused a loss or liability was in our best interest; | |
| • | the indemnified person was acting on behalf of, or performing services for, our company; | |
| • | such liability or loss was not the result of negligence or misconduct; and | |
| • | such indemnification or agreement to hold harmless is recoverable only out of our net assets and not from our shareholders. |
Other Services. In addition to the services described above to be provided by our advisor and its affiliates, affiliates of our advisor may provide other property-level services to our company and may receive compensation for such services, including leasing, development, construction management, loan origination and servicing, property tax reduction and risk managing fees. However, under no circumstances will such compensation exceed an amount that would be paid to non-affiliated third parties for similar services. A majority of the independent directors must approve all compensation for such other services paid to our advisor or any of its affiliates.
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COMPENSATION TABLE
The Compensation Table below outlines all the compensation that we will pay to our advisor, the dealer manager and the broker-dealers participating in this offering during the stages in the life of our company and other payments that are subordinated to achieving the returns listed in the table. For ease of presentation and understanding, we have used defined terms in the table. Those terms have the following meanings:
Average Invested Assets means, for any period, the average of the aggregate book value of our assets that are invested, directly or indirectly, in equity interests and in loans secured by real estate, before reserves for depreciation or bad debts or other similar non-cash reserves, computed by taking the average of the values at the end of each month during such period.
Invested Capital means the product of (1) the sum of (A) the total number of outstanding shares of our common stock and (B) the number of partnership units issued by our operating partnership to limited partners, other than our advisor, and (2) a dollar amount that initially will be $10.00 and that will be adjusted appropriately to reflect stock dividends, stock splits, or other changes in the capital structure of our company or our operating partnership, and, at our discretion, changes in the average price per share paid for our common stock and partnership units in our operating partnership after this offering. When a property is sold, Invested Capital will be reduced by the lesser of (1) the net sale proceeds available for distribution from such sale or (2) the sum of (A) the portion of Invested Capital that initially was allocated to that property and (B) any remaining shortfall in the recovery of our Invested Capital with respect to prior sales of properties.
Competitive Real Estate Commission means the real estate or brokerage commission paid for the purchase or sale of a property which is reasonable, customary and competitive in light of the size, type and location of such property.
Our advisor and its affiliates will not be compensated for any services other than those which have been fully disclosed in this Compensation Table. In those instances in which there are maximum amounts or ceilings on the compensation which may be received by our advisor or the dealer manager for services rendered, our advisor and the dealer manager may not recover any amounts in excess of such ceilings or maximum amounts for those services by reclassifying such services under a different compensation or fee category. Except as expressly provided in the table, we shall not pay, directly or indirectly, a commission or fee to our advisor or its affiliates in connection with the reinvestment of the proceeds of any resale, exchange, financing or refinancing of a company property.
Offering Stage
| Type of Compensation | Method of Compensation | Estimated Amount | ||
| Selling Commissions | The dealer manager will receive 7.0% of the gross proceeds of this offering, or $0.70 for each share sold. The dealer manager may reallow a portion of the Selling Commissions to broker-dealers for each share they sell. Shares purchased under the dividend reinvestment plan will be purchased without Selling Commissions. | Actual amount depends upon the number of shares sold. The dealer manager will receive a total of $18,900,000 if the maximum offering is sold. |
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| Type of Compensation | Method of Compensation | Estimated Amount | ||
| Marketing Support Due Diligence Reimbursement Fee | We will pay the dealer manager an amount up to 2.5% of the gross proceeds of this offering to pay expenses associated with marketing fees, wholesaling fees, expense reimbursements and volume discounts and to generally reimburse the dealer manager for due diligence expenses. We will not require the dealer manager to account for spending of amounts comprising this fee. The dealer manager may reallow up to 1% of this fee to broker-dealers participating in this offering. We will not pay this fee with respect to shares purchased under the dividend reinvestment plan. | Actual amount depends upon the number of shares sold. A total of $6,750,000 will be paid if the maximum offering is sold. | ||
| Other Organizational and Offering Expenses | Our advisor may advance, and we will reimburse it for, organization and offering expenses incurred on our behalf in connection with this offering, including legal and accounting fees, filing fees, printing costs and selling expenses. We estimate such expenses will be approximately 2.5% of the net proceeds of this offering. | Actual amounts will be based on actual funds advanced. We estimate that a total of $6,750,000 will be reimbursed if the maximum offering is sold. |
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Acquisition Stage
| Type of Compensation | Method of Compensation | Estimated Amount | ||
| Real Estate Commission or Acquisition Fee | In property acquisitions in which our advisor or an affiliate of our advisor serves as our real estate broker, our advisor or such affiliate may receive from the seller or our company in such acquisitions a real estate commission or acquisition fee of up to 3% of the purchase price of the property. Since any seller will attempt to set the selling price at an amount to cover the cost of real estate commissions or acquisition fees, we, as purchaser, may be deemed to be indirectly paying such cost in the form of a higher price. | Actual amounts depend on the purchase price of properties acquired. | ||
| Acquisition Expenses | Our advisor may advance, and we will reimburse it for costs and expenses of selecting, evaluating and acquiring properties, whether or not actually acquired, including surveys, appraisals, title insurance and escrow fees, legal and accounting fees and expenses, architectural and engineering reports, environmental and asbestos audits, travel and communication expenses, non-refundable option payments on properties not acquired and other related expenses payable to our advisor and its affiliates. Interest shall be paid on funds advanced at our advisor’s actual cost of funds or as otherwise established by our board of directors. | Actual amounts to be reimbursed could be up to 0.5% of gross offering proceeds; however, the amount that we will reimburse our advisor for Acquisition Expenses when added to Real Estate Commissions and Acquisition Fees could be up to 6% of the contract price of the property. If the maximum offering is sold, acquisition expenses are estimated to be $1,350,000. | ||
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Operating Stage
| Type of Compensation | Method of Compensation | Estimated Amount | ||
| Property Management Fee | We will pay our advisor’s affiliated property management company a Property Management Fee equal to 5% of the gross income from the properties. This fee will be paid monthly. | Actual amounts to be paid depend upon the gross income of the properties and, therefore, cannot be determined at the present time. | ||
| Compensation for Services | We will pay our advisor for other property-level services including leasing fees, construction management fees, loan origination and servicing fees, property tax reduction fees and risk management fees. Such compensation will not exceed the amount which would be paid to unaffiliated third parties providing such services. All such compensation must be approved by a majority of our independent directors. | Actual amounts to be received depend upon the services provided and, therefore, cannot be determined at the present time. | ||
| Reimbursable Expenses | We will reimburse our advisor for: • the cost to our advisor or its affiliates of goods and services used for and by us and obtained from unaffiliated parties (e.g., maintenance and repair services, marketing, advertising and printing services, etc.) and • administrative services related to such goods and services limited to ministerial services such as typing, record keeping, preparing and disseminating company reports, preparing and maintaining records regarding shareholders, record keeping and administration of our dividend reinvestment program, preparing and disseminating responses to shareholder inquiries and other communications with shareholders and any other record keeping required. | Actual amounts are dependent upon results of operations. | ||
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Liquidation Stage
| Type of Compensation | Method of Compensation | Estimated Amount | ||
| Property Disposition Fee | We will pay our advisor, or one of its affiliates, a Property Disposition Fee out of net profits upon the sale of each of the properties, in an amount equal to the lesser of 3% of the property’s contract sales price or 50% of a customary Competitive Real Estate Commission given the circumstances surrounding the sale. The amount paid, when added to the sums paid to unaffiliated parties, shall not exceed the lesser of the customary Competitive Real Estate Commission or an amount equal to 6% of the contracted for sales price. Payment of such fees shall be made only if our advisor provides a substantial amount of services in connection with the sale of the property. We will pay the Property Disposition Fee on all dispositions of properties, whether made in the ordinary course of business, upon liquidation or otherwise. | Actual amounts to be received depend upon the sale price of properties and, therefore, cannot be determined at the present time. |
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Subordinated Payments
| Type of Compensation | Method of Compensation | Estimated Amount | ||
| Incentive Distribution | Our operating partnership will pay an incentive distribution to our advisor equal to 15% of our operating partnership’s operating cash flow after our company has received, and paid to our shareholders, the sum of: • an 8% cumulative, non- compounded return on our Invested Capital, and • any remaining shortfall in the recovery of our Invested Capital with respect to prior sales of properties. If there is a shortfall in that 8% return at the end of any calendar year and our advisor previously has received incentive distributions, other than those that have previously been repaid, our advisor will be required to repay to our operating partnership an amount of those distributions sufficient to cause the cumulative 8% return threshold to be met. In no event will the cumulative amount repaid by our advisor to our operating partnership exceed the cumulative amount of incentive distributions that our advisor previously has received. | Actual amounts to be received depend upon results of operations and the actual amounts that we invest in properties and, therefore, cannot be determined at the present time. |
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| Type of Compensation | Method of Compensation | Estimated Amount | ||
| Incentive Distribution Upon Dispositions | Our operating partnership will pay an incentive distribution upon the sale of a property equal to 15% of the net proceeds from the sale after our company has received, and paid to our shareholders, the sum of • our Invested Capital that initially was allocated to that property, • any remaining shortfall in the recovery of our Invested Capital with respect to prior sales of properties, and • any remaining shortfall in the 8% return on Invested Capital. If we and, in turn, our shareholders have not received a return of our Invested Capital or if there is a shortfall in the 8% return after the sale of the last property and our advisor previously has received incentive distributions, other than those that have previously been repaid, our advisor will be required to repay to our operating partnership an amount of those distributions sufficient to cause us and, in turn, our shareholders to receive a full return of the Invested Capital and a full distribution of the 8% return. In no event will the cumulative amount repaid by our advisor to our operating partnership exceed the cumulative amount of incentive distributions that our advisor previously has received. | Actual amounts to be received depend upon the sale price of properties and, therefore, cannot be determined at the present time. |
Additional Payments for Additional Services
As specified in our advisory agreement, in extraordinary circumstances fully justified to the official or agency administering the state securities laws, our advisor and its affiliates may provide other goods and services to our company if all of the following criteria are met:
| • | the goods or services must be necessary to our prudent operation; and | |
| • | the compensation, price or fee must be equal to the lesser of 90% of the compensation, price or fee we would be required to pay to independent parties rendering comparable services or selling or leasing comparable goods on competitive terms in the same geographic location, or 90% of the |
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| compensation, price or fee charged by our advisor or its affiliates for rendering comparable services or selling or leasing comparable goods on competitive terms. |
Extraordinary circumstances shall be presumed only when there is an emergency situation requiring immediate action by our advisor or its affiliates and the goods or services are not immediately available from unaffiliated parties. Services which may be performed in such extraordinary circumstances include emergency maintenance of our properties, janitorial and other related services due to strikes or lock-outs, emergency tenant evictions and repair services which require immediate action, as well as operating and re-leasing properties with respect to which the leases are in default or have been terminated.
Limitations on Reimbursements
No reimbursement to our advisor or its affiliates is permitted for items such as rent, depreciation, utilities, capital equipment, salaries, fringe benefits and other administrative items of any controlling persons of our advisor, its affiliates or any other supervisory personnel except in those instances in which our board of directors believes it to be in our best interest that our advisor or its affiliates operate or otherwise deal with, for an interim period, a property with respect to which the lease is in default. Permitted reimbursements, except as set forth above, include salaries and related salary expenses for non-supervisory services which could be performed directly for our company by independent parties such as legal, accounting, transfer agent, data processing and duplication. Controlling persons include, but are not limited to, any person, irrespective of his or her title, who performs functions for our advisor similar to those of chairman or member of the board of directors, president or executive vice president, or those entities or individuals holding 5% or more of the stock of our advisor or a person having the power to direct or cause the direction of our advisor, whether through ownership of voting securities, by contract or otherwise. Despite the foregoing, and subject to the approval of our board of directors, including a majority of the independent directors, we may reimburse our advisor for expenses related to the activities of controlling persons undertaken in capacities other than those which cause them to be controlling persons. Our advisor has informed us that it believes that its employees and the employees of its affiliates and controlling persons who perform services for which reimbursement is allowed as described above, have the experience and educational background, in their respective fields of expertise, appropriate for the performance of such services.
Limitation on Acquisition-Related Compensation
The total of all real estate commissions and acquisition fees and expenses paid to our advisor or affiliates of our advisor in connection with our purchase of a property may not exceed an amount equal to 6% of the contract purchase price for the property.
Limitation on Operating Expenses
In the absence of a satisfactory showing to the contrary, our total operating expenses will be deemed to be excessive if, in any fiscal year, they exceed the greater of:
| • | 2% of our Average Invested Assets or | |
| • | 25% of our net income for such year. |
The independent directors have a fiduciary responsibility to limit such expenses to amounts that do not exceed these limitations.
Within 60 days after the end of any fiscal quarter for which our total operating expenses for the 12 months then ended exceeded the greater of 2% of our Average Invested Assets or 25% of net income, we will send to our shareholders a written disclosure of such fact.
Our advisor will reimburse our company at the end of the calendar year the amount by which the aggregate annual expenses paid or incurred by our company exceed the limitations provided above.
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Total operating expenses include aggregate expenses of every character paid or incurred by us as determined under generally accepted accounting principles, including the fees we pay to our advisor, such as the Incentive Distribution referred to in the Compensation Table. However, total operating expenses do not include:
| • | the expenses we incur in raising capital such as organizational and offering expenses, legal, audit, accounting, registration and other fees, printing and other expenses, and tax incurring in connection with the issuance, distribution, transfer and registration of our shares; | |
| • | interest payment; | |
| • | taxes; | |
| • | non-cash expenditures such as depreciation, amortization and bad debt reserves; and | |
| • | acquisition and disposition fees, acquisition expenses, real estate commissions on resale of properties and other expenses connected with the acquisition, disposition and ownership of real estate interests, mortgage loans or other property, including the Incentive Distribution Upon Disposition referred to in the Compensation Table. |
Additional Important Information on Compensation to Our Affiliates
Our advisor and its affiliates will be involved in determining the types and structure of the transactions in which we participate. Our advisor may benefit from our acquiring properties, retaining ownership of our properties or leveraging our properties, while it may be in your best interest as a shareholder for us to buy, sell or hold such property on an unleveraged basis. Furthermore, our advisor’s receipt and retention of many of the fees it receives and reimbursements depends upon our company making investments in properties. Therefore, the interest of our advisor in receiving such fees may conflict with the interest of our shareholders to earn income on their investment in shares and may result in our entering into transactions that do not solely reflect your interest as a shareholder. A majority of our independent directors must approve all transactions between our company and our advisor or its affiliates, including property acquisitions and dispositions. Property acquisitions and dispositions not involving our advisor or its affiliates do not require the approval of a majority of our independent directors, although a majority of our independent directors must approve the consideration paid for all property acquisitions.
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PRIOR PERFORMANCE SUMMARY
The information presented in this section represents the historical experience of real estate programs managed by our advisor through June 30, 2003. Investors in our company should not assume that they will experience returns, if any, comparable to those experienced by investors in such prior real estate programs.
As of June 30, 2003, our advisor served as advisor or sponsor of a total of approximately 60 real estate investment entities, consisting of 2 public programs and 58 non-public programs.
In the tables below, ownership interests of 100% are held in fee simple; ownership interests of less than 100% are held as undivided tenant in common interests.
Public Programs
Triple Net Properties, LLC, our advisor, has sponsored one prior public offering of our shares of common stock and a public offering of shares of common stock of T REIT, Inc., a public real estate investment trust.
| G REIT, Inc. |
Our initial public offering began on July 22, 2002 and will be terminated on the date this offering is declared effective by the SEC. As of June 30, 2003, we raised aggregate gross offering proceeds of $71,777,833 from the issuance of 7,251,864 shares of our common stock to 3,232 investors in our initial public offering. Of these shares, 66,532 shares totaling approximately $620,510 have been issued under our dividend reinvestment plan through June 30, 2003. After payment of $7,799,892 in selling commission and organization and offering expenses, we raised net offering proceeds available for investment in properties of $63,977,941 as of the same date. As of June 30, 2003, we had purchased interests in 7 properties amounting to an investment of approximately $96 million (purchase price, including debt financing). See the “Description of Real Estate Investments” section of this prospectus for a description of the properties we have purchased to date.
| T REIT, Inc. |
T REIT, Inc., a Virginia corporation, was formed in December, 1998 and is qualified as a REIT for federal income tax purposes. T REIT was formed to acquire interests in office, industrial and retail properties. Triple Net Properties, LLC, our advisor, has served as the advisor of T REIT since February 2000. The public offering of T REIT’s common stock commenced on February 22, 2000. As of May 31, 2002, when the offering was terminated, T REIT had issued approximately 4,720,176 shares of common stock and raised more than $46 million in aggregate gross proceeds. As of June 30, 2003, T REIT had approximately 2,060 investors and had purchased interests in 15 real estate properties amounting to an investment of approximately $104 million (purchase price, including debt financing). As of June 30, 2003, five of these properties had been sold. Of the 15 properties purchased by T REIT, Inc., three (20%) were in Nevada, three (20%) were in California, seven (46%) were in Texas and one was in North Dakota (7%). The properties, which are described below, are all commercial properties consisting of 6 shopping centers and 9 office buildings, or 42% shopping centers and 58% office buildings when weighted by purchase price. Weighted by purchase price, 3.9% of the property interests acquired by T REIT had tenants associated with governmental entities, the primary focus of our company.
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As of June 30, 2003, T REIT owned interests in the following properties:
| Ownership | Purchase | Mortgage Debt | ||||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Purchase Price | at Purchase | GLA (Sq Ft) | Location | |||||||||||||||||||||
| Thousand Oaks Center | 100.0% | shopping center | 12/06/00 | 13,000,000 | 10,837,500 | 162,864 | San Antonio, TX | |||||||||||||||||||||
| Pahrump Valley Junction Shopping Center | 100.0% | shopping center | 05/11/01 | 17,150,000 | 12,435,000 | 105,721 | Pahrump, NV | |||||||||||||||||||||
| Trademark Building | 40.0% | industrial building | 09/04/01 | 2,852,000 | (1) | 1,080,000 | (2) | 75,257 | Reno, NV | |||||||||||||||||||
| County Center Building | 16.0% | office/distribution building | 01/11/02 | 1,014,000 | (1) | 514,000 | (2) | 77,582 | Temecula, CA | |||||||||||||||||||
| City Center West “A” Building | 89.1% | office building | 03/15/02 | 19,313,000 | (1) | 11,586,250 | (2) | 105,964 | Las Vegas, NV | |||||||||||||||||||
| Pacific Corporate Park | 22.8% | 6-building office park & single story bldg | 03/25/02 | 14,237,000 | (1) | 9,300,000 | (2) | 167,486 | Lake Forest, CA | |||||||||||||||||||
| Titan Building and Titan Plaza | 48.5% | 6-story office building | 04/17/02 | 4,446,000 | (1) | 2,910,000 | (2) | 103,762 | San Antonio, TX | |||||||||||||||||||
| University Heights Business Park | 100.0% | 2-building flex/service center | 08/22/02 | 6,750,000 | 4,400,000 | 68,400 | San Antonio, TX | |||||||||||||||||||||
| Saddleback Financial Center | 25.0% | four-story office building | 09/25/02 | 2,687,500 | (1) | 1,912,500 | (2) | 72,711 | Laguna Hills, CA | |||||||||||||||||||
| Congress Center | 23.6% | 16-story office building | 01/08/03 | 13,906,200 | (1) | 4,110,606 | (2) | 525,000 | Chicago, IL | |||||||||||||||||||
| Gateway Mall | 100.0% | regional mall | 01/29/03 | 9,000,000 | 5,000,000 | 332,210 | Bismarck, ND | |||||||||||||||||||||
| (1) | Represents T REIT’s proportionate share of the purchase price. |
| (2) | Represents T REIT’s proportionate share of the mortgage debt at the time of purchase. |
As of June 30, 2003, T REIT had sold its interests in the following properties:
| Taxable Gain | ||||||||||||||||
| Date of | Ownership | (Loss) on | ||||||||||||||
| Property Name | Purchase | Date of Sale | Interest | Sale | ||||||||||||
| Christie Street Office Building(a) | 09/26/00 | 11/13/01 | 100.0 | % | $ | (177,949 | ) | |||||||||
| Seguin Corners Shopping Center | 11/22/00 | 08/12/02 | 26.0 | % | 1,191,661 | |||||||||||
| Plaza del Rey Shopping Center | 11/17/00 | 09/23/02 | 16.5 | % | 669,911 | |||||||||||
| Titan Land | 04/17/02 | 10/17/02 | 100.0 | % | 34,753 | |||||||||||
| Northstar Crossing Shopping Center | 10/26/00 | 01/13/03 | 100.0 | % | 23,617 | |||||||||||
| (a) | As part of the sale of Christie Street Office Building, T REIT guaranteed lease payments in the amount of $20,000 per month for a period of five years under a Master Lease Agreement obligating the company to make lease payments to the lessor in the event the sub-lessee failed to make the lease payments. Furthermore, the company would be obligated to pay a pro rata share of lease commissions and tenant improvements in the event the premises are re-leased prior to November 13, 2006. The former tenant’s lease expired on August 31, 2002 and T REIT assumed its obligations under the Master Lease Agreement beginning with rent for the month of October 2002. The advisor has agreed to indemnify T REIT against any current and future losses under the Master Lease Agreement with the indemnification evidenced by an indemnity agreement dated November 13, 2001. |
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Certain financial information for T REIT is summarized below:
| 01/01/03 – 06/30/03 | 2002 | 2001 | 2000 | |||||||||||||
| Gross Revenues | $ | 4,261,509 | $ | 6,799,384 | $ | 4,142,782 | $ | 298,621 | ||||||||
| Net Income (Loss) | $ | 1,692,671 | $ | 2,293,758 | $ | (463,632 | ) | $ | (100,783 | ) | ||||||
Private Programs
Beginning in April, 1998 through June 30, 2003, our advisor has advised a private real estate investment trust, Western Real Estate Investment Trust, Inc., which has purchased interests in 7 properties, 2 hedge funds, 51 private placement limited liability companies, 1 private placement Delaware statutory trust and 3 private placement limited liability notes programs which have raised more than $350 million from approximately 2,160 investors in properties with an aggregate price of more than $563 million. Of the 68 properties purchased for private programs, 21 (30.9%) were in California, 10 (14.7%) were in Colorado, 12 (17.6%) were in Nevada, 11 (16.2%) were in Texas, 5 (7.4%) were in Kansas, 2 (2.9%) were in South Dakota, 2 (2.9%) were in Hawaii, 2 (2.9%) were in Florida, 1 (1.5%) was in Illinois, 1 (1.5%) was in Washington and 1 (1.5%) was in Tennessee. The 68 properties are all commercial properties consisting of approximately 42% shopping centers and 58% office buildings weighted by purchase price.
Each of the prior advisor programs and the properties acquired and sold through June 30, 2003 are described below.
| Western Real Estate Investment Trust, Inc. |
Western Real Estate Investment Trust, Inc., a Virginia corporation, was formed by our advisor in July, 1998 and is qualified as a REIT for federal income tax purposes. In April, 2000, Western Real Estate Investment Trust, Inc. closed a best efforts private placement of its common stock. Western Real Estate Investment Trust, Inc. was formed to acquire office and industrial properties and retail shopping centers with the proceeds of its private placement. Our advisor manages the properties owned by Western Real Estate Investment Trust, Inc. and serves as the general partner of WREIT Operating Partnership, LP, a wholly owned subsidiary.
As of June 30, 2003, Western Real Estate Investment Trust owned interests in the following properties:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Kress Energy Center | 100 | % | office building | 07/13/98 | $ | 1,850,000 | $ | 925,000 | 53,895 | Wichita, KS | ||||||||||||||||||
| Century Plaza East Shopping Center | 100 | % | shopping center | 11/03/98 | 9,100,000 | 6,937,000 | 121,192 | East Lancaster, CA | ||||||||||||||||||||
| Brookings Mall | 68.5 | % | shopping center | 05/01/00 | 4,150,000 | 962,330 | 142,826 | Brookings, SD | ||||||||||||||||||||
As of June 30, 2003, Western Real Estate Investment Trust had sold its interests in the following properties:
| Date of | Ownership | Taxable Gain | ||||||||||||||
| Property Name | Purchase | Date of Sale | Interest | (Loss) on Sale | ||||||||||||
| Phelan Village Shopping Center | 10/16/98 | 12/20/02 | 100 | % | $ | 90,815 | ||||||||||
| Bryant Ranch Shopping Center | 12/01/98 | 09/05/02 | 100 | % | 988,804 | |||||||||||
| Huron Mall Shopping Center | 03/31/99 | 04/14/00 | 100 | % | 1,559,293 | |||||||||||
| Crossroads Shopping Center | 07/29/99 | 08/29/00 | 100 | % | 571,862 | |||||||||||
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Certain financial information for Western Real Estate Investment Trust is summarized below:
| 01/01/03 – 06/30/03 | 2002 | 2001 | 2000 | 1999 | 1998 | |||||||||||||||||||
| Gross Revenues | $ | 962,955 | $ | 2,656,537 | $ | 4,260,466 | $ | 5,273,301 | $ | 4,726,712 | $ | 594,158 | ||||||||||||
| Net Income (Loss) | $ | (2,079 | ) | $ | 139,409 | $ | 454,121 | $ | 2,092,103 | $ | (191,892 | ) | $ | 49,863 | ||||||||||
| Other Private Placements |
Our advisor is the manager for each of the limited liability companies listed below.
Telluride Barstow, LLC: The offering period began June 1, 1998 and ended December 16, 1998. The offering raised $1,620,000,or 100% of the offering amount, from 14 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Barstow Road Shopping Center | 87 | % | shopping center | 05/01/98 | $ | 4,742,207 | $ | 3,450,000 | 77,950 | Barstow, CA | ||||||||||||||||||
In February 2003, our advisor sold the Barstow Road Shopping Center with a resultant net loss on sale of $265,043.
Truckee River Office Tower, LLC: The offering period began August 21, 2998 and ended July 15, 1999. The offering raised $5,550,000, or 100% of the offering amount, from 68 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Truckee River Office Tower | 100 | % | 15-story office building | 12/01/98 | $ | 16,030,000 | $ | 12,000,000 | 138,729 | Reno, NV | ||||||||||||||||||
Yerington Shopping Center, LLC: The offering period for began December 15, 1998 and ended August 31, 1999. The offering raised $1,625,000, or 100% of the offering amount, from 11 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Yerington Plaza Shopping Center | 100 | % | shopping center | 03/08/99 | $ | 4,422,000 | $ | 3,316,200 | 55,531 | Yerington, NV | ||||||||||||||||||
NNN Fund VIII, LLC: The offering period began on February 22, 1999 and ended March 7, 2000. The offering raised $8,000,000, or 100% of the offering amount, from 125 investors and purchased the following properties:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Belmont Shopping Center | 100 | % | shopping center | 06/11/99 | $ | 3,504,879 | $ | 2,840,000 | 81,289 | Pueblo, CO | ||||||||||||||||||
| Village Fashion Center | 100 | % | shopping center | 06/18/99 | $ | 8,800,000 | $ | 6,600,000 | 129,973 | Wichita, KS | ||||||||||||||||||
| Palm Court Shopping Center | 100 | % | shopping center | 08/03/99 | $ | 8,988,000 | $ | 4,500,000 | 266,641 | Fontana, CA | ||||||||||||||||||
In November 2001, our advisor sold the Village Fashion Center with a resultant net gain on sale of $1,161,575.
In May 2003, our advisor LLC sold Palm Court Shopping Center with a resultant net gain on sale of $3,970,123.
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NNN Town & Country Shopping Center, LLC: The offering period for began on May 10, 1999 and ended on March 29, 2000. The offering raised $7,200,000, or 100% of the offering amount, from 63 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Town & Country Shopping Center | 100 | % | shopping center | 07/01/99 | $ | 32,000,000 | $ | 25,775,000 | 234,738 | Sacramento, CA | ||||||||||||||||||
NNN Town & Country Shopping Center, LLC reduced distributions to its investors during 2000 from 8% to 5% due to reduced available operating cash flow. The company experienced reduced operating cash flow due to the costs of a partial redevelopment which included the relocation of certain tenants within the shopping center and a higher than projected interest rate on the mortgage loan. Our advisor refinanced the property with a $34,000,000 loan at a lower interest rate. With redevelopment largely complete, cash flow improved and distributions were subsequently increased to 9% retroactively.
NNN “A” Credit TIC, LLC: The offering period began on August 10, 1999 and ended July 12, 2000. The offering raised $2,500,000, or 100% of the offering amount, from 29 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Pueblo Shopping Center | 100 | % | shopping center | 11/03/99 | $ | 7,075,000 | $ | 5,306,300 | 106,264 | Pueblo, CO | ||||||||||||||||||
NNN Redevelopment Fund VIII, LLC: The offering began on August 27, 1999 and ended June 5, 2000. The offering raised $$7,579,528, or 94.7% of the offering amount, from 153 investors and purchased the following properties:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Bank One Building | 100 | % | office building | 11/23/99 | $ | 8,730,000 | $ | 6,000,000 | 127,427 | Colorado Springs, CO | ||||||||||||||||||
| White Lakes Shopping Center | 100 | % | shopping center | 03/31/00 | $ | 15,000,000 | $ | 12,200,000 | 436,500 | Topeka, KS | ||||||||||||||||||
NNN Exchange Fund III, LLC: The offering began on September 15, 1999 and ended May 31, 2000. The offering raised $6,300,000, or 100% of the offering amount, from 27 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| County Fair | 100 | % | shopping center | 12/15/99 | $ | 15,850,000 | $ | 12,035,000 | 397,075 | Woodland, CA | ||||||||||||||||||
NNN Tech Fund III, LLC: The offering began on February 21, 2000 and ended June 20, 2000. The offering raised $3,698,750, or 100% of the offering amount, from 26 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Moreno Corporate Center | 100 | % | retail, office & industrial | 06/16/00 | $ | 11,766,500 | $ | 8,425,000 | 226,053 | Moreno Valley, CA | ||||||||||||||||||
The company refinanced the property and paid the loan in full. On July 3, 2001, NNN Tech Fund III, LLC sold the retail parcel, which represented approximately 26,449 square feet of leasable space, for $1,610,000.
NNN Horizon Fund, LLC: The offering, which began on March 30, 2000, was formed to offer $12,000,000 of 11% participating secured notes to assist in funding the purchase of the “Horizon Portfolio” consisting of one “power center,” one enclosed mall and five retail outlet and entertainment centers offered for sale at $93,500,000. Notes totaling $3,573,000, or 29.8% of the offering amount, were sold to 75 investors, but NNN Horizon Fund, LLC was unable to purchase the “Horizon Portfolio” of properties on
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NNN Westway Shopping Center, LLC: The offering began on April 26, 2000 and ended December 31, 2000. The offering raised $3,278,250, or 99.3% of the offering amount, from 33 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Westway Shopping Center | 100 | % | shopping center | 08/08/00 | $ | 9,698,500 | $ | 7,125,000 | 220,010 | Wichita, KS | ||||||||||||||||||
Kiwi Associates, LLC: The offering began on June 9, 2000 and ended February 4, 2001. The offering raised $2,681,352, or 95.8% of the offering amount, from 23 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Orange Street Plaza | 100 | % | shopping center | 07/14/00 | $ | 8,200,000 | $ | 6,500,000 | 127,443 | Redlands, CA | ||||||||||||||||||
In February 2003, our advisor sold Orange Street Plaza with a resultant gain on sale of $1,626,853.
NNN 2000 Value Fund, LLC: The offering began on July 15, 2000 and ended February 27, 2001. The offering raised $5,899,000, or 100% of the offering amount, from 125 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Bowling Green Financial Park | 100 | % | 7 office buildings | 12/28/00 | $ | 16,256,500 | $ | 12,290,000 | 234,551 | Sacramento, CA | ||||||||||||||||||
NNN Rocky Mountain Exchange, LLC: The offering began on July 25, 2000 and ended February 15, 2001. The offering raised $2,670,000, or 100% of the offering amount, from 11 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Galena Street Building | 100 | % | office building | 11/30/00 | $ | 7,345,150 | $ | 5,275,000 | 71,298 | Denver, CO | ||||||||||||||||||
NNN 2004 Notes Program, LLC: The offering of $5,000,000 of 11% participating unsecured notes began on August 29, 2000 and ended August 14, 2001. The notes were offered for the purpose of making unsecured loans to one or more borrowers, generally affiliates of our advisor, to acquire real estate. The notes are entitled to a profit participation in the properties purchased equal to 20% of the net profit achieved upon sale of the properties or a prepayment fee. The offering raised $5,000,000, or 100% of the offering amount, from 65 investors.
Market Centre, LLC: The offering began on September 1, 2000 and ended November 17, 2000. The offering raised $1,000,000, or 100% of the offering amount, from 7 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Market Centre | 100 | % | 11-story certified historic building | 11/18/98 | $ | 1,300,000 | $ | 900,000 | 121,868 | Wichita, KS | ||||||||||||||||||
In July 1999, Market Centre, LLC offered $1,000,000 of 11% participating unsecured notes primarily to assist with property improvements and for working capital. The notes were entitled to a profit participation in the property equal to 40% of the net profit achieved upon sale of the property or a prepayment fee. The property was refinanced and the notes paid in full with a prepayment penalty. Subsequently, Market Centre, LLC, through our advisor, raised $1,330,000 through a private placement of tenant in common interests in the building beginning in September 2000.
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NNN 2005 Notes Program, LLC: The offering of $6,000,000 of 10% participating unsecured notes began on September 15, 2000 and ended March 13, 2001. The notes were offered for the purpose of making secured loans to one or more borrowers, generally affiliates of our advisor, to acquire real estate. The notes are entitled to a profit participation in the properties purchased equal to 10% of the net profit achieved upon sale of the properties or a prepayment fee. The offering raised $2,300,000, or 38% of the offering amount, from 46 investors.
NNN Dry Creek: The offering began on November 15, 2000 and ended January 31, 2001. The offering raised $3,500,000, or 100% of the offering amount, from 16 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Dry Creek Centre | 100 | % | office/flex facility | 01/31/01 | $ | 11,100,000 | $ | 8,350,000 | 85,760 | Denver, CO | ||||||||||||||||||
NNN Sacramento Corporate Center, LLC: The offering began on November 8, 2000 and ended May 21, 2001. The offering raised $12,000,000, or 100% of the offering amount, from 66 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Sacramento Corporate Center | 100 | % | office building | 03/12/01 | $ | 31,540,000 | $ | 22,250,000 | 192,779 | Sacramento, CA | ||||||||||||||||||
NNN Camelot Plaza Shopping Center, LLC: The offering began on March 30, 2001 and ended December 3, 2001. The offering raised $2,400,000, or 100% of the offering amount, from 11 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Camelot Plaza Shopping Center | 100 | % | shopping center | 08/01/01 | $ | 6,350,000 | $ | 4,127,500 | 91,266 | San Antonio, TX | ||||||||||||||||||
NNN 2001 Value Fund, LLC: The offering began on March 12, 2001 and ended June 30, 2002. The offering raised $10,992,321, or 99.9% of the offering amount, from 263 investors and purchased the following properties:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| 1840 Aerojet Way | 100 | % | industrial building | 09/27/01 | $ | 5,100,000 | $ | 2,938,000 | 102,948 | North Las Vegas, NV | ||||||||||||||||||
| Western Plaza | 100 | % | shopping center | 07/31/01 | $ | 5,000,000 | $ | 4,250,000 | 412,127 | Amarillo, TX | ||||||||||||||||||
| Pacific Corporate Park | 40 | % | 6-building office park | 03/25/02 | $ | 9,491,400 | $ | 6,200,000 | 166,785 | Lake Forest, CA | ||||||||||||||||||
NNN Washington Square, LLC: The offering began on May 1, 2001 and ended November 21, 2001. The offering raised $3,000,000, or 100% of the offering amount, from 12 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Washington Square Center | 100 | % | shopping center | 10/16/01 | $ | 7,263,000 | $ | 4,890,000 | 71,502 | Stephenville, TX | ||||||||||||||||||
NNN Reno Trademark, LLC: The offering began on May 30, 2001 and ended September 26, 2001. The offering raised $3,850,000, or 100% of the offering amount, from 7 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Trademark Building | 60 | % | industrial building | 09/04/01 | $ | 7,296,110 | $ | 2,700,000 | 75,257 | Reno, NV | ||||||||||||||||||
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NNN One Gateway Plaza LLC: The offering began on June 8, 2001 and ended September 25, 2001. The offering raised $4,197,500, or 99.9%, of the offering amount, from 10 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| One Gateway Plaza | 100 | % | office building | 07/30/01 | $ | 12,550,000 | $ | 9,375,000 | 113,139 | Colorado Springs, CO | ||||||||||||||||||
NNN Gateway Aurora, LLC: The offering began on July 10, 2001 and ended August 17, 2001. The offering had raised $1,054,000, or 52.7%, of the offering amount, from 2 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Gateway Plaza | 100 | % | shopping center | 04/05/01 | $ | 7,763,000 | $ | 6,400,219 | 101,048 | Aurora, CO | ||||||||||||||||||
NNN LV 1900 Aerojet Way, LLC: The offering began on July 26, 2001 and ended August 31, 2001. The offering raised $2,000,000, or 100% of the offering amount, from 8 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| 1900 Aerojet Way | 100 | % | distribution center | 08/31/01 | $ | 5,067,000 | $ | 3,625,000 | 106,717 | North Las Vegas, NV | ||||||||||||||||||
NNN Timberhills Shopping Center, LLC: The offering began on July 31, 2001 and ended November 27, 2001. The offering raised $3,695,375, or 99.9%, of the offering amount, from 13 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Timberhills Shopping Center | 100 | % | shopping center | 11/21/01 | $ | 9,180,000 | $ | 6,390,000 | 102,304 | Sonora, CA | ||||||||||||||||||
NNN Addison Com Center, LLC: The offering began on August 16, 2001 and ended April 2, 2002. The offering raised $3,650,000, or 100%, of the offering amount, from 16 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Addison Com Center | 100 | % | office building | 11/01/01 | $ | 10,500,000 | $ | 7,750,000 | 96,396 | Addison, TX | ||||||||||||||||||
NNN County Center Drive, LLC: The offering began on September 18, 2001 and ended February 6, 2002. The offering raised $3,125,000, or 99%, of the offering amount, from 18 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| County Center Building | 100 | % | distribution/ warehouse/office | 09/28/01 | $ | 5,395,000 | $ | 3,210,000 | 77,582 | Temecula, CA | ||||||||||||||||||
NNN Arapahoe Service Center II, LLC: The offering began on February 11, 2002 and ended on June 20, 2002. The offering raised $4,000,000, or 100%, of the offering amount, from 16 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Arapahoe Service Center II | 100 | % | office/flex complex | 04/19/02 | $ | 7,938,000 | $ | 5,000,000 | 79,200 | Denver, CO | ||||||||||||||||||
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NNN Titan Building & Plaza, LLC: The offering began on February 18, 2002 and ended May 28, 2002. The offering raised $2,500,000, or 88.8%, of the offering amount, from 5 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Titan Building and Titan Plaza | 58 | % | office building | 04/17/02 | $ | 4,721,005 | $ | 3,090,000 | 103,762 | San Antonio, TX | ||||||||||||||||||
NNN City Center West “B”, LLC: The offering began on October 1, 2001 and ended June 14, 2002. The offering raised $8,200,000, or 100%, of the offering amount, from 15 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| City Center West “B” | 100 | % | office building | 01/23/02 | $ | 20,800,000 | $ | 14,650,000 | 104,427 | Las Vegas, NV | ||||||||||||||||||
NNN Union Square, LLC: The offering began on January 28, 2002 and ended March 2, 2002. The offering raised $578,000, or 100%, of the offering amount, from 3 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Union Square Plaza | 39 | % | shopping center | 03/08/02 | $ | 4,730,000 | $ | 4,047,500 | 130,066 | Colorado Springs, CO | ||||||||||||||||||
NNN City Center West “A”, LLC: The offering began on February 12, 2002 and ended March 15, 2002. The offering raised $1,237,803, or 35.4%, of the offering amount, from 2 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| City Center West “A” | 10.875 | % | office building | 03/15/02 | $ | 21,670,000 | $ | 13,000,000 | 105,964 | Las Vegas, NV | ||||||||||||||||||
NNN Pacific Corporate Park 1, LLC: The offering began on March 11, 2002 and ended June 25, 2002. The offering raised $5,800,000, or 100%, of the offering amount, from 45 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Pacific Corporate Park | 60 | % | 6-building office park | 03/25/02 | $ | 14,237,100 | $ | 9,300,000 | 166,785 | Lake Forest, CA | ||||||||||||||||||
NNN North Reno Plaza, LLC: The offering began on March 31, 2002 and ended June 19, 2002. The offering raised $2,750,000, or 100%, of the offering amount, from 14 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| North Reno Plaza Shopping Center | 100 | % | shopping center | 06/29/02 | $ | 7,200,000 | $ | 5,400,000 | 129,960 | Reno, NV | ||||||||||||||||||
NNN Brookhollow Park, LLC: The offering began on April 12, 2002 and ended July 3, 2002. The offering raised $6,550,000, or 100%, of the offering amount, from 24 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Brookhollow Park | 100 | % | office building | 07/03/02 | $ | 15,360,000 | $ | 10,250,000 | 102,413 | San Antonio, TX | ||||||||||||||||||
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NNN 2002 Value Fund, LLC: The offering began on May 15, 2002 and ended was still open as of June 30, 2003 (the offering closed July 14, 2003). As of June 30, 2003, the offering raised $$29,799,260, or 99.3%, of the offering amount from 707 investors and purchased the following properties:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Bank of America West | 100 | % | office building | 09/20/02 | $ | 16,900,000 | $ | 14,199,619 | 82,255 | North Las Vegas, NV | ||||||||||||||||||
NNN 1397 Galleria Drive, LLC: The offering began on May 24, 2002 and ended October 23, 2002. The offering raised $1,950,000, or 100%, of the offering amount, from 12 investors and purchased the following property:
| Mortgage | ||||||||||||||||||||||||||||
| Ownership | Purchase | Purchase | Debt at | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Galleria Office Building | 100 | % | office building | 09/11/02 | $ | 3,420,000 | $ | 1,962,000 | 13,810 | Henderson, NV | ||||||||||||||||||
NNN Bryant Ranch, LLC: The offering began on June 10, 2002 and ended November 12, 2002. The offering raised $5,000,000, or 100%, of the offering amount, from 24 investors and purchased the following property:
| Mortgage | ||||||||||||||||||||||||||||
| Ownership | Purchase | Purchase | Debt at | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Bryant Ranch Shopping Center | 100 | % | shopping center | 09/05/02 | $ | 10,080,000 | $ | 6,222,000 | 93,892 | Yorba Linda, CA | ||||||||||||||||||
In September 2002, the Bryant Ranch shopping center was sold resulting in a net gain of $988,804.
NNN 4241 Bowling Green, LLC: The offering began on June 14, 2002 and ended December 27, 2002. The offering raised $2,850,000, or 100%, of the offering amount, from 16 investors and purchased the following property:
| Mortgage | ||||||||||||||||||||||||||||
| Ownership | Purchase | Purchase | Debt at | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| 4241 Bowling Drive | 100 | % | office building | 09/25/02 | $ | 5,200,000 | $ | 3,092,139 | 28,985 | Sacramento, CA | ||||||||||||||||||
NNN Wolf Pen Plaza, LLC: The offering began on July 1, 2002 and ended October 23, 2002. The offering raised $5,500,000, or 100%, of the offering amount, from 12 investors and purchased the following property:
| Mortgage | ||||||||||||||||||||||||||||
| Ownership | Purchase | Purchase | Debt at | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Wolf Pen Plaza | 100 | % | shopping center | 09/25/02 | $ | 16,190,000 | $ | 12,265,000 | 169,989 | College Station, TX | ||||||||||||||||||
NNN Alamosa Plaza, LLC: The offering began on July 18, 2002 and ended October 25, 2002. The offering raised $6,650,000, or 100%, of the offering amount, from 11 investors and purchased the following property:
| Mortgage | ||||||||||||||||||||||||||||
| Ownership | Purchase | Purchase | Debt at | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Alamosa Plaza Shopping Center | 100 | % | shopping center | 10/08/02 | $ | 18,500,000 | $ | 13,500,000 | 77,650 | Las Vegas, NV | ||||||||||||||||||
NNN Saddleback, LLC: The offering began on August 30, 2002 and ended October 29, 2002. The offering raised $3,865,800, or 100%, of the offering amount, from 7 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Saddleback Financial Center | 75 | % | office building | 09/25/02 | $ | 11,072,500 | $ | 11,072,500 | 71,243 | Laguna Hills, CA | ||||||||||||||||||
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NNN Kahana Gateway, LLC: The offering began on October 9, 2002 and ended on March 6, 2003. The offering raised $8,140,000, or 100%, of the offering amount, from 22 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Kahana Gateway Shopping Center & Professional Bldg | 100 | % | mixed use: 73% retail, 27% office | 12/20/02 | $ | 19,400,000 | $ | 13,041,000 | 80,069 | Maui, HI | ||||||||||||||||||
NNN Springtown Mall, DST: The offering began on October 10, 2002 and ended March 21, 2003. The offering raised $2,550,000, or 100%, of the offering amount, from 14 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Springtown Mall Shopping Center | 100 | % | shopping center | 12/09/02 | $ | 6,490,000 | $ | 4,700,000 | 96,423 | San Marcos, TX | ||||||||||||||||||
NNN Congress Center, LLC: The offering began on October 15, 2002 and still open as of June 30, 2003. As of June 30, 2003, the offering raised $39,112,386, or 99.9%, of the offering amount, from 98 investors and purchased the following property:
| Ownership | Purchase | Mortgage Debt | GLA | |||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Purchase Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Congress Center | 62.70 | % | office building | 01/08/03 | $ | 136,108,000 | $ | 95,950,000 | 524,784 | Chicago, IL | ||||||||||||||||||
NNN Park Sahara, LLC: The offering began on October 25, 2002 and was still open as of June 30, 2003. As of June 30, 2003, the offering had raised $4,953,000, or 95.3%, of the offering amount, from 12 investors and purchased the following property:
| Ownership | Purchase | Purchase | Mortgage Debt | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | at Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Park Sahara Office Park | 95.25 | % | 5-bldg. office park | 03/18/03 | $ | 12,200,000 | $ | 8,400,000 | 123,709 | Las Vegas, NV | ||||||||||||||||||
NNN Parkwood Complex, LLC: The offering began on October 28, 2002 and ended April 23, 2003. The offering raised $7,472,000, or 100%, of the offering amount, from 23 investors and purchased the following property:
| Mortgage | ||||||||||||||||||||||||||||
| Ownership | Purchase | Purchase | Debt at | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Parkwood I & II | 100 | % | office | 12/31/02 | $ | 20,436,000 | $ | 13,921,600 | 196,128 | Woodlands, TX | ||||||||||||||||||
NNN 2006 Notes Program, LLC: The offering of $10,000,000 of 10% participating unsecured notes began on August 1, 2002 and ended May 22, 2003. The notes were offered for the purpose of making unsecured loans to one or more borrowers to acquire real estate. The notes are entitled to a profit participation in the properties purchased equal to 20% of the net profit achieved upon sale of the properties or a prepayment fee. The offering raised $1,044,881, or 10.4% of the offering amount, from 22 investors.
NNN Buschwood, LLC: The offering began on December 20, 2002 and ended March 25, 2003. The offering raised $3,200,000, or 100%, of the offering amount, from 13 investors and purchased the following property:
| Mortgage | ||||||||||||||||||||||||||||
| Ownership | Purchase | Purchase | Debt at | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Buschwood III Office Park | 1 | % | Office | 03/25/03 | $ | 6,983,400 | $ | 4,600,000 | 77,095 | Tampa, FL | ||||||||||||||||||
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NNN Beltline-Royal Ridge, LLC: The offering began on November 8, 2002 and was still open as of June 30, 2003. As of June 30, 2003, the offering had raised $4,900,000, or 91.6%, of the offering amount, from 17 investors and purchased the following property:
| Mortgage | ||||||||||||||||||||||||||||
| Ownership | Purchase | Purchase | Debt at | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Beltline/ Royal Ridge Tech | 100 | % | Office | 04/01/03 | $ | 9,550,000 | $ | 6,150,000 | 83,514 | San Antonio, TX | ||||||||||||||||||
NNN Parkway Towers, LLC: The offering began on November 18, 2002 and was still open as of June 30, 2003. As of June 30, 2003, the offering had raised $6,713,762, or 91.3%, of the offering amount, from 22 investors and purchased the following property:
| Mortgage | ||||||||||||||||||||||||||||
| Ownership | Purchase | Purchase | Debt at | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Parkway Towers Office Park | 100 | % | Office | 05/09/03 | $ | 12,450,000 | $ | 6,000,000 | 189,961 | Nashville, TN | ||||||||||||||||||
NNN Netpark, LLC: The offering began on March 18, 2003 and was still open as of June 30, 2003. As of June 30, 2003, the offering had raised $23,492,250, or 99.1%, of the offering amount, from 24 investors and purchased the following property:
| Mortgage | ||||||||||||||||||||||||||||
| Ownership | Purchase | Purchase | Debt at | GLA (Sq | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | Purchase | Ft) | Location | |||||||||||||||||||||
| Netpark Tampa Bay | 4.75 | % | Office | 06/06/03 | $ | 47,000,000 | $ | 31,500,000 | 919,405 | Tampa, FL | ||||||||||||||||||
NNN 602 Sawyer, LLC: The offering began on March 28, 2003 and was still open as of June 30, 2003. As of June 30, 2003, the offering had raised $4,207,625, or 89.5%, of the offering amount, from 21 investors and purchased the following property:
| Mortgage | ||||||||||||||||||||||||||||
| Ownership | Purchase | Purchase | Debt at | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| 602 Sawyer | 100 | % | office | 06/05/03 | $ | 9,270,000 | $ | 5,850,000 | 85,923 | Houston, TX | ||||||||||||||||||
NNN Xerox Centre, LLC: The offering began on February 14, 2003 and was still open as of June 30, 2003. As of June 30, 2003, the offering had raised $20,468,500, or 99.8%, of the offering price, from 67 investors and purchased the following property:
| Mortgage | ||||||||||||||||||||||||||||
| Ownership | Purchase | Purchase | Debt at | GLA | ||||||||||||||||||||||||
| Property Name | Interest | Type of Property | Date | Price | Purchase | (Sq Ft) | Location | |||||||||||||||||||||
| Xerox Centre | 100 | % | office building | 06/16/03 | $ | 60,500,000 | $ | 46,575,000 | 317,682 | Santa Ana, CA | ||||||||||||||||||
NNN Jamboree Promenade, LLC: The offering began on June 20, 2003 and was still open as of June 30, 2003. As of June 30, 2003, the offering had not raised any money.
NNN Jefferson Square, LLC: The offering began on May 1, 2003 and was still open as of June 30, 2003. As of June 30, 2003, the offering had raised $300,000, or 3.3%, of the offering amount, from 5 investors.
NNN Arapahoe Business Park, LLC: The offering began on June 13, 2003 and was still open as of June 30, 2003. As of June 30, 2003, the offering had not raised any money.
NNN 901 Corporate, LLC: The offering began on June 13, 2003 and was still open as of June 30, 2003. As of June 30, 2003, the offering had not raised any money.
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CONFLICTS OF INTEREST
Our management will be subject to various conflicts of interest arising out of our relationship with our advisor, the advisor’s affiliates and the dealer manager. All agreements and arrangements, including those relating to compensation, between us and our advisor, the dealer manager and their affiliates are not the result of arm’s-length negotiations. The limitations on our advisor described below have been adopted to control when we enter into transactions with our advisor, the dealer manager and their affiliates. With respect to the conflicts of interest described herein, our advisor, the dealer manager and their affiliates have informed us that they will endeavor to balance their interests with our interests.
We believe that the compensation paid to our advisor and its affiliates under the advisory agreement is on terms no less favorable to our company than those customary for similar services performed by independent firms in the relevant geographic areas.
Competition for the Time and Service of Our Advisor and Affiliates
Our company relies on our advisor and its affiliates to manage our assets and daily operations. Many of the same persons serve as directors, officers and employees of our company and our advisor. Affiliates of our advisor have conflicts of interest in allocating management time, services and functions among various existing real estate programs, including the prior advisor programs, and any future real estate programs or business ventures that they may organize or serve. Our advisor has informed us that it and its affiliates will employ sufficient staff to be fully capable of discharging their responsibilities in connection with our company and the various other real estate programs advised or managed by our advisor.
Process for Resolution of Conflicting Opportunities
Our advisor has sponsored publicly and privately offered real estate programs and may in the future sponsor privately and publicly offered real estate programs that may have investment objectives similar to ours. Therefore, our advisor and its affiliates could be subject to conflicts of interest between our company and other real estate programs. The advisory agreement gives us the first opportunity to buy income-producing governmental properties located in our focus states placed under contract by our advisor or its affiliates, provided that:
| • | we have funds available to make the purchase; | |
| • | our board of directors or appropriate acquisition committee votes to make the purchase within fourteen days of being offered such property by our advisor; and | |
| • | the property meets our acquisition criteria. |
Other factors that may be considered in connection with the decisions as to the suitability of the property for investment include:
| • | the effect of the acquisition on the diversification of our portfolio; | |
| • | the amount of funds we have available for investment; | |
| • | cash flow; and | |
| • | the estimated income tax effects of the purchase and subsequent disposition. |
The independent directors must, by majority vote, approve all actions by our advisor or its affiliates that present potential conflicts with our company.
We believe that the three factors, including the obligations of our advisor and its affiliates to present to us any income-producing governmental investment opportunities that could be suitable for our company, will help to lessen the competition or conflicts with respect to the acquisition of properties.
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Acquisitions From Our Advisor and Its Affiliates
We may acquire properties from our advisor, our directors or officers or their affiliates. The prices we pay for such properties will not be the subject of arm’s-length negotiations. However, we will not acquire a property from our advisor or any affiliate, including our officers and directors, unless a competent independent appraiser confirms that our purchase price is equal to or less than the property’s fair market value and a majority of our board of directors not otherwise interested in the transaction, including a majority of our independent directors, determines that the transaction and the purchase price are fair, reasonable and in our best interests. There can be no absolute assurance that the price we pay for any such property will not, in fact, exceed that which would be paid by an unaffiliated purchaser. In no event, however, will the cost of a property to our company exceed such property’s current appraised value.
We May Purchase Properties From Persons With Whom Affiliates of Our Advisor Have Prior Business Relationships
We may purchase properties from sellers with whom our advisor or its affiliates have purchased properties in the past and may purchase properties in the future. If we purchase properties from such sellers, our advisor will experience a conflict between the current interests of our company and its interests in preserving any ongoing business relationship with such seller. Our board of directors will not, and our advisor has informed us that it will not, consummate such purchases in a manner that would effect a breach of any fiduciary obligations to our company.
Our Advisor May Have Conflicting Fiduciary Obligations in the Event Our Company Acquires Properties with Our Advisor or Affiliates
Our advisor may advise us to acquire an interest in a property through a joint venture or co-ownership arrangement with our advisor or its affiliates. In such instance, our advisor will have a fiduciary duty to our company, our shareholders and the affiliate participating in the joint venture or co-ownership arrangement. In order to minimize the likelihood of a conflict between these fiduciary duties, the advisory agreement provides guidelines for investments in such co-ownership or joint venture arrangements in various respects. In addition, the advisory agreement provides that a majority of the independent directors not otherwise interested in the transaction must determine that the transaction is on terms and conditions no less favorable than from unaffiliated third parties and is fair and reasonable to our company.
Property Management Services will be Rendered by Our Advisor
Our advisor and its affiliates will provide property and asset management services to our company and other entities, some of whom may be in competition with our company. Our advisor and its affiliates will render these services to our company for the price and on the terms we would expect from an unaffiliated third party and in a manner consistent with customary business practices. Our advisor has informed us that it believes that our advisor and its affiliates have sufficient personnel and other required resources to discharge all responsibilities to the various properties that it manages and will manage in the future.
Receipt of Commissions, Fees and Other Compensation by Our Advisor
Our advisor and its affiliates have received and will continue to receive the compensation as described in “Compensation Table.” The real estate commission and/or acquisition fee described under “Compensation Table” is based on the purchase price of the properties we acquire and will be payable to our advisor despite the lack of cash available to make distributions to our shareholders. In addition, an affiliate of our advisor will receive the property management fee described under “Compensation Table” computed based on the amount of gross income generated by our properties. To that extent, our advisor benefits from our retaining ownership of properties and leveraging our properties, while our shareholders may be better served by our disposing of a property or holding a property on an unleveraged basis. Furthermore, our advisor’s receipt and retention of many of the fees and reimbursements it receives from us are dependent upon our making investments in properties. Therefore, the interest of our advisor in
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Non-Arm’s-Length Agreements; Conflicts; Competition
The agreements and arrangements, including those relating to compensation, between our company, our advisor and its affiliates are not the result of arm’s-length negotiations, but are expected to approximate the terms of arm’s-length transactions. While we will not make loans to our advisor or its affiliates, we may borrow money from our advisor or its affiliates for various business purposes, including working capital requirements, but only if a majority of our board of directors, including a majority of the independent directors, approve the transaction as being fair, competitive, commercially reasonable and no less favorable to our company than loans between unaffiliated parties under the same circumstances. Our advisor and its affiliates are not prohibited from providing services to, and otherwise dealing or doing business with, persons who deal with us, although there are no present arrangements with respect to any such services. However, no rebates or “give-ups” may be received by our advisor or its affiliates, nor may our advisor or any such affiliates participate in any reciprocal business arrangements which would have the effect of circumventing any of the provisions of the advisory agreement.
Legal Counsel for Our Company and Our Advisor is the Same Law Firm
Hirschler Fleischer, a Professional Corporation, acts as legal counsel to our advisor and some of its affiliates and also represents us. Hirschler Fleischer is not acting as counsel for the shareholders or any potential investor. There is a possibility in the future that the interests of the various parties may become adverse and, under the Code of Professional Responsibility of the legal profession, Hirschler Fleischer may be precluded from representing any one or all of such parties. If any situation arises in which our interests appear to be in conflict with those of our advisor or its affiliates, additional counsel may be retained by one or more of the parties to assure that their interests are adequately protected. Moreover, should such a conflict not be readily apparent, Hirschler Fleischer may inadvertently act in derogation of the interest of parties which could affect us and, therefore, our shareholders’ ability to meet our investment objectives.
NNN Capital Corp. is Participating as Dealer Manager in the Sale of Our Shares
NNN Capital Corp., a securities dealer affiliated with Anthony W. Thompson, the Chairman of the Board, President and Chief Executive Officer of our company and the President and Chief Executive Officer of our advisor, is participating as the dealer manager in this offering. The dealer manager is entitled to the selling commissions, marketing support and due diligence reimbursement fees based on the number of shares sold in many states, which may be retained or reallowed to broker-dealers participating in this offering. The dealer manager may be subject to a conflict of interest, which may arise out of its participation in this offering and its affiliation with Mr. Thompson, in performing independent “due diligence” with respect to our company. Any review of our structure, formation or operation performed by the dealer manager will be conducted as if it was an independent review; however, because the dealer manager is our affiliate, such review cannot be considered to represent an independent review, and such review may not be as meaningful as a review conducted by an unaffiliated broker-dealer. Therefore, this offering will not necessarily have the independent review typically conducted by an underwriter or managing broker-dealer.
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SUMMARY OF AMENDED AND RESTATED DIVIDEND REINVESTMENT PLAN
We have adopted an amended and restated dividend reinvestment plan, or DRIP, under which our shareholders may elect to have their cash dividends reinvested in additional shares of our common stock. The following discussion summarizes the principal terms of the DRIP, which is attached to this prospectus as Exhibit C.
General
Shareholders who have received a copy of this prospectus and participate in this offering or who participated in our initial public offering can elect to participate in and purchase shares through the DRIP at any time and will not need to receive a separate prospectus relating solely to the DRIP. A person who becomes a shareholder otherwise than by participating in this offering or our initial public offering may purchase shares through the DRIP only after receipt of a separate prospectus relating solely to the DRIP.
Until the earlier to occur of the termination of this offering and the sale of all the shares reserved for issuance under the DRIP, the purchase price for shares of common stock purchased under the DRIP will be $9.50 per share.
Investment of Dividends
Dividends will be used to purchase shares on behalf of the participants from our company. All such dividends shall be invested in shares within 30 days after such payment date. Any dividends not so invested will be returned to the participants in the DRIP.
As of the date of this prospectus, participants will not have the option to make voluntary contributions to the DRIP to purchase shares in excess of the amount of shares that can be purchased with their dividends. The board of directors reserves the right, however, to amend the DRIP in the future to permit voluntary contributions to the dividend reinvestment plan by participants, to the extent consistent with our objective of qualifying as a REIT.
Participant Accounts, Fee, and Allocation of Shares
For each participant in the DRIP, we will maintain a record which shall reflect for each dividend period the dividends received by us on behalf of such participant. Any interest earned on such dividends will be retained by us to defray costs relating to the DRIP.
We will use the aggregate amount of dividends to all participants for each dividend period to purchase shares for the participants. If the aggregate amount of dividends to participants exceeds the amount required to purchase all shares then available for purchase, our company will purchase all available shares and will return all remaining dividends to the participants within 30 days after the date such dividends are made. We will allocate the purchased shares among the participants based on the portion of the aggregate dividends received on behalf of each participant, as reflected in our records. The ownership of the shares purchased under the DRIP shall be reflected on our books.
Shares acquired under the DRIP will entitle the participant to the same rights and to be treated in the same manner as those purchased by the participants in this offering.
The allocation of shares among participants may result in the ownership of fractional shares, computed to four decimal places.
Administration
Our DRIP will be administered by us or one of our affiliates, the DRIP Administrator, but a different entity may act as DRIP Administrator in the future. Any replacement entity which acts as the DRIP Administrator shall be registered as a broker/dealer with the NASD and in all states in which participants of our dividend reinvestment plan reside. The DRIP Administrator will keep all records of your account
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Reports to Participants
Within 90 days after the end of each fiscal year, we will mail to each participant a statement of account describing, as to such participant:
| • | the dividends reinvested during the year; | |
| • | the number of shares purchased during the year; | |
| • | the per share purchase price for such shares; | |
| • | the total administrative charge retained by us on behalf of each participant; and | |
| • | the total number of shares purchased on behalf of the participant under the dividend reinvestment plan. |
Tax information with respect to income earned on shares under the DRIP for the calendar year will be sent to each participant.
Election to Participate or Terminate Participation
Shareholders who purchase shares in this offering may become participants in the DRIP by making a written election to participate on their Subscription Agreements at the time they subscribe for shares. Any other shareholder who receives a copy of this prospectus or a separate prospectus relating solely to the DRIP and who has not previously elected to participate in the DRIP may so elect at any time by completing the enrollment form attached to such prospectus or by other appropriate written notice to us of such shareholder’s desire to participate in the DRIP. Participation in the DRIP will commence with the next dividend made after receipt of the participant’s notice, provided it is received at least ten days prior to the record date for such dividend. Subject to the preceding sentence, the election to participate in the DRIP will apply to all dividends attributable to the dividend period in which the shareholder made such written election to participate in the DRIP and to all dividends. Participants will be able to terminate their participation in the DRIP at any time without penalty by delivering written notice to us no less than ten days prior to the next record date. We may also terminate the DRIP for any reason at any time, upon ten days’ prior written notice to all participants.
A participant who chooses to terminate participation in the DRP must terminate his or her entire participation in the DRIP and will not be allowed to terminate in part. If the DRIP is terminated, we will update our stock records to account for all whole shares purchased by the participant(s) in the DRIP, and if any fractional shares exist, we may either (a) send you a check in payment for any fractional shares in your account based on the then-current market price for the shares, or (b) credit your stock ownership account with any such fractional shares. There are no fees associated with a participant’s terminating his interest in the DRIP or our termination of the DRIP. A participant in the DRIP who terminates his interest in the DRIP will be allowed to participate in the DRIP again by notifying us and completing any required forms.
We reserve the right to prohibit an employee benefit plan or other entity subject to ERISA from participating in the DRIP.
Federal Income Tax Considerations
Shareholders subject to federal income taxation who elect to participate in the DRIP will incur tax liability for dividends reinvested under the DRIP even though they will receive no related cash. Specifically, shareholders will be treated as if they have received a cash dividend from our company and then applied such dividend to purchase shares in the DRIP. A shareholder who reinvests dividends will be taxed on such dividend at ordinary income tax rates to the extent such distributions are made out of our
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Amendments and Termination
We reserve the right to amend any aspect of the DRIP without the consent of shareholders, provided that notice of any material amendment is sent to participants at least 30 days prior to the effective date of that amendment. We also reserve the right to terminate the DRIP for any reason at any time by ten days’ prior written notice of termination to all participants. We may terminate a participant’s participation in the DRIP immediately if in our judgment such participant’s participation jeopardizes in any way our status as a REIT.
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SUMMARY OF AMENDED AND RESTATED REPURCHASE PLAN
Our amended and restated repurchase plan may, subject to restrictions, provide eligible shareholders with limited, interim liquidity by enabling them to sell shares back to us. The prices at which shares may be sold back to us are as follows:
| • | During the offering period at $9.05 per share. This is a reduction of $0.95 from the $10 offering price per share, reflecting the elimination of selling commissions and the marketing support and due diligence expense reimbursement; | |
| • | During the 12 months following the end of the offering period at $9.25 per share; | |
| • | During the next 12 months at $9.50 per share; | |
| • | During the next 12 months at $9.75 per share; and | |
| • | Thereafter, at the greater of: (i) $10 per share; or (ii) a price equal to 10 times our “funds available for distribution” per weighted average share outstanding for the prior calendar year. |
A shareholder must have beneficially held the shares for at least one year prior to offering them for sale to us through our repurchase plan.
We may make repurchases under our repurchase plan quarterly, at our sole discretion, on a first-come, first-served basis. Subject to funds being available, we will limit the number of shares repurchased during any calendar year to five percent (5%) of the weighted average number of shares outstanding during the prior calendar year. Funding for our repurchase program will come exclusively from proceeds we receive from the sale of shares under our dividend reinvestment plan and other operating funds, if any, as the board, at its sole discretion, may reserve for this purpose.
Our board of directors, in its sole discretion, may choose to terminate our repurchase plan after the end of the offering period, or reduce the number of shares purchased under the plan, if it determines that the funds allocated to our repurchase plan are needed for other purposes, such as the acquisition, maintenance or repair of properties, or for use in making a declared distribution. A determination by the board of directors to eliminate or reduce our repurchase plan will require the unanimous affirmative vote of the independent directors. A copy of our amended and restated repurchase plan is attached as Exhibit D.
We cannot guarantee that the funds set aside for our repurchase plan will be sufficient to accommodate all requests made each year. If no funds are available for the plan when repurchase is requested, the shareholder may withdraw the request, or ask that we honor the request when funds are available. Pending requests will be considered on a first-come, first-served basis.
Shareholders are not required to sell their shares to us. Our repurchase plan is intended only to provide limited, interim liquidity for shareholders until a liquidity event occurs, such as the listing of our shares on a national securities exchange, inclusion of our shares for quotation on a national market system, or our merger with a listed company. We cannot guarantee that a liquidity event will occur.
Shares we purchase under our repurchase plan will be canceled and will have the status of authorized but unissued shares. Shares we acquire through our repurchase plan will not be reissued unless they are first registered with the Securities and Exchange Commission under the Securities Act of 1933 and under appropriate state securities laws or otherwise issued in compliance with such laws.
If we terminate, reduce or otherwise change our repurchase plan, we will send a letter to shareholders informing them of the change, and we will disclose the changes in reports filed with the Securities and Exchange Commission.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
The following discussion should be read in conjunction with our financial statements and notes appearing elsewhere in this Form 10-Q. Such financial statements and information have been prepared to reflect our financial position as of September 30, 2003 and December 31, 2002, together with results of operations and cash flows for the three-month and nine-month periods ended September 30, 2003 and 2002.
Forward-Looking Statements
Historical results and trends should not be taken as indicative of future operations. Management’s statements contained in this report that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results may differ materially from those included in the forward-looking statements. We intend such forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of our company, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “prospects” or similar expressions. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations and future prospects of our company on a consolidated basis include, but are not limited to: changes in economic conditions generally and the real estate market specifically, legislative/regulatory changes (including changes to laws governing the taxation of REITs), availability of capital, interest rates, competition, supply and demand for operating properties in our current and proposed market areas and generally accepted accounting principles, policies and guidelines applicable to REITs. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning our company and its business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the SEC. Our expectations are as of the date this Form 10-Q is filed, and we do not intend to update any of the forward-looking statements after the date this Quarterly Report on Form 10-Q is filed to conform these statements to actual results, unless required by law.
Overview and Background
We were incorporated on December 18, 2001 under the laws of the Commonwealth of Virginia. We operate as a real estate investment trust for federal income tax purposes. As a REIT, we are generally not subject to income taxes. To maintain our REIT status, we are required to distribute annually as dividends at least 90% of our REIT taxable income, as defined by the Internal Revenue Code, or Code, to our shareholders, among other requirements. If we fail to qualify as a REIT in any taxable year, we will be subject to Federal income tax on our taxable income at regular corporate tax rates. As of September 30, 2003, we believe we were in compliance with all relevant REIT requirements.
We were incorporated to raise capital and acquire ownership interests in office, industrial, retail and service real estate properties, a number of which will have a government-tenant orientation. We commenced planned principal operations in September 2002 when we completed our first real estate property acquisition. As of September 30, 2003, we have purchased interests in nine real estate properties, including six office properties and three undivided tenant in common interests in office properties.
We are externally advised by Triple Net Properties, LLC, our advisor, which is primarily responsible for managing the day-to-day operations and assets of our company. The Advisory Agreement between us and our advisor has a one year term, and is subject to successive renewals with the written consent of the parties including a majority of the independent directors. Our advisor is affiliated with our company in that
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Public Offering of Equity Securities/Use of Proceeds
Pursuant to a Registration Statement on Form S-11/A under the Securities Act of 1933, as amended, we offered for sale to the public on a “best efforts” basis a minimum of 100,000 and a maximum of 20,000,000 shares of our common stock at a price of $10 per share and up to 1,000,000 additional shares pursuant to a dividend reinvestment plan under which our shareholders may elect to have dividends reinvested in additional shares at $9.50 per share. The Registration Statement was declared effective by the SEC on July 22, 2002. As discussed in the Registration Statement, we plan to principally use the net offering proceeds from the sale of shares to acquire ownership interests in real estate properties with a government-tenant orientation. We intend to finance property acquisitions with a combination of net offering proceeds and debt secured by the acquired properties.
As of September 30, 2003, we had issued approximately 12,008,464 shares of our common stock for aggregate gross proceeds before offering costs and selling commissions totaling $119,477,000. Of these amounts, approximately 22,100 shares or $200,005 of our common stock were sold to our advisor, and approximately 9,595 shares or $86,836 of our common stock were sold to other affiliated parties. In addition, 137,536 shares totaling approximately $1,297,500 have been issued under our dividend reinvestment program, or DRIP, through September 30, 2003.
In connection with the offering, we incurred approximately $13,658,000 of costs related to the issuance and distribution of shares through September 30, 2003. Such amount includes a total of approximately $9,314,000 paid to the dealer manager of the offering (NNN Capital Corp., which is wholly owned by our CEO), and is principally comprised of selling commissions, and investor marketing and due diligence costs. In addition, approximately $1,518,000 was paid to our advisor for offering expenses.
Critical Accounting Policies
The preparation of these financial statements in accordance with accounting principles generally accepted in the United States of America 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 revenue recognition, allowance for doubtful accounts, impairment of real estate assets, deferred assets and qualification as a REIT. 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 and those estimates could be different under different assumptions or conditions.
| Revenue Recognition and Allowance for Doubtful Accounts |
Base rental income is recognized on a straight-line basis over the terms of the respective lease agreements. Differences between rental income recognized and amounts contractually due under the lease agreements are credited or charged, as applicable, to rent receivable. We will maintain, as necessary, an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make required payments, which will result in a reduction to income. Management will determine the adequacy of this allowance by continually evaluating individual tenant receivables considering the tenant’s financial condition, security deposits, letters of credit, lease guarantees and current economic conditions.
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| Impairment of Real Estate Assets |
We assess the impairment of a real estate asset when events or changes in circumstances indicate that the net book value may not be recoverable. Indicators management considers important which could trigger an impairment review include the following:
| • | significant negative industry or economic trend; | |
| • | a significant underperformance relative to historical or projected future operating results; and | |
| • | a significant change in the manner in which the asset is used. | |
| Deferred Assets |
Costs incurred for debt financing and property leasing are capitalized as deferred assets. Deferred financing costs include amounts paid to lenders and others to obtain financing. Such costs are amortized over the term of the related loan. Amortization of deferred financing costs is included in interest expense in our statements of operations. Deferred leasing costs include leasing commissions that are amortized using the straight-line method over the term of the related lease. Unamortized financing and leasing costs are charged to expense in the event of debt prepayment or early termination of the lease.
| Qualification as a REIT |
We have made an election to be taxed as a REIT. If we were to fail to qualify as a REIT, it would be, among other things, required to provide for federal income taxes on its income and reduce the level of distributions made to its shareholders. Critical estimates include the allocation of cost between personal and real property, and the calculation of earnings and profits for tax purposes, among others.
Description of Real Estate Investments
| 5508 Highway 290 West — Austin, Texas |
On September 13, 2002, through our wholly-owned subsidiary, GREIT — 5508 Highway 290 West, LP, a Texas limited partnership, we purchased a 100% fee simple interest in the 5508 Highway 290 West Building, a 74,089 square foot property located in Austin, Texas. The property was built in 2001 and consists of two three-story office buildings, a main building and a back building of approximately 61,089 and 13,000 square feet, respectively, on 6.5 acres. The property was purchased from an unaffiliated third party for a purchase price of $10,225,000. The seller of the property paid a sales commission to Realty of $300,000, or 3.0% of the purchase price. The purchase was financed by Greenwich Capital Financial Products, Inc., which provided a $6,700,000 first mortgage loan with an interest rate at 400 basis points over LIBOR under which we were required to make interest-only payments until the due date of September 1, 2003, at which time the loan had to be paid in full or refinanced.
On March 31, 2003, we paid in full the $6,700,000 loan outstanding on the 5508 Highway 290 West Building. On April 1, 2003, we refinanced the property in the amount of $5,150,000 under our credit facility with LaSalle Bank National Association. Under the terms of the credit facility, we are required to make interest-only payments until the due date of January 30, 2006, at which time the loan must be paid in full or refinanced. On May 6, 2003, LaSalle advanced additional funds of $1,545,000 collateralized by this property.
| Two Corporate Plaza — Clear Lake, Texas |
On November 27, 2002, through our wholly-owned subsidiary, GREIT — Two Corporate Plaza, LP, a Texas limited partnership, we purchased a 100% fee simple interest in the Two Corporate Plaza, a 161,331 square foot property located in Clear Lake, Texas. The property was built in 1989 and consists of an eight-story office building and a three-story parking garage. The property includes approximately 137,731 and 23,600 square feet of office and retail space, respectively, on 5.1 acres. The property was purchased from an unaffiliated third party for a purchase price of $13,580,000. The seller of the property paid a sales
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| Congress Center, Chicago, Illinois |
On January 9, 2003, through our wholly-owned subsidiary, GREIT — Congress Center, LLC, we purchased a 30% undivided tenant in common interest in Congress Center, a 16-story Class A office building of approximately 525,000 square feet located in Chicago, Illinois. NNN Congress Center, LLC and WREIT — Congress Center, LLC, affiliates of our company, simultaneously purchased undivided tenant in common interests totaling approximately 70% ownership of the property. The property was purchased from an unaffiliated third party for a purchase price of $136,108,000. Our cash investment was approximately $14,556,000. Our company’s total investment consisted of our proportionate share of the purchase price of approximately $40,832,000 (consisting of approximately $12,047,000 in cash and $28,785,000 in debt), plus $2,509,000 for our proportionate share of closing costs, loan fees and reserves. We are jointly and severally liable for the total debt of $95,950,000 and any subsequent increases in the total debt. The seller of the property paid a sales commission to Realty of $2,000,000, or approximately 1.5% of the purchase price.
| Atrium Building, Lincoln, Nebraska |
On January 31, 2003, through our wholly-owned subsidiary, GREIT — Atrium Building, LLC, we purchased the Atrium Building, a six-story Class B office building with approximately 166,868 square feet located in Lincoln, Nebraska. At purchase, the property was approximately 82% leased with government entities of the State of Nebraska occupying approximately 80% of the property. The property was purchased from an unaffiliated third party for a purchase price of $4,532,000. The property is encumbered by two ground leases under parts of the office building which expire in 2054 and 2055, respectively, including renewal options. The Company funded the purchase price with $2,200,000 in borrowings under its credit facility with LaSalle National Bank Association, or LaSalle. We are required to make interest only payments until the due date of January 30, 2006, at which time the loan must be paid in full or refinanced. The seller of the property paid a sales commission to Realty of $132,000, or approximately 2.9% of the purchase price.
| Park Sahara, Las Vegas, Nevada |
On March 18, 2003, through our wholly-owned subsidiary, GREIT — Park Sahara, LLC, we purchased a 4.75% undivided tenant in common interest in Park Sahara, a five-building Class B office park containing a total of approximately 123,709 square feet on an approximately 6.95 acre site located in Las Vegas, Nevada. The remaining undivided tenant in common interest was purchased by NNN Park Sahara, LLC, an affiliate of our company. The property was purchased from an unaffiliated third party for a total purchase price of $12,200,000. Our total cash investment was approximately $211,000. Our proportionate share of the total purchase price was approximately $579,500 including $399,000 in debt. Our liability for the debt is limited to the amount of our investment in the property. The seller of the property paid a sales commission to Realty of $320,000, or approximately 2.6% of the purchase price.
| Department of Children and Families Campus, Plantation, Florida |
On April 25 2003, through our wholly-owned subsidiary, GREIT — Department of DCF, LLC, we purchased the Department of Children and Families Campus, or DCF , consisting of one one-story and two three-story Class B buildings with a total of approximately 124,037 square feet located on a 9.4 acre site in Plantation, Florida. At purchase, the property was approximately 92% leased to several state and local Florida government agencies. The property was purchased from an unaffiliated third party for a purchase price of $11,580,000. The purchase was financed with $7,605,000 in borrowings under our credit facility with LaSalle. We are required to make interest only payments until the due date of January 30,
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| Gemini Plaza, Houston, Texas |
On May 2, 2003, through our wholly-owned subsidiary, GREIT — Gemini Plaza, LLC, we purchased Gemini Plaza, a six-story Class A office building with approximately 158,627 square feet on a 7.02 acre site located in Houston, Texas. At purchase, the property was 100% leased to the United Space Alliance, a joint venture between government contractors Boeing Company and Lockheed Martin Corporation. The property was purchased from an unaffiliated third party for a purchase price of $15,000,000. The purchase was financed with $9,815,000 in borrowings under our credit facility with LaSalle. We are required to make interest only payments until the due date of January 30, 2006, at which time the loan must be paid in full or refinanced. The seller of the property paid a sales commission to Realty of $325,000, or approximately 2.2% of the purchase price.
| Bay View Plaza — Alameda, California |
On July 31, 2003, through our wholly-owned subsidiary, GREIT — Bay View, LP, a California limited partnership, we purchased an approximately 97.68% majority tenant in common interest in Bay View Plaza in Alameda, California. The property was built in 2001 and consists of a two-story Class A office building with approximately 61,463 square feet on a 3.01 acre site in the master-planned Harbor Bay Office Park. The remaining minority tenant-in-common interest was purchased by an unaffiliated third party, NNN Bay View 1, LLC. The property was purchased from an unaffiliated third party for a purchase price of $11,655,000 in cash. Our proportionate share of the total purchase price was approximately $11,329,000. The seller of the property paid a sales commission to Realty of $380,000, or approximately 3.0% of the purchase price.
| North Pointe Corporate Center — Sacramento, California |
On August 11, 2003, through our wholly-owned subsidiary, GREIT — North Pointe, LP, a California limited partnership, we purchased North Pointe Corporate Center in Sacramento, California. North Pointe is a 130,805 square foot four-story Class A office building on 5.6 acres built in 1988. The property was purchased from an unaffiliated third party for a purchase price of $24,205,000 in cash. The seller of the property paid a sales commission to Realty of $705,000, or approximately 2.9% of the purchase price.
Results of Operations
We commenced our planned principal operations in the third quarter of 2002 when we completed our first property acquisition. The comparability of the financial information discussed below is limited by acquisitions completed during the periods presented. See description of real estate investments above and the real estate investment table presented on page 42 for the timing of these investments.
| Three Months Ended September 30, 2003 and September 30, 2002 |
Rental Income. Rental income consists of straight-line monthly base rent, percentage rental income, if applicable, due pursuant to tenant leases and property operating expenses recovered from tenants. Rental income increased by $3,261,133 to $3,342,130 for the three months ended September 30, 2003 compared to $80,997 for the three months ended September 30, 2002. Our rental income increased significantly due to the acquisition of six additional properties. Management expects rental income to continue to increase due to the planned acquisition of additional properties and ownership of recently acquired properties for a full quarter of operations.
Interest Income. Interest income consists primarily of interest earned on offering proceeds temporarily held by us as cash and cash equivalents pending investment in properties or use for corporate operations. Cash and cash equivalents are invested in short-term money market investments. Interest income increased by $47,253 to $52,998 for the three months ended September 30, 2003 compared to
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Rental Expenses. Rental expenses consist of the costs of owning and maintaining our properties including primarily property management fees, real estate taxes, insurance, maintenance to the exterior of the buildings and the parking lots. These expenses increased by $1,475,038 to $1,494,722 for the three months ended September 30, 2003 compared to $19,684 for the three months ended September 30, 2002. Our rental expenses increased significantly due to the acquisition of six additional properties. Management expects rental expenses to continue to increase due to the planned acquisition of additional properties and ownership of recently acquired properties for a full quarter of operations.
General and Administrative Expenses. General and administrative expenses consist primarily of third party legal and accounting fees and the cost of computerized information services and related office expenses required to maintain our accounting and investor records. These expenses increased by $316,453 to $375,076 for the three months ended September 30, 2003 compared to $58,623 for the three months ended September 30, 2002. Management expects general and administrative expenses to increase on a basis commensurate with the acquisition of additional properties. In addition, management anticipates increased legal, accounting and consulting expenses related to the registration of the second offering and expanded SEC compliance requirements mandated by the Sarbanes-Oxley Act.
Depreciation. Depreciation expense increased by $400,097 to $416,394 for the three months ended September 30, 2003 compared to $16,297 for the three months ended September 30, 2002. Management expects depreciation expense to continue to increase in proportion with the acquisition of additional properties.
Interest Expense. Interest expense consists of interest incurred on mortgage notes payable and borrowings under our line of credit facility and the amortization of deferred financing fees. Interest expense increased by $799,957 to $843,567 in the three months ended September 30, 2003 compared to $43,610 for the three month ended September 30, 2002, including a charge of $286,811 for the fair value adjustments of the interest rate swap agreement which resulted from ineffectiveness in hedging activities. Management expects interest expense to continue to increase with the acquisition of additional properties.
Equity in Net Earnings of Unconsolidated Real Estate. Our equity in earnings of unconsolidated real estate was $274,400 for the three months ended September 30, 2003; we had no investments in unconsolidated real estate in the three months ended September 30, 2002. The majority of this amount was contributed by our 30% undivided tenant in common interest in Congress Center. Management expects equity in the earnings of unconsolidated real estate generated by these investments to increase as the underlying properties become fully leased.
Net Income. Net income was $532,428 or $0.06 per share basic and diluted for the three months ended September 30, 2003 compared to net loss of $(51,472) or $(0.16) per share basic and diluted for the three months ended September 30, 2002. Dividends declared were $1,818,769 or $0.15 per share for the three months ended September 30, 2003 compared to $28,647 or $0.09 per share for the three months ended September 30, 2002.
| Nine Months Ended September 30, 2003 and September 30, 2002 |
Rental Income. Rental income increased by $6,804,374 to $6,885,371 for the nine months ended September 30, 2003 compared to $80,997 for the nine months ended September 30, 2002. Our rental income increased significantly during the nine months ended September 30, 2003 due to the acquisition of six additional properties. Management expects rental income to continue to increase due to the ownership of certain recently acquired properties for a full quarter of operations and the planned acquisition of additional properties.
Interest Income. Interest income increased by $70,860 to $76,605 for the nine months ended September 30, 2003 compared to $5,745 for the nine months ended September 30, 2002. This increase was primarily due to the increase in offering proceeds pending investment.
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Rental Expenses. Rental expenses increased by $2,756,342 to $2,776,026 for the nine months ended September 30, 2003 compared to $19,684 for the nine months ended September 30, 2002. Our rental expenses increased significantly during the nine months ended September 30, 2003 due to the acquisition of six additional properties. Management expects rental expenses to continue to increase due to the ownership of certain recently acquired properties for a full quarter of operations and the planned acquisition of additional properties.
General and Administrative Expenses. General and administrative expenses increased by $869,805 to $928,428 for the nine months ended September 30, 2003 compared to $58,623 for the nine months ended September 30, 2002. Management expects general and administrative expenses to increase on a basis commensurate with the acquisition of additional properties. In addition, management anticipates increased legal, accounting and consulting expenses related to the registration of the second offering and expanded SEC compliance requirements mandated by the Sarbanes-Oxley Act.
Depreciation. Depreciation expense increased by $805,551 to $821,848 for the nine months ended September 30, 2003 compared to $16,297 for the nine months ended September 30, 2002. Depreciation expense increased significantly during the nine months ended September 30, 2003 due to the acquisition of six additional properties. Management expects depreciation expense to continue to increase in proportion with the acquisition of additional properties.
Interest Expense. Interest expense increased by $1,664,021 to $1,707,631 for the nine months ended September 30, 2003 as compared to $43,610 for the nine months ended September 30, 2002. Interest expense increased significantly relative to previous quarters due primarily to additional funds advanced under the Company’s line of credit facility, including a charge of $286,811 for the fair value adjustments of the interest rate swap agreement which resulted from ineffectiveness in hedging activities. Management expects interest expense to continue to increase with the acquisition of additional properties.
Equity in Net Earnings of Unconsolidated Real Estate. The Company’s equity in earnings of unconsolidated real estate was $381,076 for the nine months ended September 30, 2003; we had no investments in unconsolidated real estate for the nine months ended September 30, 2002. The majority of this amount was contributed by our undivided tenant in common ownership interest of 30% in Congress Center. Management expects equity in the earnings of unconsolidated real estate generated by these investments to increase as the underlying properties become fully leased.
Net Income. Net income was $1,099,051 or $0.18 per share basic and diluted for the nine months ended September 30, 2003 compared to a net loss of $(51,472) or $(0.16) per share basic and diluted for the nine months ended September 30, 2002. Dividends declared were $3,411,586 or $0.52 per share for the nine months ended September 30, 2003 compared to $28,647 or $0.09 per share for the nine months ended September 30, 2002.
Years Ended December 31, 2002 and December 31, 2001
As of December 31, 2001, we operated as a developmental stage enterprise. In September 2002, we completed our first property acquisition and commenced our planned principal operations.
During 2002, rental income, rental expenses, mortgage interest, depreciation and amortization and substantially all of the general and administrative expenses incurred during 2002 were a result of the operations of 5508 Highway 290 Building and Two Corporate Plaza, two properties acquired at the end of the third quarter and during the fourth quarter of 2002, respectively.
Rental Income. Rental income consists of basic monthly rent due pursuant to tenant leases and property operating expenses recovered from tenants. Rental income was approximately $732,685 for the year ended December 31, 2002. Of this amount, approximately $595,922 was directly attributable to rental income and approximately $136,763 was comprised of tenant reimbursement for common area maintenance charges, taxes, insurance and other items. We anticipate that rental income will increase in 2003 as a result of a full year of operations of current properties and the acquisition of additional properties.
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Interest Income. Interest income consists of interest earned from short-term money market funds and loans that are held by our company. Interest income was approximately $17,816 for the year ended December 31, 2002.
Rental Expenses. Rental expenses consist of the costs of owning and maintaining our properties including primarily property management fees, real estate taxes, insurance, maintenance to the exterior of the buildings and the parking lots. These expenses were approximately $204,561 for the year ended December 31, 2002. We anticipate that rental expenses will increase in 2003 as a result of a full year of operations of current properties and the acquisition of additional properties.
General and Administrative Expenses. General and administrative expenses consist primarily of third party professional legal and accounting fees and the cost of computerized information services and related office expenses required to maintain our accounting and investor records. These expenses were approximately $169,532 of which approximately $97,659 resulted from fees paid to our attorneys and accountants to facilitate our regulatory filings and compliance with the SEC. We anticipate that such costs will decrease as a percentage of revenues in 2003.
Depreciation. Depreciation expense is calculated using the straight-line method. Buildings and improvements are depreciated over their estimated useful lives ranging primarily from 39 to 15 years, respectively. Certain items, lease commissions, for example, are depreciated over their useful lives. Depreciation expense related to our properties was approximately $102,149 for the year ended December 31, 2002.
Interest Expense. Interest expense, which consists almost entirely of mortgage interest paid on properties, was approximately $248,609, including amortization of deferred financing fees of $49,424, for the year ended December 31, 2002.
Net Income and net income per common share. As a result of the above items, net income for the year ended December 31, 2002 was $25,650 and net income per common share, basic and diluted, was $0.06, based on weighted average common shares outstanding of 405,481.
Liquidity and Capital Resources — September 30, 2003
| Capital Resources |
At September 30, 2003, we had $9,340,739 of cash and cash equivalents as compared to $8,469,335 at December 31, 2002 to meet our immediate short-term liquidity requirements. Management expects that future short-term liquidity requirements will be financed by net cash flow from operations, borrowings under the LaSalle credit facility and existing working capital. Operating cash flows are expected to increase as additional properties are added to our portfolio.
We anticipate that adequate cash will be generated from operations to fund our operating and administrative expenses, continuing debt service obligation and the payment of dividends in the foreseeable future.
We operate as a real estate investment trust for federal income tax purposes. As a REIT, we are generally not subject to income taxes. To maintain our REIT status, we are required to distribute annually as dividends at least 90% of our REIT taxable income, as defined by the Code, to our shareholders, among other requirements. We expect to continue to use our cash flow from operating activities for distributions to shareholders and to support the operating activities of our company. We invest amounts accumulated for distribution in short-term investments.
Cash dividends for the nine months ended September 30, 2003 totaled $1,578,866. We currently pay cash dividends monthly at an annual rate of $0.750 per share. Dividends are determined by our board of directors and are dependent on a number of factors, including the amount of funds available for distribution, our financial condition, any decision by our board of directors to reinvest funds rather than to distribute the funds, our capital expenditures, the annual distribution required to meet REIT status under the Code and other factors our board of directors may deem relevant.
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| Cash Flows From Operating Activities |
Net cash provided by operating activities was $4,489,306 for the nine months ended September 30, 2003 compared to $672,487 for the nine months ended September 30, 2002. The increase in cash provided by operating activities was primarily due to the increased size and performance of our real estate portfolio. The largest source of cash provided by operating activities was rental income. Management expects cash flows from operating activities to increase due to the planned acquisition of additional properties.
| Cash Flows Used in Investing Activities |
Net cash used in investing activities amounted to $80,825,748 for the nine months ended September 30, 2003 compared to $10,786,716 for the nine months ended September 30, 2002. The acquisition of properties and undivided tenant in common ownership interests accounted for the majority of this increase.
We do not have any material planned capital expenditures at existing properties resulting from any known demand based on existing trends. However, management may conclude that expenditures to improve properties purchased are necessary and/or desirable in the future.
| Cash Flows From Financing Activities |
Cash provided by financing activities amounted to $77,207,846 for the nine months ended September 30, 2003 compared to $11,670,500 for the nine months ended September 30, 2002. The largest source of cash provided by financing activities was $85,980,383 raised through our offering (net of offering costs) during the nine months ended September 30, 2003. For the nine months ended September 30, 2003, we incurred offering costs including selling commissions, investor marketing and due diligence costs and organizational and other offering expenses totaling $13,658,000. Our advisor has agreed to reimburse us for all public offering expenses including selling commissions, the marketing contribution and the due diligence expense allowance which together exceed 14% of the gross offering proceeds. Amounts incurred for offering expenses to date are not in excess of such limitation.
Partially offsetting these sources of cash from financing activities were approximately $6,787,000 in cash used to repay the first mortgage loan obtained upon the acquisition of the 5508 Highway 290 West Office Complex and the payment of cash dividends to shareholders during the nine months ended September 30, 2003.
We intend to acquire additional properties and may seek to fund these acquisitions through utilization of our current cash balances and/or proceeds received from the sale of our common shares and a combination of subsequent equity offerings, debt financings or asset dispositions.
Our ability to continue to finance our operations is subject to several uncertainties. Although management anticipates the continued use of our line of credit facility, in general, our ability to obtain mortgage loans on income producing property is dependent upon meeting certain conditions in our credit facility. In addition, our ability to generate working capital is dependent on our ability to attract and retain tenants and the economic and business environments of the various markets in which our properties are located. Our ability to sell real estate investments is partially dependent upon the state of real estate markets and the ability of purchasers to obtain financing at reasonable commercial rates.
| LaSalle Credit Facility |
In January 2003, we obtained a credit facility with a maximum amount of $25,000,000 through LaSalle Bank National Association which matures on January 30, 2006. Advances under this credit facility (1) will be made for the purchase of properties by us and collateralized by the related property; (2) will bear interest at our choice of the Prime Rate or the LIBOR plus a margin of 2.50% per annum, declining to 2.25% when we meet certain conditions, including attaining $50,000,000 in net worth, no default on advances, and full compliance with other covenants under the credit facility; (3) are subject to a floor rate
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On April 29, 2003, LaSalle increased the amount available under our line of credit facility from $25,000,000 to $40,000,000. As of April 29, 2003, we met certain required conditions resulting in a decrease of the floor rate from 4.15% to 3.90% per annum.
On July 17, 2003, our company and LaSalle amended the credit agreement to increase our line of credit from $40,000,000 to $65,000,000. The amended agreement provides that we may request on up to three separate occasions on or before July 17, 2005 to increase the line of credit to $200,000,000 in the aggregate.
On August 8, 2003, we paid down our line of credit with LaSalle in the amount of $6,000,000.
On September 19, 2003, LaSalle approved an increase in the amount of our line of credit from $65,000,000 to $75,000,000 pursuant to the terms of the amended credit agreement.
On September 20, 2003, we paid down our line of credit with LaSalle in the amount of $20,000,000.
Properties financed by borrowings under the LaSalle line of credit are required to meet certain minimum loan to value, debt service coverage and other requirements on a combined basis. As of September 30, 2003, we were in compliance with all such requirements.
As of September 30, 2003, our borrowings under this credit facility totaled $1,135,000 and undrawn amounts under the credit facility totaled $73,865,000.
| Interest Rate Swap |
On May 2, 2003, we entered into an interest swap agreement with LaSalle to hedge our exposure to $26,400,000 in LIBOR based variable rate borrowings under our credit facility, representing all of the outstanding borrowings at the inception of the swap agreement. The risk being hedged is the risk of changes in cash flows due to changes in interest rates. The swap agreement requires us to pay an effective fixed rate of 4.53% per annum over the term of the swap agreement.
During the quarter ended September 30, 2003, we repaid substantially all of our variable rate borrowings, thereby making the interest rate swap ineffective for hedge accounting purposes. As a result, the fair value adjustments to the interest rate swap, which totaled $286,811, have been charged to interest expense. Additionally, interest rate pay differentials arising from the swap agreement during the quarter ended September 30, 2003 resulted in additional interest expense totaling $74,257.
Subsequent Events
On October 8, 2003, we borrowed $29,620,215 under the LaSalle line of credit. The amount drawn was collateralized by the following properties: 5508 Highway 290 West Office Complex — $5,529,983; Gemini Plaza — $9,815,000; and North Point Corporate Center — $14,275,232. Proceeds were utilized to purchase additional real estate properties, as noted below.
On October 10, 2003, through our wholly owned subsidiary, GREIT — 824 Market Street, LLC, a Delaware limited liability company, we purchased 824 Market Street, a ten-story Class B+ multi-tenant office tower with approximately 200,020 square feet in Wilmington, Delaware. The property is approximately 93% leased with approximately 35% of the property leased to GSA (US Bankruptcy Court — District of Delaware). The property was purchased from an unaffiliated third party for a purchase price of approximately $31,900,000 in cash. We paid an acquisition fee to Realty of $970,000, or approximately 3.0% of the purchase price.
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On October 24, 2003, our advisor entered into a contract on behalf of our company with an unaffiliated third-party seller for the acquisition of Centerpoint Corporate Park, a four-building portfolio totaling approximately 435,894 square feet situated in a Class A eight-building suburban corporate campus in Kent, Washington, a suburb of Seattle. The property is approximately 67% leased, with approximately 13.7% leased by PASC (Patient Accounting Services Corporation), 9.2% leased by Alaska Airlines, 7.2% leased by United Airlines, 5.4% leased by Noridian Blue Cross and 5.3% by the Federal Bureau of Investigation. The purchase price for the property is approximately $55,300,000. The seller will pay Realty a sales commission of $1,084,000, or approximately 2.0% of the purchase price, for arranging the transaction. Closing of this acquisition is anticipated in the fourth quarter of 2003. We made a deposit of $2,000,000 related to this potential acquisition. Under certain circumstances, such deposit may be nonrefundable.
On October 24, 2003, our advisor entered into a contract on behalf of our company with an unaffiliated third-party seller for the acquisition of One World Trade Center, a 27-story Class A multi-tenant office building with approximately 570,485 square feet in downtown Long Beach, California. The property, which includes a retail component of approximately 120,000 square feet, is approximately 85% leased, with approximately 9.3% leased by the U.S. Customs Trade Office and 5.3% by the Federal Bureau of Investigation. The purchase price for the property is approximately $113,650,000. The seller will pay Realty a sales commission of $2,400,000, or approximately 2.1% of the purchase price, for arranging the transaction. Closing of this acquisition is anticipated in the fourth quarter of 2003. We made a deposit of $3,000,000 related to this potential acquisition. Under certain circumstances, such deposit may be nonrefundable.
On October 28, 2003, through our wholly owned subsidiary, GREIT — Sutter Square, LP, a California limited partnership, we purchased Sutter Square Galleria, a mixed-use two-building property with approximately 61,036 square feet in Sacramento, California. The property is subject to a ground lease expiring in 2030 with one ten-year option period thereafter. The property is approximately 96% leased with the University of California Davis Extension, John Robert Powers and Blockbuster occupying approximately 30%, 16% and 13%, respectively, of the property. The total purchase price for the property was approximately $8,240,000. In connection with the purchase, we assumed the existing loan from GE Capital Loan Services in the amount of $4,024,126. The loan bears interest at a fixed rate of 6.89% per annum. We are required to make monthly principal and interest payments on a 30-year amortization schedule until the due date of November 1, 2008. We paid an acquisition fee to Realty of $240,000, or approximately 2.9% of the purchase price.
On November 7, 2003, LaSalle approved an increase in the amount of our line of credit from $75,000,000 to $115,000,000, pursuant to the terms of the amended credit agreement.
Commitments and Contingencies
We have real estate deposits outstanding and management is currently considering several other potential property acquisitions. The decision to acquire one or more of these properties will generally depend upon:
| • | receipt of a satisfactory environmental survey and property appraisal for each property; | |
| • | no material adverse change occurring in the properties, the tenants or in the local economic conditions; and | |
| • | receipt of sufficient financing, either through the net proceeds from this offering or satisfactory debt financing. | |
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There can be no assurance that any or all of the conditions will be satisfied.
Funds From Operations
Due to the unique operating characteristics of certain real estate companies, the National Association of Real Estate Investment Trusts, or NAREIT, an industry trade group, has promulgated a standard known as funds from operations, or FFO, which it believes more accurately reflects the operating performance of a REIT. As defined by NAREIT, FFO equals net income or loss determined in accordance with accounting principles generally accepted in the United States, or GAAP, less extraordinary, unusual and non-recurring items, excluding gains/losses from debt restructuring and sales of property, plus depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures in which the REIT holds an interest.
We compute FFO in accordance with the April 2002 “White Paper on Funds From Operations,” and “National Policy Bulletin” published by NAREIT. We generally considers FFO to be a relevant and meaningful supplemental measure of the performance of an equity REIT because it is predicated on a cash flow analysis, as contrasted with net income/loss determined on a GAAP basis that gives effect to non-cash items such as depreciation. However, FFO is not intended to be an alternative to net income or loss as an indicator of our company’s performance, nor to cash flow provided by/used in operating activities (based on GAAP) as a measure of liquidity. In addition, FFO is not necessarily indicative of cash available to pay distributions or finance other operating requirements. Since the aforementioned NAREIT publications only provide general guidelines for computing FFO, the computation thereof may vary from one REIT to another because capitalization and expense accounting policies may differ from entity to entity.
FFO for the three and nine months ended September 30, 2003 and 2002 is summarized below:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
| Net income | $ | 532,428 | $ | (51,472 | ) | $ | 1,099,051 | $ | (51,473 | ) | ||||||
| Add: | ||||||||||||||||
| Depreciation — Operating properties | 416,394 | 16,297 | 821,848 | 16,297 | ||||||||||||
| Depreciation — Unconsolidated real estate operating properties | 297,844 | — | 659,196 | — | ||||||||||||
| Funds from operations | $ | 1,246,666 | $ | (35,175 | ) | $ | 2,580,095 | $ | (35,176 | ) | ||||||
Liquidity and Capital Resources — December 31, 2002
| Capital Resources |
As of December 31, 2002, we had received aggregate gross offering proceeds of $21,540,539 from the issuance of shares of our common stock, and, after payment of $2,936,369 in selling commissions and organization and offering expenses, we raised net offering proceeds available for investment in properties of $18,604,170 as of the same date.
The net increase in cash and cash equivalents during 2002 is principally the result of $18,604,070 of net proceeds from the our initial public offering. Management expects that future short-term liquidity requirements will be financed by net cash flow from operations and existing working capital. Operating cash flows are expected to increase as additional properties are added to our portfolio.
We anticipate that adequate cash will be available to fund its operating and administrative expenses, continuing debt service obligations and the payment of dividends in accordance with REIT requirements in the foreseeable future.
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In order to qualify as a REIT for federal income tax purposes, we are required to make distributions to our shareholders of at least 90% of REIT taxable income. We expect to use our cash flow from operating activities for distributions to shareholders and for payment of other expenditures. We intend to invest amounts accumulated for distribution in short-term investments.
Dividends paid for the year ended December 31, 2002 were $169,820. Approximately 71% of such distributions represented a return of capital for federal income tax purposes. Dividends are determined by our board of directors and are dependent on a number of factors, including the amount of funds available for distribution, our financial condition, any decision by the board of directors to reinvest funds rather than to distribute the funds, our capital expenditures, the annual distribution required to maintain REIT status under the Code and other factors the board of directors may deem relevant.
| Cash Flows From Operating Activities |
Net cash used in operating activities was $608,907 for the year ended December 31, 2002 primarily as a result of rental income, net of expenses, associated with the acquisitions completed in 2002, partially offset by deposits and reserves included in other assets and changes in our operating assets and liabilities.
| Cash Flows Used In Investing Activities |
Net cash used in investing activities amounted to $26,101,496. Of this amount, $23,830,511 related primarily to the acquisition of our first two operating properties in September and November. Of the $2,270,985 in cash used for real estate deposits, $2,000,000 was accounted for by the deposit on our planned purchase of an undivided tenant in common interest in the Congress Center property. Management expects cash flows from operating activities to increase due to a full year of operations of existing properties and the acquisition of additional properties. Management is currently considering other potential property acquisitions. The decision to acquire one or more of these properties will generally depend upon (1) the property’s suitability with regard to the strategy and objectives of our company, (2) receipt of a satisfactory environmental survey and property appraisal, (3) an absence of any material adverse change relating to the property, its tenants or local economic conditions, and (4) adequate financing. There is no assurance that any of these conditions will be satisfied or, if satisfied, that we will purchase any additional properties.
We do not have any material planned capital expenditures resulting from any known demand based on existing trends. However, management may conclude that expenditures to improve properties purchased after December 31, 2002 are necessary and/or desirable.
| Cash Flows From Financing Activities |
Cash provided by financing activities amounted to $35,089,194 for the year ended December 31, 2002. Of this amount, $18,604,070 was raised through our initial offering (net of offering costs) during the year. We raised $6,700,000 through the loan obtained upon the acquisition of the 5508 Highway 290 West Building in September 2002 and $10,160,000 through the loan obtained upon the acquisition of Two Corporate Plaza in November 2002. Partially offsetting these amounts was $169,820 in dividends paid to shareholders during the year. For the year ended December 31, 2002, we incurred offering costs including selling commissions, investor marketing and due diligence costs, organizational and other offering expenses totaling $2,936,369.
Our advisor has guaranteed payment of all public offering expenses (excluding selling commissions, the marketing contribution and the due diligence expense allowance) which together exceed 15% of the gross initial offering proceeds. Effective October 17, 2002, our board of directors lowered the limitation on offering and organizational expenses to be borne by our company from 15% to 14% of the total proceeds raised in the initial offering. As of December 31, 2002, organizational and offering costs did not exceed these limitations and we anticipate that these costs will not exceed these limitations upon completion of the initial offering. Any excess amounts at the completion of the initial offering will be reimbursed by the advisor.
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We intend to acquire additional properties and may seek to fund these acquisitions through utilization of our current cash balances and/or proceeds received from a combination of subsequent equity offerings, debt financings or asset dispositions.
Our ability to continue to finance our operations is subject to several uncertainties. Management believes that in the event that cash flow generated from operations is not sufficient to meet our requirements, we can secure a line of credit to finance any temporary cash flow deficits. Additionally, our cash position of $8,378,891 at December 31, 2002 could be used to compensate for any temporary cash flow deficits. In general, our ability to obtain mortgage loans on income producing property is dependent upon our ability to attract and retain tenants and the economic and business environments of the various markets in which our properties are located, as well as the willingness of mortgage-lending institutions to make loans secured by real property. Our ability to sell real estate investments is partially dependent upon the ability of purchasers to obtain financing at reasonable commercial rates.
| REIT Status |
Management of our company monitors the various qualification tests we must meet to maintain its status as a REIT. Large ownership of our stock is tested upon purchase to determine that no more than 50% in value of the outstanding stock is owned directly, or indirectly, by five or fewer persons or entities at a time. Management also determines, on a quarterly basis, that the Gross Income, Asset and Distribution Tests imposed by the REIT requirements are met. On an ongoing basis, as due diligence is performed by our advisor on potential real estate purchases or temporary investment of uninvested capital, management determines that the income from the new asset will qualify for REIT purposes.
Contractual Obligations and Commercial Commitments as of December 31, 2002
The following summarizes our contractual obligations and other commitments at December 31, 2002, and the effect such obligations could have on our liquidity and cash flow in future periods:
| Amount of Commitment Expiring by Period | ||||||||||||||||||||
| Less Than | 1-3 | 4-5 | Over 5 | |||||||||||||||||
| 1 Year | Years | Years | Years | Total | ||||||||||||||||
| Mortgage Loans Payable | $ | 6,827,265 | $ | 430,160 | $ | 9,602,575 | $ | — | $ | 16,860,000 | ||||||||||
| Purchase Commitments | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
Inflation
Our rental income and operating expenses for those properties owned or to be owned and operated under triple-net leases are not likely to be directly affected by future inflation, since rents are or will be fixed under the leases and property expenses are the responsibility of the tenants. The capital appreciation of the triple-net leased properties is likely to be influenced by interest rate fluctuations. To the extent that inflation determines interest rates, future inflation may have an effect on the capital appreciation of the triple-net leased properties. As of June 30, 2003, the properties owned by our company were subject to some triple-net leases.
Impact of Recently Issued Accounting Pronouncements
In June, 2002, the FASB approved for issuance SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” SFAS No. 146 is effective for such activities initiated after December 31, 2002. Activities of this type include restructurings (such as relocation of a business and fundamental reorganizations of a business itself), which may give rise to costs such as contract cancellation provisions, employee relocation, and one-time termination costs. SFAS No. 146 prohibits liability recognition based solely on management’s intent, and requires that liabilities be measured at estimated fair value. Management has not determined the effect, if any, of SFAS No. 146 on our future financial statements.
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In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”, an amendment of FASB Statement No. 123. The disclosure requirements of Statement 123, “Accounting for Stock-Based Compensation”, which apply to stock compensation plans of all companies, are amended to require certain disclosures about stock-based employee compensation plans in an entity’s accounting policy note. Those disclosures include a tabular format of pro forma net income and, if applicable, earnings per share under the fair value method if the intrinsic value method is used in any period presented. Pro forma information in a tabular format is also required in the notes to interim financial information if the intrinsic value method is used in any period presented. Before amendment by Statement 148, Statement 123 required entities changing to the fair value method of accounting for stock-based employee compensation to account for the change in method prospectively. The FASB decided to provide a choice among three transition methods (the prospective method originally required by Statement 123, the modified prospective method, and the retroactive restatement method) for entities voluntarily adopting the fair value method in periods beginning before December 16, 2003. Statement 123’s original prospective transition method will not be available to entities changing to the fair value method in fiscal years beginning after December 15, 2003. The amendments to the disclosure and transition provisions of Statement 123 are effective for fiscal years ending after December 15, 2002. Calendar year-end entities are required to include the new disclosures in their 2002 financial statements. The disclosure requirement for interim financial information is effective for interim periods beginning after December 15, 2002. Our company has adopted the annual disclosure requirements of SFAS 148 in the accompanying consolidated financial statements. The implementation of this standard did not have a material effect upon our financial statements.
The FASB has issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” — an interpretation of FASB Nos. 5, 57 and 107 and rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Implementation of these provisions of the Interpretation is not expected to have a material impact on the Company’s consolidated financial statements. The disclosure requirements of the Interpretation are effective for financial statements of interim or annual periods ended after December 15, 2002, and have been adopted in the accompanying consolidated financial statements as of September 30, 2003.
The FASB has issued Interpretation No. 46, “Consolidation of Variable Interest Entities” — an interpretation of Accounting Research Bulletin (“ARB”) No. 51. This Interpretation defines a variable interest entity and provides that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities, and results of the activities of the variable interest entity should be included in consolidated financial statements with those of the business enterprise. Furthermore, the FASB indicates that the voting interest approach of ARB No. 51 is not effective in identifying controlling financial interests in entities that are not controllable through voting interest or in which the equity investors do not bear the residual economic risk. This Interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Interpretation applies to public enterprises as of the beginning of the applicable interim or annual period. The implementation of this Interpretation did not have a material effect upon our financial statements.
In May 2003, the FASB issued Statement No. 150 (“SFAS 150”), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with the standard, financial instruments
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MARKET FOR REGISTRANT’S COMMON EQUITY AND
Market Information
There is no established public trading market for our shares of common stock.
Shareholders
As of September 30, 2003, we had 4,708 shareholders of record.
Dividends
We paid monthly dividends on our common stock from September 1, 2002 through December 1, 2002 at an annual rate of $0.700 per share (7.00% based on a $10.00 purchase price). On November 25, 2002, our board of directors approved an increase in the annual distribution to $0.725 per share (7.25% based on a $10.00 purchase price) effective January 1, 2002. On March 22, 2003, our board of directors approved an increase in the annual distribution to $0.75 per share (7.50% based on a $10.00 purchase price) effective June 1, 2003.
The continued payment of dividends subsequent to the termination of this offering will depend primarily on our ability to generate positive cash flow from future operations. However, we cannot assure you that we will continue to pay dividends at the same rate or at all.
Equity Compensation Plan Information
Our equity compensation plan information is as follows:
| Weighted Average Exercise | ||||||||||||
| Number of Securities to be Issued | Price of Outstanding | Number of Securities | ||||||||||
| Upon Exercise of Outstanding | Options, Warrants | Remaining Available | ||||||||||
| Plan Category | Options, Warrants and Rights | and Rights | for Future Issuance | |||||||||
| Equity compensation plans approved by security holders(1) | 130,000 | $ | 9.05 | 370,000 | ||||||||
| Equity compensation plans not approved by security holders | — | — | ||||||||||
| Total | 130,000 | 370,000 | ||||||||||
| (1) | Each of the independent director and office/ employee stock option plans was approved at our annual shareholders meeting held on June 28, 2003. |
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PRINCIPAL SHAREHOLDERS
The following table shows, as of September 30, 2003, the number and percentage of shares of our common stock owned by (1) any person who is known by us to be the beneficial owner of more than 5% of the outstanding shares of our common stock, (2) the CEO and each of our four most highly compensated executive officers if such officer’s salary and bonus for 2002 exceeded $100,000, (3) each director and (4) all directors and executive officers as a group.
| Number of Shares of | ||||||||
| Common Stock | Percent of | |||||||
| Name | Beneficially Owned(1) | Class | ||||||
| Anthony W. Thompson, Chairman, CEO and President | 27,625(2 | ) | * | % | ||||
| Gary T. Wescombe, Director | -0- | * | ||||||
| Edward A. Johnson, Director | -0- | * | ||||||
| D. Fleet Wallace, Director | -0- | * | ||||||
| W. Brand Inlow, Director | -0- | * | ||||||
| All Named Executive Officers and Directors as a Group | 27,625 | * | ||||||
| * | Represents less than 1% of our outstanding common stock. |
| (1) | These amounts include shares issuable upon exercise of options granted to each individual under our independent director stock option plan or our officer and employee stock option plan, to the extent that such options are currently exercisable or will become exercisable within 60 days after the date of this prospectus. |
| (2) | Includes 5,525 shares owned by AWT Family LP, a limited partnership controlled by Mr. Thompson and 22,100 shares owned by our advisor, Triple Net Properties, LLC. Mr. Thompson is the President and approximately 36% owner of Triple Net Properties, LLC. |
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DESCRIPTION OF CAPITAL STOCK
General
The following statements with respect to our capital stock are subject to the provisions of our articles of incorporation and bylaws as in effect as of the date of this prospectus. You should be aware that, while accurate, these statements do not purport to be complete, or to give full effect to the terms or the provisions of the statutory or common law.
Common Stock
Under our articles of incorporation, we have 50,000,000 authorized shares of common stock, $.01 par value per share, available. We have authorized the issuance of 28,500,000 shares of common stock in connection with this offering. The common stock offered by this prospectus, when issued, will be duly authorized, fully paid and nonassessable. The common stock is not convertible or subject to redemption.
Holders of our common stock:
| • | are entitled to receive dividends when and as declared by our board of directors after payment of, or provision for, full cumulative dividends on and any required redemptions of shares of preferred stock then outstanding; | |
| • | are entitled to share ratably in the distributable assets of our company remaining after satisfaction of the prior preferential rights of the preferred stock and the satisfaction of all of our debts and liabilities in the event of any voluntary or involuntary liquidation or dissolution of our company; and | |
| • | do not have preemptive rights. |
Initially, we will serve as our own transfer agent for the common stock.
Shareholder Voting
Except as otherwise provided, all shares of common stock shall have equal voting rights. Shareholders do not have cumulative voting rights. The voting rights per share of our equity securities issued in the future shall be established by our board of directors. The shareholders purchasing shares in this offering will not have preemptive rights to purchase any securities issued by us in the future.
All elections for directors shall be decided, without the need for concurrence by our board of directors, by the affirmative vote of a majority of votes cast at a meeting, provided that a quorum, defined as a majority of the aggregate number of votes entitled to be cast thereon, is present. Any or all directors may be removed, with or without cause and without the necessity for concurrence by our board of directors, by the affirmative vote of the holders of at least a majority of the outstanding shares entitled to vote at an annual or special meeting called for the purpose of removing directors. All other questions shall be decided by a majority of the votes cast at a meeting.
Our articles of incorporation provide that all of the matters listed below require the affirmative vote of a majority of our shareholders:
| • | amend our articles of incorporation, including, by way of illustration, amendments to provisions relating to director qualifications, fiduciary duty, liability and indemnification, conflicts of interest, investment policies or investment restrictions, except for amendments with respect to authorizations of series of preferred stock and amendments which do not adversely affect the rights, preferences and privileges of our shareholders; | |
| • | sell all or substantially all of our assets other than in the ordinary course of our business; | |
| • | cause a merger or reorganization of our company; | |
| • | dissolve or liquidate our company; or |
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| • | take any action to disqualify our company as a REIT or otherwise revoke our election to be taxed as a REIT. |
Our articles of incorporation further provide that, without the necessity for concurrence by our board of directors our shareholders may:
| • | amend our articles of incorporation; | |
| • | remove any or all of our directors; or | |
| • | dissolve or liquidate our company. |
Each shareholder entitled to vote on a matter may do so at a meeting in person, by written proxy or by a signed writing or consent directing the manner in which he or she desires that his or her vote be cast or without a meeting by a signed writing or consent directing the manner in which he or she desires that his or her vote be cast. Any such signed writing or written consent must be received by the board of directors prior to the date on which the vote is taken.
Pursuant to Virginia law, if no meeting is held, 100% of the shareholders must consent in writing.
Preferred Stock
Our articles of incorporation authorize our board of directors without further shareholder action to provide for the issuance of up to 10 million shares of preferred stock, in one or more series, with such voting powers and with such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions, as our board of directors shall approve. As of the date of this prospectus, there are no preferred shares outstanding and we have no present plans to issue any preferred shares. There is no requirement that a majority of the independent directors approve the issuance of preferred stock.
Issuance of Additional Securities and Debt Instruments
Our board of directors is authorized to issue additional securities, including common stock, preferred stock, convertible preferred stock and convertible debt, for cash, property or other consideration on such terms as they may deem advisable and to classify or reclassify any unissued shares of capital stock of our company without approval of the holders of the outstanding securities. We may issue debt obligations with conversion privileges on such terms and conditions as the directors may determine, whereby the holders of such debt obligations may acquire our common stock or preferred stock. We may also issue warrants, options and rights to buy shares on such terms as the directors deem advisable, despite the possible dilution in the value of the outstanding shares which may result from the exercise of such warrants, options or rights to buy shares, as part of a ratable issue to shareholders, as part of a private or public offering or as part of other financial arrangements.
Restrictions on Ownership and Transfer
In order to qualify as a REIT under the federal tax laws, we must meet several requirements concerning the ownership of our outstanding capital stock. Specifically, no more than 50% in value of our outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals, as defined in the federal income tax laws to include specified private foundations, employee benefit plans and trusts, and charitable trusts, during the last half of a taxable year, other than our first REIT taxable year. Moreover, 100 or more persons must own our outstanding shares of capital stock during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year, other than our first REIT taxable year.
Because our board of directors believes it is essential for our company to qualify and continue to qualify as a REIT and for other corporate purposes, our articles of incorporation, subject to the exceptions
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| • | the number of outstanding shares of our common stock; or | |
| • | the number of outstanding shares of our preferred stock of any class or series of preferred stock. |
Our articles of incorporation provide that, subject to the exceptions described below, any transfer of common or preferred stock that would:
| • | result in any person owning, directly or indirectly, shares of our common or preferred stock in excess of 9.9% of the outstanding shares of common stock or any class or series of preferred stock; | |
| • | result in our common and preferred stock being owned by fewer than 100 persons, determined without reference to any rules of attribution; | |
| • | result in our company being “closely held” under the federal income tax laws; or | |
| • | cause our company to own, actually or constructively, 10% or more of the ownership interests in a tenant of our real property, under the federal income tax laws; |
will be null and void, and the intended transferee will acquire no rights in such shares of stock. In addition, such shares will be designated as shares-in-trust and transferred automatically to a trust effective on the day before the purported transfer of such shares. The record holder of the shares that are designated as shares-in-trust, or the prohibited owner, will be required to submit such number of shares of common stock or preferred stock to our company for registration in the name of the trust. We will designate the trustee, but he will not be affiliated with our company. The beneficiary of a trust will be one or more charitable organizations that are named by our company.
Shares-in-trust will remain shares of issued and outstanding common stock or preferred stock and will be entitled to the same rights and privileges as all other stock of the same class or series. The trust will receive all dividends and distributions on the shares-in-trust and will hold such dividends or distributions in trust for the benefit of the beneficiary. The trust will vote all shares-in-trust. The trust will designate a permitted transferee of the shares-in-trust, provided that the permitted transferee purchases such shares-in-trust for valuable consideration and acquires such shares-in-trust without such acquisition resulting in a transfer to another trust.
Our articles of incorporation require that the prohibited owner of the shares-in-trust pay to the trust the amount of any dividends or distributions received by the prohibited owner that are attributable to any shares-in-trust and the record date of which was on or after the date that such shares of stock became shares-in-trust. The prohibited owner generally will receive from the trust the lesser of:
| • | the price per share such prohibited owner paid for the shares of common stock or preferred stock that were designated as shares-in-trust or, in the case of a gift or devise, the market price per share on the date of such transfer; or | |
| • | the price per share received by the trust from the sale of such shares-in-trust. |
The trust will distribute any amounts received by the trust in excess of the amounts to be paid to the prohibited owner to the beneficiary.
The shares-in-trust will be deemed to have been offered for sale to our company, or our designee, at a price per share equal to the lesser of:
| • | the price per share in the transaction that created such shares-in-trust or, in the case of a gift or devise, the market price per share on the date of such transfer; or | |
| • | the market price per share on the date that our company, or our designee, accepts such offer. |
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We will have the right to accept such offer for a period of 90 days after the later of the date of the purported transfer which resulted in such shares-in-trust or the date we determine in good faith that a transfer resulting in such shares-in-trust occurred.
“Market price” on any date means the average of the closing prices for the five consecutive trading days ending on such date. The “closing price” refers to the last quoted price as reported by the primary securities exchange or market on which our stock is then listed or quoted for trading. If our stock is not so listed or quoted at the time of determination of the market price, our board of directors will determine the market price in good faith.
If you acquire or attempt to acquire shares of our common or preferred stock in violation of the foregoing restrictions, or if you owned shares of common or preferred stock that were transferred to a trust, then we will require you immediately to give us written notice of such event and to provide us with such other information as we may request in order to determine the effect, if any, of such transfer on our status as a REIT.
If you own, directly or indirectly, more than 5%, or such lower percentages as required under the federal income tax laws, of our outstanding shares of stock, then you must, within 30 days after January 1 of each year, provide to us a written statement or affidavit stating your name and address, the number of shares of common and preferred stock owned directly or indirectly, and a description of how such shares are held. In addition, each direct or indirect shareholder shall provide to us such additional information as we may request in order to determine the effect, if any, of such ownership on our status as a REIT and to ensure compliance with the ownership limit.
The ownership limit generally will not apply to the acquisition of shares of common or preferred stock by an underwriter that participates in a public offering of such shares or by our advisor. In addition, our board of directors, upon receipt of a ruling from the Internal Revenue Service or an opinion of counsel and upon such other conditions as our board of directors may direct, may exempt a person from the ownership limit. However, the ownership limit will continue to apply until:
| • | our board of directors determines that it is no longer in the best interests of our company to attempt to qualify, or to continue to qualify, as a REIT; and | |
| • | there is an affirmative vote of a majority of the number of shares of outstanding common and preferred stock entitled to vote on such matter at a regular or special meeting of our shareholders. |
All certificates representing shares of common or preferred stock will bear a legend referring to the restrictions described above.
The ownership limit in our articles of incorporation may have the effect of delaying, deferring or preventing a takeover or other transaction or change in control of our company that might involve a premium price for your shares of common stock or otherwise be in your interest as a shareholder.
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IMPORTANT PROVISIONS OF VIRGINIA CORPORATE LAW
The following is a summary of some important provisions of Virginia corporate law, our articles of incorporation and our bylaws in effect as of the date of this prospectus, copies of which may be obtained from our company.
Our Articles of Incorporation and Bylaws
Shareholder rights and related matters are governed by the Virginia Stock Corporation Act, our articles of incorporation and bylaws, as amended. Our board of directors, including our independent directors, unanimously approved our articles of incorporation and bylaws, as amended. A majority of our independent directors must approve or ratify any subsequent amendment to our articles of incorporation and bylaws. Provisions of our articles of incorporation and bylaws, which are summarized below, may make it more difficult to change the composition of our board of directors and may discourage or make more difficult any attempt by a person or group to obtain control of our company.
Shareholders’ Meetings
An annual meeting of our shareholders will be held upon reasonable notice and within a reasonable period, not less than 30 days, following delivery of the annual report, for the purpose of electing directors and for the transaction of such other business as may come before the meeting. A special meeting of our shareholders may be called by the President or a majority of our board of directors, and shall be called by the President upon written request of shareholders holding in the aggregate at least 10% of the outstanding shares. Upon receipt of a written request, either in person or by mail, stating the purpose(s) of the meeting, we shall provide all shareholders, within 10 days after receipt of this request, written notice, either in person or by mail, of a meeting and the purpose of such meeting to be held on a date not less than 15 nor more than 60 days after the distribution of such notice, at a time and place specified in the request, or if none is specified, at a time and place convenient to our shareholders. At any meeting of the shareholders, each shareholder is entitled to one vote for each share owned of record on the applicable record date. In general, the presence in person or by proxy of a majority of the outstanding shares shall constitute a quorum, and the majority vote of our shareholders will be binding on all of our shareholders.
Our Board of Directors
Our articles of incorporation provide that the number of directors of our company may not be fewer than three and that a majority of the directors shall be independent directors. This provision may only be amended by a vote of a majority of our shareholders. Our bylaws provide that the initial number of directors shall be three. A vacancy in our board of directors caused by the death, resignation or incapacity of a director or by an increase in the number of directors may be filled by the vote of a majority of the remaining directors. With respect to a vacancy created by the death, resignation or incapacity of an independent director, the remaining independent directors shall nominate a replacement. Vacancies occurring as a result of the removal of a director by our shareholders shall be filled by a majority vote of our shareholders. Any director may resign at any time and may be removed with or without cause by our shareholders owning at least a majority of the outstanding shares.
Each director will serve a term beginning on the date of his or her election and ending on the next annual meeting of the shareholders. Because holders of common stock have no right to cumulative voting for the election of directors, at each annual meeting of shareholders, the holders of the shares of common stock with a majority of the voting power of the common stock will be able to elect all of the directors.
Fiduciary Duties
Our advisor and directors are deemed to be in a fiduciary relationship to us and our shareholders and our directors have a fiduciary duty to the shareholders to supervise our relationship with the advisor.
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Limitation of Liability and Indemnification
Subject to the conditions set forth below, our articles of incorporation provide that we will indemnify and hold harmless our directors, officers, advisors or their affiliates against any and all losses or liabilities reasonably incurred by our directors, officers, advisors or any of their affiliates in connection with or by reason of any act or omission performed or omitted to be performed on our behalf.
Under our articles of incorporation, our company shall indemnify any of our directors, officers or advisors or any of their affiliates for any liability or loss suffered by such party seeking indemnification and we shall hold harmless any of our directors, officers or advisors or any of their affiliates for any loss or liability suffered by our company, provided, that:
| • | the party seeking indemnification was acting on behalf of or performing services on the part of our company; | |
| • | our directors, officers, or our advisor or their affiliates have determined, in good faith, that the course of conduct which caused the loss or liability was in the best interest of our company; | |
| • | such indemnification or agreement to be held harmless is recoverable only out of our net assets and not from our shareholders; and | |
| • | such liability or loss was not the result of: |
| • | negligence or misconduct by our officers or directors, excluding the independent directors or our advisor or their affiliates; or | |
| • | gross negligence or willful misconduct by the independent directors. |
Our articles of incorporation further provide that our company shall indemnify and hold harmless any of our directors, officers, our advisor or any of their affiliates who is or was serving at our request as a director, trustee, partner or officer of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise to the same extent and subject to the same conditions as set forth above.
Our company shall not indemnify any of our directors, officers, or our advisor or any of their affiliates for losses, liabilities or expenses arising from or out of an alleged violation of federal or state securities laws by such party unless one or more of the following conditions are met:
| • | there has been a successful determination on the merits of each count involving alleged securities law violations as to the party seeking indemnification; | |
| • | such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the party seeking indemnification; or | |
| • | a court of competent jurisdiction approves a settlement of the claims against the party seeking indemnification and finds that indemnification of the settlement and related costs should be made and the court considering the request has been advised of the position of the Securities and Exchange Commission and the published opinions of any state securities regulatory authority in which shares of our stock were offered and sold as to indemnification for securities law violations. |
We may advance amounts to persons entitled to indemnification for reasonable expenses and costs incurred as a result of any proceeding for which indemnification is being sought in advance of a final disposition of the proceeding only if all of the following conditions are satisfied:
| • | the legal action relates to acts or omissions with respect to the performance of duties or services by the indemnified party for or on behalf of our company; | |
| • | the legal action is initiated by a third party who is not a shareholder of our company or the legal action is initiated by a shareholder of our company acting in his or her capacity as such and a court of competent jurisdiction specifically approves such advancement; |
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| • | the party receiving such advances furnishes our company with a written statement of his or her good faith belief that he or she has met the standard of conduct described above; and | |
| • | the indemnified party receiving such advances furnishes to our company a written undertaking, personally executed on his or her behalf, to repay the advanced funds to our company, together with the applicable legal rate of interest thereon, if it is ultimately determined that he or she did not meet the standard of conduct described above. |
Authorizations of payments shall be made by a majority vote of a quorum of disinterested directors.
Also, our board of directors may cause our company to indemnify or contract to indemnify any person not specified above who was, is, or may become a party to any proceeding, by reason of the fact that he or she is or was an employee or agent of our company, or is or was serving at the request of our company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, to the same extent as if such person were specified as one whom indemnification is granted as described above. Any determination to indemnify or contract to indemnify under our articles of incorporation shall be made by a majority vote of a quorum consisting of disinterested directors.
We may purchase and maintain insurance to indemnify such parties against the liability assumed by them in accordance with our articles of incorporation.
The indemnification provided in our articles of incorporation is not exclusive to any other right to which any person may be entitled, including any right under policies of insurance that may be purchased and maintained by our company or others, with respect to claims, issues, or matters in relation to which our company would not have obligation or right to indemnify such person under the provisions of our articles of incorporation.
To the extent that the indemnification may apply to liabilities arising under the Securities Act, in the opinion of the Securities and Exchange Commission, such indemnification is contrary to public policy and, therefore, unenforceable.
Defenses Available
There are defenses available to our directors and officers and our advisor under Virginia corporate law in the event of a shareholder action against them. One such defense is the “business judgment rule.” Under the business judgment rule, a director or officer may contend that he or she performed the action giving rise to the shareholder’s action in good faith and in a manner he or she reasonably believed to be in the best interests of our company. The directors and officers also are entitled to rely on information, opinions, reports or records prepared by experts, including accountants, consultants and counsel, who were selected with reasonable care.
Inspection of Books and Records
Our advisor will keep, or cause to be kept, on our behalf, full and true books of account on an accrual basis of accounting, in accordance with generally accepted accounting principles. We will maintain at all times at our principal office all of our books of account, together with all of our other records, including a copy of our articles of incorporation and any amendments to our articles of incorporation.
Any shareholder or his or her agent will be permitted access to all of our records at all reasonable times, and may inspect and copy any of them. We will permit the official or agency administering the securities laws of a jurisdiction including, without limitation, the Texas State Securities Board, to inspect our books and records upon reasonable notice and during normal business hours. As part of our books and records, we will maintain an alphabetical list of the names, addresses and telephone numbers of our shareholders along with the number of shares held by each of them. We will make the shareholder list available for inspection by any shareholder or his or her agent at our principal office upon the request of the shareholder.
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We will update, or cause to be updated, the shareholder list at least quarterly to reflect changes in the information contained therein.
We will mail a copy of the shareholder list to any shareholder requesting the shareholder list within ten days of the request. The copy of the shareholder list will be printed in alphabetical order, on white paper, and in a readily readable type size. We may impose a reasonable charge for copy work incurred in reproducing the shareholder list.
The purposes for which a shareholder may request a copy of the shareholder list include, without limitation, matters relating to shareholders’ voting rights and the exercise of shareholders’ rights under federal proxy laws.
If our advisor or our board of directors neglects or refuses to exhibit, produce or mail a copy of the shareholder list as requested, our advisor and our board of directors will be liable to any shareholder requesting the list for the costs, including attorneys’ fees, incurred by that shareholder for compelling the production of the shareholder list, and for actual damages suffered by any shareholder by reason of such refusal or neglect. It will be a defense that the actual purpose and reason for the requests for inspection or for a copy of the shareholder list is to secure such list of shareholders or other information for the purpose of selling such list or copies thereof, or of using the same for a commercial purpose other than in the interest of the applicant as a shareholder relative to the affairs of our company. We may require that the shareholder requesting the shareholder list represent that he or she is not requesting the list for a commercial purpose unrelated to the shareholder’s interests in our company and that he or she will not make any commercial distribution of such list or the information disclosed through such inspection. These remedies are in addition to, and shall not in any way limit, other remedies available to shareholders under federal law, or the laws of any state.
The list may not be sold for commercial purposes.
Restrictions on Roll-Up Transactions
In connection with a proposed “roll-up transaction,” which, in general terms, is any transaction involving the acquisition, merger, conversion, or consolidation, directly or indirectly, of our company and the issuance of securities of an entity that would be created or would survive after the successful completion of the roll-up transaction, we will obtain an appraisal of all of our properties from an independent appraiser. In order to qualify as an independent appraiser for this purpose, the person or entity must have no material current or prior business or personal relationship with our advisor or directors and must be engaged to a substantial extent in the business of rendering opinions regarding the value of assets of the type held by our company. Our properties will be appraised on a consistent basis, and the appraisal will be based on the evaluation of all relevant information and will indicate the value of our properties as of a date immediately prior to the announcement of the proposed roll-up transaction. The appraisal will assume an orderly liquidation of properties over a 12-month period. The terms of the engagement of such independent appraiser will clearly state that the engagement is for the benefit of our company and our shareholders. We will include a summary of the independent appraisal, indicating all material assumptions underlying the appraisal, in a report to the shareholders in connection with a proposed roll-up transaction.
In connection with a proposed roll-up transaction, the person sponsoring the roll-up transaction must offer to shareholders who vote against the proposal a choice of:
| • | accepting the securities of the entity that would be created or would survive after the successful completion of the roll-up transaction offered in the proposed roll-up transaction; or | |
| • | one of the following: |
| • | remaining shareholders of our company and preserving their interests in our company on the same terms and conditions as existed previously; or | |
| • | receiving cash in an amount equal to the shareholder’s pro rata share of the appraised value of our net assets. |
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Our company is prohibited from participating in any proposed roll-up transaction:
| • | which would result in the shareholders having voting rights in the entity that would be created or would survive after the successful completion of the roll-up transaction that are less than those provided in our articles of incorporation, including rights with respect to the election and removal of directors, annual reports, annual and special meetings, amendment of the articles of incorporation, and dissolution of our company; | |
| • | which includes provisions that would operate as a material impediment to, or frustration of, the accumulation of shares by any purchaser of the securities of the entity that would be created or would survive after the successful completion of the roll-up transaction, except to the minimum extent necessary to preserve the tax status of such entity, or which would limit the ability of an investor to exercise the voting rights of its securities of the entity that would be created or would survive after the successful completion of the roll-up transaction on the basis of the number of shares held by that investor; | |
| • | in which our shareholder’s rights to access of records of the entity that would be created or would survive after the successful completion of the roll-up transaction will be less than those provided in our articles of incorporation and described in “Inspection of Books and Records,” above; or | |
| • | in which our company would bear any of the costs of the roll-up transaction if our shareholders do not approve the roll-up transaction. |
Anti-Takeover Provisions of the Virginia Stock Corporation Act
The Virginia Stock Corporation Act contains anti-takeover provisions regarding affiliated transactions, control share acquisitions and the adoption of shareholder rights plans. In general, the Virginia Stock Corporation Act’s affiliated transactions provisions prevent a Virginia corporation from engaging in an affiliated transaction with an interested shareholder, unless approved by a majority of the disinterested directors and the holders of at least two-thirds of the outstanding voting stock not owned by the interested shareholder. Generally, this provision would prevent us from engaging in a transaction with any person owning more than 10% of any class of voting securities of our company unless a majority of the disinterested directors on our board of directors and holders of at least two-thirds of the outstanding voting stock not owned by the interested shareholder approved the transaction.
Under the control share acquisitions provisions of the Virginia Stock Corporation Act, shares acquired in a control share acquisition, which means a transaction that increases the voting strength of the person acquiring such shares above statutory thresholds in director elections, generally have no voting rights unless granted by a majority of the outstanding voting stock not owned by such acquiring person. If such voting rights are granted and the acquiring person controls 50% or more of the voting power, all shareholders, other than the acquiring person, are entitled to receive fair value for their shares. If such voting rights are not granted, the corporation may, if authorized by its articles of incorporation or bylaws, purchase the acquiring person’s shares at their cost to the acquiring person. As permitted by the Virginia Stock Corporation Act, we have included a provision in our bylaws that opts our company out of the control share acquisition statute. Our bylaws, however, may be amended by our board of directors without shareholder approval.
Finally, the shareholder rights plan provisions of the Virginia Stock Corporation Act permit our board of directors to adopt a shareholder rights plan that could render a hostile takeover prohibitively expensive if our board of directors determines that such a takeover is not in our best interests. The existence of the shareholder rights plan provisions of the Virginia Stock Corporation Act, as well as the affiliated transactions and control share acquisition provisions, could delay or prevent a change in control of our company, impede a merger, consolidation or other business combination involving our company or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company.
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Dissolution or Termination of Our Company
We are an infinite-life corporation which may be dissolved under the procedures explained in the Virginia Stock Corporation Act at any time by the affirmative vote of a majority of our shareholders and without the necessity of the concurrence of our board of directors. If, before the tenth anniversary of the date of this prospectus, our common stock is not listed on a national stock exchange or quoted on a quotation system of a national securities association or we have not merged with an entity whose shares are so listed or quoted, we intend to submit for a vote of the shareholders at the next annual meeting a proposal to liquidate all of our properties in an orderly fashion and distribute the proceeds to our shareholders. Our operating partnership will terminate on December 31, 2050, unless its term is extended in accordance with the Virginia Revised Uniform Limited Partnership Act.
Transactions with Affiliates
We have established restrictions upon dealings between our company, our advisor and any of their officers, directors or affiliates in our articles of incorporation and elsewhere. The Virginia Stock Corporation Act also governs such transactions. Under the Virginia Stock Corporation Act, each director is required to discharge his duties in accordance with his good faith business judgment of the best interest of our company. In addition, Virginia law provides that a transaction with our company in which a director or officer of our company has a direct or indirect interest is not voidable by us solely because of the directors’ or officers’ interest in the transaction if:
| • | the material facts of the transaction and interest are disclosed to or known by the directors and the transaction is authorized, approved or ratified by the disinterested directors; or | |
| • | the material facts of the transaction and interest are disclosed to or known by our shareholders and the transaction is authorized approved or ratified by the disinterested shareholders; or | |
| • | the transaction is established to be fair to our company. |
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SHARES AVAILABLE FOR FUTURE SALE
All of the shares of common stock offered and sold by this prospectus to the public or pursuant to our dividend reinvestment plan will be freely tradable under the federal securities laws, except shares held by affiliates of our company, such as officers and directors. We may issue up to 27,000,000 shares to the public and up to 1,500,000 shares in connection with our dividend reinvestment plan.
AGREEMENT OF LIMITED PARTNERSHIP
The following description of the Agreement of Limited Partnership is a summary of the provisions that may be included in the Agreement of Limited Partnership when a party other than our company and our advisor is admitted as a partner of our operating partnership. Our operating partnership may issue units of limited partnership interest in exchange for interests in properties, thus creating additional limited partners in our operating partnership.
Management
Our operating partnership has been organized as a Virginia limited partnership under the terms of the Agreement of Limited Partnership. As the sole general partner of our operating partnership, we will have full, exclusive and complete responsibility and discretion in the management and control of it. When and if additional limited partners are admitted, they will have no authority in their capacity as limited partners to transact business for, or participate in the management activities or decisions of, our operating partnership. However, any amendment to the Agreement of Limited Partnership that would affect the limited partners’ redemption/rights described below would require the consent of limited partners holding more than 50% of the units of limited partnership interest held by such partners.
Transferability of Interests
It is anticipated that our company may not voluntarily withdraw from our operating partnership or transfer or assign our interest in our operating partnership unless the transaction in which such withdrawal or transfer occurs results in the limited partners receiving property in an amount equal to the amount they would have received had they exercised their redemption rights immediately prior to such transaction, or unless the successor to our company contributes substantially all of its assets to our operating partnership in return for an interest in our operating partnership. Except in the limited situations described in the Agreement of Limited Partnership, it is anticipated that the limited partners may not transfer their interests in our operating partnership, in whole or in part, without our written consent, which consent we may withhold in our sole discretion.
Capital Contribution
We will contribute to our operating partnership all the net proceeds of the offering as an initial capital contribution in exchange for 100% of the general partnership interests in our operating partnership. No proceeds are allocated to our advisor’s incentive limited partnership interest. Our advisor’s incentive limited partnership interest will entitle our advisor to receive an incentive distribution equal to 15% of the partnership’s cash flow from operations after our company receives and pays to our shareholders a threshold annual return of 8% on their investments in our company. In addition, the incentive limited partnership interest will entitle our advisor to receive an additional incentive distribution equal to 15% of the net proceeds from the sale of properties after our company receives and pays to our shareholders their invested capital plus the annual return of 8% on their investments in our company. Our advisor has no voting rights by virtue of its incentive limited partnership interest. The Agreement of Limited Partnership provides that if our operating partnership requires additional funds at any time or from time to time in excess of funds available to our operating partnership from borrowing or capital contributions, we may borrow such funds from a financial institution or other lender and lend such funds to our operating partnership on the same terms and conditions as are applicable to our borrowing of such funds. Under the Agreement of Limited Partnership,
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Moreover, we will be authorized to cause our operating partnership to issue partnership interests for less than fair market value if our company has concluded in good faith that such issuance is in the best interests of our company and our operating partnership. If we so contribute additional capital to our operating partnership, we will receive additional units of limited partnership interest of our operating partnership and our percentage interest in our operating partnership will be increased on a proportionate basis based upon the amount of such additional capital contributions and the value of our operating partnership at the time of such contributions. Conversely, the percentage interests of any limited partners will be decreased on a proportionate basis in the event of additional capital contributions by our company. In addition, if we contribute additional capital to our operating partnership, we will revalue the property of our operating partnership to its fair market value, as determined by us, and the capital accounts of the partners will be adjusted to reflect the manner in which the unrealized gain or loss inherent in such property that has not been reflected in the capital accounts previously would be allocated among the partners under the terms of the Agreement of Limited Partnership if there were a taxable disposition of such property for such fair market value on the date of the revaluation.
Redemption Rights
Under the Agreement of Limited Partnership, it is anticipated that any limited partners, other than our advisor, will receive redemption rights, which will enable them to cause our operating partnership to redeem their units of limited partnership interests in our operating partnership in exchange for cash or, at our option, common stock on a one-for-one basis. The redemption price will be paid in cash, at our discretion, or if the issuance of common stock to the redeeming limited partner would:
| • | result in any person owning, directly or indirectly, stock in excess of the ownership limit; | |
| • | result in our shares of capital stock being owned by fewer than 100 persons, determined without reference to any rules of attribution; | |
| • | result in our company being “closely held” under the federal income tax laws; | |
| • | cause us to own, actually or constructively, 10% or more of the ownership interests in a tenant of our real property; or | |
| • | cause the acquisition of common stock by such redeeming limited partner to be “integrated” with any other distribution of common stock for purposes of complying with the Securities Act. |
A limited partner may exercise the redemption rights at any time after one year following the date on which he received such units of limited partnership interest in our operating partnership, provided that a limited partner may not exercise the redemption right for fewer than 1,000 units or, if such limited partner holds fewer than 1,000 units, all of the units held by such limited partner. In addition, a limited partner may not exercise the redemption right more than two times annually.
The number of shares of common stock issuable upon exercise of the redemption rights will be adjusted upon the occurrence of share splits, mergers, consolidations or similar pro rata share transactions, which otherwise would have the effect of diluting or increasing the ownership interests of the limited partners or our shareholders.
As of September 30, 2003, there were no limited partners.
Incentive Units
Our operating partnership will issue 100 units of incentive limited partnership interest to our advisor. The incentive units will entitle our advisor to receive an incentive distribution equal to 15% of our
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| • | an 8% cumulative, non-compounded return on our Invested Capital; and | |
| • | any remaining shortfall in the recovery of our Invested Capital with respect to prior sales of our operating partnership’s properties. |
Invested Capital will equal the product of:
| • | the sum of (1) the number of shares of common stock that we issue, including any shares actually issued through the dividend reinvestment program, or the director stock options, and (2) the number of partnership units issued by our operating partnership to limited partners other than our advisor; and | |
| • | a dollar amount that initially will be $10.00 and that will be adjusted appropriately to reflect stock dividends, stock splits, or other changes in the capital structure of our company or our operating partnership, and, at our discretion, changes in the average price per share paid for our common stock and partnership units in our operating partnership after this offering. |
When a property is sold, Invested Capital will be reduced by the lesser of: the net sale proceeds available for distributions; or the sum of (1) the portion of Invested Capital that initially was allocated to that property and (2) any remaining shortfall in the recovery of our Invested Capital with respect to prior sales of properties.
If there is a shortfall in the 8% return on Invested Capital at the end of any calendar year and our advisor previously has received incentive distributions, other than those that have previously been repaid, our advisor will be required to repay to our operating partnership an amount of those distributions sufficient to cause the cumulative 8% return threshold to be met. In no event will the cumulative amount repaid by our advisor to our operating partnership exceed the cumulative amount of incentive distributions that our advisor previously has received.
The incentive units also will entitle our advisor to receive an incentive distribution equal to 15% of the net proceeds of the sale of a property after our company has received, and paid to the shareholders, the sum of:
| • | our Invested Capital that initially was allocated to the property sold; | |
| • | any remaining shortfall in the recovery of our Invested Capital with respect to prior sales of properties; and | |
| • | any remaining shortfall in the 8% return. |
If we and, in turn, our shareholders have not received a return of our Invested Capital or if there is a shortfall in the 8% return after the sale of the operating partnership’s last property and our advisor previously has received incentive distributions, other than those that have previously been repaid, our advisor will be required to repay to our operating partnership an amount of those distributions sufficient to cause us and, in turn, our shareholders to receive a full return of our Invested Capital and a full distribution of the 8% return. In no event will the cumulative amount repaid by our advisor to our operating partnership exceed the cumulative amount of incentive distributions that our advisor previously has received.
If the advisory agreement is terminated as a result of the merger of our advisor into our company in connection with the listing of our shares on a national exchange or market, our advisor’s incentive limited partnership interest will be redeemed for cash, or if agreed by both parties, shares of common stock of our company. Our cost to redeem the incentive units will be the amount that would be payable to the advisor pursuant to the “incentive distribution” and “incentive distribution upon dispositions” described under the heading “Compensation Table” if we liquidated all of our assets for their fair market value. The advisory agreement may be terminated by our advisor or a majority of the independent directors upon 60 days’ prior written notice without cause or penalty, in which case we will not be required to pay any termination fee.
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Operations
The Agreement of Limited Partnership requires that our operating partnership be operated in a manner that will enable our company to satisfy the requirements for being classified as a REIT, to avoid any federal income or excise tax liability imposed by the federal income tax laws, other than any federal income tax liability associated with our retained capital gains, and to ensure that our operating partnership will not be classified as a “publicly traded partnership” for purposes of the federal income tax laws.
In addition to the administrative and operating costs and expenses incurred by our operating partnership, our operating partnership will pay all administrative costs and expenses of our company, including:
| • | all expenses relating to our formation and continuity of existence; | |
| • | all expenses relating to our public offering; | |
| • | all expenses associated with the preparation and filing of any periodic reports under federal, state or local laws or regulations; | |
| • | all expenses associated with compliance with laws, rules and regulations promulgated by any regulatory body; and | |
| • | all other operating or administrative costs incurred by our company in the ordinary course of business on behalf of our operating partnership. |
Distributions
The Agreement of Limited Partnership provides that our operating partnership will distribute to the partners cash from operations, including net sale or refinancing proceeds, but excluding net proceeds from the sale of our operating partnership’s property in connection with the liquidation of our operating partnership, on a monthly basis. In our sole discretion, we will determine the amounts of such distributions. Distributions of cash from operations will be made first to our company until we have received an 8% cumulative, non-compounded return on our Invested Capital plus any remaining shortfall in the recovery of our Invested Capital with respect to prior sales of our operating partnership’s properties. Any remaining cash from operations will be distributed 85% to us and 15% to our advisor. The net sale proceeds from the sale of one of our operating partnership’s properties will be distributed 100% to us until we have received an amount equal to the sum of (1) our Invested Capital that initially was allocated to that property, (2) any remaining shortfall in the recovery of our Invested Capital with respect to prior sales of properties, and (3) any remaining shortfall in our 8% return. Any remaining net sale proceeds will be distributed 85% to us and 15% to our advisor.
Notwithstanding the foregoing, if there is a shortfall in the distribution of the 8% return to us at the end of any calendar year and the advisor previously has received incentive distributions, other than distributions that have previously been repaid, the advisor will be required to repay to the operating partnership whatever portion of those prior distributions is necessary to cause our 8% return to be met.
Upon liquidation of our operating partnership, after payment of, or adequate provision for, debts and obligations of our operating partnership, including any partner loans, any remaining assets of our operating partnership will be distributed to all partners with positive capital accounts in accordance with their respective positive capital account balances. Notwithstanding the foregoing, if we have not received a full return of our Invested Capital or there is a shortfall in our 8% return when the operating partnership’s last property has been sold and the advisor previously has received distributions, other than distributions that have previously been repaid, the advisor will be required to repay to the operating partnership whatever portion of those prior distributions is necessary to cause a full return of our Invested Capital and a full distribution of our 8% return.
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Allocations
Operating Income. Operating income of our operating partnership will be allocated as follows:
| (1) First, 100% to our company to the extent operating losses previously allocated 100% to us pursuant to clause (3) under Operating Losses below and losses from property sales previously allocated 100% to us pursuant to clause (2) under Losses from Capital Transactions below; | |
| (2) Second, 85% to our company and 15% to our advisor to the extent of operating losses and losses from property sales previously allocated to us and the advisor in that same proportion pursuant to clause (2) under Operating Losses below and clause (1) under Losses from Capital Transactions below; | |
| (3) Third, 100% to our company until we have been allocated operating income and gain from property sales in an amount equal to the distributions to us of our 8% return on Invested Capital; | |
| (4) Fourth, 85% to our company and 15% to our advisor until the advisor has been allocated operating income and gain from property sales in an amount equal to the cash from operations and net sale proceeds distributed to the advisor; and | |
| (5) Thereafter, any remaining operating income will be allocated 100% to our company. |
Operating Losses. Operating losses of our operating partnership will be allocated as follows:
| (1) First, 100% to our company to the extent of operating income previously allocated 100% to us pursuant to clause (5) under Operating Income above; | |
| (2) Second, 85% to our company and 15% to our advisor to the extent of operating income and gain from property sales previously allocated to us and the advisor in that same proportion pursuant to clause (4) under Operating Income above and clause (4) under Gains from Capital Transactions below; and | |
| (3) Thereafter, any remaining operating losses will be allocated 100% to our company. |
All depreciation and amortization deductions of our operating partnership will be allocated 100% to our company.
Gains from Capital Transactions. Gains from the sale of property other than the disposition of all or substantially all of the assets of the operating partnership will be allocated as follows:
| (1) First, 100% to our company to the extent of operating losses and losses from property sales previously allocated 100% to us pursuant to clause (3) under Operating Losses above and clause (2) under Losses from Capital Transactions below; | |
| (2) Second, 85% to our company and 15% to our advisor to the extent of operating losses and losses from property sales previously allocated to us and the advisor in that same proportion pursuant to clause (2) under Operating Losses above and clause (1) under Losses from Capital Transactions below; | |
| (3) Third, 100% to our company until we have been allocated an aggregate amount equal to the sum of (A) any depreciation or amortization recapture associated with the operating partnership’s investment in the property, (B) the amount by which our Invested Capital allocable to the property sold exceeds the operating partnership’s investment in the property, (C) any remaining shortfall in the recovery of our Invested Capital with respect to prior sales of properties that is distributed to us in connection with the sale of the property, and (D) any remaining shortfall in our 8% return that is distributed to us in connection with the sale of the property; and | |
| (4) Thereafter, any remaining gain will be allocated 85% to our company and 15% to our advisor. |
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Losses from Capital Transactions. Losses from the sale of property other than the disposition of all or substantially all of the assets of the operating partnership will be allocated as follows:
| (1) First, 85% to our company and 15% to our advisor to the extent of operating income and gain from property sales previously allocated to us and the advisor in that same proportion pursuant to clause (4) under Operating Income above and clause (4) under Gains from Capital Transactions above; and | |
| (2) Thereafter, any remaining loss will be allocated 100% to our company. |
Gains from Terminating Capital Transactions. Gains from the sale of all or substantially all of the assets of the operating partnership will be allocated as follows:
| (1) First, to our company until our aggregate capital account balance equals the sum of (A) the Invested Capital and (B) the cumulative 8% return that has not previously been distributed; and | |
| (2) Thereafter, any remaining gain will be allocated 85% to our company and 15% to our advisor. |
Losses from Terminating Capital Transactions. Losses from the sale of all or substantially all of the assets of the operating partnership will be allocated as follows:
| (1) First, 85% to our company and 15% to our advisor to the extent of operating income and gain from property sales previously allocated to us and the advisor in that same proportion pursuant to clauses (2) and (4) under “Operating Income” above and clause (4) under “Gains from Capital Transactions” above; and | |
| (2) Thereafter, any remaining loss will be allocated 100% to our company. |
Notwithstanding the foregoing, to the extent that our advisor is required to repay distributions to the operating partnership, the allocations will be adjusted to reflect such repayment.
All allocations are subject to compliance with the provisions of the federal income tax laws.
Term
Our operating partnership will continue until December 31, 2050, or until sooner dissolved upon the bankruptcy, dissolution or withdrawal of our company, unless the limited partners elect to continue our operating partnership; the sale or other disposition of all or substantially all the assets of our operating partnership; or the election by the general partner.
Tax Matters
Under the Agreement of Limited Partnership, we will be the tax matters partner of our operating partnership and, as such, will have authority to handle tax audits and to make tax elections under the federal income tax laws on behalf of our operating partnership.
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FEDERAL INCOME TAX CONSEQUENCES OF OUR STATUS AS A REIT
This section summarizes the federal income tax issues that you, as a prospective shareholder, may consider relevant. Because this section is a summary, it does not address all of the tax issues that may be important to you. In addition, this section does not address the tax issues that may be important to shareholders that are subject to special treatment under the federal income tax laws, such as insurance companies, tax-exempt organizations, except to the extent discussed in “— Taxation of Tax-Exempt Shareholders” below, financial institutions or broker-dealers, and non-U.S. individuals and foreign corporations, except to the extent discussed in “— Taxation of Non-U.S. Shareholders” below, among others.
The statements in this section are based on the current federal income tax laws governing qualification as a REIT. We cannot assure you that new laws, interpretations thereof, or court decisions, any of which may take effect retroactively, will not cause any statement in this section to be inaccurate.
We urge you to consult your own tax advisor regarding the specific tax consequences to you of investing in our common stock and of our election to be taxed as a REIT. Specifically, you should consult your own tax advisor regarding the federal, state, local, foreign, and other tax consequences of such investment and election, and regarding potential changes in applicable tax laws.
Taxation of Our Company
We have qualified and elected to be taxed as a REIT under the federal income tax laws for the year ended December 31, 2002. We cannot assure you, however, that we will qualify or remain qualified as a REIT. This section discusses the laws governing the federal income tax treatment of a REIT and its shareholders, which laws are highly technical and complex.
Hirschler Fleischer, our counsel, has given us an opinion that we qualified to be taxed as a REIT under the federal income tax laws for our taxable year ending on December 31, 2002, and that our organization and proposed method of operation will enable us to continue to satisfy the REIT requirements and qualify as a REIT. You should be aware that Hirschler Fleischer’s opinion is not binding upon the Internal Revenue Service or any court. In addition, Hirschler Fleischer’s opinion is based on specified assumptions and on the factual representations we have made, all of which are described in Hirschler Fleischer’s opinion.
Our REIT qualification depends on our ability to meet on a continuing basis several qualification tests set forth in the federal tax laws. Those qualification tests involve the percentage of income that we earn from specified sources, the percentage of our assets that fall within specified categories, the diversity of our share ownership, and the percentage of our earnings that we distribute. We describe the REIT qualification tests, and the consequences of our failure to meet those tests, in more detail below. Hirschler Fleischer will not review our compliance with those tests on a continuing basis. Accordingly, neither we nor Hirschler Fleischer can assure you that we will satisfy those tests.
If we qualify as a REIT, we generally will not be subject to federal income tax on the taxable income that we distribute to our shareholders. The benefit of that tax treatment is that it avoids the “double taxation,” which means taxation at both the corporate and shareholder levels, that generally results from owning stock in a corporation.
However, we will be subject to federal tax in the following circumstances:
| • | we will pay federal income tax on taxable income, including net capital gain, that we do not distribute to our shareholders during, or within a specified time period after, the calendar year in which the income is earned; | |
| • | we may be subject to the “alternative minimum tax” on any items of tax preference that we do not distribute or allocate to our shareholders; |
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| • | we will pay income tax at the highest corporate rate on (1) net income from the sale or other disposition of property acquired through foreclosure that we hold primarily for sale to customers in the ordinary course of business and (2) other non-qualifying income from foreclosure property; | |
| • | we will pay a 100% tax on our net income from sales or other dispositions of property, other than foreclosure property, that we hold primarily for sale to customers in the ordinary course of business; | |
| • | if we fail to satisfy the 75% gross income test or the 95% gross income test, as described below under “— Requirements for Qualification — Income Tests,” and nonetheless continue to qualify as a REIT because we meet other requirements, we will pay a 100% tax on (1) the gross income attributable to the greater of the amounts by which we fail the 75% and 90% gross income tests, multiplied by (2) a fraction intended to reflect our profitability; | |
| • | if we fail to distribute during a calendar year at least the sum of (1) 90% of our REIT ordinary net income for such year, (2) 90% of our REIT capital gain net income for such year (unless an election is made as provided below), and (3) any undistributed taxable income from prior periods, we will pay a 4% excise tax on the excess of such required distribution over the amount we actually distributed; | |
| • | we may elect to retain and pay income tax on our net long-term capital gain; and | |
| • | if we acquire any asset from a C corporation, or a corporation generally subject to full corporate-level tax, in a merger or other transaction in which we acquire a basis determined by reference to the C corporation’s basis in the asset, we will pay tax at the highest regular corporate rate if we recognize gain on the sale or disposition of such asset during the 10-year period after we acquire such asset. The amount of gain on which we will pay tax is the lesser of (1) the amount of gain that we recognize at the time of the sale or disposition and (2) the amount of gain that we would have recognized if we had sold the asset at the time we acquired the asset. The rule described in this paragraph will apply assuming that we make an election under IRS Notice 88-19 upon our acquisition of an asset from a C corporation. |
Requirements for Qualification
A REIT is a corporation, trust, or association that meets the following requirements:
| (1) it is managed by one or more trustees or directors; | |
| (2) its beneficial ownership is evidenced by transferable shares, or by transferable certificates of beneficial interest; | |
| (3) it would be taxable as a domestic corporation, but for the REIT provisions of the federal income tax laws; | |
| (4) it is neither a financial institution nor an insurance company subject to specified provisions of the federal income tax laws; | |
| (5) at least 100 persons are beneficial owners of its shares or ownership certificates; | |
| (6) not more than 50% in value of its outstanding shares or ownership certificates is owned, directly or indirectly, by five or fewer individuals, including specified entities, during the last half of any taxable year; | |
| (7) it elects to be a REIT, or has made such election for a previous taxable year, and satisfies all relevant filing and other administrative requirements established by the Internal Revenue Service that must be met to elect and maintain REIT status; |
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| (8) it uses a calendar year for federal income tax purposes and complies with the record keeping requirements of the federal income tax laws; and | |
| (9) it meets other qualification tests, described below, regarding the nature of its income and assets. |
We must meet requirements 1 through 4 during our entire taxable year and must meet requirement 5 during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. Requirements 5 and 6 will not apply to us until our second taxable year.
If we comply with all the requirements for ascertaining the ownership of our outstanding shares in a taxable year and have no reason to know that we violated requirement 6 above, we will be deemed to have satisfied that requirement for such taxable year. For purposes of determining share ownership under requirement 6, an “individual” generally includes a supplemental unemployment compensation benefits plan, a private foundation, or a portion of a trust permanently set aside or used exclusively for charitable purposes. An “individual,” however, generally does not include a trust that is a qualified employee pension or profit sharing trust under the federal income tax laws, and all of the beneficiaries of such a trust will be treated as holding our shares in proportion to their actuarial interests in the trust for purposes of requirement 6.
We plan to issue sufficient common stock with sufficient diversity of ownership to satisfy requirements 5 and 6 set forth above. In addition, our articles of incorporation restrict the ownership and transfer of our stock so that we should continue to satisfy requirements 5 and 6. The provisions of our articles of incorporation restricting the ownership and transfer of our stock are described in “Description of Capital Stock — Restrictions on Ownership and Transfer.”
A corporation that is a “qualified REIT subsidiary” is not treated as a corporation separate from its parent REIT. All assets, liabilities, and items of income, deduction, and credit of a “qualified REIT subsidiary” are considered to be assets, liabilities, and items of income, deduction, and credit of the REIT. A “qualified REIT subsidiary” is a corporation, all of the capital stock of which is owned by the REIT. Thus, in applying the requirements described herein, any of our “qualified REIT subsidiaries” will be ignored, and all assets, liabilities, and items of income, deduction, and credit of such subsidiaries will be considered to be assets, liabilities, and items of income, deduction, and credit of our company. We currently do not have any corporate subsidiaries, but we may have corporate subsidiaries in the future.
In the case of a REIT that is a partner in a partnership, the REIT is treated as owning its proportionate share of the assets of the partnership and as earning its allocable share of the gross income of the partnership for purposes of the applicable REIT qualification tests. Thus, our proportionate share of the assets, liabilities, and items of income of our operating partnership will be treated as assets and gross income of our company for purposes of applying the requirements described in this prospectus.
Income Tests
We must satisfy two gross income tests annually to qualify and maintain our qualification as a REIT. First, at least 75% of our gross income, excluding gross income from prohibited transactions, for each taxable year must consist of defined types of income that we derive, directly or indirectly, from investments relating to real property or mortgages on real property or temporary investment income. Qualifying income for purposes of the 75% gross income test includes:
| • | “rents from real property;” | |
| • | interest on debt secured by mortgages on real property or on interests in real property; and | |
| • | dividends or other distributions on and gain from the sale of shares in other REITs. |
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Second, at least 95% of our gross income, excluding gross income from prohibited transactions, for each taxable year must consist of income that is qualifying income for purposes of the 75% gross income test described above, dividends, other types of interest, gain from the sale or disposition of stock or securities, or any combination of the foregoing. The following paragraphs discuss the specific application of those tests to our company.
Rents and Interest
Rent that we receive from our tenants will qualify as “rents from real property” in satisfying the gross income requirements for a REIT described above only if the following conditions are met:
| • | The amount of rent must not be based, in whole or in part, on the income or profits of any person, but may be based on a fixed percentage or percentages of receipts or sales. | |
| • | Neither we nor a direct or indirect owner of 10% or more of our stock may own, actually or constructively, 10% or more of a tenant from whom we receive rent, known as a related party tenant. | |
| • | If the rent attributable to the personal property leased in connection with a lease of our real property exceeds 15% of the total rent received under the lease, the rent that is attributable to personal property will not qualify as “rents from real property.” |
We generally must not operate or manage our real property or furnish or render services to our tenants, other than through a taxable subsidiary or an “independent contractor” who is adequately compensated and from whom we do not derive revenue. However, we need not provide services through an independent contractor, but instead may provide services directly, if the services are “usually or customarily rendered” in connection with the rental of space for occupancy only and are not otherwise considered “rendered to the occupant.” In addition, we may render a de minimus amount of “non-customary” services to the tenants of a property, other than through a taxable subsidiary or an independent contractor, as long as our income from the services does not exceed 1% of our gross income from the related property.
We do not expect to charge rent for any of our properties that is based, in whole or in part, on the income or profits of any person, except by reason of being based on a fixed percentage of gross revenues, as described above. Furthermore, we have represented that, to the extent that the receipt of such rent would jeopardize our REIT status, we will not charge rent for any of our properties that is based, in whole or in part, on the income or profits of any person. In addition, we do not anticipate receiving rent from a related party tenant, and we have represented that, to the extent that the receipt of such rent would jeopardize our REIT status, we will not lease any of our properties to a related party tenant. We also do not anticipate that we will receive rent attributable to the personal property leased in connection with a lease of our real property that exceeds 15% of the total rent received under the lease. Furthermore, we have represented that, to the extent that the receipt of such rent would jeopardize our REIT status, we will not allow the rent attributable to personal property leased in connection with a lease of our real property to exceed 15% of the total rent received under the lease. Finally, we do not expect to furnish or render, other than under the 1% de minimus rule described above, “non-customary” services to our tenants other than through an independent contractor, and we have represented that, to the extent that the provision of such services would jeopardize our REIT status, we will not provide such services to our tenants other than through an independent contractor.
If our rent attributable to the personal property leased in connection with a lease of our real property exceeds 15% of the total rent we receive under the lease for a taxable year, the portion of the rent that is attributable to personal property will not be qualifying income for purposes of either the 75% or 95% gross income test. Thus, if such rent attributable to personal property, plus any other income that we receive during the taxable year that is not qualifying income for purposes of the 95% gross income test, exceeds 5% of our gross income during the year, we would lose our REIT status. Furthermore, if either (1) the rent we receive under a lease of our property is considered based, in whole or in part, on the income or
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To the extent that we receive from our tenants reimbursements of amounts that the tenants are obligated to pay to third parties or penalties for the nonpayment or late payment of such amounts, those amounts should qualify as “rents from real property.” However, to the extent that we receive interest accrued on the late payment of the rent or other charges, that interest will not qualify as “rents from real property,” but instead will be qualifying income for purposes of the 95% gross income test. We may receive income not described above that is not qualifying income for purposes of the gross income tests. We will monitor the amount of non-qualifying income that our assets produce and we will manage our portfolio to comply at all times with the gross income tests.
For purposes of the 75% and 95% gross income tests, the term “interest” generally excludes any amount that is based in whole or in part on the income or profits of any person. However, the term “interest” generally does not exclude an amount solely because it is based on a fixed percentage or percentages of receipts or sales. Furthermore, if a loan contains a provision that entitles a REIT to a percentage of the borrower’s gain upon the sale of the secured property or a percentage of the appreciation in the property’s value as of a specific date, income attributable to such provision will be treated as gain from the sale of the secured property, which generally is qualifying income for purposes of the 75% and 95% gross income tests.
Failure to Satisfy Income Tests
If we fail to satisfy one or both of the 75% and 95% gross income tests for any taxable year, we nevertheless may qualify as a REIT for such year if we qualify for relief under the relief provisions of the federal income tax laws. Those relief provisions generally will be available if:
| • | our failure to meet such tests is due to reasonable cause and not due to willful neglect; | |
| • | we attach a schedule of the sources of our income to our tax return; and | |
| • | any incorrect information on the schedule was not due to fraud with intent to evade tax. |
We cannot predict, however, whether in all circumstances we would qualify for the relief provisions. In addition, as discussed above in “— Taxation of Our Company,” even if the relief provisions apply, we would incur a 100% tax on the gross income attributable to the greater of the amounts by which we fail the 75% and 95% gross income tests, multiplied by a fraction intended to reflect our profitability.
Prohibited Transaction Rules
A REIT will incur a 100% tax on the net income derived from any sale or other disposition of property, other than foreclosure property, that the REIT holds primarily for sale to customers in the ordinary course of a trade or business. We anticipate that none of our assets will be held for sale to customers and that a sale of any such asset would not be in the ordinary course of our business. Whether a REIT holds an asset “primarily for sale to customers in the ordinary course of a trade or business” depends, however, on the facts and circumstances in effect from time to time, including those related to a particular asset. Nevertheless, we will attempt to comply with the terms of safe-harbor provisions in the federal income tax laws prescribing when an asset sale will not be characterized as a prohibited
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Asset Tests
To qualify as a REIT, we also must satisfy two asset tests at the close of each quarter of each taxable year. First, at least 75% of the value of our total assets must consist of:
| • | cash or cash items, including receivables specified in the federal tax laws; | |
| • | government securities; | |
| • | interests in mortgages on real property; | |
| • | stock of other REITs; | |
| • | investments in stock or debt instruments but only during the one-year period following our receipt of new capital that we raise through equity offerings or offerings of debt with a term of at least five years; or | |
| • | interests in real property, including leaseholds and options to acquire real property and leaseholds. |
The second asset test has two components. First, of our investments not included in the 75% asset class, the value of our interest in any one issuer’s securities may not exceed 5% of the value of our total assets. Second, we may not own more than 10% of any one issuer’s outstanding voting securities. For purposes of both components of the second asset test, “securities” does not include our stock in other REITs or any qualified REIT subsidiary or our interest in any partnership, including our operating partnership.
We anticipate that, at all relevant times, (1) at least 75% of the value of our total assets will be represented by real estate assets, cash and cash items, including receivables, and government securities and (2) we will not own any securities in violation of the 5% or 10% asset tests. In addition, we will monitor the status of our assets for purposes of the various asset tests and we will manage our portfolio to comply at all times with such tests.
Recently enacted legislation (the “Tax Bill”) allows us to own up to 100% of the stock of taxable REIT subsidiaries (“TRSs”), which can perform activities unrelated to our tenants, such as third-party management, development, and other independent business activities, as well as provide services to our tenants. We and our subsidiary must elect for the subsidiary to be treated as a TRS. In addition, the Tax Bill prevents us from owning more than 10% of the voting power or value of the stock of a taxable subsidiary that is not treated as a TRS. Overall, no more than 20% of our assets can consist of securities of TRSs under the Tax Bill.
If we should fail to satisfy the asset tests at the end of a calendar quarter, we would not lose our REIT status if (1) we satisfied the asset tests at the close of the preceding calendar quarter and (2) the discrepancy between the value of our assets and the asset test requirements arose from changes in the market values of our assets and was not wholly or partly caused by an acquisition of one or more non-qualifying assets. If we did not satisfy the condition described in clause (2) of the preceding sentence, we still could avoid disqualification as a REIT by eliminating any discrepancy within 30 days after the close of the calendar quarter in which the discrepancy arose.
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Distribution Requirements
To qualify as a REIT, each taxable year, we must make distributions, other than capital gain dividends and deemed distributions of retained capital gain, to our shareholders in an aggregate amount at least equal to:
| • | the sum of (1) 90% of our “REIT taxable income,” computed without regard to the dividends paid deduction and our net capital gain or loss, and (2) 90% of our after-tax net income, if any, from foreclosure property; minus | |
| • | the sum of specified items of non-cash income. |
We must pay such distributions in the taxable year to which they relate, or in the following taxable year if we declare the distribution before we timely file our federal income tax return for such year and pay the distribution on or before the first regular dividend payment date after such declaration.
We will pay federal income tax on any taxable income, including net capital gain, that we do not distribute to our shareholders. Furthermore, if we fail to distribute during a calendar year or, in the case of distributions with declaration and record dates falling in the last three months of the calendar year, by the end of January following such calendar year, at least the sum of:
| • | 85% of our REIT ordinary income for such year; | |
| • | 95% of our REIT capital gain income for such year; and | |
| • | any undistributed taxable income from prior periods; |
we will incur a 4% nondeductible excise tax on the excess of such required distribution over the amounts we actually distributed. We may elect to retain and pay income tax on the net long-term capital gain we receive in a taxable year. If we so elect, we will be treated as having distributed any such retained amount for purposes of the 4% excise tax described above. We intend to make timely distributions sufficient to satisfy the annual distribution requirements.
From time to time, we may experience timing differences between (1) our actual receipt of income and actual payment of deductible expenses and (2) the inclusion of that income and deduction of such expenses in arriving at our REIT taxable income. In that case, we still would be required to recognize such excess as income in the calendar quarter in which it was due. Further, it is possible that, from time to time, we may be allocated a share of net capital gain attributable to the sale of depreciated property which exceeds our allocable share of cash attributable to that sale. Therefore, we may have less cash available for distribution than is necessary to meet the applicable distribution requirement or to avoid corporate income tax or the excise tax imposed on undistributed income. In such a situation, we might be required to borrow money or raise funds by issuing additional stock.
We may be able to correct a failure to meet the distribution requirements for a year by paying “deficiency dividends” to our shareholders in a later year. We may include such deficiency dividends in our deduction for dividends paid for the earlier year. Although we may be able to avoid income tax on amounts we distribute as deficiency dividends, we will be required to pay interest to the Internal Revenue Service based on the amount of any deduction we take for deficiency dividends.
Record Keeping Requirements
We must maintain specified records in order to qualify as a REIT. In addition, to avoid a monetary penalty, we must request on an annual basis information from our shareholders designed to disclose the actual ownership of our outstanding stock. We intend to comply with such requirements.
Failure to Qualify
If we fail to qualify as a REIT in any taxable year, and no relief provision applies, we will be subject to federal income tax and any applicable alternative minimum tax on our taxable income at regular
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Taxation of Taxable U.S. Shareholders
As long as we qualify as a REIT, a taxable “U.S. shareholder” must take into account distributions out of our current or accumulated earnings and profits and that we do not designate as capital gain dividends or retained long-term capital gain as ordinary income. REIT dividends paid to a U.S. shareholder that is a corporation will not qualify for the dividends received deduction generally available to corporations. As used herein, the term “U.S. shareholder” means a holder of our common stock that for U.S. federal income tax purposes is:
| • | a citizen or resident of the United States; | |
| • | a corporation, partnership, or other entity created or organized in or under the laws of the United States or of an political subdivision thereof; | |
| • | an estate whose income from sources without the United States is includable in gross income for U.S. federal income tax purposes regardless of its connection with the conduct of a trade or business within the United States; or | |
| • | any trust with respect to which (A) a U.S. court is able to exercise primary supervision over the administration of such trust and (B) one or more U.S. persons have the authority to control all substantial decisions of the trust. |
A U.S. shareholder generally will recognize distributions that we designate as capital gain dividends as long-term capital gain without regard to the period for which the U.S. shareholder has held its common stock. We generally will designate our capital gain dividends as either 20% or 25% rate distributions. A corporate U.S. shareholder, however, may be required to treat up to 20% of capital gain dividends as ordinary income.
We may elect to retain and pay income tax on the net long-term capital gain that is received in a taxable year. In that case, a U.S. shareholder would be taxed on its proportionate share of our undistributed long-term capital gain. The U.S. shareholder would receive a credit or refund for its proportionate share of the tax we paid. The U.S. shareholder would increase the basis in its stock by the amount of its proportionate share of our undistributed long-term capital gain, minus its share of the tax we paid.
If a distribution exceeds our current and accumulated earnings and profits but does not exceed the adjusted basis of a U.S. shareholder’s common stock, the U.S. shareholder will not incur tax on the distribution. Instead, such distribution will reduce the adjusted basis of the common stock. A U.S. shareholder will recognize a distribution that exceeds both our current and accumulated earnings and profits and the U.S. shareholder’s adjusted basis in its common stock as long-term capital gain, or short-term capital gain if the common stock has been held for one year or less, assuming the common stock is a capital asset in the hands of the U.S. shareholder. In addition, if we declare a distribution in October, November, or December of any year that is payable to a U.S. shareholder of record on a specified date in any such month, such distribution shall be treated as both paid by us and received by the U.S. shareholder on December 31 of such year, provided that we actually pay the distribution during January of the following calendar year. We will notify U.S. shareholders after the close of our taxable year as to the portions of the distributions attributable to that year that constitute ordinary income or capital gain dividends.
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Taxation of U.S. Shareholders on the Disposition of the Common Stock
In general, a U.S. shareholder who is not a dealer in securities must treat any gain or loss realized upon a taxable disposition of the common stock as long-term capital gain or loss if the U.S. shareholder has held the common stock for more than one year and otherwise as short-term capital gain or loss. However, a U.S. shareholder generally must treat any loss upon a sale or exchange of common stock held by such shareholder for six months or less as a long-term capital loss to the extent of capital gain dividends and other distributions from us that such U.S. shareholder treats as long-term capital gain. All or a portion of any loss a U.S. shareholder realizes upon a taxable disposition of the common stock may be disallowed if the U.S. shareholder purchases other shares of common stock within 30 days before or after the disposition.
Capital Gains and Losses
A taxpayer generally must hold a capital asset for more than one year for gain or loss derived from its sale or exchange to be treated as long-term capital gain or loss. The highest marginal individual income tax rate is 39.1%. The maximum tax rate on long-term capital gain applicable to non-corporate taxpayers is 20% for sales and exchanges of assets held for more than one year. The maximum tax rate on long-term capital gain from the sale or exchange of depreciable real property is 25% to the extent that such gain would have been treated as ordinary income if the property were a type of depreciable property other than real property. With respect to distributions that we designate as capital gain dividends and any retained capital gain that we are deemed to distribute, we generally may designate whether such a distribution is taxable to our non-corporate shareholders at a 20% or 25% rate. Thus, the tax rate differential between capital gain and ordinary income for non-corporate taxpayers may be significant. In addition, the characterization of income as capital gain or ordinary income may affect the deductibility of capital losses. A non-corporate taxpayer may deduct capital losses not offset by capital gains against its ordinary income only up to a maximum annual amount of $3,000. A non-corporate taxpayer may carry forward unused capital losses indefinitely. A corporate taxpayer must pay tax on its net capital gain at ordinary corporate rates. A corporate taxpayer can deduct capital losses only to the extent of capital gains, with unused losses being carried back three years and forward five years.
Information Reporting Requirements and Backup Withholding
We will report to our shareholders and to the Internal Revenue Service the amount of distributions we pay during each calendar year, and the amount of tax we withhold, if any. Under the backup withholding rules, a shareholder may be subject to backup withholding at the rate of 31% with respect to distributions unless such holder either:
| • | is a corporation or comes within another exempt category and, when required, demonstrates this fact; or | |
| • | provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding, and otherwise complies with the applicable requirements of the backup withholding rules. |
A shareholder who does not provide us with its correct taxpayer identification number also may be subject to penalties imposed by the Internal Revenue Service. Any amount paid as backup withholding will be creditable against the shareholder’s income tax liability. In addition, we may be required to withhold a portion of capital gain distributions to any shareholders who fail to certify their non-foreign status to us. The Treasury Department has issued final regulations regarding the backup withholding rules as applied to non-U.S. shareholders.
Taxation of Tax-Exempt Shareholders
Tax-exempt entities, including qualified employee pension and profit sharing trusts and individual retirement accounts and annuities, generally are exempt from federal income taxation. However, they are
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| • | the percentage of the dividends that the tax-exempt trust must otherwise treat as unrelated business taxable income is at least 5%; | |
| • | we qualify as a REIT by reason of the modification of the rule requiring that no more than 50% of our shares be owned by five or fewer individuals that allows the beneficiaries of the pension trust to be treated as holding our stock in proportion to their actuarial interests in the pension trust; and | |
| • | either (A) one pension trust owns more than 25% of the value of our stock or (B) a group of pension trusts individually holding more than 10% of the value of our stock collectively owns more than 50% of the value of our stock. |
Taxation of Non-U.S. Shareholders
The rules governing U.S. federal income taxation of nonresident alien individuals, foreign corporations, foreign partnerships, and other foreign shareholders are complex. This section is only a summary of such rules. We urge those non-U.S. shareholders to consult their own tax advisors to determine the impact of federal, state, and local income tax laws on ownership of the common stock, including any reporting requirements.
A non-U.S. shareholder that receives a distribution that is not attributable to gain from our sale or exchange of U.S. real property interests, as defined below, and that we do not designate as a capital gain dividend or retained capital gain will recognize ordinary income to the extent that we pay such distribution out of our current or accumulated earnings and profits. A withholding tax equal to 30% of the gross amount of the distribution ordinarily will apply to such distribution unless an applicable tax treaty reduces or eliminates the tax. However, if a distribution is treated as effectively connected with the non-U.S. shareholder’s conduct of a U.S. trade or business, the non-U.S. shareholder generally will be subject to federal income tax on the distribution at graduated rates, in the same manner as U.S. shareholders are taxed with respect to such distributions. A non-U.S. shareholder may also be subject to the 30% branch profits tax. We plan to withhold U.S. income tax at the rate of 30% on the gross amount of any such distribution paid to a non-U.S. shareholder unless either:
| • | a lower treaty rate applies and the non-U.S. shareholder files the required form evidencing eligibility for that reduced rate with us; or | |
| • | the non-U.S. shareholder files an IRS Form 4224 with us claiming that the distribution is effectively connected income. |
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The U.S. Treasury Department has issued final regulations that modify the manner in which we will comply with the withholding requirements for distributions made after December 31, 2000.
A non-U.S. shareholder will not incur tax on a distribution that exceeds our current and accumulated earnings and profits but does not exceed the adjusted basis of its common stock. Instead, such a distribution will reduce the adjusted basis of such stock. A non-U.S. shareholder will be subject to tax on a distribution that exceeds both our current and accumulated earnings and profits and the adjusted basis of its common stock, if the non-U.S. shareholder otherwise would be subject to tax on gain from the sale or disposition of its common stock, as described below. Because we generally cannot determine at the time we make a distribution whether or not the distribution will exceed our current and accumulated earnings and profits, we normally will withhold tax on the entire amount of any distribution at the same rate as we would withhold on a dividend. However, a non-U.S. shareholder may obtain a refund of amounts that we withhold if it later determines that a distribution in fact exceeded our current and accumulated earnings and profits.
We must withhold 10% of any distribution that exceeds our current and accumulated earnings and profits. Consequently, although we intend to withhold at a rate of 30% on the entire amount of any distribution, to the extent that we do not do so, we will withhold at a rate of 10% on any portion of a distribution not subject to withholding at a rate of 30%.
For any year in which we qualify as a REIT, a non-U.S. shareholder will incur tax on distributions that are attributable to gain from our sale or exchange of “U.S. real property interests” under special provisions of the federal income tax laws. The term “U.S. real property interests” includes interests in U.S. real property and stock in corporations at least 50% of whose assets consists of interests in U.S. real property. Under those rules, a non-U.S. shareholder is taxed on distributions attributable to gain from sales of U.S. real property interests as if such gain were effectively connected with a U.S. business of the non-U.S. shareholder. A non-U.S. shareholder thus would be taxed on such a distribution at the normal capital gain rates applicable to U.S. shareholders and might also be subject to the alternative minimum tax. A nonresident alien individual also might be subject to a special alternative minimum tax. A non-U.S. corporate shareholder not entitled to treaty relief or exemption also may be subject to the 30% branch profits tax on such distributions. We must withhold 35% of any distribution that we could designate as a capital gain dividend. A non-U.S. shareholder will receive a credit against its tax liability for the amount we withhold.
A non-U.S. shareholder generally will not incur tax under the provisions applicable to distributions that are attributable to gain from the sale of U.S. real property interests on gain from the sale of its common stock as long as at all times non-U.S. persons hold, directly or indirectly, less than 50% in value of our stock. We cannot assure you that this test will be met. If the gain on the sale of the common stock were taxed under those provisions, a non-U.S. shareholder would be taxed in the same manner as U.S. shareholders with respect to such gain, subject to applicable alternative minimum tax, a special alternative minimum tax in the case of nonresident alien individuals, and the possible application of the 30% branch profits tax in the case of non-U.S. corporations. Furthermore, a non-U.S. shareholder will incur tax on gain not subject to the provisions applicable to distributions that are attributable to gain from the rule of U.S. real property interests if either:
| • | the gain is effectively connected with the non-U.S. shareholder’s U.S. trade or business, in which case the non-U.S. shareholder will be subject to the same treatment as U.S. shareholders with respect to such gain; or | |
| • | the non-U.S. shareholder is a nonresident alien individual who was present in the U.S. for 183 days or more during the taxable year, in which case the non-U.S. shareholder will incur a 30% tax on his capital gains. |
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Other Tax Consequences
We and/or you may be subject to state and local tax in various states and localities, including those states and localities in which we or you transact business, own property, or reside. The state and local tax treatment in such jurisdictions may differ from the federal income tax treatment described above. Consequently, you should consult your own tax advisor regarding the effect of state and local tax laws upon an investment in our common stock.
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ERISA CONSIDERATIONS
The following is a summary of material considerations arising under ERISA and the prohibited transaction provisions of the federal income tax laws that may be relevant to a prospective purchaser. This discussion does not deal with all aspects of either ERISA or the prohibited transaction provisions of the federal income tax laws or, to the extent not preempted, state law that may be relevant to particular employee benefit plan shareholders, including plans subject to Title I of ERISA, other employee benefit plans and IRAs subject to the prohibited transaction provisions of the federal income tax laws, and governmental plans and church plans that are exempt from ERISA and the prohibited transaction provisions of the federal income tax laws but that may be subject to state law requirements, in light of their particular circumstances.
In considering whether to invest a portion of the assets of a pension, profit-sharing, retirement or other employee benefit plan, fiduciaries should consider, among other things, whether the investment:
| • | will be in accordance with the documents and instruments covering the investments by such plan; | |
| • | will allow the plan to satisfy the diversification requirements of ERISA, if applicable; | |
| • | will result in unrelated business taxable income to the plan; | |
| • | will provide sufficient liquidity; and | |
| • | is prudent under the general ERISA standards. |
In addition to imposing general fiduciary standards of investment prudence and diversification, ERISA and the corresponding provisions of the federal income tax laws prohibit a wide range of transactions involving the assets of the plan and persons who have specified relationships to the plan, who are “parties in interest” within the meaning of ERISA and, “disqualified persons” within the meaning of the federal income tax laws. Thus, a designated plan fiduciary considering an investment in our shares should also consider whether the acquisition or the continued holding of our shares might constitute or give rise to a direct or indirect prohibited transaction. The fiduciary of an IRA or of an employee benefit plan not subject to Title I of ERISA because it is a governmental or church plan or because it does not cover common law employees should consider that such an IRA or plan not subject to Title I of ERISA may only make investments that are authorized by the appropriate governing documents, not prohibited under the prohibited transaction provisions of the federal income tax laws and permitted under applicable state law.
The Department of Labor has issued final regulations that provide guidance on the definition of plan assets under ERISA. Under the regulations, if a plan acquires an equity interest in an entity which is neither a “publicly-offered security” nor a security issued by an investment company registered under the Investment Company Act of 1940, the plan’s assets would include, for ERISA purposes, both the equity interest and an undivided interest in each of the entity’s underlying assets unless an exception from the plan asset regulations applies.
The regulations define a publicly-offered security as a security that is:
| • | “widely-held;” | |
| • | “freely-transferable;” and | |
| • | either part of a class of securities registered under Section 12(b) or 12(g) of the Securities Exchange Act of 1934, or sold in connection with an effective registration statement under the Securities Act, provided the securities are registered under the Exchange Act within 190 days after the end of the fiscal year of the issuer during which the offering occurred. |
The regulations provide that a security is “widely held” only if it is part of a class of securities that is owned by 100 or more investors independent of the issuer and of one another. A security will not fail to be widely held because the number of independent investors falls below 100 subsequent to the initial public offering as a result of events beyond the issuer’s control.
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Our shares of common stock are being sold in connection with an effective registration statement under the Securities Act. In addition, we have in excess of 100 independent shareholders. Thus, both the first and second criterion of the publicly-offered security exception will be satisfied.
The regulations list restrictions on transfer that ordinarily will not prevent securities from being freely transferable. Such restrictions on transfer include:
| • | any restriction on or prohibition against any transfer or assignment that would result in the termination or reclassification of an entity for federal or state tax purposes, or that otherwise would violate any federal or state law or court order; | |
| • | any requirement that advance notice of a transfer or assignment be given to the issuer; | |
| • | any administrative procedure that establishes an effective date, or an event, such as completion of an offering, prior to which a transfer or assignment will not be effective; and | |
| • | any limitation or restriction on transfer or assignment that is not imposed by the issuer or a person acting on behalf of the issuer. |
We believe that the restrictions imposed under our articles of incorporation on the ownership and transfer of our common stock will not result in the failure of our common stock to be “freely transferable.” We also are not aware of any other facts or circumstances limiting the transferability of our common stock that are not enumerated in the regulations as those not affecting free transferability. However, no assurance can be given that the Department of Labor or the Treasury Department will not reach a contrary conclusion.
If the underlying assets of our company were treated by the Department of Labor as “plan assets,” the management of our company would be treated as fiduciaries with respect to plan shareholders and the prohibited transaction restrictions of ERISA and the federal income tax laws would apply unless an exception under ERISA were to apply. If the underlying assets of our company were treated as “plan assets,” an investment in our company also might constitute an improper delegation of fiduciary responsibility to our company and expose the fiduciary of the plan to co-fiduciary liability under ERISA and might result in an impermissible commingling of plan assets with other property.
If a prohibited transaction were to occur, the federal income tax laws and ERISA would impose an excise tax equal to 15% of the amount involved and authorize the Internal Revenue Service to impose an additional 100% excise tax if the prohibited transaction is not “corrected.” Such taxes will be imposed on any disqualified person who participates in the prohibited transaction. In addition, our advisor and possibly other fiduciaries of plan shareholders subject to ERISA who permitted such prohibited transaction to occur or who otherwise breached their fiduciary responsibilities would be required to restore to the plan any profits realized by these fiduciaries as a result of the transaction or beach. With respect to an IRA that invests in our company, the occurrence of a prohibited transaction involving the individual who established the IRA, or his or her beneficiary, would cause the IRA to lose its tax-exempt status under the federal income tax laws. In that event, the IRA owner generally would be taxed on the fair market value of all the assets in the IRA as of the first day of the owner’s taxable year in which the prohibited transaction occurred.
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PLAN OF DISTRIBUTION
The total of 28,500,000 shares registered in this offering includes:
| • | a maximum of 27,000,000 shares offered to residents of our sales states; and | |
| • | up to 1,500,000 shares offered to our shareholders under our dividend reinvestment plan. |
The offering of shares will terminate on the earlier of , 200 or the date on which the maximum offering has been sold. However, we reserve the right to terminate this offering at any time prior to such termination date.
Shares Issued Publicly to Residents of Our Sales States
The 27,000,000 shares offered to residents of our sales states are being offered through NNN Capital Corp., our dealer manager, a registered broker-dealer affiliated with our advisor, and unaffiliated broker-dealers. NNN Capital Corp. has also operated under the name TMP Capital Corp and Stafford Capital Corp. The shares are being offered at a price of $10.00 per share on a “best efforts” basis, which means generally that the dealer manager will be required to use only its best efforts to sell the shares and has no firm commitment or obligation to purchase any of the shares.
Our board of directors and the dealer manager have determined the offering price of the shares. While our board considered primarily the per share offering prices in similar offerings conducted by companies formed for purposes similar to ours when determining the offering price, the offering price is not related to the company’s historical book value or earnings and bears no relationship to any established criteria for valuing adjusted or outstanding shares.
Except as provided below, the dealer manager will receive commissions of 7.0% of the gross offering proceeds. In addition, we will reimburse the expenses incurred by the dealer manager and nonaffiliated dealers for actual marketing support and due diligence purposes in the maximum amount of 2.5% of the gross offering proceeds. We will not pay referral or similar fees to any accountants, attorneys or other persons in connection with the distribution of the shares.
The dealer manager may authorize other broker-dealers who are members of the NASD to sell shares. In the event of the sale of shares by such other broker-dealers, the dealer manager may reallow its commissions in the amount of up to 7.0% of the gross offering proceeds to such participating broker-dealers.
We have agreed to indemnify the participating broker-dealers, including the dealer manager, against liabilities arising under the Securities Act unless such liability arises from information in this prospectus relating to the dealer manager and supplied by the dealer manager. Causes of action resulting from violations of federal or state securities laws shall be governed by such law.
The broker-dealers are not obligated to obtain any subscriptions, and there is no assurance that any shares will be sold.
Our advisor and its affiliates may at their option purchase shares offered hereby at the public offering price, net of the selling commission and marketing support and due diligence reimbursement fee in which case they have advised us that they would expect to hold such shares as shareholders for investment and not for distribution. We will not pay any selling commissions in connection with any shares purchased by our advisor.
Payment for shares should be made by check payable to “PriVest Bank, as Escrow Agent for G REIT, Inc.” Subscriptions will be effective only upon acceptance by us, and we reserve the right to reject any subscription in whole or in part. We will not authorize any sales to discretionary accounts without the prior specific written approval of the transaction by the investor. In no event may a subscription for shares be accepted until at least five business days after the date the subscriber receives this prospectus. Each subscriber will receive a confirmation of his purchase. Except for purchase under the dividend reinvestment plan, all accepted subscriptions will be for whole shares and for not less than
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We established an escrow account in which we will place all subscriber funds received pending their use for the specific purposes described in our registration statement (for example, acquisition of interests in real estate and repayment of debt). All monies in the escrow account shall be held in trust for the benefit of the subscribers, and shall not be commingled with the funds of, or become an asset of, our company until such time as they are released from the escrow account for the purposes stated in the prospectus. Funds in the escrow account shall not be subject to attachment, levy or other encumbrance in any legal action by a third party against our company. In the event any funds are not released from the escrow account in consummation of the transactions and purposes stated in the prospectus, such monies shall be returned to subscribers pro rata. The escrow account will be maintained at PriVest Bank in South Coast Metro, California
Subscriptions will be accepted or rejected within 30 days of receipt by us, and if rejected, all funds shall be returned to subscribers within 10 business days. Investors whose subscriptions are accepted will be admitted as shareholders of our company periodically, but not less often than quarterly.
The dealer manager may sell shares to our advisor, its officers, directors and affiliates, to retirement plans of broker-dealers participating in this offering, to broker-dealers in their individual capacities, to IRAs and qualified plans of their registered representatives or to any one of their registered representatives in their individual capacities net of the selling commission and marketing support and due diligence reimbursement fees in consideration of the services rendered by such broker-dealers and registered representatives in the distribution. The net proceeds to our company from such sales will be identical to our net proceeds from other sales of shares.
In connection with sales of 25,000 or more shares to a “purchaser,” as defined below, registered representatives must give such purchaser the option to reduce the amount of selling commissions payable to participating broker-dealers. Such reduction will be credited to the purchaser by reducing the total purchase price payable by such purchaser. The following table illustrates the various discount levels:
| Purchase | Selling | Marketing and | Net Proceeds | |||||||||||||
| Dollar Volume of | Price Per | Commissions | Due Diligence | to Company | ||||||||||||
| Shares Purchased | Share | Per Share | Fee Per Share | Per Share | ||||||||||||
| $250,000-$499,999 | $ | 9.80 | $ | 0.55 | $ | 0.20 | $ | 9.05 | ||||||||
| $500,000-$999,999 | $ | 9.65 | $ | 0.40 | $ | 0.20 | $ | 9.05 | ||||||||
| $1,000,000-$1,999,999 | $ | 9.50 | $ | 0.25 | $ | 0.20 | $ | 9.05 | ||||||||
| $2,000,000-$5,000,000 | $ | 9.35 | $ | 0.10 | $ | 0.20 | $ | 9.05 | ||||||||
| Over $5,000,000 | $ | 9.30 | $ | 0.05 | $ | 0.20 | $ | 9.05 | ||||||||
For example, if an investor purchases 100,000 shares in our company, he would pay $950,000 rather than $1,000,000 for the shares, in which event the commission on the sale of such shares would be $25,000, or $0.25 per share, and we would receive net proceeds of $905,000, or $9.05 per share. Our net proceeds will not be affected by volume discounts.
Because all investors will be deemed to have contributed the same amount per share to our company for purposes of distributions of cash available for distribution, an investor qualifying for a volume discount will receive a higher return on his investment in our company than investors who do not qualify for such discount.
Subscriptions may be combined for the purpose of determining the volume discounts in the case of subscriptions made by any “purchaser,” provided all such shares are purchased through the same broker-dealer. The volume discount shall be prorated among the separate subscribers considered to be a single “purchaser.” Any request to combine more than one subscription must be made in writing and must set forth the basis for such request. Any such request will be subject to verification by our advisor that all of such subscriptions were made by a single “purchaser.”
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For the purposes of such volume discounts, the term “purchaser” includes:
| • | an individual, his or her spouse and their children under the age of 21 who purchase the shares for his, her or their own accounts; | |
| • | a corporation, partnership, association, joint-stock company, trust fund or any organized group of persons, whether incorporated or not; | |
| • | an employees’ trust, pension, profit sharing or other employee benefit plan qualified under the federal income tax laws; and | |
| • | all commingled trust funds maintained by a given bank. |
Notwithstanding the above, in connection with volume sales made to investors in our company, the dealer manager may, in its sole discretion, waive the “purchaser” requirements and aggregate subscriptions as part of a combined order for purposes of determining the number of shares purchased, provided that any aggregate group of subscriptions must be received from the same broker-dealer, including the dealer manager. Any such reduction in selling commission will be prorated among the separate subscribers except that, in the case of purchases through the dealer manager, the dealer manager may allocate such reduction among separate subscribers considered to be a single “purchaser” as it deems appropriate. An investor may reduce the amount of his purchase price to the net amount shown in the foregoing table, if applicable. If such investor does not reduce the purchase price, the excess amount submitted over the discounted purchase price shall be returned to the actual separate subscribers for shares. Except as provided in this paragraph, separate subscriptions will not be cumulated, combined or aggregated.
California residents should be aware that volume discounts will not be available in connection with the sale of shares made to California residents to the extent such discounts do not comply with the provisions of the California corporate securities laws. Under these laws, volume discounts can be made available to California residents only in accordance with the following conditions:
| • | there can be no variance in the net proceeds to our company from the sale of the shares to different purchasers of the same offering; | |
| • | all purchasers of the shares must be informed of the availability of quantity discounts; | |
| • | the same volume discounts must be allowed to all purchasers of shares which are part of the offering; | |
| • | the minimum amount of shares as to which volume discounts are allowed cannot be less than $10,000; | |
| • | the variance in the price of the shares must result solely from a different range of commissions, and all discounts allowed must be based on a uniform scale of commissions; and | |
| • | no discounts are allowed to any group of purchasers. |
Accordingly, volume discounts for California residents will be available in accordance with the foregoing table of uniform discount levels based on dollar volume of shares purchased, but no discounts are allowed to any group of purchasers, and no subscriptions may be aggregated as part of a combined order for purposes of determining the number of shares purchased.
Investors who, in connection with their purchase of shares, have engaged the services of a registered investment advisor with whom the investor has agreed to pay a fee for investment advisory services in lieu of normal commissions based on the volume of securities sold may agree with the participating broker-dealer selling such shares and the dealer manager to reduce the amount of selling commissions payable with respect to such sale to zero. The net proceeds to our company will not be affected by eliminating the commissions payable in connection with sales to investors purchasing through such investment advisors. All such sales must be made through registered broker-dealers.
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Neither the dealer manager nor its affiliates will directly or indirectly compensate any person engaged as an investment advisor by a potential investor as an inducement for such investment advisor to advise favorably for investment in our company.
Shares Issued Under Dividend Reinvestment Plan
We have adopted a dividend reinvestment plan under which our shareholders may elect to have their cash dividends reinvested in additional shares of our common stock. Dividends will be used to purchase shares on behalf of the participants from our company. All such dividends shall be invested in shares within 30 days after such payment date. Participants will not have the option to make voluntary contributions to the dividend reinvestment plan to purchase shares in excess of the amount of shares that can be purchased with their dividends. Until the earlier to occur of the termination of this offering or the sale of all the shares reserved for issuance under the dividend reinvestment plan, the purchase price for shares of common stock purchased under the dividend reinvestment plan will be $9.50. Shares acquired under the dividend reinvestment plan will entitle the participant to the same rights and to be treated in the same manner as those purchased by the participants in this offering. The dividend plan will be administered by us or one of our affiliates. Participants may terminate their participation in the dividend reinvestment plan by written notice to us.
SALES LITERATURE
In addition to this prospectus, we may use certain supplemental sales material in connection with the offering of the shares. However, such sales material will only be used when accompanied by or preceded by the delivery of this prospectus. This material, prepared by our advisor, may include the following: a brochure describing the advisor and its affiliates and our investment objectives; a fact sheet that provides information regarding properties purchased to date and other summary information related to our offering; property brochures; and the past performance of programs managed by our advisor and its affiliates. No person has been authorized to prepare for, or furnish to, a prospective investor any sales material other than that described herein and “tombstone” newspaper advertisements or solicitations of interest that are limited to identifying the offering and the location of sources of additional information.
The offering of our shares is made only by means of this prospectus. Although the information contained in such sales material will not conflict with any of the information contained in this prospectus, such material does not purport to be complete and should not be considered a part of this prospectus or the registration statement of which this prospectus is a part.
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EXPERTS
The consolidated financial statements and schedule of G REIT, Inc. as of December 31, 2002 and December 31, 2001 and for the period from December 18, 2001 (inception) through December 31, 2001 and the year ended December 31, 2002, together with the historical statement of revenues and certain expenses of the 5508 Highway 290 West Office Building for the year ended December 31, 2001, the historical statement of revenues and certain expenses of Two Corporate Plaza for the year ended December 31, 2001, the historical statement of revenues and certain expenses of Congress Center for the year ended December 31, 2002, the historical statement of revenues and certain expenses of Atrium Building for the year ended December 31, 2002, the historical statement of revenues and certain expenses of Department of Children and Families Campus for the year ended December 31, 2002, the historical statement of revenues and certain expenses of Gemini Plaza for the year ended December 31, 2002, the historical statement of revenues and certain expenses of Bay View Plaza for the year ended December 31, 2002 and the historical statement of revenues and certain expenses of North Pointe Corporate Center for the year ended December 31, 2002, all of which are included in this registration statement and prospectus, have been audited by Grant Thornton LLP, independent certified public accountants, as stated in their reports appearing in this registration statement and prospectus, and have been included in reliance upon the reports of such firm given upon their authority as experts in accounting and auditing.
REPORTS TO SHAREHOLDERS
We intend to furnish our shareholders with annual reports containing consolidated financial statements audited by our independent certified public accountants.
LEGAL MATTERS
The validity of the shares offered by this prospectus will be passed upon by Hirschler Fleischer, Richmond, Virginia. Hirschler Fleischer will advise us with respect to real estate law and other matters as well. Hirschler Fleischer has also represented Triple Net Properties, LLC, our advisor, as well as various other affiliates of our advisor, in other matters and may continue to do so in the future.
LEGAL PROCEEDINGS
None of our company, our operating partnership or our advisor is currently involved in any material litigation, nor to their knowledge, is any material litigation threatened against any of them.
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ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration statement on Form S-11 of which this prospectus is a part under the Securities Act with respect to the shares offered by this prospectus. This prospectus does not contain all of the information set forth in the registration statement, portions of which have been omitted as permitted by the rules and regulations of the Securities and Exchange Commission. Statements contained in this prospectus as to the content of any contract or other document filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference and the schedules and exhibits to this prospectus. For further information regarding our company and the shares offered by this prospectus, reference is made by this prospectus to the registration statement and such schedules and exhibits.
The registration statement and the schedules and exhibits forming a part of the registration statement filed by us with the Securities and Exchange Commission can be inspected and copies obtained from the Securities and Exchange Commission at Room 1204, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of such material can be obtained from the Public Reference Section of the Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, the Securities and Exchange Commission maintains a Web site that contains reports, proxies and information statements and other information regarding our company and other registrants that have been filed electronically with the Securities and Exchange Commission. The address of such site is http://www.sec.gov.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | ||||
Unaudited Financial Statements — September 30, 2003 | ||||
| Consolidated Balance Sheets as of September 30, 2003 (unaudited) and December 31, 2002 | F-3 | |||
| Consolidated Statements of Operations for the three-month and nine-month periods ended September 30, 2003 (unaudited) | F-4 | |||
| Consolidated Statements of Shareholders’ Equity | F-5 | |||
| Consolidated Statements of Cash Flows | F-6 | |||
| Notes to Consolidated Financial Statements | F-7 | |||
Audited Financial Statements — Year Ended December 31, 2002 | ||||
| Report of Independent Certified Public Accountants | F-19 | |||
| Consolidated Balance Sheets | F-20 | |||
| Consolidated Statements of Operations | F-21 | |||
| Consolidated Statements of Shareholders’ Equity | F-22 | |||
| Consolidated Statements of Cash Flows | F-23 | |||
| Notes to Consolidated Financial Statements | F-24 | |||
| Schedule III (Real Estate and Accumulated Depreciation) | F-36 | |||
Financial Statements of Audited Properties | ||||
5508 Highway 290 West Office Building (acquisition completed September 13, 2002) | ||||
| Report of Independent Certified Public Accountants | F-37 | |||
| Historical Statement of Revenues and Certain Expenses for the Year Ended December 31, 2001 | F-38 | |||
| Notes to Historical Statement of Revenues and Certain Expenses | F-39 | |||
Two Corporate Plaza (acquisition completed November 27, 2002) | ||||
| Report of Independent Certified Public Accountants | F-41 | |||
| Historical Statement of Revenues and Certain Expenses for the Year Ended December 31, 2001 | F-42 | |||
| Notes to Historical Statement of Revenues and Certain Expenses | F-43 | |||
Congress Center (acquisition completed January 9, 2003) | ||||
| Report of Independent Certified Public Accountants | F-45 | |||
| Historical Statement of Revenues and Certain Expenses for the Year Ended December 31, 2002 | F-46 | |||
| Notes to Historical Statement of Revenues and Certain Expenses | F-47 | |||
Atrium Building (acquisition completed January 31, 2003) | ||||
| Report of Independent Certified Public Accountants | F-50 | |||
| Historical Statement of Revenues and Certain Expenses for the Year Ended December 31, 2002 | F-51 | |||
| Notes to Historical Statement of Revenues and Certain Expenses | F-52 | |||
Department of Children and Families Campus (acquisition completed April 25, 2003) | ||||
| Report of Independent Certified Public Accountants | F-55 | |||
| Historical Statement of Revenues and Certain Expenses for the Year Ended December 31, 2002 | F-56 | |||
| Notes to Historical Statement of Revenues and Certain Expenses | F-57 | |||
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| Page | ||||
Gemini Plaza (acquisition completed May 2, 2003) | ||||
| Report of Independent Certified Public Accountants | F-59 | |||
| Historical Statement of Revenues and Certain Expenses for the Year Ended December 31, 2002 | F-60 | |||
| Notes to Historical Statement of Revenues and Certain Expenses | F-61 | |||
Bay View Plaza (acquisition completed July 31, 2003) | ||||
| Report of Independent Certified Public Accountants | F-63 | |||
| Historical Statement of Revenues and Certain Expenses for the Year Ended December 31, 2002 | F-64 | |||
| Notes to Historical Statement of Revenues and Certain Expenses | F-65 | |||
North Pointe Corporate Center (acquisition completed August 11, 2003) | ||||
| Report of Independent Certified Public Accountants | F-67 | |||
| Historical Statement of Revenues and Certain Expenses for the Year Ended December 31, 2002 | F-68 | |||
| Notes to Historical Statement of Revenues and Certain Expenses | F-69 | |||
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G REIT, Inc.’s (the “Company’s”) registration statement on Form S-11/ A (the “Registration Statement”) was declared effective July 22, 2002 by the Securities and Exchange Commission (“SEC”). In September 2002, the Company completed its first property acquisition and commenced its planned principal operations. The accompanying September 30, 2003 interim financial statements of the Company required to be filed with this Quarterly Report on Form 10-Q, together with the related Notes, were prepared by management without audit and commence on the following page. In the opinion of management, the interim financial statements present fairly the financial condition and results of operations of the Company. However, these interim financial statements should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2002 previously filed with the SEC.
G REIT, INC.
| September 30, | December 31, | ||||||||
| 2003 | 2002 | ||||||||
| (Unaudited) | |||||||||
| ASSETS | |||||||||
| Real estate investments: | |||||||||
| Operating properties | $ | 90,985,786 | $ | 23,830,511 | |||||
| Investments in unconsolidated real estate | 15,147,663 | — | |||||||
| 106,133,449 | 23,830,511 | ||||||||
| Less accumulated depreciation | (923,997 | ) | (102,149 | ) | |||||
| 105,209,452 | 23,728,362 | ||||||||
| Cash and cash equivalents | 9,340,739 | 8,469,335 | |||||||
| Accounts receivable | 291,975 | 98,149 | |||||||
| Accounts receivable from related parties | — | 4,063 | |||||||
| Real estate deposits | 1,174,871 | 2,270,985 | |||||||
| Deferred financing costs | 1,912,764 | 360,688 | |||||||
| Other assets, net | 1,425,082 | 1,529,727 | |||||||
| Total assets | $ | 119,354,883 | $ | 36,461,309 | |||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||
| Accounts payable and accrued liabilities | $ | 3,048,213 | $ | 770,770 | |||||
| Mortgage loans payable | 10,072,474 | 16,860,000 | |||||||
| Line of credit | 1,135,000 | — | |||||||
| Security deposits and prepaid rent | 865,792 | 370,539 | |||||||
| Distributions payable | 707,610 | 109,642 | |||||||
| 15,829,089 | 18,110,951 | ||||||||
| Commitments and contingencies | — | — | |||||||
| Minority interest | 272,836 | — | |||||||
| Shareholders’ equity: | |||||||||
| Common stock, $.01 par value; 50,000,000 shares authorized; 12,008,464 shares issued and outstanding at September 30, 2003 and 2,158,407 shares issued and outstanding at December 31, 2002 | 120,085 | 21,584 | |||||||
| Additional paid-in capital | 105,699,220 | 18,582,586 | |||||||
| Distributions in excess of earnings | (2,566,347 | ) | (253,812 | ) | |||||
| Total shareholders’ equity | 103,252,958 | 18,350,358 | |||||||
| Total liabilities and shareholders’ equity | $ | 119,354,883 | $ | 36,461,309 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
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G REIT, INC.
| Nine Months Ended | Three Months Ended | ||||||||||||||||
| September 30, | September 30, | ||||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||||
| Revenues | |||||||||||||||||
| Rental income | $ | 6,885,371 | $ | 80,997 | $ | 3,342,130 | $ | 80,997 | |||||||||
| Interest income | 76,605 | 5,745 | 52,998 | 5,745 | |||||||||||||
| 6,961,976 | 86,742 | 3,395,128 | 86,742 | ||||||||||||||
| Expenses | |||||||||||||||||
| Rental expenses | 2,776,026 | 19,684 | 1,494,722 | 19,684 | |||||||||||||
| General and administrative | 928,428 | 58,623 | 375,076 | 58,623 | |||||||||||||
| Depreciation | 821,848 | 16,297 | 416,394 | 16,297 | |||||||||||||
| Amortization of lease commissions | 6,369 | — | 3,642 | — | |||||||||||||
| Interest (including amortization of deferred financing fees) | 1,707,631 | 43,610 | 843,567 | 43,610 | |||||||||||||
| 6,240,302 | 138,214 | 3,133,401 | 138,214 | ||||||||||||||
| Income before equity in earnings of unconsolidated real estate | 721,674 | (51,472 | ) | 261,727 | (51,472 | ) | |||||||||||
| Equity in earnings of unconsolidated real estate | 381,076 | — | 274,400 | — | |||||||||||||
| Minority interest | (3,699 | ) | — | (3,699 | ) | — | |||||||||||
| Net income | $ | 1,099,051 | $ | (51,472 | ) | $ | 532,428 | $ | (51,472 | ) | |||||||
| Earnings per share — basic and diluted | $ | 0.18 | $ | (0.16 | ) | $ | 0.06 | $ | (0.16 | ) | |||||||
| Dividends declared per share | $ | 0.52 | $ | 0.09 | $ | 0.15 | $ | 0.09 | |||||||||
| Weighted average number of common shares outstanding | |||||||||||||||||
| Basic | 6,067,049 | 330,965 | 9,643,425 | 330,965 | |||||||||||||
| Diluted | 6,110,859 | 330,965 | 9,773,485 | 330,965 | |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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G REIT, INC.
| Common | Additional | Distributions | ||||||||||||||||||
| Number of | Stock, | Paid-in | in Excess of | |||||||||||||||||
| Shares | Par Value | Capital | Earnings | Total | ||||||||||||||||
| BALANCE — December 31, 2002 | 2,158,407 | $ | 21,584 | $ | 18,582,586 | $ | (253,812 | ) | $ | 18,350,358 | ||||||||||
| Issuance of common shares, net of offering costs | 9,850,057 | 98,501 | 87,116,634 | — | 87,215,135 | |||||||||||||||
| Distributions | — | — | — | (3,411,586 | ) | (3,411,586 | ) | |||||||||||||
| Net income | — | — | — | 1,099,051 | 1,099,051 | |||||||||||||||
| BALANCE — September 30, 2003 | 12,008,464 | $ | 120,085 | $ | 105,699,220 | $ | (2,566,347 | ) | $ | 103,252,958 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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G REIT, INC.
| Nine Months | Nine Months | |||||||||
| Ended | Ended | |||||||||
| September 30, | September 30, | |||||||||
| 2003 | 2002 | |||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||
| Net income | $ | 1,099,051 | $ | (51,472 | ) | |||||
| Adjustments to reconcile net income to net cash provided by operating activities | ||||||||||
| Equity in earnings of unconsolidated real estate, net of distributions | (381,076 | ) | — | |||||||
| Depreciation | 821,848 | 16,297 | ||||||||
| Amortization of deferred financing fees | 258,206 | 12,107 | ||||||||
| Minority interest expense | 3,699 | — | ||||||||
| Change in fair value of interest rate swap | 286,811 | — | ||||||||
| Change in operating assets and liabilities: | ||||||||||
| Accounts receivable | (193,826 | ) | — | |||||||
| Other assets | 108,708 | — | ||||||||
| Accounts payable and accrued liabilities | 1,990,632 | 506,792 | ||||||||
| Security deposits and prepaid rent | 495,253 | 188,763 | ||||||||
| Net cash provided by operating activities | 4,489,306 | 672,487 | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||
| Purchase of real estate operating properties | (65,659,514 | ) | (10,786,716 | ) | ||||||
| Purchase of investments in unconsolidated real estate | (14,979,938 | ) | — | |||||||
| Capital expenditures | (186,296 | ) | — | |||||||
| Net cash used in investing activities | (80,825,748 | ) | (10,786,716 | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||
| Proceeds from issuance of common stock, net | 85,980,383 | 6,033,213 | ||||||||
| Receivable from advisor/affiliates | — | (468,246 | ) | |||||||
| Borrowings under line of credit | 27,135,000 | — | ||||||||
| Repayments under line of credit | (26,000,000 | ) | — | |||||||
| Principal payments on notes payable | (6,787,526 | ) | — | |||||||
| Borrowings under notes payable | — | 6,700,000 | ||||||||
| Distributions paid | (1,578,866 | ) | (6,116 | ) | ||||||
| Payment of deferred financing costs | (1,810,282 | ) | (588,351 | ) | ||||||
| Minority interest contributions | 269,137 | — | ||||||||
| Net cash provided by financing activities | 77,207,846 | 11,670,500 | ||||||||
| NET INCREASE IN CASH AND CASH EQUIVALENTS | 871,404 | 1,556,271 | ||||||||
| CASH AND CASH EQUIVALENTS — beginning of period | 8,469,335 | — | ||||||||
| CASH AND CASH EQUIVALENTS — end of period | $ | 9,340,739 | $ | 1,556,271 | ||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||||
| Cash paid during the period for: | ||||||||||
| Interest | $ | 962,172 | $ | 31,503 | ||||||
| Income taxes | $ | 800 | $ | — | ||||||
| SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES: | ||||||||||
| Issuance of common stock for dividends reinvested | $ | 1,234,756 | $ | 3,220 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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G REIT, INC.
1. Organization
G REIT, Inc. (the “Company”), was incorporated on December 18, 2001 under the laws of the Commonwealth of Virginia. The Company has elected to be treated as a real estate investment trust (“REIT”) for federal income tax purposes. The Company was incorporated to raise capital and acquire ownership interests in office, industrial and service real estate properties with a government-tenant orientation. In September 2002, the Company completed its first property acquisition and commenced its planned principal operations. As of September 30, 2003, the Company owned interests in nine real estate properties, including six operating properties and three tenant in common interest properties.
The Company is externally advised by Triple Net Properties, LLC (the “Advisor”), which is primarily responsible for managing the day-to-day operations and assets of the Company. The Advisory Agreement between the Company and the Advisor has a one year term and is subject to successive renewals with the written consent of the parties including a majority of the independent directors. The Advisor is affiliated with the Company in that the two entities have common officers and directors, some of whom also own an equity interest in the Advisor (see Note 8).
Pursuant to a Registration Statement on Form S-11/ A under the Securities Act of 1933, as amended, the Company offered for sale to the public on a “best efforts” basis a minimum of 100,000 and a maximum of 20,000,000 shares of its common stock at a price of $10 per share (the “Offering”) and up to 1,000,000 additional shares pursuant to a dividend reinvestment plan under which its shareholders may elect to have dividends reinvested in additional shares at $9.50 per share. The Registration Statement was declared effective by the SEC on July 22, 2002. As discussed in the Registration Statement, the Company plans to principally use the net Offering proceeds from the sale of shares to acquire ownership interests in real estate properties. The Company intends to finance property acquisitions with a combination of net Offering proceeds and debt secured by the acquired properties.
The Company owns all of its interests in properties through its majority-owned subsidiary, G REIT, L.P., a Virginia limited partnership (the “Operating Partnership”), and conducts substantially all of its operations through the Operating Partnership. As of September 30, 2003, the Company was the sole general partner of the Operating Partnership and owned substantially all of the equity interests therein, except for 100 incentive non-voting ownership units issued to the Company’s Advisor. The incentive units entitle the Advisor to receive certain incentive distributions of operating cash flow after a minimum 8% return on invested capital has been paid to the Company’s shareholders (as defined in the Registration Statement). In addition, the Advisor is entitled to incentive distributions from net proceeds from the sale of properties after the Company’s shareholders have received distributions equal to their invested capital, as defined, plus an 8% return on such invested capital.
2. Interim Financial Statements and Summary of Significant Accounting Policies
| Basis of Presentation |
The accompanying consolidated financial statements include the accounts of the Company, G REIT, L.P., the wholly owned subsidiaries of G REIT, L.P. and its majority tenant in common interest in one real estate property. Minority interest represents the ownership interest of an unrelated party in such property. All material inter-company transactions and account balances have been eliminated in consolidation. All references to the Company include the Operating Partnership and its subsidiary entities and property.
The information furnished has been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting, the instructions to Form 10-Q
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
and Rule 10-01 of Regulation S-X. Accordingly, certain information and disclosures have been condensed or omitted. In the opinion of management, all normal and recurring adjustments considered necessary for the fair presentation of the Company’s financial position, results of operations and cash flows have been included. The results of operations for the three-month and nine-month periods ended September 30, 2003 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2003. These interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, previously filed with the SEC.
| Real Estate Investments |
| Operating Properties |
Operating properties are carried at cost less accumulated depreciation. Cost includes the cost of land and completed buildings and related improvements. Expenditures that increase the service life of properties are capitalized; the cost of maintenance and repairs is charged to expense as incurred. Depreciation is generally provided on a straight-line basis over the estimated useful lives of the buildings and improvements, ranging primarily from 15 to 39 years. When depreciable property is retired or disposed of, the related costs and accumulated depreciation are removed from the accounts and any gain or loss reflected in operations.
Impairment losses are recorded on long-lived assets used in operations. Impairment losses are recorded on an operating property when indicators of impairment are present and the carrying amount of the asset is greater than the sum of the future undiscounted cash flows predicted to be generated by that asset. As of September 30, 2003, no indicators of impairment existed and no impairment losses have been recorded.
The Company follows the provisions of EITF 97-11, Accounting for Internal Costs Related to Real Estate Property Acquisitions. Accordingly, the Company does not capitalize internal acquisition costs incurred in conjunction with the identification and acquisition of properties to be held for operations.
| Investments in Unconsolidated Real Estate |
Investments in unconsolidated real estate are accounted for using the equity method of accounting. Disposition of investments accounted for using the equity method are classified within continuing operations in conformity with APB No. 18.
| Financing Costs |
Financing costs consist of loan fees and other loan costs. Loan fees and other loan costs are amortized over the term of the respective loan. Amortization of financing costs is included in interest expense.
| Revenue Recognition |
Real estate property is leased to tenants under leases with terms exceeding one year. Revenues from these leases, which are accounted for as operating leases, are recognized on a straight-line basis over the related term. Cost recoveries from tenants are included in rental income in the period the related costs are incurred.
Deferred rent receivable arises during free rent periods of a lease. The deferred rent receivable is included in other assets at September 30, 2003 and totaled $111,670.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Income Taxes |
The Company operates as a real estate investment trust for federal income tax purposes. As a REIT, the Company is generally not subject to income taxes. To maintain its REIT status, the Company is required to distribute annually as dividends at least 90% of its REIT taxable income, as defined by the Internal Revenue Code, to its shareholders, among other requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to Federal income tax on its taxable income at regular corporate tax rates. As of September 30, 2003, the Company believes it was in compliance with all relevant REIT requirements. Although the Company qualifies as a REIT, the Company may be subject to certain state and local taxes on its income and property and Federal income and excise taxes on its undistributed income
| Per Share Data |
The Company reports earnings per share pursuant to Statement of Financial Accounting Standards No. 128, “Earnings Per Share.” Basic earnings per share attributable for all periods presented is computed by dividing the net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed based on the weighted average number of common shares and all potentially dilutive securities. As of September 30, 2003, there were 130,000 potentially dilutive securities including 90,000 options granted to officers.
| Allowance for Uncollectible Receivables |
When needed, the Company maintains an allowance for estimated losses resulting from the inability of tenants to make required payments, which results in a reduction of income. Management determines the adequacy of this allowance by continually evaluating individual tenant receivables considering the tenant’s financial condition, security deposits, letters of credit, lease guarantees and current economic conditions. As of September 30, 2003, there was no allowance for uncollectible accounts.
| Stock Options |
The Company follows the disclosure only provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). For employee compensatory stock options that will eventually vest, compensation expense is recognized during the periods in which the related employee services are rendered. Such expense is generally measured by determining the excess, if any, of the grant date estimated fair market value of the underlying stock over the amount to be paid by the employee in conformity with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Compensatory stock options and similar equity instruments issued to non-employees in exchange for goods or services are accounted for based on the estimated fair market value of (1) the goods or services received or (2) the equity instrument issued, whichever is more reliably measurable. This accounting policy is in conformity with SFAS 123.
Concurrent with commencement of the Offering, the Company adopted stock option plans for (1) independent and outside directors and (2) its officers and employees. Shares of common stock issued upon the exercise of such options will have certain transferability restrictions. The unregistered public sale of restricted stock, which is governed by Rule 144 of the Securities Act of 1933, as amended, is prohibited during the first year of ownership and limited as set forth in such rule during the second year of ownership.
Stock options granted pursuant to the Plans will expire ten years from the grant date and will be exercisable in whole or in part upon the second anniversary of the grant date; provided, however, that if the exercise of any stock option would cause the aggregate of all Company stock owned by the Advisor,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the Dealer Manager of the Offering (NNN Capital Corp., an affiliate of the Company and the Advisor), their affiliates, and the Company’s officers and directors to exceed 10.0% of the total outstanding shares of the Company’s common stock, such exercise would be delayed until the first date on which the exercise would not cause such limit to be exceeded. The Company has authorized and reserved a total of 100,000 shares and 400,000 shares for issuance under the Director Plan and the Officer/ Employee Plan, respectively. Options grants are subject to shareholder approval of the Plans. Each of the Plans was approved by shareholders at the Annual Meeting of Shareholders held June 28, 2003.
As of September 30, 2003, options for a total of 90,000 and 40,000 shares were outstanding under the Officer/Employee and Director Plans, respectively.
| Number | Exercise | Weighted Average | |||||||||||
| of Shares | Prices | Exercise Price | |||||||||||
| Options outstanding at December 31, 2002 | — | $ | — | $ | — | ||||||||
| Granted | 130,000 | 9.05 | 9.05 | ||||||||||
| Exercised | — | — | — | ||||||||||
| Cancelled | — | — | — | ||||||||||
| Expired | — | — | — | ||||||||||
| Options outstanding at September 30, 2003 | 130,000 | 9.05 | 9.05 | ||||||||||
A summary of outstanding options exercisable under the Plans is presented in the schedule below.
| Range of | Number | Contractual | Exercise | Number | Exercise | |||||||||||||||
| Exercise Prices | Outstanding | Life (Years) | Price — Options | Exercisable | Price — Options | |||||||||||||||
| $9.05 | 130,000 | 9.32 | $ | 9.05 | — | $ | 9.05 | |||||||||||||
Pursuant to SFAS 148, the Company is required to disclose the effects on net income and per share data as if the Company had elected to use the fair value approach to account for its stock-based compensation plans. Had the compensation cost for all of the Company’s option plans been determined using the fair value method, the pro forma expense associated with outstanding options for the three months and nine months ended September 30, 2003 would have been as follows.
| Three Months | Nine Months | |||||||
| Ended | Ended | |||||||
| September 30, | September 30, | |||||||
| 2003 | 2003 | |||||||
| Actual net income | $ | 532,428 | $ | 1,099,051 | ||||
| Pro forma compensation expense | (15,438 | ) | (50,271 | ) | ||||
| Pro forma net income | $ | 516,990 | $ | 1,048,780 | ||||
| Actual net income per share — basic and diluted | $ | 0.06 | $ | 0.18 | ||||
| Pro forma net income per share — basic and diluted | $ | 0.05 | $ | 0.17 | ||||
This pro forma amount was determined by estimating the fair value of each option beginning June 28, 2003, when shareholder approval of the option plans was obtained, at $0.95 per option, using the Black-Scholes option-pricing model, assuming of a 7.50% dividend yield, a 3.53% risk-free interest rate based on the 10-year U.S. Treasury Bond, an expected life of 9.32 years, and a volatility rate of 0%.
| Derivative Instruments and Hedging Activities |
In the normal course of business, we are exposed to the effects of interest rate changes. We limit these risks by following established risk management policies and procedures, including the occasional use
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Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of derivatives. For interest rate exposures, interest rate swaps may be used primarily to hedge the cash flow risk of variable rate borrowing obligations.
Derivatives are recognized as either assets or liabilities in the statement of financial position and measured at fair value in accordance with Statement of Financial Accounting Standards No. 133. Additionally, the fair value adjustments will affect either accumulated other comprehensive income or net income depending on whether the derivative instrument qualifies as a hedge for accounting purposes.
The Company requires that its derivative instruments be effective in reducing the interest rate risk exposure that they are designated to hedge. Key criteria which are essential for qualifying as hedge accounting include the notional amount, benchmark interest rate, and the fair value of the swap at inception must be zero, all interest receipts/payments must be designated as hedged and the repricing dates must be the same over the term of the swap.
Interest rate swaps that convert variable payments to fixed payments are cash flow hedges if they qualify for hedge accounting and are fully effective. If the instrument is considered ineffective in hedging cash flow risk, the fair value adjustments related to the swaps are charged to interest (See Note 5).
| Recently Issued Accounting Pronouncements |
In June, 2002, the FASB approved for issuance SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 is effective for such activities initiated after December 31, 2002. Activities of this type include restructurings (such as relocation of a business and fundamental reorganizations of a business itself), which may give rise to costs such as contract cancellation provisions, employee relocation and one-time termination costs. SFAS No. 146 prohibits liability recognition based solely on management’s intent and requires that liabilities be measured at estimated fair value. The adoption of SFAS No. 146 did not have a material impact on the Company’s financial statements.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”, an amendment of FASB Statement No. 123. The disclosure requirements of Statement 123, “Accounting for Stock-Based Compensation,” which apply to stock compensation plans of all companies, are amended to require certain disclosures about stock-based employee compensation plans in an entity’s accounting policy note. Those disclosures include a tabular format of pro forma net income and, if applicable, earnings per share under the fair value method if the intrinsic value method is used in any period presented. Pro forma information in a tabular format is also required in the notes to interim financial information if the intrinsic value method is used in any period presented. Before amendment by Statement 148, Statement 123 required entities changing to the fair value method of accounting for stock- based employee compensation to account for the change in method prospectively. The FASB decided to provide a choice among three transition methods (the prospective method originally required by Statement 123, the modified prospective method, and the retroactive restatement method) for entities voluntarily adopting the fair value method in periods beginning before December 16, 2003. Statement 123’s original prospective transition method will not be available to entities changing to the fair value method in fiscal years beginning after December 15, 2003. The amendments to the disclosure and transition provisions of Statement 123 are effective for fiscal years ending after December 15, 2002. Calendar year-end entities are required to include the new disclosures in their 2002 financial statements. The disclosure requirement for interim financial information is effective for interim periods beginning after December 15, 2002. The Company has adopted the interim disclosure requirements of SFAS 148 in the accompanying consolidated financial statements. The implementation of this standard did not have a material effect upon the Company’s financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The FASB has issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” — an interpretation of FASB Nos. 5, 57 and 107 and rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Implementation of these provisions of the Interpretation is not expected to have a material impact on the Company’s consolidated financial statements. The disclosure requirements of the Interpretation are effective for financial statements of interim or annual periods ended after December 15, 2002 and have been adopted in the accompanying consolidated financial statements with no additional disclosure required.
The FASB has issued Interpretation No. 46, “Consolidation of Variable Interest Entities” — an interpretation of Accounting Research Bulletin (“ARB”) No. 51. This Interpretation defines a variable interest entity and provides that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities, and results of the activities of the variable interest entity should be included in consolidated financial statements with those of the business enterprise. Furthermore, the FASB indicates that the voting interest approach of ARB No. 51 is not effective in identifying controlling financial interests in entities that are not controllable through voting interest or in which the equity investors do not bear the residual economic risk. This Interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Interpretation applies to public enterprises as of the beginning of the applicable interim or annual period. The implementation of this Interpretation did not have a material effect upon the Company’s financial statements.
In May 2003, the FASB issued Statement No. 150 (“SFAS 150”), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes standards for how an issuer classifies and measures in its statement of financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with the standard, financial instruments that embody obligations for the issuer are required to be classified as liabilities. SFAS 150 is effective for all financial instruments created or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of SFAS 150 is not expected to have a material effect on the Company’s consolidated financial condition or results of operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
3. Real Estate Investments
| Operating Properties |
The Company’s operating properties at September 30, 2003 were as follows:
| Percentage | Buildings and | |||||||||||||||
| Ownership | Land | Improvements | Total | |||||||||||||
| 5508 Highway 290 West Office Building, Austin, TX | 100.00 | % | $ | 1,535,875 | $ | 8,696,923 | $ | 10,232,798 | ||||||||
| Two Corporate Plaza, Clear Lake, TX | 100.00 | % | 2,040,578 | 11,728,523 | 13,769,101 | |||||||||||
| Atrium Building, Lincoln, NE | 100.00 | % | 1,075,996 | 3,354,736 | 4,430,732 | |||||||||||
| Department of Children and Families Campus, Plantation, FL | 100.00 | % | 1,743,333 | 9,873,446 | 11,616,779 | |||||||||||
| Gemini Plaza, Houston, TX | 100.00 | % | 2,255,841 | 12,783,118 | 15,038,959 | |||||||||||
| Bay View Plaza, Alameda, CA | 97.68 | % | 1,750,480 | 9,923,285 | 11,673,765 | |||||||||||
| North Pointe Corporate Center, Sacramento, CA | 100.00 | % | 3,633,548 | 20,590,104 | 24,223,652 | |||||||||||
| 14,035,651 | 76,950,135 | 90,985,786 | ||||||||||||||
| Less accumulated depreciation | — | (923,997 | ) | (923,997 | ) | |||||||||||
| $ | 14,035,651 | $ | 76,026,138 | $ | 90,061,789 | |||||||||||
On July 31, 2003, through its wholly owned subsidiary, GREIT — Bay View, LP, a California limited partnership, the Company purchased an approximately 97.68% majority tenant in common interest in Bay View Plaza located in Alameda, California. The remaining minority tenant in common interest was purchased by NNN Bay View 1, LLC, an unaffiliated third party. The seller was an unaffiliated third party. The total purchase price for the property was approximately $11,655,000 in cash. The Company’s proportionate share of the total purchase price was approximately $11,329,000. The seller paid a sales commission to Triple Net Properties Realty, Inc. (“Realty”), an affiliate of the Company’s advisor, of $380,000, or approximately 3.0% of the purchase price.
On August 11, 2003, through its wholly owned subsidiary, GREIT — North Pointe, LP, a California limited partnership, the Company purchased North Pointe Corporate Center located in Sacramento, California. The seller was an unaffiliated third party. The total purchase price for the property was approximately $24,205,000 in cash. The seller paid a sales commission to Realty of $705,000, or approximately 2.9% of the purchase price.
| Investments in Unconsolidated Real Estate |
The Company’s unconsolidated investments in real estate consist of:
| Ownership % | Company Investment | |||||||
| Congress Center, Chicago, IL | 30.00 | % | $ | 14,927,076 | ||||
| Park Sahara, Las Vegas, NV | 4.75 | % | 220,587 | |||||
| $ | 15,147,663 | |||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Unaudited condensed combined financial information as of September 30, 2003 and for the three months and nine months then ended for the Company’s investments in unconsolidated real estate is presented below.
| Real estate operating properties | $ | 149,147,877 | ||
| Other assets | 3,196,099 | |||
| Total assets | $ | 152,343,976 | ||
| Notes payable secured by real estate operating properties | $ | 107,662,634 | ||
| Other liabilities | 7,600 | |||
| Total liabilities | $ | 107,670,234 | ||
| Total equity | 44,673,742 | |||
| Total liabilities and equity | $ | 152,343,976 | ||
| Company’s share of total equity | $ | 15,147,663 | ||
| Three Months | Nine Months | |||||||
| September 30, 2003 | September 30, 2003 | |||||||
| Revenues | $ | 4,411,545 | $ | 11,011,515 | ||||
| Rental and other expenses | (2,890,495 | ) | (7,041,881 | ) | ||||
| Interest expense | (784,004 | ) | (2,581,687 | ) | ||||
| Net earnings | 737,046 | 1,387,947 | ||||||
| Company’s share of earnings | $ | 274,400 | $ | 381,076 | ||||
4. Other Assets
Other assets as of September 30, 2003 and the year ended December 31, 2002 consisted of the following:
| September 30, | December 31, | ||||||||
| 2003 | 2002 | ||||||||
| Property impounds & reserves | $ | 1,041,340 | $ | 952,526 | |||||
| Deferred rent receivable | 111,670 | 20,853 | |||||||
| Prepaid expenses and deposits | 212,311 | 46,167 | |||||||
| Lease commissions — net of amortization | 54,252 | 25,741 | |||||||
| Receivables — other | 5,509 | 484,440 | |||||||
| Total other assets | $ | 1,425,082 | $ | 1,529,727 | |||||
5. Notes Payable
| Line of Credit |
On September 19, 2003, LaSalle National Bank Association (“LaSalle”) approved an increase in the amount of the Company’s line of credit from $65,000,000 to $75,000,000 pursuant to the terms of the amended credit agreement.
On September 20, 2003, the Company paid down our line of credit with LaSalle in the amount of $20,000,000.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Properties financed by borrowings under the LaSalle line of credit are required to meet certain minimum loan to value, debt service coverage and other requirements on a combined basis. As of September 30, 2003, the Company was in compliance with all such requirements.
As of September 30, 2003, the Company’s borrowings under this credit facility totaled $1,135,000, and undrawn amounts totaled $73,865,000. The weighted average interest rate on the line of credit for the three month and nine month periods ended September 30, 2003 was 3.90% and 3.94%, respectively.
| Interest Rate Swap |
On May 2, 2003, the Company entered into an interest swap agreement with LaSalle to hedge its exposure to $26,400,000 in LIBOR based variable rate borrowings under its credit facility, representing all of the outstanding borrowings at the inception of the swap agreement. The risk being hedged is the risk of changes in cash flows due to changes in interest rates. The swap agreement requires the Company to pay an effective fixed rate of 4.53% per annum over the term of the swap agreement.
During the quarter ended September 30, 2003, the Company repaid substantially all of its variable rate borrowings, thereby making the interest rate swap ineffective for hedge accounting purposes. As a result, the fair value adjustments to the interest rate swap, which totaled $286,811, have been charged to interest expense. Additionally, interest rate pay differentials arising from the swap agreement during the quarter ended September 30, 2003 resulted in additional interest expense totaling $74,257.
| Mortgage Loan Payable |
In connection with the acquisition of Two Corporate Plaza, an office building located in Clear Lake, Texas, in November 2002, the Company borrowed $10,160,000 from an unaffiliated lender under a first mortgage loan bearing interest at a fixed interest rate of 5.92%. The Company is required to make payments of principal and interest on a 30-year amortization schedule until the due date of December 11, 2007, at which time the loan will have to be paid in full or refinanced. The outstanding loan balance at September 30, 2003 was approximately $10,072,000.
6. Shareholders’ Equity
As of September 30, 2003, the Company had issued 12,008,464 shares of its common stock (“Shares”) for aggregate gross proceeds before offering costs and selling commissions totaling $119,477,000. Of these amounts, approximately 22,100 shares or $200,005 of the Company’s common stock were sold to the Advisor, and approximately 9,595 shares or $86,836 of the Company’s common stock were sold to other affiliated parties. In addition, 137,536 shares totaling approximately $1,297,500 have been issued under the Company’s Dividend Reinvestment Program (“DRIP”) through September 30, 2003.
In connection with the Offering, the Company incurred approximately $13,658,000 of costs related to the issuance and distribution of Shares through September 30, 2003, including $10,547,000 during the nine months ended September 30, 2003. Such amount includes $9,314,000 paid to the Dealer Manager of the Offering (NNN Capital Corp., a company wholly owned by the Company’s CEO), principally comprised of selling commissions, investor marketing and due diligence costs. In addition, approximately $1,518,000 was paid to the Advisor for reimbursement of actual offering expenses.
Beginning September 1, 2002, the Company began paying monthly dividends to shareholders of record as of the end of the preceding month. The Company pays monthly dividends at an annual rate of 0.750 per share (0.725 per share prior to June 2003 and 0.700 per share prior to January 2002) to the extent of available funds.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For the nine months ended September 30, 2003, the Company declared total dividends of $3,411,586, of which $1,578,866 was paid in cash.
7. Dividend Reinvestment Program
Effective with the Offering, the Company adopted a DRIP that allows Company shareholders to purchase up to 1,000,000 shares of common stock through reinvestment of dividends, subject to certain conditions. The Company registered and reserved 1,000,000 shares for distribution pursuant to the DRIP.
During the three months and nine months ended September 30, 2003, the Company issued 64,172 Shares and 130,704 Shares, respectively, under the Company’s DRIP.
8. Advisory Agreement and Related Party Transactions
| Advisory Agreement |
Under the terms of the Advisory Agreement, the Advisor has responsibility for the day-to-day operations of the Company, administers the Company’s accounting and bookkeeping functions, serves as a consultant in connection with policy decisions to be made by the Company’s Board of Directors, manages the Company’s property and renders other services deemed appropriate by the Company’s Board of Directors. The Advisor bears the expenses incurred for the performance of its services and is entitled to reimbursement subject to certain limitations. Fees and costs reimbursed to the Advisor cannot exceed 2% of average invested assets or 25% of net income for the previous four quarters as defined. During the nine months ended September 30, 2003, there were no reimbursements to the Advisor for costs and expenses relating to the Advisory Agreement.
| Offering Expenses |
The Advisor has guaranteed payment of all public offering expenses (excluding selling commissions, the marketing contribution and the due diligence expense allowance) incurred on behalf of the Company which together exceed 14% of the gross Offering proceeds. Effective October 17, 2002, the Board of Directors of the Company lowered the limitation on offering and organizational expenses to be borne by the Company from 15% to 14% of the total proceeds raised in the Offering.
Through September 30, 2003, total offering expenses incurred and reimbursed to the Advisor and affiliates totaled approximately $13,658,000 ($10,547,000 incurred during the nine months ended September 30, 2003) which are not in excess of this limitation.
| Real Estate Commissions |
For the three months and nine months ended September 30, 2003, Realty received real estate sales commissions of $1,076,000 and $2,400,000, respectively, in connection with the acquisition of properties by the Company.
| Property Management Fees |
The Company pays Realty property management fees equal to 5% of the gross income of each property managed by Realty. All of the Company’s properties are managed by Realty and, for the three months and nine months ended September 30, 2003, the Company incurred approximately $149,000 and $321,000, respectively, in property management fees.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| Incentive Distributions |
The Advisor owns 100 non-voting incentive performance units in G REIT, L.P., the Company’s Operating Partnership and is entitled to incentive distributions of operating cash flow after the Company’s shareholders have received an 8% annual return on their invested capital. No incentive distributions were made to the Advisor for the nine months ended September 30, 2003.
9. Commitments and Contingencies
| Acquisitions |
The Company has real estate deposits outstanding and management is currently considering several other potential property acquisitions. The decision to acquire one or more of these properties will generally depend upon:
| • | receipt of a satisfactory environmental survey and property appraisal for each property; | |
| • | no material adverse change occurring in the properties, the tenants or in the local economic conditions; and | |
| • | receipt of sufficient financing, either through the net proceeds from this offering or satisfactory debt financing. | |
There can be no assurance that any or all of the conditions will be satisfied.
| Contingent Loan Obligations |
In connection with the purchase of its tenant in common interest in Congress Center (see Note 3), the Company is jointly and severally liable on two loans encumbering the property with a maximum principal amount of $95,950,000 and maturing through January 2006. The loans are cross-collateralized and cross-defaulted. The Company’s joint and several obligation under these loans constitutes a guarantee of entities under the common control of the Advisor and, as a result, it is exempted from recognition and measurement required by FIN 45 and no liability related to this obligation has been recorded in the accompanying consolidated financial statements. In the event of a loan default by the other property owners of Congress Center, the Company may be responsible for fully repaying the loans and accrued interest thereon. In such event, the Company would then have recourse against the other property owners and be able to proportionately increase its ownership interest in the property.
10. Subsequent Events
On October 8, 2003, the Company borrowed $29,620,215 under the LaSalle line of credit. The amount drawn was collateralized by the following properties: 5508 Highway 290 West Office Complex — $5,529,983; Gemini Plaza — $9,815,000; and North Point Corporate Center — $14,275,232. Proceeds were utilized to purchase additional real estate property, as noted below.
On October 10, 2003, through its wholly owned subsidiary, GREIT — 824 Market Street, LLC, a Delaware limited liability company, the Company purchased 824 Market Street, a ten-story Class B+ multi-tenant office tower with approximately 200,020 square feet in Wilmington, Delaware. The property is approximately 93% leased with approximately 35% of the property leased to GSA (US Bankruptcy Court — District of Delaware). The property was purchased from an unaffiliated third party for a purchase price of approximately $31,900,000 in cash. The Company paid an acquisition fee to Realty of $970,000, or approximately 3.0% of the purchase price.
On October 10, 2003, the Company filed a registration statement on Form S-11 with the Securities and Exchange Commission for a second offering of its common stock. Pursuant to this registration
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
statement, the Company will be offering for sale to the public on a “best efforts” basis an additional 27 million shares of its common stock at a purchase price of $10.00 per share and up to 1.5 million additional shares through its dividend reinvestment plan. The Company anticipates that this registration statement will go effective during the first quarter of 2004 and that the current offering will terminate in conjunction with the commencement of the second offering.
On October 24, 2003, the Company’s advisor entered into a contract on behalf of the Company with an unaffiliated third-party seller for the acquisition of Centerpoint Corporate Park, a four-building portfolio totaling approximately 435,894 square feet situated in a Class A eight-building suburban corporate campus in Kent, Washington, a suburb of Seattle. The property is approximately 67% leased, with approximately 13.7% leased by PASC (Patient Accounting Services Corporation), 9.2% leased by Alaska Airlines, 7.2% leased by United Airlines, 5.4% leased by Noridian Blue Cross and 5.3% by the Federal Bureau of Investigation. The purchase price for the property is approximately $55,300,000. The seller will pay Realty a sales commission of $1,084,000, or approximately 2.0% of the purchase price, for arranging the transaction. Closing of this acquisition is anticipated in the fourth quarter of 2003. The Company made a deposit of $2,000,000 related to this potential acquisition. Under certain circumstances, such deposit may be nonrefundable.
On October 24, 2003, the Company’s advisor entered into a contract on behalf of the Company with an unaffiliated third-party seller for the acquisition of One World Trade Center, a 27-story Class A multi-tenant office building with approximately 570,485 square feet in downtown Long Beach, California. The property, which includes a retail component of approximately 120,000 square feet, is approximately 85% leased, with approximately 9.3% leased by the U.S. Customs Trade Office and 5.3% by the Federal Bureau of Investigation. The purchase price for the property is approximately $113,650,000. The seller will pay Realty a sales commission of $2,400,000, or approximately 2.1% of the purchase price, for arranging the transaction. Closing of this acquisition is anticipated in the fourth quarter of 2003. The Company made a deposit of $3,000,000 related to this potential acquisition. Under certain circumstances, such deposit may be nonrefundable.
On October 28, 2003, through its wholly owned subsidiary, GREIT — Sutter Square, LP, a California limited partnership, the Company purchased Sutter Square Galleria, a mixed-use two-building property with approximately 61,036 square feet in Sacramento, California. The property is subject to a ground lease expiring in 2030 with one ten-year option period thereafter. The property is approximately 96% leased with the University of California Davis Extension, John Robert Powers and Blockbuster occupying approximately 30%, 16% and 13%, respectively, of the property. The purchase price for the property was approximately $8,240,000. In connection with the purchase, the Company assumed the existing loan from GE Capital Loan Services in the amount of $4,024,126. The loan bears interest at a fixed rate of 6.89% per annum. The Company is required to make monthly principal and interest payments on a 30-year amortization schedule until the due date of November 1, 2008. The Company paid an acquisition fee to Realty of $240,000, or approximately 2.9% of the purchase price.
On November 7, 2003, LaSalle approved an increase in the amount of the Company’s line of credit from $75,000,000 to $115,000,000, pursuant to the terms of the amended credit agreement. The Company has an option to increase the LaSalle credit facility up to $200,000,000, subject to meeting certain conditions. The option expires July 17, 2005.
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
We have audited the accompanying consolidated balance sheets of G REIT, Inc. (the “Company”) as of December 31, 2002 and 2001, and the related consolidated statements of operations, shareholders’ equity and cash flows for the year ended December 31, 2002 and the period from December 18, 2001 (inception) through December 31, 2001. These financial statements 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of G REIT, Inc. as of December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for the year ended December 31, 2002 and the period from December 18, 2001 through December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
We have also audited Schedule III of G REIT, Inc. for the year ended December 31, 2002. In our opinion, this 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/ GRANT THORNTON LLP
Irvine, California
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G REIT, INC.
CONSOLIDATED BALANCE SHEETS
| 2002 | 2001 | ||||||||
| ASSETS | |||||||||
| Real estate investments: | |||||||||
| Operating properties | $ | 23,830,511 | $ | — | |||||
| Less accumulated depreciation | (102,149 | ) | — | ||||||
| 23,728,362 | — | ||||||||
| Cash and cash equivalents | 8,378,891 | 100 | |||||||
| Accounts receivable | 98,149 | — | |||||||
| Accounts receivable from related parties | 4,063 | — | |||||||
| Real estate deposits | 2,270,985 | — | |||||||
| Other assets, net | 1,980,859 | — | |||||||
| $ | 36,461,309 | $ | 100 | ||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||
| Accounts payable and accrued liabilities | $ | 770,770 | $ | — | |||||
| Distributions payable | 109,642 | — | |||||||
| Security deposits and prepaid rent | 370,539 | — | |||||||
| Notes payable | 16,860,000 | — | |||||||
| 18,110,951 | — | ||||||||
| Commitments and contingencies | — | — | |||||||
| Shareholders’ equity: | |||||||||
| Common stock, $.01 par value; 50,000,000 shares authorized; 2,158,417 shares issued and outstanding at December 31, 2002 and 10 shares at December 31, 2001 | 21,584 | — | |||||||
| Additional paid-in capital | 18,582,586 | 100 | |||||||
| Distributions in excess of earnings | (253,812 | ) | — | ||||||
| 18,350,358 | 100 | ||||||||
| $ | 36,461,309 | $ | 100 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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G REIT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| 2002 | 2001 | ||||||||
| Revenues | |||||||||
| Rental income | $ | 732,685 | $ | — | |||||
| Interest income | 17,816 | — | |||||||
| 750,501 | — | ||||||||
| Expenses | |||||||||
| Rental expenses | 204,561 | — | |||||||
| General and administrative | 169,532 | — | |||||||
| Depreciation | 102,149 | — | |||||||
| Interest (including amortization of deferred financing fees) | 248,609 | — | |||||||
| 724,851 | — | ||||||||
| Net income | $ | 25,650 | $ | — | |||||
| Net income per common share — basic and diluted | $ | 0.06 | $ | — | |||||
| Weighted average number of common shares outstanding — basic and diluted | 405,481 | 10 | |||||||
| Distributions declared | $ | 279,462 | $ | — | |||||
The accompanying notes are an integral part of these consolidated financial statements.
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G REIT, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| Additional | Distributions | |||||||||||||||||||
| Number of | Paid-In | in Excess of | ||||||||||||||||||
| Shares | Par Value | Capital | Earnings | Total | ||||||||||||||||
BALANCE — December 18, 2001 (inception) | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
| Issuance of common stock | 10 | — | 100 | — | 100 | |||||||||||||||
| Distributions | — | — | — | — | — | |||||||||||||||
| Net income | — | — | — | — | — | |||||||||||||||
BALANCE — December 31, 2001 | 10 | — | 100 | — | 100 | |||||||||||||||
| Issuance of common stock, net of offering costs of $2,936,369 | 2,158,407 | 21,584 | 18,582,486 | — | 18,604,070 | |||||||||||||||
| Distributions | — | — | — | (279,462 | ) | (279,462 | ) | |||||||||||||
| Net income | — | — | — | 25,650 | 25,650 | |||||||||||||||
BALANCE — December 31, 2002 | 2,158,417 | $ | 21,584 | $ | 18,582,586 | $ | (253,812 | ) | $ | 18,350,358 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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G REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| 2002 | 2001 | |||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||
| Net income | $ | 25,650 | $ | — | ||||||
| Adjustments to reconcile net income to net cash used in operating activities | ||||||||||
| Depreciation | 102,149 | — | ||||||||
| Amortization of deferred financing fees | 49,424 | — | ||||||||
| Change in operating assets and liabilities: | ||||||||||
| Accounts receivable | (98,149 | ) | — | |||||||
| Accounts receivable from related parties | (4,063 | ) | — | |||||||
| Other assets | (1,825,227 | ) | — | |||||||
| Accounts payable and accrued liabilities | 770,770 | — | ||||||||
| Security deposits and prepaid rent | 370,539 | — | ||||||||
| Net cash used in operating activities | (608,907 | ) | — | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||
| Purchase of real estate operating properties | (23,830,511 | ) | — | |||||||
| Real estate deposits | (2,270,985 | ) | — | |||||||
| Net cash used in investing activities | (26,101,496 | ) | — | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||
| Proceeds from issuance of common stock, net | 18,604,070 | 100 | ||||||||
| Borrowings under notes payable | 16,860,000 | — | ||||||||
| Payment of deferred financing costs | (205,056 | ) | — | |||||||
| Distributions | (169,820 | ) | — | |||||||
| Net cash provided by financing activities | 35,089,194 | 100 | ||||||||
NET INCREASE IN CASH AND CASH EQUIVALENTS | $ | 8,378,791 | $ | 100 | ||||||
CASH AND CASH EQUIVALENTS— beginning of period | $ | 100 | $ | — | ||||||
CASH AND CASH EQUIVALENTS— end of period | $ | 8,378,891 | $ | 100 | ||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||||
| Cash paid during the year for: | ||||||||||
| Interest | $ | 108,888 | $ | — | ||||||
| Income taxes | $ | — | $ | — | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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G REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
G REIT, Inc. (the “Company”), was incorporated on December 18, 2001 under the laws of the Commonwealth of Virginia. The Company, which is qualified, has elected to be treated as a real estate investment trust (“REIT”) for federal income tax purposes for its first full tax year. The Company was incorporated to raise capital and to acquire ownership interests in, manage, operate, lease, acquire, develop, invest in and dispose of office, industrial and service real estate properties, a number of which will have a government-tenant orientation. As of December 31, 2002, the Company had acquired two office properties. The Company internally evaluates all properties as one industry segment and accordingly does not report segment information.
The Company is externally advised by Triple Net Properties, LLC (the “Advisor”), which is primarily responsible for managing the day-to-day operations and assets of the Company. The Advisory Agreement between the Company and the Advisor has a one year term, and is subject to successive renewals. The Advisor is affiliated with the Company in that the two entities have common officers and directors, some of whom also own an equity interest in the Advisor. (See Note 7).
Pursuant to a Registration Statement on Form S-11 under the Securities Act of 1933, as amended, the Company is offering for sale to the public on a “best efforts” basis a minimum of 100,000 and a maximum of 20,000,000 shares of its common stock at a price of $10 per share (the “Offering”) and up to 1,000,000 additional shares pursuant to the Company’s Dividend Reinvestment Plan (“DRIP”) under which its shareholders may elect to have dividends reinvested in additional shares. The Registration Statement was declared effective by the Securities and Exchange Commission (“SEC”) on July 22, 2002. As discussed in the Registration Statement, the Company plans to principally use the net Offering proceeds from the sale of shares to acquire ownership interests in real estate properties. The Company intends to finance property acquisitions with a combination of net Offering proceeds and debt secured by the acquired properties.
As of December 31, 2001, the Company operated as a development stage enterprise. In September 2002, the Company completed its first property acquisition and commenced its planned principal operations.
The Company owns all of its interests in properties through its majority-owned subsidiary, G REIT, L.P., a Virginia limited partnership (the “Operating Partnership”), and conducts substantially all of its operations through the Operating Partnership. As of December 31, 2002, the Company was the sole general partner of the Operating Partnership and owned 100% of the equity interests therein, except for 100 incentive non-voting ownership units issued to the Company’s Advisor. The incentive units entitle the Advisor to receive certain incentive distributions of operating cash flow after a minimum 8% return on invested capital has been paid to the Company’s shareholders (as defined in the Registration Statement). In addition, the Advisor is entitled to incentive distributions from net proceeds from the sale of properties after the Company’s shareholders have received their invested capital, as defined, plus an 8% return on such invested capital. The unregistered public sale of restricted stock, which is governed by Rule 144 of the Securities Act of 1933, as amended, is prohibited during the first year of ownership and limited as set forth in such rule during the second year of ownership.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
| Basis of Presentation |
The accompanying consolidated financial statements include the accounts of the Company, the Operating Partnership and the wholly owned subsidiaries of the Operating Partnership; all material inter-company transactions and account balances have been eliminated in consolidation. All references to the Company include the Operating Partnership and its subsidiaries.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| Cash and Cash Equivalents |
Cash and cash equivalents consist of all highly liquid investments with a maturity of three months or less when purchased.
| Organizational Costs |
The Company complies with Statement of Position 98-5, Reporting the Costs of Start-Up Activities, which requires that all organizational and start-up costs be expensed as incurred. Organizational and start up expenses are included in general and administrative expenses.
| Real Estate Investments |
Real estate investments consist of two operating properties held for investment acquired in September and November 2002, carried at cost less accumulated depreciation. Cost includes the cost of land and completed buildings and related improvements. Expenditures that increase the service life of properties are capitalized; the cost of maintenance and repairs is charged to expense as incurred. Depreciation is generally provided on a straight-line basis over the estimated useful lives of the buildings and improvements, ranging primarily from 15 to 39 years. When depreciable property is retired or disposed of, the related costs and accumulated depreciation are removed from the balance sheets and any gain or loss reflected in statements of operations.
Impairment losses are recorded on long-lived assets used in operations and include the operating property when indicators of impairment are present and the assets’ carrying amount is greater than the sum of the future undiscounted cash flows, excluding interest, estimated to be generated by those assets. As of December 31, 2002, no indicators of impairment existed and no impairment losses have been recorded.
The Company follows the provisions of EITF 97-11, Accounting for Internal Costs Related to Real Estate Property Acquisitions. Accordingly, the Company does not capitalize internal acquisition costs incurred in conjunction with the identification and acquisition of properties to be held for operations.
| Real Estate Deposits |
Real estate deposits are paid on properties the Company is evaluating for purchase. Real estate deposits are capitalized when paid and may become nonrefundable under certain circumstances. When properties are acquired, the purchase price is reduced by the amounts of deposits paid by the Company. At December 31, 2002, management believes all real estate deposits are considered refundable.
| Other Assets |
Financing costs consist of loan fees and other loan costs. Loan fees and other loan costs are amortized over the term of the respective loan. Amortization of financing costs is included in interest expense.
| Revenue Recognition |
Real estate property is leased to tenants under leases with terms exceeding one year. Revenues from these leases, which are accounted for as operating leases, are recognized on a straight-line basis over the related term. Cost recoveries from tenants are included in rental income in the period the related costs are incurred.
Deferred rent receivable arises during free rent periods of a lease. The deferred rent receivable is included in other assets at December 31, 2002 and totaled $20,854.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| Concentration of Credit Risk |
Financial instruments that potentially subject the Company to a concentration of credit risk are primarily cash investments and accounts receivable from tenants. Cash is generally invested in investment-grade short-term instruments and the amount of credit exposure to any one commercial issuer is limited. The Company has cash in financial institutions which is insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $100,000 per institution. At December 31, 2002, the Company had cash accounts in excess of FDIC insured limits. Concentration of credit risk with respect to accounts receivable from tenants is limited. The Company performs credit evaluations of prospective tenants, and security deposits are obtained.
| Other Concentrations |
As of December 31, 2002, the Company has two properties in the state of Texas. Additionally, Lockheed Engineering accounts for approximately 27% of the Company’s revenues. No other single tenant accounted for a significant portion of the Company’s rental income.
| Fair value of financial instruments |
The carrying amount of cash, accounts receivable, real estate deposits, accounts payable and accrued liabilities approximates fair value because of the short maturity of these financial instruments. Notes payable are carried at amounts that approximate fair value. The estimated fair value of notes payable is based on borrowing rates currently available to the Company for loans with similar terms and maturities.
| Income Taxes |
The Company operates as a real estate investment trust for federal income tax purposes. As a REIT, the Company is generally not subject to income taxes. To maintain its REIT status, the Company is required to distribute annually as dividends at least 90% of its REIT taxable income for the year ended December 31, 2002, as defined by the Internal Revenue Code (“IRC”), to its shareholders, among other requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to Federal income tax on its taxable income at regular corporate tax rates. Although the Company qualifies as a REIT, the Company may be subject to certain state and local taxes on its income and property and Federal income and excise taxes on its undistributed income
| Per Share Data |
The Company reports earnings per share pursuant to Statement of Financial Accounting Standards No. 128, “Earnings Per Share”. Basic earnings per share attributable for all periods presented is computed by dividing the net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed based on the weighted average number of common shares and all potentially dilutive securities.
| Use of Estimates |
The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities as of December 31, 2002 and 2001, and the revenues and expenses for the year ended December 31, 2002 and the period December 18, 2001 through December 31, 2001. Actual results could differ from those estimates.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| Stock Options |
The Company follows the disclosure only provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). For employee compensatory stock options that will eventually vest, compensation expense is recognized during the periods in which the related employee services are rendered. Such expense is generally measured by determining the excess, if any, of the grant date estimated fair market value of the underlying stock over the amount to be paid by the employee in conformity with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”). Compensatory stock options and similar equity instruments issued to non-employees in exchange for goods or services are accounted for based on the estimated fair market value of (1) the goods or services received or (2) the equity instrument issued, whichever is more reliably measurable. This accounting policy is in conformity with SFAS 123.
Concurrent with commencement of the Offering, the Company adopted stock option plans for (1) independent and outside directors and (2) its officers and employees. Pursuant to the provisions of the Company’s option plans, as amended on July 22, 2002, the Company intends to grant 20,000 options under its independent director stock option plan (the “Directors Plan”) and 90,000 options under its officer/employee stock option plan (the “Officer/ Employee Plan”) to purchase Company common stock at $9.05 per share, which is the Offering price per share net of estimated selling commission and other offering costs. Shares of common stock issued upon the exercise of such options will have certain transferability restrictions. The unregistered public sale of restricted stock, which is governed by Rule 144 of the Securities Act of 1933, as amended, is prohibited during the first year of ownership and limited as set forth in such rule during the second year of ownership.
The number of stock options that can be granted to the Company’s directors, officers and employees is limited to 10% of the number of outstanding shares of the Company’s common stock at the time of the option grant. Accordingly, option grants will not be effective until and unless the Company sells at least 1.1 million shares of its common stock under the Offering. The 10% threshold referred to above was met on October 29, 2002. However, the option grants are subject to shareholder approval of the option plans and, therefore, for accounting purposes, they are not considered outstanding.
The stock options described above will expire ten years from the grant date and will be exercisable in whole or in part upon the second anniversary of the grant date; provided, however, that if the exercise of any stock option would cause the aggregate of all Company stock owned by the Advisor, the Dealer Manager of the Offering (NNN Capital Corp., an affiliate of the Company and the Advisor), their affiliates, and the Company’s officers and directors to exceed 10.0% of the total outstanding shares of the Company’s common stock, such exercise would be delayed until the first date on which the exercise would not cause such limit to be exceeded.
The Company has authorized and reserved a total of 100,000 shares and 400,000 shares for issuance under the Directors Plan and the Officer/ Employee Plan, respectively.
| Recently Issued Accounting Pronouncements |
The Financial Accounting Standards Board has issued Statements No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”) and No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs, and is effective for financial statements issued for fiscal years beginning after June 15, 2002. SFAS 144 supersedes Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”, addresses financial accounting and reporting for the impairment or disposal of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
long-lived assets, including accounting for a segment of a business accounted for as a discontinued operation. SFAS 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001. The adoption of SFAS 144 did not have a material impact on the Company’s financial statements.
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections”. SFAS No. 145 rescinds three existing pronouncements (relating to the intangible assets of motor carriers and certain debt extinguishments), amends SFAS No. 13 (“Accounting for Leases”), and makes technical corrections that are not substantive in nature to several other pronouncements. The amendment of SFAS No. 13, which is effective for transactions occurring after May 15, 2002, requires sale-leaseback accounting by lessees for certain lease modifications that are economically similar to sale-leaseback transactions. SFAS No. 145 did not affect the accompanying 2002 financial statements, and is not presently expected to have a significant impact on the Company’s future financial statements.
In June, 2002, the FASB approved for issuance SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” SFAS No. 146 is effective for such activities initiated after December 31, 2002. Activities of this type include restructurings (such as relocation of a business and fundamental reorganizations of a business itself), which may give rise to costs such as contract cancellation provisions, employee relocation, and one-time termination costs. SFAS No. 146 prohibits liability recognition based solely on management’s intent, and requires that liabilities be measured at estimated fair value. Management has not determined the effect, if any, of SFAS No. 146 on the Company’s future financial statements.
In December 2002, the FASB issued SFAS 148, “Accounting for Stock-Based Compensation— Transition and Disclosure”, an amendment of FASB Statement No. 123. The disclosure requirements of Statement 123, “Accounting for Stock-Based Compensation”, which apply to stock compensation plans of all companies, are amended to require certain disclosures about stock-based employee compensation plans in an entity’s accounting policy note. Those disclosures include a tabular format of pro forma net income and, if applicable, earnings per share under the fair value method if the intrinsic value method is used in any period presented. Pro forma information in a tabular format is also required in the notes to interim financial information if the intrinsic value method is used in any period presented. Before amendment by Statement 148, Statement 123 required entities changing to the fair value method of accounting for stock-based employee compensation to account for the change in method prospectively. The FASB decided to provide a choice among three transition methods (the prospective method originally required by Statement 123, the modified prospective method, and the retroactive restatement method) for entities voluntarily adopting the fair value method in periods beginning before December 16, 2003. Statement 123’s original prospective transition method will not be available to entities changing to the fair value method in fiscal years beginning after December 15, 2003.
The amendments to the disclosure and transition provisions of Statement 123 are effective for fiscal years ending after December 15, 2002. Calendar year-end entities are required to include the new disclosures in their 2002 financial statements. The disclosure requirement for interim financial information is effective for interim periods beginning after December 15, 2002. The Company has adopted the annual disclosure requirements of SFAS 148 in the accompanying consolidated financial statements. The implementation of this standard did not have a material effect upon the Company’s financial statements.
The FASB has issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” — an interpretation of FASB Nos. 5, 57 and 107 and rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Implementation of these provisions of the Interpretation is not expected to have a material impact on the Company’s consolidated financial statements. The disclosure requirements of the Interpretation are effective for financial statements of interim or annual periods ended after December 15, 2002, and have been adopted in the accompanying consolidated financial statements for December 31, 2002, with no additional disclosure required.
The FASB has issued Interpretation No. 46, “Consolidation of Variable Interest Entities” — an interpretation of Accounting Research Bulletin (“ARB”) No. 51. This Interpretation defines a variable interest entity and provides that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities, and results of the activities of the variable interest entity should be included in consolidated financial statements with those of the business enterprise. Furthermore, the FASB indicates that the voting interest approach of ARB No. 51 is not effective in identifying controlling financial interests in entities that are not controllable through voting interest or in which the equity investors do not bear the residual economic risk. This Interpretation applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. The Interpretation applies to public enterprises as of the beginning of the applicable interim or annual period. Management believes the implementation of this Interpretation will not have a material effect upon the Company’s financial statements.
3. OPERATING PROPERTIES
The Company’s real estate assets consisted of two wholly-owned operating properties at December 31, 2002 summarized as follows:
| Buildings and | ||||||||||||
| Land | Improvements | Total | ||||||||||
| 5508 Highway 290 West Office Building, Austin, TX | $ | 1,535,875 | $ | 8,689,125 | $ | 10,225,000 | ||||||
| Two Corporate Plaza, Clear Lake, TX | 2,040,577 | 11,564,934 | 13,605,511 | |||||||||
| 3,576,452 | 20,254,059 | 23,830,511 | ||||||||||
| Less: accumulated depreciation | — | (102,149 | ) | (102,149 | ) | |||||||
| $ | 3,576,452 | $ | 20,151,910 | $ | 23,728,362 | |||||||
The Company’s properties are leased to tenants under operating leases with terms ranging from 3 to 25 years and are either subject to scheduled fixed increases or adjustments based on the Consumer Price Index. Generally, the leases grant tenants renewal options. Leases also provide for additional rents based on certain operating expenses. Future minimum rent to be received from noncancelable operating leases,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
excluding tenant reimbursements of certain costs, for each of the next five years ending December 31 and thereafter, are summarized as follows:
Future Rent Receipts
| Year | Amount | |||
| 2003 | $ | 3,699,375 | ||
| 2004 | 3,585,708 | |||
| 2005 | 3,397,808 | |||
| 2006 | 2,070,918 | |||
| 2007 | 609,890 | |||
| Thereafter | 484,613 | |||
| $ | 13,848,312 | |||
A certain amount of the Company’s rental income is from tenants with leases which are subject to contingent rent provisions. These contingent rents are subject to the tenant achieving periodic revenues in excess of specified levels. For the year ended December 31, 2002, the amount of contingent rent earned by the Company was not significant.
4. NOTES PAYABLE
In connection with the acquisition of 5508 Highway 290 West Office Building, an office building located in Austin, Texas, in September 2002, the Company borrowed $6,700,000 from an unaffiliated lender under a first mortgage loan bearing interest at a variable interest rate of 400 basis points over LIBOR (1.50% at December 31, 2002). The Company is required to make interest-only payments until the due date of October 1, 2003, at which time the loan will have to be paid in full or refinanced.
In connection with the acquisition of Two Corporate Plaza, an office building located in Clear Lake, Texas, in November 2002, the Company borrowed $10,160,000 from an unaffiliated lender under a first mortgage loan bearing interest at a fixed interest rate of 5.92%. The Company is required to make payments of principal and interest on a 30-year amortization schedule until the due date of December 11, 2007, at which time the loan will have to be paid in full or refinanced.
The principal payments due on notes payable for each of the next five years ending December 31 and thereafter are summarized as follows:
| Year | Amount | |||
| 2003 | $ | 6,827,265 | ||
| 2004 | 135,007 | |||
| 2005 | 143,220 | |||
| 2006 | 151,933 | |||
| 2007 | 9,602,575 | |||
| $ | 16,860,000 | |||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
5. SHAREHOLDERS’ EQUITY
As of December 31, 2002, the Company had issued 2,158,417 shares of common stock, including 22,100 shares issued to Triple Net Properties, LLC, (the “Advisor”), 16,025 shares to other affiliated parties, and 6,933 shares issued under the Dividend Reinvestment Program (the “DRIP”) at $9.05 per share resulting in aggregate gross proceeds before offering costs and selling commissions of approximately $21,540,539.
The Company incurred Offering expenses of approximately $2,936,369 of costs related to the issuance and distribution of its common stock through the year ended December 31, 2002. Such amount includes reimbursements of offering costs to the Advisor of $408,974. It also includes a total of approximately $1,732,148 paid to the Dealer Manager of the Offering (Stafford Capital Corp., formerly NNN Capital Corp., which is wholly owned by the Company’s CEO), and is principally comprised of selling commissions, (the majority of which are re-allowed to selling broker dealers), and investor marketing and due diligence costs.
The Company has established an annual dividend rate and has committed to paying monthly dividends at an annual rate of 7.25% to the extent of lawfully available funds. Beginning September 1, 2002, the Company began monthly distributions to shareholders of record as of the end of the preceding month. As of December 31, 2002, the Company had declared total dividends of $279,462 and paid total cash dividends of $169,820.
The Advisor has guaranteed payment of all public offering expenses (excluding selling commissions, the marketing contribution and the due diligence expense allowance) which together exceed 15% of the gross Offering proceeds. Effective October 17, 2002, the Board of Directors of the Company lowered the limitation on offering and organizational expenses to be borne by the Company from 15% to 14% of the total proceeds raised in the Offering. As of December 31, 2002, organizational and offering costs did not exceed these limitations and the Company anticipates that these costs will not exceed these limitations upon completion of the Offering. Any excess amounts at the completion of the Offering will be reimbursed by the Advisor.
6. DIVIDEND REINVESTMENT PROGRAM
Effective with the Offering, the Company adopted a DRIP that allowed Company shareholders to purchase up to 1 million shares of common stock through reinvestment of dividends, subject to certain conditions. The Company registered and reserved 1,000,000 shares for distribution pursuant to the DRIP.
During the year ended December 31, 2002, the Company sold 11,488 shares of common stock under the Company’s DRIP, of which 6,839 were issued at year end.
7. ADVISORY AGREEMENT AND RELATED PARTY TRANSACTIONS
| Advisory Agreement |
Under the terms of the agreement between the Company and the Advisor (the “Advisory Agreement”), the Advisor has responsibility for the day-to-day operations of the Company; administers the Company’s accounting and bookkeeping functions; serves as a consultant in connection with policy decisions to be made by the Company’s Board of Directors; manages the Company’s property; and renders other services deemed appropriate by the Company’s Board of Directors. The Advisor bears expenses incurred for the performance of its services and is entitled to reimbursement subject to certain limitations. Fees and costs reimbursed to the Advisor cannot exceed 2% of average invested assets, as defined, or 25% of net income for the previous four quarters as defined.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| Organizational and Offering Expenses |
The Company’s Advisor and affiliated entities have incurred offering costs and certain expenses on the Company’s behalf. Pursuant to a written agreement, such entities accepted responsibility for such costs and expenses until the Company’s Registration Statement was declared effective by the SEC. However, the Company’s obligation for such costs and expenses will not exceed 15% of the total proceeds raised in the Offering, as more fully disclosed in the Company’s Registration Statement.
At December 31, 2002, total organizational and offering expenses incurred by the Advisor and affiliates totaled $2,936,369, all of which have been borne by the Company, subject to the limitation described above, and reflected as a reduction of additional paid-in capital. The offering expenses include $1,732,148 paid to the Dealer Manager and $408,974 in reimbursements to the Advisor for legal, accounting and other expenses of the offering.
Effective October 17, 2002, the Board of Directors of the Company lowered the limitation on offering costs and organizational expenses to be borne by the Company from 15% to 14% of total proceeds raised in the Offering.
| Real Estate Commissions |
The purchase price of 5508 Highway 290 West Building Complex included a real estate sales commission, which was paid by the seller to Triple Net Properties Realty, Inc. (“Realty”), an affiliate of the Advisor, totaling $300,000 or approximately 3% of the purchase price. The purchase price of Two Corporate Plaza also included a real estate sales commission, which was paid by the seller to Triple Net Properties Realty, Inc., totaling $380,000 or approximately 2.8% of the purchase price.
| Property Management Fees |
The Company pays Realty a property management fee equal to 5% of the gross income from the properties. Beginning October 1, 2002 through December 31, 2002, property management fees of $26,516 were paid to Realty including $2,058 in amounts for on-site personnel.
| Incentive Distributions |
The Advisor owns non-voting incentive performance units in G REIT, L.P., the Company’s Operating Partnership and is entitled to incentive distributions of operating cash flow after the Company’s shareholders have received an 8% annual return on their invested capital. No incentive distributions were made to the Advisor for the year ended December 31, 2002.
8. SUBSEQUENT AND PROPOSED ACQUISITIONS
| Congress Center |
On January 9, 2003, through its wholly owned subsidiary, GREIT — Congress Center, LLC, a Delaware limited liability company, the Company purchased an approximately 30% undivided tenant in common interest in Congress Center, a 16-story Class A office building of approximately 525,000 square feet built in 2001 and located in Chicago, Illinois. The Company’s affiliates, NNN Congress Center, LLC and WREIT — Congress Center, LLC, simultaneously purchased undivided tenant in common interests totaling approximately 70% ownership of the property. The seller was Congress Center, L.L.C., an unaffiliated third-party. The total purchase price for Congress Center was $136,108,000. The purchase price included a sales commission payable to Realty of $2,000,000, approximately 1.50% of the purchase price. The Company’s total investment consisted of its proportionate share of the purchase price
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(approximately $40,832,000 including $12,047,000 in cash and $28,785,000 in debt), plus $2,509,000 for its proportionate share of closing costs, loan fees and reserves. The Company is jointly and severally liable with the other tenants in common for the total debt of $95,950,000 and any subsequent increases in the total debt.
| Atrium Building |
On January 31, 2003, through its wholly owned subsidiary, GREIT — Atrium Building, LLC, a Delaware limited liability company, the Company purchased the Atrium Building in Lincoln, Nebraska from 1200 N Street, LTD. The property, which was originally built in 1917 and extensively renovated with the most recent renovations completed in 1995, consists of a 6-story Class B office building containing 166,868 square feet. The property was purchased from an unaffiliated third party, for a purchase price of approximately $4,532,000. The property is encumbered by two ground leases under parts of the office building, which expire in 2054 and 2055, respectively, including renewal options. The Company financed the purchase price with $2,200,000 in borrowings under a new credit facility arranged through LaSalle Bank National Association, a real estate lender. The Company is required to make interest only payments until the due date of January 30, 2006, at which time the loan will have to be paid in full or refinanced. The purchase price included a sales commission payable to Realty of $132,000, approximately 2.9% of the purchase price.
| Park Sahara |
On March 18, 2003, through its wholly owned subsidiary, GREIT — Park Sahara, LLC, a Delaware limited liability company, the Company purchased an approximately 4.75% undivided tenant in common interest in Park Sahara, a five-building Class B office park containing a total of approximately 123,709 square feet on an approximately 6.95 acre site located in Las Vegas, Nevada. The remaining undivided tenant in common interest was purchased by NNN Park Sahara, LLC, an affiliate of the Company. The seller was Park Sahara Office Center, LP, an unaffiliated third party. The total purchase price for the property was approximately $12,200,000. The purchase was financed through (1) the assumption of a $5,040,000, 8.00% fixed rate loan on a 25-year amortization schedule due September, 2007 from IDS American Express, (2) a new approximately $2,260,000, 6.92% fixed rate loan on a 25-year amortization schedule due September 2007 from IDS American Express and, (3) a $1,100,000, 7.00% fixed rate interest-only loan also due September 2007 from the seller. The Company’s total cash investment was $211,000 and its proportionate share of the total purchase price was approximately $579,500 including $399,000 in debt. The Company’s liability for the property’s debt is limited to the amount of its investment in the property. The purchase price included a sales commission payable to Realty of $320,000, approximately 2.60% of the purchase price.
| Department of Children and Families Campus |
On January 7, 2003, the Advisor entered into a contract on behalf of the Company with an unaffiliated third-party for the acquisition of the Department of Children and Families Campus, which consists of a one-story and two three-story Class B buildings with a total of approximately 124,037 square feet located on a 9.4 acre site in Plantation, Florida. The property is approximately 98% leased, with approximately 90% of the office building space being leased by several State of Florida government and local agency and state contractor tenants, including the State of Florida Department of Children and Families and the Broward County Sheriff’s Department. The purchase price for the property is approximately $11,580,000. The seller will pay Realty a commission of $300,000 at settlement for arranging the purchase. Closing of this acquisition is anticipated late in the first quarter or early in the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
second quarter of 2003. The Company has a deposit of $200,000 related to this potential acquisition. Under certain circumstances, such deposits may be nonrefundable.
| Gemini Plaza |
On January 10, 2003, the Advisor entered into a contract on behalf of the Company with an unaffiliated third-party for the acquisition of Gemini Plaza, a six-story Class A office building with approximately 158,627 square feet on an approximately 7.02 acre site in Houston, Texas. The property is approximately 100% leased, with approximately 100% of the office building space being leased by the United Space Alliance, a joint venture of the Lockheed Martin Corporation and The Boeing Company. The purchase price for the property is approximately $15,000,000. The seller will pay Realty a commission of $325,000 at settlement for arranging the purchase. Closing of this acquisition is anticipated during the first quarter of 2003. The Company has a deposit of $250,000 related to this potential acquisition. Under certain circumstances, such deposits may be nonrefundable.
| Other |
In addition, the Company has real estate deposits outstanding and is currently considering several other potential property acquisitions. The Company’s decision to acquire one or more of these properties will generally depend upon:
| • | receipt of a satisfactory environmental survey and property appraisal for each property; | |
| • | no material adverse change occurring in the properties, the tenants or in the local economic conditions; and | |
| • | receipt of sufficient financing, either through the net proceeds from this offering or satisfactory debt financing. |
There can be no assurance that any or all of the conditions will be satisfied.
9. COMMITMENTS AND CONTINGENCIES
The Company’s 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 the Company’s consolidated financial position and results of operations.
10. SELECTED QUARTERLY DATA
Set forth below is certain unaudited quarterly financial information. The Company believes 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 Financial Statements.
| Year Ended December 31, 2002 | ||||||||||||||||
| 4th | 3rd | 2nd | 1st | |||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
| Revenues | $ | 663,759 | $ | 86,742 | $ | — | $ | — | ||||||||
| Expenses | 586,637 | 138,214 | — | — | ||||||||||||
| Net income (loss) | $ | 77,122 | $ | (51,472 | ) | $ | — | $ | — | |||||||
| Basic and diluted EPS | 0.27 | (0.21 | ) | — | — | |||||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
11. OTHER SUBSEQUENT EVENTS
In January 2003, the Company obtained a new credit facility with a maximum amount of $25,000,000 through LaSalle Bank National Association which matures on January 30, 2006. Advances under this credit facility (1) will be made for the purchase of properties by the Company and collateralized by the related property; (2) will bear interest at the choice of the Company at the Prime Rate or the LIBOR plus a margin of 2.50% per annum, declining to 2.25% when the Company meets certain conditions, including attaining $50,000,000 in net worth, no default on advances, and full compliance with other covenants under the credit facility; (3) are subject to a floor rate of 4.15% per annum; and (4) require interest only payments on a monthly basis. In connection with this credit facility, the Company has granted LaSalle a right of first refusal to finance the purchase of properties by the Company. As of March 15, 2003, the Company’s advances under this credit facility totaled approximately $2,200,000 pursuant to borrowings to finance the purchase of the Atrium Building.
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G REIT, INC.
SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION
| Initial Costs to Company | Gross Amount at Which Carried at Close of Period | |||||||||||||||||||||||||||||||
| Buildings and | Buildings and | Accumulated | Date | |||||||||||||||||||||||||||||
| Encumbrance | Land | Improvements | Land | Improvements | Total | Depreciation | Constructed | |||||||||||||||||||||||||
| 5508 Highway 290 | $ | 6,700,000 | $ | 1,535,875 | $ | 8,689,125 | $ | 1,535,875 | $ | 8,689,125 | $ | 10,225,000 | $ | 65,082 | 2001 | |||||||||||||||||
| Two Corporate Plaza | 10,160,000 | 2,040,577 | 11,564,934 | 2,040,577 | 11,564,934 | 13,605,511 | 37,067 | 1989 | ||||||||||||||||||||||||
| Total | $ | 16,860,000 | $ | 3,576,452 | $ | 20,254,059 | $ | 3,576,452 | $ | 20,254,059 | $ | 23,830,511 | $ | 102,149 | ||||||||||||||||||
| Maximum Life on Which | ||||||||
| Date | Depreciation in Latest Income | |||||||
| Description | Acquired | Statement Is Computed | ||||||
| 5508 Highway 290 West Building, TX | 2002 | 39 | ||||||
| Two Corporate Plaza, TX | 2002 | 39 | ||||||
(a) The changes in total real estate for the year ended December 31, 2002 are as follows:
| 2002 | ||||
| Balance at beginning of period | $ | — | ||
| Acquisitions | 23,830,511 | |||
| Dispositions | — | |||
| Balance at end of period | $ | 23,830,511 | ||
(b) The changes in accumulated depreciation for the year ended December 31, 2002 are as follows:
| 2002 | ||||
| Balance at beginning of period | $ | — | ||
| Additions | 102,149 | |||
| Deletions | — | |||
| Balance at end of period | $ | 102,149 | ||
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
We have audited the accompanying historical statement of revenues and certain expenses (the “historical statement”) of 5508 Highway 290 West Building, Austin, Texas (the “Property”) for the year ended December 31, 2001. This historical statement is the responsibility of the Property’s management. Our responsibility is to express an opinion on this historical statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the historical statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the historical statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the historical statement. We believe that our audit provides a reasonable basis for our opinion.
The accompanying historical statement was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission as described in Note 2, and is not intended to be a complete presentation of the Property’s revenues and expenses.
In our opinion, the December 31, 2001 historical statement presents fairly, in all material respects, the revenues and certain expenses, as defined above, of the Property for the year ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
| /s/ GRANT THORNTON LLP |
Irvine, California
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5508 HIGHWAY 290 WEST BUILDING
HISTORICAL STATEMENT OF REVENUES
REVENUES | |||||
| Rental income | $ | 755,533 | |||
DIRECT OPERATING EXPENSES | |||||
| Rental property expenses | 244,187 | ||||
| Property taxes and assessments | 95,163 | ||||
| Insurance | 22,226 | ||||
| Management fees | 35,900 | ||||
| 397,476 | |||||
EXCESS OF REVENUES OVER CERTAIN EXPENSES | $ | 358,057 | |||
The accompanying notes are an integral part of this historical statement of revenues and certain expenses.
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5508 HIGHWAY 290 WEST BUILDING
NOTES TO HISTORICAL STATEMENT OF REVENUES
Note 1 — Description of the Transaction
On September 13, 2002, GREIT-5508 Highway 290 West, LP, a wholly owned subsidiary of G REIT, Inc. (the “Company”), acquired the 5508 Highway 290 West Building (the “Property”) from an unaffiliated third party for a net purchase price of approximately $10,225,000 (as amended). The Company funded the purchase price from cash on hand and a $6,700,000 first mortgage loan with an interest rate of LIBOR plus 400 basis points from Greenwich Capital Financial Products, Inc., a real estate lender. The loan requires interest only payments through September 1, 2003 at which time the loan will be paid in full or refinanced. The Property is located in Austin, Texas. The purchase price, included a sales commission payable to Triple Net Properties Realty, Inc., an affiliate of Triple Net Properties, LLC, the Company’s advisor of $300,000, approximately 3% of the purchase price.
Note 2 — Summary of Significant Accounting Policies
| Basis of Presentation |
The historical statement of revenues and certain expenses (the “historical statement”) reflect the operations of the Property. The accompanying historical statement of the Property has been prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission.
Certain revenues, costs and expenses that are dependent on the ownership, management and carrying value of the Property have been excluded from the accompanying historical statement. The excluded revenues consist primarily of non-operating revenue related to the Property. The excluded expenses consist primarily of interest, depreciation and amortization of the Property. Consequently, the excess of revenues over expenses as presented is not intended to be either a complete presentation of the Property’s historical revenues and expenses or comparable to the proposed future operations of the Property.
| Revenue Recognition |
The Property is leased to tenants under leases with terms exceeding one year. Revenues from these leases, which are accounted for as operating leases, are recognized on a straight-line basis over the related term. Cost recoveries from tenants are included in rental income in the period the related costs are accrued.
| Risks and Uncertainties |
The real estate industry is cyclical, being dependent in part on the status of local, regional, and national economies. As such, future revenues and expenses achieved by the Property’s management could materially differ from historical results.
For the year ended December 31, 2001, each of the following tenants generated rental income in excess of 10% of the Property’s total rental income:
| Rentable | Occupancy | Rental Income | ||||||||||
| Tenant Name | Square Feet | Date | in 2001 | |||||||||
| Air Products and Chemicals, Inc. | 18,247 | October 2001 | $ | 104,288 | ||||||||
| Epic Edge Inc. | 11,146 | January 2001 | 279,331 | |||||||||
| E Comm Networks | 6,244 | January 2001 | 127,839 | |||||||||
| Brooks Automation | 6,594 | April 2001 | 104,977 | |||||||||
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NOTES TO HISTORICAL STATEMENT OF REVENUES
If any of these tenants were to default on its lease, future revenues of the Property would be severely impacted.
| Capitalization Policy |
Recurring repair and maintenance costs are expensed as incurred. Replacements and betterments are capitalized and depreciated over their useful lives.
| Use of Estimates |
The preparation of the historical statement in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported herein. Actual results could differ from these estimates in the near term.
Note 3 — Management Fees
The Property was managed by A.S.C. Management Inc, an affiliate of MFPB 290 West, Ltd., the seller of the Property. Management fees approximate 5% of rental income. A.S.C. Management Inc.’s role as the property manager was terminated upon the acquisition of the Property by the Company.
Note 4 — Future Minimum Rental Income
The Property is leased to seven tenants under operating leases with terms ranging from 3 to 6 years. Certain of these leases are subject to scheduled rent increases. Generally, the leases grant tenants renewal options. The following table represents approximate future minimum rents to be received under the non-cancelable operating leases, excluding tenant reimbursements, for each of the next five years ending December 31 and thereafter:
| 2002 | $ | 1,094,128 | ||
| 2003 | 1,160,599 | |||
| 2004 | 1,197,882 | |||
| 2005 | 1,237,809 | |||
| 2006 | 658,682 | |||
| Thereafter | 158,274 | |||
| $ | 5,507,374 | |||
Note 5 — Subsequent Events
During 2002, the Property signed leases with four new tenants representing 21,963 rentable square feet or 29% of the total rentable space, thereby increasing the Property’s physical occupancy to 100%.
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
G REIT, Inc.
We have audited the accompanying historical statement of revenues and certain expenses (the “historical statement”) of Two Corporate Plaza, Clear Lake, Texas (“Two Corporate Plaza”) for the year ended December 31, 2001. This historical statement is the responsibility of the property’s management. Our responsibility is to express an opinion on this historical statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the historical statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the historical statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the historical statement. We believe that our audit provides a reasonable basis for our opinion.
The accompanying historical statement was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission as described in Note 2, and is not intended to be a complete presentation of Two Corporate Plaza’s revenues and expenses.
In our opinion, the historical statement referred to above presents fairly, in all material respects, the revenues and certain expenses, as defined above, of Two Corporate Plaza for the year ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
| /s/ GRANT THORNTON LLP |
Irvine, California
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TWO CORPORATE PLAZA
HISTORICAL STATEMENT OF REVENUES
REVENUES | |||||
| Rental income | $ | 2,247,492 | |||
DIRECT OPERATING EXPENSES | |||||
| Rental property expenses | 650,148 | ||||
| Property taxes and assessments | 359,091 | ||||
| Insurance | 21,750 | ||||
| Management fees | 48,783 | ||||
| 1,079,772 | |||||
EXCESS OF REVENUES OVER CERTAIN EXPENSES | $ | 1,167,720 | |||
The accompanying notes are an integral part of this historical statement of revenues and certain expenses.
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TWO CORPORATE PLAZA
NOTES TO HISTORICAL STATEMENT OF REVENUES
Note 1 — Description of the Transaction
On November 27, 2002, G REIT, Inc. (the “Company”) through its wholly owned subsidiary, GREIT — Two Corporate Plaza, LP, a Texas limited partnership, purchased Two Corporate Plaza located in Clear Lake City, Texas (“Two Corporate Plaza”) from ASP Two Corporate Plaza, L.P., an unaffiliated third-party, for a purchase price of approximately $13,580,000. The Company funded the purchase price with a $10,160,000 first mortgage loan from Nomura Credit & Capital, Inc., bearing interest at a fixed rate of 5.92% per annum. The Company is required to make monthly principal and interest payments on a 30-year amortization schedule until the due date of December 31, 2007, at which time the loan will have to be paid in full or refinanced. The purchase price included a sales commission payable to Triple Net Properties Realty, Inc., an affiliate of Triple Net Properties, LLC, the Company’s advisor, of $380,000, approximately 2.80% of the purchase price.
Note 2 — Summary of Significant Accounting Policies
| Basis of Presentation |
The historical statement of revenues and certain expenses (the “historical statement”) reflects the operations of Two Corporate Plaza. The accompanying historical statement of Two Corporate Plaza has been prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission.
Certain revenues, costs and expenses that are dependent on the ownership, management and carrying value of Two Corporate Plaza have been excluded from the accompanying historical statement. The excluded revenues consist primarily of non-operating revenue related to Two Corporate Plaza. The excluded expenses consist primarily of interest, depreciation and amortization related to this property. Consequently, the excess of revenues over expenses as presented is not intended to be either a complete presentation of Two Corporate Plaza’s historical revenues and expenses or comparable to its proposed future operations.
| Revenue Recognition |
Two Corporate Plaza is leased to tenants under leases with terms exceeding one year. Revenues from these leases, which are accounted for as operating leases, are recognized on a straight-line basis over the related term. Cost recoveries from tenants are included in revenues in the period the related costs are accrued.
| Risks and Uncertainties |
The real estate industry is cyclical, being dependent in part on the status of local, regional, and national economies. As such, future revenues and expenses achieved by the property’s management could materially differ from historical results.
For the year ended December 31, 2001, each of the following tenants generated rental income in excess of 10% of Two Corporate Plaza’s total rental income:
| Rentable | Rental Income | |||||||||||
| Tenant Name | Square Feet | Occupancy Date | in 2001 | |||||||||
| Lockheed Martin | 57,086 | October 1998 | $ | 937,236 | ||||||||
| Akzo Nobel Chemical | 16,390 | October 2000 | 286,627 | |||||||||
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If any of these tenants were to default on its lease, future revenues of Two Corporate Plaza would be severely impacted.
| Capitalization Policy |
Recurring repair and maintenance costs are expensed as incurred. Replacements and betterments are capitalized and depreciated over their useful lives.
| Use of Estimates |
The preparation of the historical statement in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported herein. Actual results could differ from these estimates in the near term.
Note 3 — Management Fees
The Property was managed by TransWestern Commercial Services, an unaffiliated third party. Management fees approximate 2.5% of rental receipts, as defined. TransWestern Commercial Services’s role as the property manager was terminated upon the acquisition of Two Corporate Plaza by the Company.
Note 4 — Future Minimum Rental Income
Two Corporate Plaza is leased to twenty one tenants under operating leases with terms ranging from three to seventeen years. Certain of these leases are subject to scheduled rent increases. Generally, the leases grant tenants renewal options. The following table represents approximate future minimum rents to be received under the non-cancelable operating leases, excluding tenant reimbursements, for each of the next five years ending December 31 and thereafter:
| 2002 | $ | 2,644,187 | ||
| 2003 | 2,532,778 | |||
| 2004 | 2,399,591 | |||
| 2005 | 2,198,697 | |||
| 2006 | 1,286,860 | |||
| Thereafter | 836,449 | |||
| $ | 11,898,562 | |||
Note 5 — Subsequent Events
During 2002, Two Corporate Plaza signed leases with three new tenants representing 27,254 rentable square feet or 17% of the total rentable space, thereby adjusting the physical occupancy to 97%.
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
We have audited the accompanying historical statement of revenues and certain expenses (the “historical statement”) of Congress Center, Chicago Illinois (“Congress Center”) for the year ended December 31, 2002. This historical statement is the responsibility of the property’s management. Our responsibility is to express an opinion on this historical statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the historical statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the historical statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the historical statement. We believe that our audit provides a reasonable basis for our opinion.
The accompanying historical statement was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission as described in Note 2, and is not intended to be a complete presentation of Congress Center’s revenues and expenses.
In our opinion, the historical statement referred to above presents fairly, in all material respects, the revenues and certain expenses, as defined above, of Congress Center for the year ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
| /s/ GRANT THORNTON LLP |
Irvine, California
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CONGRESS CENTER
HISTORICAL STATEMENT OF REVENUES
REVENUES | |||||
| Rental income | $ | 8,121,156 | |||
DIRECT OPERATING EXPENSES | |||||
| Rental property expenses | 2,175,806 | ||||
| Property taxes and assessments | 2,250,000 | ||||
| Insurance | 127,452 | ||||
| Management fees | 99,182 | ||||
| 4,652,440 | |||||
EXCESS OF REVENUES OVER CERTAIN EXPENSES | $ | 3,468,716 | |||
The accompanying notes are an integral part of this historical statement of revenues and certain expenses.
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CONGRESS CENTER
NOTES TO HISTORICAL STATEMENT OF REVENUES
Note 1 — Description of the Transaction
On January 9, 2003, G REIT, Inc. (the “Company”) through its wholly owned subsidiary, GREIT — Congress Center, LLC, a Delaware limited liability company, purchased an approximately 30% undivided tenant in common interest in Congress Center, a 16-story Class A office building of approximately 525,000 square feet located in Chicago, Illinois (the “Property”). NNN Congress Center, LLC and WREIT — Congress Center, LLC, affiliates of the Company, simultaneously purchased undivided tenant in common interests totaling approximately 70% ownership of the Property. G REIT, Inc., NNN Congress Center, LLC and W REIT, Inc., are collectively, the “Tenants in Common”. The seller was Congress Center, L.L.C., an unaffiliated third-party. The total purchase price for the Property was $136,108,000. The purchase price included a sales commission payable to Triple Net Properties Realty, Inc., an affiliate of Triple Net Properties, LLC, the Company’s advisor, of $2,000,000, approximately 1.50% of the purchase price.
The purchase of the Property was financed by Fleet National Bank which provided an $80,950,000, 36-month senior first mortgage bridge loan (“Bridge Loan”) bearing interest at a stated rate equal to the 30-day London Interbank Offered Rate (“LIBOR”) plus 1.75% per annum (percent at date of acquisition), declining to 1.50% upon certain conditions. The loan requires interest only payments until the Property is 95% leased, and then amortizes on a 30-year schedule. The Bridge Loan can be extended pursuant to two one-year extensions, at the borrowers’ election, upon satisfaction of certain minimum loan to value, debt coverage, and other conditions and payment of a 0.25% fee upon each extension. Under certain circumstances, the principal amount of the Bridge Loan may be increased by up to $9,000,000 under “earn out” and tenant improvement provisions related to leasing activity. Such proceeds, when and if available, will be used for the payment of tenant improvements, property reserves or to reduce other indebtedness of the Property. The purchase was additionally funded with financing provided by Fleet Real Estate, Inc., an affiliate of Fleet National Bank, under a $15,000,000, 36-month mezzanine loan (“Mezzanine Loan”). The Mezannine Loan accrues interest at the 30-day LIBOR plus 6.75% (the “Accrual Rate”). During the first year, interest on the Mezzanine Loan will be payable at an amount which may be less than or equal to the Accrual Rate and as a result, interest on this loan which may be deferred and accrued during this period will be added to the Mezannine Loan’s principal balance, as applicable. Specifically, interest on the Mezzanine Loan will be payable at the greater of (i) the 30-day LIBOR plus 2.00% or (ii) the excess of Property cash flow remaining after payment of all approved operating expenses, reserves and debt service related to the Bridge Loan, but not to exceed unpaid interest accrued based on the Accrual Rate. The loan features interest-only payments until extended, then amortizes on a 30-year schedule. The Mezzanine Loan can be extended pursuant to two one-year extensions, at the borrowers’ election, upon satisfaction of certain minimum loan to value, debt coverage, and other conditions and payment of a 0.25% fee upon each extension. The Bridge Loan and Mezzanine Loan contain cross-default provisions.
Note 2 — Summary of Significant Accounting Policies
| Basis of Presentation |
The historical statement of revenues and certain expenses (the “historical statement”) reflect the operations of Congress Center. The accompanying historical statement of Congress Center have been prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission.
Certain revenues, costs and expenses that are dependent on the ownership, management and carrying value of Congress Center have been excluded from the accompanying historical statement. The excluded
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NOTES TO HISTORICAL STATEMENT OF REVENUES
revenues consist primarily of non-operating revenue related to Congress Center. The excluded expenses consist primarily of interest, depreciation and amortization related to this property. Consequently, the excess of revenues over expenses as presented is not intended to be either a complete presentation of Congress Center’s historical revenues and expenses or comparable to its proposed future operations.
| Revenue Recognition |
Congress Center is leased to tenants under leases with terms exceeding one year. Revenues from these leases, which are accounted for as operating leases, are recognized on a straight-line basis over the related term. Cost recoveries from tenants are included in revenues in the period the related costs are accrued.
| Use of Estimates |
The preparation of the historical statement in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported herein. Actual results could differ from these estimates in the near term.
| Risks and Uncertainties |
The real estate industry is cyclical, being dependent in part on the status of local, regional, and national economies. As such, future revenues and expenses achieved by the property’s management could materially differ from historical results.
For the year ended December 31, 2002, each of the following tenants generated rental income in excess of 10% of Congress Center’s total rental income:
| Rentable | Rental Income | |||||||||||
| Tenant Name | Square Feet | Occupancy Date | in 2002 | |||||||||
| GE Employers Reinsurance Corporation | 66,520 | January 1, 2002 | $ | 1,390,873 | ||||||||
| North American Life and Health Insurance Company | 100,890 | March 1, 2002 | 1,779,814 | |||||||||
If any of these tenants were to default on its lease, future revenues of Congress Center would be severely impacted.
Property tax expenses have been accrued by the property owner using an estimate of the fair market value of Congress Center based on an appraisal as of January 1, 2002 prepared by an independent third party appraiser, and the applicable tax rates in the state of Illinois for the tax year 2002. The fair market value of Congress Center, as used by the property owner, is 40% of the assessed value established by Cook County tax assessor’s office in January 2003. Accordingly, on February 28,2003, the property owner initiated an appeal process to obtain a reduction of the property’s assessed value.
Within the state of Illinois, counties and municipalities are allowed to establish assessed values and tax levies in arrears of the subject tax year. Thus, tax levies for the year ended December 31, 2002 and the ultimate property tax expense for such tax year will not be finalized until September 2003, after completion of the appeal process. Management has engaged outside legal counsel, intends to vigorously defend its estimate of fair market value and believes it will be successful in the appeal process. In the event the appeal process is not successful, property tax expenses could increase, perhaps significantly, from amounts presently estimated. The outcome of this uncertainty is not presently known.
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NOTES TO HISTORICAL STATEMENT OF REVENUES
| Capitalization Policy |
Recurring repair and maintenance costs are expensed as incurred. Replacements and betterments are capitalized and depreciated over their useful lives.
Note 3 — Management Fees
The Property was managed by US Equities Corporation, an unaffiliated third party. Management fees approximate 3.0% of rental cash receipts, as defined, excluding straight line rents. US Equities Corporation’s role as the property manager was terminated upon the acquisition of Congress Center by the Company and other tenants in common.
Note 4 — Future Minimum Rental Income
Congress Center is leased to seven tenants under operating leases with terms ranging from eleven to seventeen years. Certain of these leases are subject to scheduled rent increases. Generally, the leases grant tenants renewal options. The following table represents approximate future minimum rents to be received under the non-cancelable operating leases, excluding tenant reimbursements, for each of the next five years ending December 31 and thereafter:
| 2003 | $ | 9,334,380 | ||
| 2004 | 12,044,574 | |||
| 2005 | 12,309,156 | |||
| 2006 | 12,573,944 | |||
| 2007 | 12,839,500 | |||
| Thereafter | 70,632,734 | |||
| $ | 129,734,288 | |||
Note 5 — Subsequent Events
Effective 2003, two tenants will occupy additional space under new leases representing 123,398 rentable square feet or 23% of the total rentable space, thereby adjusting the Property’s physical occupancy to 85%.
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
We have audited the accompanying historical statement of revenues and certain expenses (the “historical statement”) of Atrium Building, Lincoln, Nebraska (“Atrium Building”) for the year ended December 31, 2002. This historical statement is the responsibility of the property’s management. Our responsibility is to express an opinion on this historical statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the historical statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the historical statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the historical statement. We believe that our audit provides a reasonable basis for our opinion.
The accompanying historical statement was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission as described in Note 2, and is not intended to be a complete presentation of Atrium Building’s revenues and expenses.
In our opinion, the historical statement referred to above presents fairly, in all material respects, the revenues and certain expenses, as defined above, of Atrium Building for the year ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
| /s/ GRANT THORNTON LLP |
Irvine, California
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ATRIUM BUILDING
HISTORICAL STATEMENT OF REVENUES
REVENUES | |||||
| Rental income | $ | 1,507,501 | |||
DIRECT OPERATING EXPENSES | |||||
| Rental property expenses | 826,302 | ||||
| Property taxes and assessments | 68,727 | ||||
| Insurance | 27,710 | ||||
| Ground lease expense | 34,435 | ||||
| Management fees | 48,675 | ||||
| 1,005,849 | |||||
EXCESS OF REVENUES OVER CERTAIN EXPENSES | $ | 501,652 | |||
The accompanying notes are an integral part of this historical statement of revenues and certain expenses.
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ATRIUM BUILDING
NOTES TO HISTORICAL STATEMENT OF REVENUES
Note 1 — Description of the Transaction
On January 31, 2003, G REIT, Inc. (the “Company”) through its wholly owned subsidiary, GREIT — Atrium Building, LLC, a Delaware limited liability company, purchased the Atrium Building in Lincoln, Nebraska (the “Property”) from 1200 N Street, LTD, an unaffiliated third-party, for a purchase price of approximately $4,532,000. The property is encumbered by two ground leases under parts of the office building, which expire in 2054 and 2055, respectively, including renewal options. See Note 5 below. The Company funded the purchase price with $2,200,000 in borrowings under its new credit facility arranged through LaSalle Bank National Association, a real estate lender. The Company is required to make interest only payments until the due date of January 30, 2006, at which time the loan will have to be paid in full or refinanced. The purchase price included a sales commission payable to an affiliate of the Company and Triple Net Properties, LLC, the Company’s advisor of $132,000, approximately 2.9% of the purchase price.
Note 2 — Summary of Significant Accounting Policies
| Basis of Presentation |
The historical statement of revenues and certain expenses (the “historical statement”) reflect the operations of Atrium Building. The accompanying historical statement of Atrium Building has been prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission.
Certain revenues, costs and expenses that are dependent on the ownership, management and carrying value of Atrium Building have been excluded from the accompanying historical statement. The excluded revenues consist primarily of non-operating revenue related to Atrium Building. The excluded expenses consist primarily of interest, depreciation and amortization related to this property. Consequently, the excess of revenues over expenses as presented is not intended to be either a complete presentation of Atrium Building’s historical revenues and expenses or comparable to its proposed future operations.
| Revenue Recognition |
Atrium Building is leased to tenants under leases with terms exceeding one year. Revenues from these leases, which are accounted for as operating leases, are recognized on a straight-line basis over the related term. Cost recoveries from tenants are included in revenues in the period the related costs are accrued.
| Use of Estimates |
The preparation of the historical statement in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported herein. Actual results could differ from these estimates in the near term.
| Risks and Uncertainties |
The real estate industry is cyclical, being dependent in part on the status of local, regional, and national economies. As such, future revenues and expenses achieved by the property’s management could materially differ from historical results.
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NOTES TO HISTORICAL STATEMENT OF REVENUES
For the year ended December 31, 2002, each of the following tenants generated rental income in excess of 10% of Atrium Building’s total rental income:
| Rentable | Occupancy | Rental Income | ||||||||||
| Tenant Name | Square Feet | Date | in 2002 | |||||||||
| Nebraska Library Commission | 42,353 | June 2001 | $ | 437,850 | ||||||||
| Dept of Environmental Quality | 62,357 | August 1999 | 636,042 | |||||||||
If any of these tenants were to default on its lease, future revenues of Atrium Building would be severely impacted.
| Capitalization Policy |
Recurring repair and maintenance costs are expensed as incurred. Replacements and betterments are capitalized and depreciated over their useful lives.
Note 3 — Management Fees
The Property was managed by Grubb & Ellis/ Pacific Realty, an unaffiliated third party. Management fees approximate 3.25% of gross revenues, as defined. Grubb & Ellis/ Pacific Realty’s role as the property manager was terminated upon the acquisition of Atrium Building by the Company.
Note 4 — Future Minimum Rental Income
Atrium Building is leased to seven tenants under operating leases with terms ranging from two to five years. Certain of these leases are subject to scheduled rent increases. Generally, the leases grant tenants renewal options. The following table represents approximate future minimum rents to be received under the non-cancelable operating leases, excluding tenant reimbursements, for each of the next five years ending December 31 and thereafter:
| 2003 | $ | 1,421,943 | ||
| 2004 | 1,129,213 | |||
| 2005 | 792,644 | |||
| 2006 | 738,436 | |||
| 2007 | 415,294 | |||
| $ | 4,497,530 | |||
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NOTES TO HISTORICAL STATEMENT OF REVENUES
Note 5 — Ground Leases
The Property is encumbered by two ground leases under parts of the office building, which expire in 2054 and 2055, respectively, including renewal options. The leases are subject to scheduled rent increases. The following table represents approximate future minimum rents to be paid under these non-cancelable operating leases, for each of the next five years ending December 31 and thereafter:
| 2003 | $ | 41,000 | ||
| 2004 | 41,000 | |||
| 2005 | 41,000 | |||
| 2006 | 41,000 | |||
| 2007 | 41,000 | |||
| Thereafter | 1,242,833 | |||
| $ | 1,447,833 | |||
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
We have audited the accompanying historical statement of revenues and certain expenses (the “historical statement”) of Department of Children and Families Campus, a real estate property located in Plantation, Florida (“DCFC”) for the year ended December 31, 2002. This historical statement is the responsibility of the property’s management. Our responsibility is to express an opinion on this historical statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the historical statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the historical statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the historical statement. We believe that our audit provides a reasonable basis for our opinion.
The accompanying historical statement was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission as described in Note 2, and is not intended to be a complete presentation of DCFC’s revenues and expenses.
In our opinion, the December 31, 2002 historical statement presents fairly, in all material respects, the revenues and certain expenses, as defined above, of DCFC for the year ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
| /s/ GRANT THORNTON LLP |
Irvine, California
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DEPARTMENT OF CHILDREN AND FAMILIES CAMPUS
HISTORICAL STATEMENT OF REVENUES
REVENUES | |||||
| Rental income | $ | 1,898,497 | |||
DIRECT OPERATING EXPENSES | |||||
| Rental property expenses | 411,423 | ||||
| Property taxes and assessments | 187,054 | ||||
| Insurance | 23,927 | ||||
| Management fees | 67,143 | ||||
| 689,547 | |||||
EXCESS OF REVENUES OVER CERTAIN EXPENSES | $ | 1,208,950 | |||
The accompanying notes are an integral part of this historical statement of revenues and certain expenses.
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DEPARTMENT OF CHILDREN AND FAMILIES CAMPUS
NOTES TO HISTORICAL STATEMENT OF REVENUES
Note 1 — Description of the Transaction
On April 25, 2003, G REIT, Inc. (the “Company,”) through its wholly-owned subsidiary, GREIT — Department of DCF, LLC, purchased the Department of Children and Families Campus in Plantation, Florida (the “Property”) from an unaffiliated third party for a purchase price of $11,580,000. The Company financed the purchase price with $7,605,000 in borrowings under a credit facility arranged through LaSalle Bank National Association. The Company is required to make interest only payments until the due date of January 30, 2006, at which time the loan must be paid in full or refinanced. The seller of the Property paid a sales commission to Triple Net Properties Realty, Inc., an affiliate of the Company’s advisor, of $300,000, or approximately 2.6% of the purchase price.
Note 2 — Summary of Significant Accounting Policies
| Basis of Presentation |
The historical statement of revenues and certain expenses (the “historical statement”) reflects the operations of the Property. The accompanying historical statement of the Property has been prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission.
Certain revenues, costs and expenses that are dependent on the ownership, management and carrying value of the Property have been excluded from the accompanying historical statement. The excluded revenues consist primarily of non-operating revenue related to the Property. The excluded expenses consist primarily of interest, depreciation and amortization related to this Property. Consequently, the excess of revenues over expenses as presented is not intended to be either a complete presentation of the Property’s historical revenues and expenses or comparable to its proposed future operations.
| Revenue Recognition |
The Property is leased to tenants under leases with terms exceeding one year. Revenues from these leases, which are accounted for as operating leases, are recognized on a straight-line basis over the related term. Cost recoveries from tenants are included in revenues in the period the related costs are accrued.
| Use of Estimates |
The preparation of the historical statement in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported herein. Actual results could differ from these estimates in the near term.
| Risks and Uncertainties |
The real estate industry is cyclical, being dependent in part on the status of local, regional, and national economies. As such, future revenues and expenses achieved by the property’s management could materially differ from historical results.
For the year ended December 31, 2002, each of the following tenants generated rental income in excess of 10% of the Property’s total rental income:
| Aggregate Annual | % Aggregate Annual | |||||||
| Tenant Name | Rental Income | Rental Income | ||||||
| Department of Children and Families | $ | 1,315,361 | 69 | % | ||||
| Broward County Sheriff’s Office | 369,722 | 19 | % | |||||
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NOTES TO HISTORICAL STATEMENT OF REVENUES
If either of these tenants were to default on its lease, future revenues of the Property would be severely impacted.
| Capitalization Policy |
Recurring repair and maintenance costs are expensed as incurred. Replacements and betterments are capitalized and depreciated over their useful lives.
Note 3 — Management Fees
�� The Property was managed by Procacci Commercial Realty, Inc., an unaffiliated third party. Management fees approximated 4.0% of rental receipts, as defined. Procacci Commercial Realty Inc.’s role as the property manager was terminated upon the acquisition of the Property by the Company.
Note 4 — Future Minimum Rental Income
The Property is leased to 7 tenants under operating leases with terms ranging from 5 to 8 years. Certain of these leases are subject to scheduled rent increases. Generally, the leases grant tenants renewal options. The following table represents approximate future minimum rents to be received under the non-cancelable operating leases, excluding tenant reimbursements, for each of the next five years ending December 31:
| 2003 | $ | 1,950,800 | ||
| 2004 | 1,979,531 | |||
| 2005 | 881,225 | |||
| 2006 | 351,402 | |||
| 2007 | 49,389 | |||
| $ | 5,212,347 | |||
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
We have audited the accompanying historical statement of revenues and certain expenses (the “historical statement”) of Gemini Plaza, Houston, Texas (“Gemini Plaza”) for the year ended December 31, 2002. This historical statement is the responsibility of the property’s management. Our responsibility is to express an opinion on this historical statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the historical statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the historical statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the historical statement. We believe that our audit provides a reasonable basis for our opinion.
The accompanying historical statement was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission as described in Note 2, and is not intended to be a complete presentation of Gemini Plaza’s revenues and expenses.
In our opinion, the December 31, 2002 historical statement presents fairly, in all material respects, the revenues and certain expenses, as defined above, of Gemini Plaza for the year ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
| /s/ GRANT THORNTON LLP |
Irvine, California
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GEMINI PLAZA
HISTORICAL STATEMENT OF REVENUES
REVENUES | |||||
| Rental income | $ | 1,763,118 | |||
DIRECT OPERATING EXPENSES | |||||
| Property taxes and assessments | 295,818 | ||||
| Insurance | 25,709 | ||||
| Management fees | 29,346 | ||||
| 350,873 | |||||
EXCESS OF REVENUES OVER CERTAIN EXPENSES | $ | 1,412,245 | |||
The accompanying notes are an integral part of this historical statement of revenues and certain expenses.
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GEMINI PLAZA
NOTES TO HISTORICAL STATEMENT OF REVENUES
Note 1 — Description of the Transaction
On May 2, 2003, G REIT, Inc. (the “Company,”) through its wholly-owned subsidiary, GREIT — Gemini Plaza, LLC, purchased Gemini Plaza in Houston, Texas (the “Property”) from an unaffiliated third party for a purchase price of $15,000,000. The Company financed the purchase price with $9,815,000 in borrowings under its revolving credit facility arranged through LaSalle Bank National Association. The Company is required to make interest only payments until the due date of January 30, 2006, at which time the loan must be paid in full or refinanced. The seller of the property paid a sales commission to Triple Net Properties Realty, Inc., an affiliate of the Company’s advisor, of $325,000, or approximately 2.2% of the purchase price.
The Property is 100% leased to the United Space Alliance (“USA”), a joint venture between Boeing Company and Lockheed Martin Corporation. USA is a leading space operations company that is the prime contractor for NASA’s space shuttle program. USA’s lease expires in May 2011.
Note 2 — Summary of Significant Accounting Policies
| Basis of Presentation |
The historical statement of revenues and certain expenses (the “historical statement”) reflects the operations of the Property. The accompanying historical statement of the Property has been prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission.
Certain revenues, costs and expenses that are dependent on the ownership, management and carrying value of the Property have been excluded from the accompanying historical statement. The excluded revenues consist primarily of non-operating revenue related to the Property. The excluded expenses consist primarily of interest, depreciation and amortization related to this Property. Consequently, the excess of revenues over expenses as presented is not intended to be either a complete presentation of the Property’s historical revenues and expenses or comparable to its proposed future operations.
| Revenue Recognition |
The Property is leased to a single tenant under a lease with a term of 10 years. Revenues from this lease, which is accounted for as an operating lease, are recognized on a straight-line basis over the related term. Property taxes recovered from the tenant are included in revenues in the period the related costs are accrued.
| Expenses |
Pursuant to the lease, the tenant is responsible and contracts directly with service providers for utilities, janitorial services, and maintenance of interior and exterior of the building which may include ventilation, electrical, plumbing and elevator services. These expenses are not borne by the Property and as such, are not part of the accompanying historical statement.
| Use of Estimates |
The preparation of the historical statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported herein. Actual results could differ from these estimates in the near term.
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NOTES TO HISTORICAL STATEMENT OF REVENUES
| Risks and Uncertainties |
The real estate industry is cyclical, being dependent in part on the status of local, regional, and national economies. As such, future revenues and expenses achieved by the property’s management could materially differ from historical results.
For the year ended December 31, 2002, one tenant generated rental income in excess of 10% of the Property’s total rental income:
| Aggregate Annual | % Aggregate Annual | |||||||
| Tenant Name | Rental Income | Rental Income | ||||||
| United Space Alliance | $ | 1,763,118 | 100 | % | ||||
If this tenant was to default on its lease, future revenues of the Property would be severely impacted.
| Capitalization Policy |
Recurring repair and maintenance costs are expensed as incurred. Replacements and betterments are capitalized and depreciated over their useful lives.
Note 3 — Management Fees
The Property was managed by GC Realty Services, an entity affiliated with the seller. Property management functions included tenant relations, property oversight and accounting. Management fees approximate 2.0% of rental receipts, as defined. GC Realty Services’ role as the property manager was terminated upon the acquisition of the Property by the Company.
Note 4 — Future Minimum Rental Income
�� The Property is leased to United Space Alliance under an operating lease expiring in 2011. The lease contains a renewal option. The following table represents approximate future minimum rents to be received under the non-cancelable operating lease, excluding tenant reimbursements, for each of the next five years ending December 31 and thereafter:
| 2003 | $ | 1,467,300 | ||
| 2004 | 1,467,300 | |||
| 2005 | 1,467,300 | |||
| 2006 | 1,467,300 | |||
| 2007 | 1,467,300 | |||
| Thereafter | 5,013,275 | |||
| $ | 12,349,775 | |||
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
We have audited the accompanying historical statement of revenues and certain expenses (the “historical statement”) of Bay View Plaza, Alameda, California (“Bay View”) for the year ended December 31, 2002. This historical statement is the responsibility of the property’s management. Our responsibility is to express an opinion on this historical statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the historical statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the historical statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the historical statement. We believe that our audit provides a reasonable basis for our opinion.
The accompanying historical statement was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission as described in Note 2, and is not intended to be a complete presentation of Bay View’s revenues and expenses.
In our opinion, the December 31, 2002 historical statement presents fairly, in all material respects, the revenues and certain expenses, as defined above, of Bay View for the year ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
| /s/ GRANT THORNTON LLP |
Irvine, California
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BAY VIEW PLAZA
HISTORICAL STATEMENT OF REVENUES
REVENUES | |||||
| Rental income | $ | 1,350,621 | |||
DIRECT OPERATING EXPENSES | |||||
| Rental property expenses | 319,665 | ||||
| Property taxes and assessments | 151,854 | ||||
| Insurance | 25,494 | ||||
| Management fees | 33,498 | ||||
| 530,511 | |||||
EXCESS OF REVENUES OVER CERTAIN EXPENSES | $ | 820,110 | |||
The accompanying notes are an integral part of this historical statement of revenues and certain expenses.
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BAY VIEW PLAZA
NOTES TO HISTORICAL STATEMENT OF REVENUES
Note 1 — Description of the Transaction
On July 31, 2003, G REIT, Inc. (the “Company,”) through its wholly-owned subsidiary, GREIT-Bay View Plaza, LP, a California limited Partnership, purchased a 97.68% interest in Bay View Plaza in Alameda, California (the “Property”). The property was purchased from an unaffiliated party for a purchase price of $11,355,000. The Company’s proportionate share of the purchase price was $11,329,000. The seller of the Property paid a sales commission to Triple Net Properties Realty, Inc., an affiliate of the Company’s advisor, of $380,000, or approximately 3% of the purchase price.
Note 2 — Summary of Significant Accounting Policies
| Basis of Presentation |
The historical statement of revenues and certain expenses (the “historical statement”) reflects the operations of the Property. The accompanying historical statement of the Property has been prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission.
Certain revenues, costs and expenses that are dependent on the ownership, management and carrying value of the Property have been excluded from the accompanying historical statement. The excluded revenues consist primarily of non-operating revenue related to the Property. The excluded expenses consist primarily of interest, depreciation and amortization related to this Property. Consequently, the excess of revenues over expenses as presented is not intended to be either a complete presentation of the Property’s historical revenues and expenses or comparable to its proposed future operations.
| Revenue Recognition |
The Property is leased to tenants under leases with terms exceeding one year. Revenues from these leases, which are accounted for as operating leases, are recognized on a straight-line basis over the related term. Cost recoveries from tenants are included in revenues in the period the related costs are incurred.
| Use of Estimates |
The preparation of the historical statement in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported herein. Actual results could differ from these estimates in the near term.
| Risks and Uncertainties |
The real estate industry is cyclical, being dependent in part on the status of local, regional, and national economies. As such, future revenues and expenses achieved by the property’s management could materially differ from historical results.
For the year ended December 31, 2002, each of the following tenants generated rental income in excess of 10% of the Property’s total rental income:
| Aggregate Annual | % Aggregate Annual | |||||||
| Tenant Name | Rental Income | Rental Income | ||||||
| Good Guys | $ | 999,242 | 74.0 | % | ||||
| National Medical Services | 351,379 | 26.0 | % | |||||
If any of these tenants were to default on its lease, future revenues of the Property would be severely impacted.
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| Capitalization Policy |
Recurring repair and maintenance costs are expensed as incurred. Replacements and betterments are capitalized and depreciated over their useful lives.
Note 3 — Management Fees
The Property was managed by CB Richard Ellis Group (“CBRE”), an unaffiliated third party. Management fees approximated 2.25% of rental receipts, as defined. CBRE’s role as the property manager was terminated upon the acquisition of the Property by the Company.
Note 4 — Future Minimum Rental Income
The Property is leased to two tenants under operating leases with remaining terms ranging from 4 to 9 years. Certain of these leases are subject to scheduled rent increases. Generally, the leases grant tenants renewal options. The following table represents approximate future minimum rents to be received under the non-cancelable operating leases, excluding tenant reimbursements, for each of the next five years ending December 31 and thereafter:
| 2003 | $ | 878,364 | ||
| 2004 | 906,910 | |||
| 2005 | 936,402 | |||
| 2006 | 966,877 | |||
| 2007 | 998,357 | |||
| Thereafter | 3,647,574 | |||
| $ | 8,334,484 | |||
Note 5 — Subsequent Event
In January 2003, the State of California Employment Development Department signed an eight-year lease for approximately 20% of the Property’s rentable square footage, which increased the total occupancy of the building to approximately 89%.
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
We have audited the accompanying historical statement of revenues and certain expenses (the “historical statement”) of North Pointe Corporate Center, Sacramento, California (“North Pointe”) for the year ended December 31, 2002. This historical statement is the responsibility of the property’s management. Our responsibility is to express an opinion on this historical statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the historical statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the historical statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the historical statement. We believe that our audit provides a reasonable basis for our opinion.
The accompanying historical statement was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission as described in Note 2, and is not intended to be a complete presentation of North Pointe’s revenues and expenses.
In our opinion, the December 31, 2002 historical statement presents fairly, in all material respects, the revenues and certain expenses, as defined above, of North Pointe for the year ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
| /s/ GRANT THORNTON LLP |
Irvine, California
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NORTH POINTE CORPORATE CENTER
HISTORICAL STATEMENT OF REVENUES
REVENUES | |||||
| Rental income | $ | 2,744,647 | |||
DIRECT OPERATING EXPENSES | |||||
| Rental property expenses | 530,580 | ||||
| Property taxes and assessments | 137,784 | ||||
| Insurance | 23,153 | ||||
| Management fees | 85,543 | ||||
| 777,060 | |||||
EXCESS OF REVENUES OVER CERTAIN EXPENSES | $ | 1,967,587 | |||
The accompanying notes are an integral part of this historical statement of revenues and certain expenses.
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NORTH POINTE CORPORATE CENTER
NOTES TO HISTORICAL STATEMENT OF REVENUES
Note 1 — Description of the Transaction
On August 11, 2003, G REIT, Inc. (the “Company,”) through its wholly-owned subsidiary, GREIT-North Pointe, LP, purchased North Pointe Corporate Center in Sacramento, California (the “Property”) from an unaffiliated third party for a purchase price of $24,205,000 in cash. The seller of the property paid a sales commission to Triple Net Properties Realty, Inc., an affiliate of the Company’s advisor, of $705,000, or approximately 2.9% of the purchase price
Note 2 — Summary of Significant Accounting Policies
| Basis of Presentation |
The historical statement of revenues and certain expenses (the “historical statement”) reflects the operations of the Property. The accompanying historical statement of the Property has been prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission.
Certain revenues, costs and expenses that are dependent on the ownership, management and carrying value of the Property have been excluded from the accompanying historical statement. The excluded revenues consist primarily of non-operating revenue related to the Property. The excluded expenses consist primarily of interest, depreciation and amortization related to this Property. Consequently, the excess of revenues over expenses as presented is not intended to be either a complete presentation of the Property’s historical revenues and expenses or comparable to its proposed future operations.
| Revenue Recognition |
The Property is leased to tenants under leases with terms exceeding one year. Revenues from these leases, which are accounted for as operating leases, are recognized on a straight-line basis over the related term. Cost recoveries from tenants are included in revenues in the period the related costs are incurred.
| Use of Estimates |
The preparation of the historical statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported herein. Actual results could differ from these estimates in the near term.
| Risks and Uncertainties |
The real estate industry is cyclical, being dependent in part on the status of local, regional, and national economies. As such, future revenues and expenses achieved by the property’s management could materially differ from historical results.
For the year ended December 31, 2002, each of the following tenants generated rental income in excess of 10% of the Property’s total rental income:
| Aggregate Annual | % Aggregate Annual | |||||||
| Tenant Name | Rental Income | Rental Income | ||||||
| GSA (IRS) | $ | 2,344,468 | 85.4 | % | ||||
| Quest Education Corporation | 400,179 | 14.6 | % | |||||
If either of these tenants was to default on its lease, future revenues of the Property would be severely impacted.
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NOTES TO HISTORICAL STATEMENT OF REVENUES
| Capitalization Policy |
Recurring repair and maintenance costs are expensed as incurred. Replacements and betterments are capitalized and depreciated over their useful lives.
Note 3 — Management Fees
The Property was managed by Fulcrum Property Management (“FPM”). Management fees approximate 3% of rental receipts, as defined. FPM’s role as the property manager was terminated upon the acquisition of the Property by the Company.
Note 4 — Future Minimum Rental Income
The Property is leased to two tenants under operating leases with remaining terms ranging from 4 to 5 years. Certain of these leases are subject to scheduled rent increases. Generally, the leases grant tenants renewal options. The following table represents approximate future minimum rents to be received under the non-cancelable operating leases, excluding tenant reimbursements, for each of the next five years ending December 31:
| 2003 | $ | 2,860,083 | ||
| 2004 | 2,860,083 | |||
| 2005 | 2,860,083 | |||
| 2006 | 2,829,243 | |||
| 2007 | 1,660,000 | |||
| $ | 13,069,492 | |||
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EXHIBIT A
PRIOR PERFORMANCE TABLES
The following Prior Performance Tables (the “Tables”) provide information relating to prior real estate investment programs sponsored by our advisor (“Prior Programs”).
As a prospective investor, you should read these Tables carefully together with the summary information concerning the Prior Programs as set forth in “PRIOR PERFORMANCE SUMMARY” elsewhere in this prospectus.
AS AN INVESTOR IN OUR COMPANY, YOU WILL NOT OWN ANY INTEREST IN THE PRIOR PROGRAMS AND SHOULD NOT ASSUME THAT YOU WILL EXPERIENCE RETURNS, IF ANY, COMPARABLE TO THOSE EXPERIENCED BY INVESTORS IN THE PRIOR PROGRAMS.
Our advisor is responsible for managing our day-to-day business affairs and assets, administering our bookkeeping and accounting functions, serving as our consultant in connection with policy decisions to be made by our board of directors, managing or causing to be managed our properties, and rendering other services as our board of directors deems necessary. The financial results of the Prior Programs thus provide an indication of our advisor’s performance of its obligations during the periods covered. However, general economic conditions affecting the real estate industry and other factors contribute significantly to financial results.
The following tables are included herein:
| Table I — Experience in Raising and Investing Funds (Unaudited) | |
| Table II — Compensation to Sponsor (Unaudited) | |
| Table III — Annual Operating Results of Prior Programs (Unaudited) | |
| Table IV — Results of Completed Programs (not applicable) | |
| Table V — Sales or Disposals of Properties (Unaudited) |
Additional information relating to the acquisition of properties by the Prior Programs is contained in Table VI, which is included in the registration statement which our company has filed with the Securities and Exchange Commission. We will provide to you copies of any or all information concerning the Prior Programs at no charge upon request.
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TABLE I
| Telluride | Truckee | Yerington | NNN | NNN | NNN | NNN | |||||||||||||||||||||||||||
| Barstow, | River Office | Shopping | Fund VIII, | Town & | ‘A’ Credit | Redevelopment | |||||||||||||||||||||||||||
| LLC | WREIT, Inc. | Tower, LLC | Center, LLC | LLC | Country, LLC | TIC, LLC | Fund, LLC | ||||||||||||||||||||||||||
| Dollar Amount Offered | $ | 1,620,000 | $ | 50,000,000 | $ | 5,550,000 | $ | 1,625,000 | $ | 8,000,000 | $7,200,000 | $ | 2,500,000 | $ | 8,000,000 | ||||||||||||||||||
| Dollar Amount Raised | 1,620,000 | 14,051,000 | 5,550,000 | 1,625,000 | 8,000,000 | 7,200,000 | 2,500,000 | 7,579,528 | |||||||||||||||||||||||||
| Percentage Amount Raised | 100.0% | 28.1% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 94.7% | |||||||||||||||||||||||||
| Less Offering Expenses: | |||||||||||||||||||||||||||||||||
| Selling Commissions | 10.0% | 8.0% | 10.0% | 10.0% | 10.0% | 10.0% | 10.0% | 10.0% | |||||||||||||||||||||||||
| Marketing Support & Due Diligence Reimbursement | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | |||||||||||||||||||||||||
| Organization & Offering Expenses(1) | 2.5% | 4.5% | 3.0% | 4.9% | 3.0% | 3.0% | 3.5% | 3.5% | |||||||||||||||||||||||||
| Due Diligence Allowance(2) | 1.5% | 0.5% | 0.5% | 0.5% | 0.5% | 0.5% | 0.5% | 0.5% | |||||||||||||||||||||||||
| Reserves | 3.6% | 1.5% | 3.7% | 7.8% | 8.9% | 2.0% | 6.1% | 9.5% | |||||||||||||||||||||||||
| Percent Available for Investment | 82.4% | 85.5% | 82.8% | 76.8% | 77.6% | 84.5% | 79.9% | 76.5% | |||||||||||||||||||||||||
| Acquisition Cost: | |||||||||||||||||||||||||||||||||
| Cash Down Payment | 75.6% | 83.0% | 73.7% | 70.3% | 70.7% | 74.3% | 73.8% | 69.5% | |||||||||||||||||||||||||
| Loan Fees | 5.3% | 2.5% | 5.1% | 2.0% | 2.4% | 5.7% | 2.1% | 2.5% | |||||||||||||||||||||||||
| Acquisition Fees Paid to Affiliates | 1.5% | 0.0% | 4.0% | 4.5% | 4.5% | 4.5% | 4.0% | 4.5% | |||||||||||||||||||||||||
| Total Acquisition Cost | 82.4% | 85.5% | 82.8% | 76.8% | 77.6% | 84.5% | 79.9% | 76.5% | |||||||||||||||||||||||||
| Percent Leveraged | 0% | 68% | 78% | 71% | 77% | 81% | 73% | 78% | |||||||||||||||||||||||||
| Date Offering Began | 1-Jun-98 | 1-Jul-98 | 21-Aug-98 | 15-Dec-98 | 22-Feb-99 | 10-May-99 | 10-Aug-99 | 27-Aug-99 | |||||||||||||||||||||||||
| Date Offering Ended | 16-Dec-98 | 27-Apr-00 | 15-Jul-99 | 31-Aug-99 | 7-Mar-00 | 29-Mar-00 | 12-Jul-00 | 5-Jun-00 | |||||||||||||||||||||||||
| Length of Offering (days) | 198 | 666 | 328 | 260 | 379 | 324 | 337 | 283 | |||||||||||||||||||||||||
| Days to Invest 90% of Amount Available for Investment (Measured from Beginning of Offering) | 46 | N/A | 102 | 83 | 180 | 43 | 295 | 258 | |||||||||||||||||||||||||
| Number of Investors | 14 | 326 | 68 | 11 | 125 | 63 | 29 | 153 | |||||||||||||||||||||||||
| (1) | Includes legal, accounting, printing and other offering expenses, including amounts for the reimbursement for marketing, salaries and direct expenses of employees engaged in marketing and other organization expenses. |
| (2) | Nonaccountable due diligence reimbursement to Selling Group. |
A-2
Table of Contents
TABLE I
| NNN | NNN | NNN | NNN | ||||||||||||||||||||||||||||||
| Exchange | NNN Tech | Horizon | NNN | Kiwi | 2000 Value | Rocky Mount. | |||||||||||||||||||||||||||
| Fund III, LLC | Fund, LLC | T REIT, Inc. | Fund LLC | Westway, LLC | Assoc, LLC | Fund, LLC | Exchange, LLC | ||||||||||||||||||||||||||
| Dollar Amount Offered | $6,300,000 | $ | 3,700,000 | $ | 100,000,000 | $ | 12,000,000 | $ | 3,300,000 | $ | 2,800,000 | $ | 5,900,000 | $ | 2,670,000 | ||||||||||||||||||
| Dollar Amount Raised | 6,300,000 | 3,698,750 | 46,395,000 | 3,573,000 | 3,278,250 | 2,681,352 | 5,899,000 | 2,670,000 | |||||||||||||||||||||||||
| Percentage Amount Raised | 100.0% | 100.0% | 46.4% | 29.8% | 99.3% | 95.8% | 100.0% | 100.0% | |||||||||||||||||||||||||
| Less Offering Expenses: | |||||||||||||||||||||||||||||||||
| Selling Commissions | 10.0% | 8.0% | 8.0% | 8.5% | 8.0% | 8.0% | 9.5% | 8.5% | |||||||||||||||||||||||||
| Marketing Support & Due Diligence Reimbursement | 0.0% | 2.0% | 1.5% | 2.0% | 2.0% | 2.0% | 0.0% | 2.0% | |||||||||||||||||||||||||
| Organization & Offering Expenses(1) | 3.5% | 3.5% | 2.5% | 1.0% | 3.5% | 3.5% | 4.0% | 4.0% | |||||||||||||||||||||||||
| Due Diligence Allowance(2) | 0.5% | 0.5% | 0.0% | 0.0% | 0.5% | 0.5% | 0.5% | 0.0% | |||||||||||||||||||||||||
| Reserves | 10.5% | 8.2% | 0.0% | 0.0% | 5.4% | 4.8% | 5.4% | 4.5% | |||||||||||||||||||||||||
| Percent Available for Investment | 75.5% | 77.8% | 88.0% | 88.5% | 80.6% | 81.2% | 79.9% | 81.0% | |||||||||||||||||||||||||
| Acquisition Cost: | |||||||||||||||||||||||||||||||||
| Cash Down Payment | 69.0% | 68.9% | 88.0% | 88.5% | 73.9% | 74.7% | 73.9% | 74.5% | |||||||||||||||||||||||||
| Loan Fees | 2.0% | 4.4% | 0.0% | 0.0% | 2.2% | 2.0% | 2.2% | 2.0% | |||||||||||||||||||||||||
| Acquisition Fees Paid to Affiliates | 4.5% | 4.5% | 0.0% | 0.0% | 4.5% | 4.5% | 4.5% | 4.5% | |||||||||||||||||||||||||
| Total Acquisition Cost | 75.5% | 77.8% | 88.0% | 88.5% | 80.6% | 81.2% | 79.9% | 81.0% | |||||||||||||||||||||||||
| Percent Leveraged | 71% | 75% | 70% | N/A | 73% | 0% | 0% | 74% | |||||||||||||||||||||||||
| Date Offering Began | 15-Sep-99 | 21-Feb-00 | 22-Feb-00 | 30-Mar-00 | 26-Apr-00 | 9-Jun-00 | 15-Jul-00 | 25-Jul-00 | |||||||||||||||||||||||||
| Date Offering Ended | 31-May-00 | 20-Jun-00 | 31-May-02 | 23-Jun-00 | 31-Dec-00 | 4-Feb-01 | 27-Feb-01 | 15-Feb-01 | |||||||||||||||||||||||||
| Length of Offering (days) | 259 | 120 | 829 | 85 | 249 | 240 | 227 | 205 | |||||||||||||||||||||||||
| Days to Invest 90% of Amount Available for Investment (Measured from Beginning of Offering) | 259 | 116 | N/A | N/A | 162 | 240 | 214 | 127 | |||||||||||||||||||||||||
| Number of Investors | 27 | 26 | 2,065 | 75 | 33 | 23 | 125 | 11 | |||||||||||||||||||||||||
| (1) | Includes legal, accounting, printing and other offering expenses, including amounts for the reimbursement for marketing, salaries and direct expenses of employees engaged in marketing and other organization expenses. |
| (2) | Nonaccountable due diligence reimbursement to Selling Group. |
A-3
Table of Contents
TABLE I
| NNN | NNN | NNN | NNN | NNN | NNN | NNN | |||||||||||||||||||||||||||
| 2004 Notes | Market | 2005 Notes | Sacramento | Dry Creek | Camelot | 2001 Value | Washington | ||||||||||||||||||||||||||
| Program, LLC | Center, LLC | Program, LLC | Corp Ctr, LLC | Centre, LLC | Plaza, LLC | Fund, LLC | Square, LLC | ||||||||||||||||||||||||||
| Dollar Amount Offered | $ | 5,000,000 | $ | 1,000,000 | $ | 2,300,000 | $ | 12,000,000 | $ | 3,500,000 | $ | 2,400,000 | $ | 11,000,000 | $ | 3,000,000 | |||||||||||||||||
| Dollar Amount Raised | 5,000,000 | 1,000,000 | 2,300,000 | 12,000,000 | 3,500,000 | 2,400,000 | 10,992,321 | 3,000,000 | |||||||||||||||||||||||||
| Percentage Amount Raised | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100% | 99.9% | 100.0% | |||||||||||||||||||||||||
| Less Offering Expenses: | |||||||||||||||||||||||||||||||||
| Selling Commissions | 8.0% | 8.0% | 8.0% | 8.0% | 8.0% | 8.0% | 8.0% | 8.0% | |||||||||||||||||||||||||
| Marketing Support & Due Diligence Reimbursement | 1.5% | 1.5% | 1.5% | 1.5% | 1.5% | 2.5% | 2.5% | 2.5% | |||||||||||||||||||||||||
| Organization & Offering Expenses(1) | 1.5% | 1.5% | 1.5% | 4.0% | 3.5% | 5.0% | 3.5% | 4.0% | |||||||||||||||||||||||||
| Due Diligence Allowance(2) | 0.0% | 0.5% | 0.0% | 0.5% | 0.0% | 0.0% | 0.0% | 0.0% | |||||||||||||||||||||||||
| Reserves | 0.0% | 10.8% | 0.0% | 4.0% | 3.3% | 7.8% | 21.4% | 4.6% | |||||||||||||||||||||||||
| Percent Available for Investment | 89.0% | 77.7% | 89.0% | 82.0% | 83.7% | 76.8% | 64.6% | 80.9% | |||||||||||||||||||||||||
| Acquisition Cost: | |||||||||||||||||||||||||||||||||
| Cash Down Payment | 89.0% | 73.2% | 89.0% | 77.5% | 80.1% | 72.8% | 56.4% | 78.9% | |||||||||||||||||||||||||
| Loan Fees | 0.0% | 4.5% | 0.0% | 0.0% | 3.6% | 4.0% | 3.2% | 2.0% | |||||||||||||||||||||||||
| Acquisition Fees Paid to Affiliates | 0.0% | 0.0% | 0.0% | 4.5% | 0.0% | 0.0% | 5.0% | 0.0% | |||||||||||||||||||||||||
| Total Acquisition Cost | 89.0% | 77.7% | 89.0% | 82.0% | 83.7% | 76.8% | 64.6% | 80.9% | |||||||||||||||||||||||||
| Percent Leveraged | N/A | 73% | N/A | 71% | 74% | 60% | 65% | 67% | |||||||||||||||||||||||||
| Date Offering Began | 29-Aug-00 | 1-Sep-00 | 15-Sep-00 | 8-Nov-00 | 15-Nov-00 | 30-Mar-01 | 12-Mar-01 | 1-May-01 | |||||||||||||||||||||||||
| Date Offering Ended | 14-Aug-01 | 17-Nov-00 | 13-Mar-01 | 21-May-01 | 31-Jan-01 | 3-Dec-01 | 30-Jun-02 | 21-Nov-01 | |||||||||||||||||||||||||
| Length of Offering (days) | 350 | 77 | 179 | 194 | 77 | 248 | 475 | 204 | |||||||||||||||||||||||||
| Days to Invest 90% of Amount Available for Investment (Measured from Beginning of Offering) | 342 | 47 | 164 | 147 | 77 | 248 | 443 | 204 | |||||||||||||||||||||||||
| Number of Investors | 65 | 7 | 46 | 66 | 16 | 11 | 263 | 12 | |||||||||||||||||||||||||
| (1) | Includes legal, accounting, printing and other offering expenses, including amounts for the reimbursement for marketing, salaries and direct expenses of employees engaged in marketing and other organization expenses. |
| (2) | Nonaccountable due diligence reimbursement to Selling Group. |
A-4
Table of Contents
TABLE I
| NNN | NNN LV | NNN | NNN | NNN | NNN | ||||||||||||||||||||||||||||
| Reno | NNN | NNN | 1900 | Timberhills | Addison | County | Arapahoe | ||||||||||||||||||||||||||
| Trademark, | One Gateway | Gateway | Aerojet | Shop Ctr, | Com Ctr, | Center | Svd. Center, | ||||||||||||||||||||||||||
| LLC | Plaza, LLC | Aurora, LLC | Way, LLC | LLC | LLC | Drive, LLC | LLC | ||||||||||||||||||||||||||
| Dollar Amount Offered | $3,850,000 | $ | 4,200,000 | $ | 2,000,000 | $ | 2,000,000 | $3,700,000 | $ | 3,650,000 | $ | 3,125,000 | $ | 4,000,000 | |||||||||||||||||||
| Dollar Amount Raised | 3,850,000 | 4,197,500 | 1,054,000 | 2,000,000 | 3,695,375 | 3,650,000 | 3,093,750 | 4,000,000 | |||||||||||||||||||||||||
| Percentage Amount Raised | 100.0% | 99.9% | 52.7% | 100.0% | 99.9% | 100.0% | 99.0% | 100.0% | |||||||||||||||||||||||||
| Less Offering Expenses: | |||||||||||||||||||||||||||||||||
| Selling Commissions | 8.5% | 8.0% | 8.0% | 7.5% | 8.0% | 8.0% | 8.0% | 8.0% | |||||||||||||||||||||||||
| Marketing Support & Due Diligence Reimbursement | 2.0% | 1.5% | 1.5% | 2.0% | 2.5% | 2.5% | 2.5% | 2.5% | |||||||||||||||||||||||||
| Organization & Offering Expenses(1) | 4.0% | 4.0% | 3.0% | 3.0% | 4.0% | 4.0% | 4.0% | 4.0% | |||||||||||||||||||||||||
| Due Diligence Allowance(2) | 0.0% | 1.0% | 1.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | |||||||||||||||||||||||||
| Reserves | 4.5% | 4.0% | 0.0% | 9.1% | 4.0% | 3.8% | 4.5% | 4.6% | |||||||||||||||||||||||||
| Percent Available for Investment | 81.0% | 81.5% | 86.5% | 78.4% | 81.5% | 81.7% | 81.0% | 80.9% | |||||||||||||||||||||||||
| Acquisition Cost: | |||||||||||||||||||||||||||||||||
| Cash Down Payment | 79.0% | 75.0% | 85.0% | 76.1% | 79.3% | 79.3% | 79.0% | 76.0% | |||||||||||||||||||||||||
| Loan Fees | 2.0% | 2.5% | 1.5% | 2.3% | 2.2% | 2.4% | 2.0% | 2.4% | |||||||||||||||||||||||||
| Acquisition Fees Paid to Affiliates | 0.0% | 4.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 2.5% | |||||||||||||||||||||||||
| Total Acquisition Cost | 81.0% | 81.5% | 86.5% | 78.4% | 81.5% | 81.7% | 81.0% | 80.9% | |||||||||||||||||||||||||
| Percent Leveraged | 63% | 74% | 83% | 71% | 69% | 73% | 58% | 63% | |||||||||||||||||||||||||
| Date Offering Began | 30-May-01 | 8-Jun-01 | 10-Jul-01 | 26-Jul-01 | 31-Jul-01 | 16-Aug-01 | 18-Sep-01 | 11-Feb-02 | |||||||||||||||||||||||||
| Date Offering Ended | 26-Sep-01 | 25-Sep-01 | 17-Aug-01 | 31-Aug-01 | 27-Nov-01 | 2-Apr-02 | 6-Feb-02 | 20-Jun-02 | |||||||||||||||||||||||||
| Length of Offering (days) | 119 | 109 | 38 | 36 | 119 | �� | 76 | 141 | 67 | ||||||||||||||||||||||||
| Days to Invest 90% of Amount Available for Investment (Measured from Beginning of Offering) | 119 | 109 | 38 | 36 | 119 | 77 | 141 | 67 | |||||||||||||||||||||||||
| Number of Investors | 7 | 10 | 2 | 8 | 13 | 16 | 18 | 16 | |||||||||||||||||||||||||
| (1) | Includes legal, accounting, printing and other offering expenses, including amounts for the reimbursement for marketing, salaries and direct expenses of employees engaged in marketing and other organization expenses. |
| (2) | Nonaccountable due diligence reimbursement to Selling Group. |
A-5
Table of Contents
TABLE I
| NNN | |||||||||||||||||||||||||||||||||
| NNN | VC/RE | NNN | NNN | NNN | Pacific | NNN | |||||||||||||||||||||||||||
| Titan | Balanced | City Center | Union | City Center | Corporate | North | NNN | ||||||||||||||||||||||||||
| Bldg. & | Fund II, | West ‘B’, | Square, | West ‘A’, | Park 1, | Reno | Brookhollow | ||||||||||||||||||||||||||
| Plaza, LLC | LLC | LLC | LLC | LLC | LLC | LLC | LLC | ||||||||||||||||||||||||||
| Dollar Amount Offered | $2,500,000 | $ | 10,000,000 | $ | 8,200,000 | $578,000 | $ | 3,500,000 | $ | 5,800,000 | $ | 2,750,000 | $ | 6,550,000 | |||||||||||||||||||
| Dollar Amount Raised | 2,219,808 | — | 8,200,000 | 578,000 | 1,237,803 | 5,800,000 | 2,750,000 | $ | 6,550,000 | ||||||||||||||||||||||||
| Percentage Amount Raised | 88.8% | 0.0% | 100.0% | 100.0% | 35.4% | 100.0% | 100.0% | 100.0% | |||||||||||||||||||||||||
| Less Offering Expenses: | |||||||||||||||||||||||||||||||||
| Selling Commissions | 8.0% | 4.0% | 8.0% | 8.0% | 8.0% | 0.0% | 8.0% | 8.0% | |||||||||||||||||||||||||
| Marketing Support & Due Diligence Reimbursement | 2.5% | 2.0% | 2.5% | 2.7% | 2.5% | 1.0% | 2.5% | 2.5% | |||||||||||||||||||||||||
| Organization & Offering Expenses(1) | 3.0% | 0.5% | 4.0% | 1.8% | 4.0% | 1.0% | 4.0% | 4.0% | |||||||||||||||||||||||||
| Due Diligence Allowance(2) | 1.9% | 0.0% | 4.0% | 2.0% | 0.0% | 2.5% | 0.0% | 0.0% | |||||||||||||||||||||||||
| Reserves | 3.8% | 1.0% | 4.6% | 5.5% | 2.7% | 7.5% | 14.6% | 4.5% | |||||||||||||||||||||||||
| Percent Available for Investment | 80.8% | 92.5% | 76.9% | 80.0% | 82.8% | 88.0% | 70.9% | 81.0% | |||||||||||||||||||||||||
| Acquisition Cost: | |||||||||||||||||||||||||||||||||
| Cash Down Payment | 75.2% | 0.0% | 75.0% | 73.0% | 76.2% | 85.1% | 65.5% | 75.6% | |||||||||||||||||||||||||
| Loan Fees | 1.6% | 55.5% | 1.9% | 7.0% | 2.6% | 2.9% | 2.3% | 1.9% | |||||||||||||||||||||||||
| Acquisition Fees Paid to Affiliates | 4.0% | 37.0% | 0.0% | 0.0% | 4.0% | 0.0% | 3.1% | 3.5% | |||||||||||||||||||||||||
| Total Acquisition Cost | 80.8% | 92.5% | 76.9% | 80.0% | 82.8% | 88.0% | 70.9% | 81.0% | |||||||||||||||||||||||||
| Percent Leveraged | 66% | N/A | 70% | 75% | 60% | 56% | 75% | 66% | |||||||||||||||||||||||||
| Date Offering Began | 18-Feb-02 | 1-Nov-01 | 31-Oct-01 | 28-Jan-02 | 12-Feb-02 | 11-Mar-02 | 31-Mar-02 | 12-Apr-02 | |||||||||||||||||||||||||
| Date Offering Ended | 28-May-02 | Open | 14-Jun-02 | 2-Mar-02 | 15-Mar-02 | 25-Jun-02 | 19-Jun-02 | 3-Jul-02 | |||||||||||||||||||||||||
| Length of Offering (days) | 58 | Open | 84 | 33 | 31 | 106 | 80 | 82 | |||||||||||||||||||||||||
| Days to Invest 90% of Amount Available for Investment (Measured from Beginning of Offering) | 58 | N/A | 85 | 40 | 41 | 14 | 80 | 82 | |||||||||||||||||||||||||
| Number of Investors | 5 | 9 | 15 | 3 | 2 | 45 | 14 | 24 | |||||||||||||||||||||||||
| (1) | Includes legal, accounting, printing and other offering expenses, including amounts for the reimbursement for marketing, salaries and direct expenses of employees engaged in marketing and other organization expenses. |
| (2) | Nonaccountable due diligence reimbursement to Selling Group. |
A-6
Table of Contents
TABLE I
| NNN | NNN | ||||||||||||||||||||||||||||||||
| NNN | NNN | Bryant | NNN | NNN | NNN | NNN | Kahana | ||||||||||||||||||||||||||
| 2002 Value | 1397 Galleria | Ranch | 4241 Bowling | Wolf Pen | Alamosa | Saddleback, | Gateway, | ||||||||||||||||||||||||||
| Fund, LLC | Drive, LLC | LLC | Green, LLC | Plaza, LLC | Plaza, LLC | LLC | LLC | ||||||||||||||||||||||||||
| Dollar Amount Offered | $30,000,000 | $1,950,000 | $5,000,000 | $2,850,000 | $5,500,000 | $6,650,000 | $3,865,800 | $8,140,000 | |||||||||||||||||||||||||
| Dollar Amount Raised | 29,799,260 | 1,950,000 | 5,000,000 | 2,850,000 | 5,500,000 | 6,650,000 | 3,865,800 | 8,140,000 | |||||||||||||||||||||||||
| Percentage Amount Raised | 99.3% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | 100.0% | |||||||||||||||||||||||||
| Less Offering Expenses: | |||||||||||||||||||||||||||||||||
| Selling Commissions | 8.0% | 8.0% | 8.0% | 8.0% | 8.0% | 8.0% | 8.0% | 8.0% | |||||||||||||||||||||||||
| Marketing Support & Due Diligence Reimbursement | 2.5% | 2.5% | 2.5% | 2.5% | 2.5% | 2.5% | 2.5% | 2.5% | |||||||||||||||||||||||||
| Organization & Offering Expenses(1) | 2.5% | 4.0% | 4.0% | 4.0% | 4.0% | 4.0% | 4.0% | 4.0% | |||||||||||||||||||||||||
| Due Diligence Allowance(2) | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | |||||||||||||||||||||||||
| Reserves | 8.0% | 8.2% | 8.6% | 7.0% | 8.2% | 5.6% | 7.8% | 5.3% | |||||||||||||||||||||||||
| Percent Available for Investment | 79.0% | 77.3% | 76.9% | 78.5% | 77.3% | 79.9% | 77.7% | 80.2% | |||||||||||||||||||||||||
| Acquisition Cost: | |||||||||||||||||||||||||||||||||
| Cash Down Payment | 71.0% | 69.8% | 71.6% | 73.5% | 71.9% | 75.2% | 71.9% | 76.3% | |||||||||||||||||||||||||
| Loan Fees | 2.5% | 5.0% | 2.8% | 2.5% | 2.4% | 2.2% | 3.3% | 1.9% | |||||||||||||||||||||||||
| Acquisition Fees Paid to Affiliates | 5.5% | 2.5% | 2.5% | 2.5% | 3.0% | 2.5% | 2.5% | 2.0% | |||||||||||||||||||||||||
| Total Acquisition Cost | 79.0% | 77.3% | 76.9% | 78.5% | 77.3% | 79.9% | 77.7% | 80.2% | |||||||||||||||||||||||||
| Percent Leveraged | 69% | 57% | 60% | 58% | 75% | 72% | 66% | 67% | |||||||||||||||||||||||||
| Date Offering Began | 15-May-02 | 24-May-02 | 10-Jun-02 | 14-Jun-02 | 1-Jul-02 | 18-Jul-02 | 30-Aug-02 | 9-Oct-02 | |||||||||||||||||||||||||
| Date Offering Ended | 14-Jul-03 | 23-Oct-02 | 12-Nov-02 | 27-Dec-02 | 23-Oct-02 | 25-Oct-02 | 29-Oct-02 | 6-Mar-03 | |||||||||||||||||||||||||
| Length of Offering (days) | 425 | 152 | 155 | 196 | 114 | 99 | 60 | 148 | |||||||||||||||||||||||||
| Days to Invest 90% of Amount Available for Investment (Measured from Beginning of Offering) | 128 | 110 | 87 | 109 | 86 | 82 | 26 | 72 | |||||||||||||||||||||||||
| Number of Investors | 707 | 12 | 24 | 16 | 12 | 11 | 7 | 22 | |||||||||||||||||||||||||
| (1) | Includes legal, accounting, printing and other offering expenses, including amounts for the reimbursement for marketing, salaries and direct expenses of employees engaged in marketing and other organization expenses. |
| (2) | Nonaccountable due diligence reimbursement to Selling Group. |
A-7
Table of Contents
TABLE I
| NNN | NNN | NNN | NNN | NNN | |||||||||||||||||||||||||||||
| Springtown | Congress | Park | Parkwood | NNN | NNN | Beltline/ | |||||||||||||||||||||||||||
| Mall | Center | Sahara, | Complex, | G REIT, | 2006 Notes | Buschwood, | Royal Ridge, | ||||||||||||||||||||||||||
| Investors, LLC | LLC | LLC | LLC | Inc. | Program, LLC | LLC | LLC | ||||||||||||||||||||||||||
| Dollar Amount Offered | $2,550,000 | $39,112,386 | $5,200,000 | $7,472,000 | $200,000,000 | $10,000,000 | $3,200,000 | $4,900,000 | |||||||||||||||||||||||||
| Dollar Amount Raised | 2,550,000 | 39,067,812 | 4,953,000 | 7,472,000 | 71,777,833 | 1,044,881 | 3,200,000 | 4,490,500 | |||||||||||||||||||||||||
| Percentage Amount Raised | 100.0% | 99.9% | 95.3% | 100.0% | 35.9% | 10.4% | 100.0% | 91.6% | |||||||||||||||||||||||||
| Less Offering Expenses: | |||||||||||||||||||||||||||||||||
| Selling Commissions | 8.0% | 8.0% | 8.0% | 8.0% | 7.5% | 6.5% | 8.0% | 8.0% | |||||||||||||||||||||||||
| Marketing Support & Due Diligence Reimbursement | 2.5% | 2.5% | 2.5% | 2.5% | 2.0% | 1.0% | 2.5% | 2.5% | |||||||||||||||||||||||||
| Organization & Offering Expenses(1) | 4.0% | 4.0% | 4.0% | 4.0% | 2.5% | 0.5% | 4.0% | 4.0% | |||||||||||||||||||||||||
| Due Diligence Allowance(2) | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | |||||||||||||||||||||||||
| Reserves | 10.2% | 7.9% | 8.1% | 8.0% | 0.0% | 0.0% | 7.9% | 7.9% | |||||||||||||||||||||||||
| Percent Available for Investment | 75.3% | 77.6% | 77.4% | 77.5% | 88.0% | 92.0% | 77.6% | 77.6% | |||||||||||||||||||||||||
| Acquisition Cost: | |||||||||||||||||||||||||||||||||
| Cash Down Payment | 70.2% | 73.5% | 73.1% | 70.7% | 87.5% | 92.0% | 72.2% | 72.7% | |||||||||||||||||||||||||
| Loan Fees | 2.6% | 1.9% | 1.8% | 4.3% | 0.0% | 0.0% | 2.4% | 2.4% | |||||||||||||||||||||||||
| Acquisition Fees Paid to Affiliates | 2.5% | 2.2% | 2.5% | 2.5% | 0.5% | 0.0% | 3.0% | 2.5% | |||||||||||||||||||||||||
| Total Acquisition Cost | 75.3% | 77.6% | 77.4% | 77.5% | 88.0% | 92.0% | 77.6% | 77.6% | |||||||||||||||||||||||||
| Percent Leveraged | 72% | 69% | 68% | 73% | 62% | N/A | 65% | 64% | |||||||||||||||||||||||||
| Date Offering Began | 10-Oct-02 | 15-Oct-02 | 25-Oct-02 | 28-Oct-02 | 22-Jul-02 | 1-Aug-02 | 20-Dec-02 | 8-Nov-02 | |||||||||||||||||||||||||
| Date Offering Ended | 21-Mar-03 | Open | 17-Mar-03 | 23-Apr-03 | Open | 22-May-03 | 25-Mar-03 | Open | |||||||||||||||||||||||||
| Length of Offering (days) | 162 | Open | 144 | 177 | Open | 295 | 95 | Open | |||||||||||||||||||||||||
| Days to Invest 90% of Amount Available for Investment (Measured from Beginning of Offering) | 60 | 85 | 144 | 64 | N/A | N/A | 95 | 144 | |||||||||||||||||||||||||
| Number of Investors | 14 | 98 | 12 | 23 | 3,122 | 22 | 13 | 17 | |||||||||||||||||||||||||
| (1) | Includes legal, accounting, printing and other offering expenses, including amounts for the reimbursement for marketing, salaries and direct expenses of employees engaged in marketing and other organization expenses. |
| (2) | Nonaccountable due diligence reimbursement to Selling Group. |
A-8
Table of Contents
TABLE I
| NNN | NNN | NNN | NNN | NNN | NNN | ||||||||||||||||||||||||||||||||
| Parkway | NNN | NNN | Xerox | Jamboree | Jefferson | Arapahoe | 901 | ||||||||||||||||||||||||||||||
| Towers, | Netpark, | 602 Sawyer, | Centre, | Promenade, | Square, | Bus. Park, | Corporate, | Program | |||||||||||||||||||||||||||||
| LLC | LLC | LLC | LLC | LLC | LLC | LLC | LLC | Totals | |||||||||||||||||||||||||||||
| Dollar Amount Offered | $ | 7,350,000 | $ | 23,700,000 | $ | 4,700,000 | $ | 20,500,000 | $ | 6,800,000 | $ | 9,200,000 | $ | 3,800,000 | $ | 6,300,000 | $ | 746,508,186 | |||||||||||||||||||
| Dollar Amount Raised | 6,713,762 | 23,492,250 | 4,207,625 | 20,468,500 | — | — | — | — | $ | 468,882,660 | |||||||||||||||||||||||||||
| Percentage Amount Raised | 91.3% | 99.1% | 89.5% | 99.8% | 0.0% | 0.0% | 0.0% | 0.0% | 62.8% | ||||||||||||||||||||||||||||
| Less Offering Expenses: | |||||||||||||||||||||||||||||||||||||
| Selling Commissions | 8.0% | 8.0% | 8.0% | 8.0% | 8.0% | 8.0% | 8.0% | 8.0% | |||||||||||||||||||||||||||||
| Marketing Support & Due Diligence Reimbursement | 2.5% | 2.5% | 2.5% | 2.5% | 2.5% | 2.5% | 2.5% | 2.5% | |||||||||||||||||||||||||||||
| Organization & Offering Expenses(1) | 4.0% | 4.0% | 4.0% | 4.0% | 4.0% | 4.0% | 4.0% | 4.0% | |||||||||||||||||||||||||||||
| Due Diligence Allowance(2) | 0.0% | 5.9% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | 0.0% | |||||||||||||||||||||||||||||
| Reserves | 7.9% | 6.2% | 3.6% | 8.0% | 3.1% | 3.8% | 8.9% | 4.0% | |||||||||||||||||||||||||||||
| Percent Available for Investment | 77.6% | 73.4% | 81.9% | 77.5% | 82.4% | 81.7% | 76.6% | 81.5% | |||||||||||||||||||||||||||||
| Acquisition Cost: | |||||||||||||||||||||||||||||||||||||
| Cash Down Payment | 73.2% | 67.5% | 78.1% | 74.6% | 76.5% | 76.4% | 73.4% | 76.8% | |||||||||||||||||||||||||||||
| Loan Fees | 1.9% | 3.1% | 1.5% | 1.9% | 3.3% | 1.5% | 1.6% | 2.1% | |||||||||||||||||||||||||||||
| Acquisition Fees Paid to Affiliates | 2.5% | 2.8% | 2.3% | 1.0% | 2.6% | 3.8% | 1.6% | 2.6% | |||||||||||||||||||||||||||||
| Total Acquisition Cost | 77.6% | 73.4% | 81.9% | 77.5% | 82.4% | 81.7% | 76.6% | 81.5% | |||||||||||||||||||||||||||||
| Percent Leveraged | 47% | 67% | 64% | 74% | 0% | 0% | 0% | 0% | |||||||||||||||||||||||||||||
| Date Offering Began | 18-Nov-02 | 18-Mar-03 | 28-Mar-03 | 14-Feb-03 | 20-Jun-03 | 1-May-03 | 13-Jun-03 | 13-Jun-03 | |||||||||||||||||||||||||||||
| Date Offering Ended | Open | Open | Open | Open | Open | Open | Open | Open | |||||||||||||||||||||||||||||
| Length of Offering (days) | Open | Open | Open | Open | Open | Open | Open | Open | |||||||||||||||||||||||||||||
| Days to Invest 90% of Amount Available for Investment (Measured from Beginning of Offering) | 172 | 85 | 69 | 122 | — | — | — | — | |||||||||||||||||||||||||||||
| Number of Investors | 22 | 24 | 21 | 67 | — | 5 | — | — | |||||||||||||||||||||||||||||
| (1) | Includes legal, accounting, printing and other offering expenses, including amounts for the reimbursement for marketing, salaries and direct expenses of employees engaged in marketing and other organization expenses. |
| (2) | Nonaccountable due diligence reimbursement to Selling Group. |
A-9
Table of Contents
TABLE II
| Truckee | ||||||||||||||||||||||||||||||||||
| Telluride | River Office | Yerington | NNN | NNN | NNN | NNN | ||||||||||||||||||||||||||||
| Barstow, | WREIT, | Tower, | Shopping | Fund VIII, | Town & | ‘A’ Credit | Redevelopment | |||||||||||||||||||||||||||
| LLC | Inc. | LLC | Center, LLC | LLC | Country, LLC | TIC, LLC | Fund, LLC | |||||||||||||||||||||||||||
| Date Offering Commenced | 1-Jun-98 | 1-Jul-98 | 21-Aug-98 | 15-Dec-98 | 22-Feb-99 | 10-May-99 | 10-Aug-99 | 27-Aug-99 | ||||||||||||||||||||||||||
| Dollar Amount Raised to Sponsor From Proceeds of Offering | $ | 1,620,000 | $ | 14,051,000 | $ | 5,550,000 | $ | 1,625,000 | $ | 8,000,000 | $ | 7,200,000 | $ | 2,500,000 | $ | 7,579,528 | ||||||||||||||||||
| Amounts Paid to Sponsor from Proceeds of Offering: | ||||||||||||||||||||||||||||||||||
| Selling Commissions to Selling Group Members | $ | 162,000 | $ | 1,124,080 | $ | 555,000 | $ | 162,500 | $ | 800,000 | $ | 720,000 | $ | 250,000 | $ | 757,953 | ||||||||||||||||||
| Marketing Support & Due Diligence Reimbursement | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Organization & Marketing Expenses | 40,000 | 632,295 | 166,500 | 79,625 | 240,000 | 216,000 | 87,500 | 265,283 | ||||||||||||||||||||||||||
| Due Diligence Allowance | 24,300 | 70,255 | 27,750 | 8,125 | 40,000 | 36,000 | 12,500 | 37,898 | ||||||||||||||||||||||||||
| Acquisition Fees | 25,000 | — | 220,000 | 73,125 | 360,000 | 324,000 | 100,000 | 341,079 | ||||||||||||||||||||||||||
| Totals | $ | 251,300 | $ | 1,826,630 | $ | 969,250 | $ | 323,375 | $ | 1,440,000 | $ | 1,296,000 | $ | 450,000 | $ | 1,402,213 | ||||||||||||||||||
| Dollar Amount of Cash Generated from Operations Before Deducting Payments to Sponsor | $ | 1,214,500 | $ | 4,438,159 | $ | 5,944,609 | $ | 930,804 | $ | 3,353,618 | $ | 3,521,983 | $ | 1,095,119 | $ | 5,236,520 | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 1998 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | 27,506 | $ | 26,103 | $ | 9,390 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Asset Management Fees | 14,550 | 26,932 | 6,781 | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Totals | $ | 42,056 | $ | 53,035 | $ | 16,171 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 1999 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | 39,936 | $ | 193,174 | $ | 129,204 | $ | 17,599 | $ | 74,766 | $ | 86,309 | $ | 7,885 | $ | 7,164 | ||||||||||||||||||
| Asset Management Fees | 41,741 | 119,017 | 80,500 | 6,264 | 155,585 | 80,000 | 11,343 | 14,234 | ||||||||||||||||||||||||||
| Leasing Commissions | 5,040 | 34,360 | 212,925 | — | 56,146 | 52,618 | — | — | ||||||||||||||||||||||||||
| Totals | $ | 86,717 | $ | 346,551 | $ | 422,629 | $ | 23,863 | $ | 286,497 | $ | 218,927 | $ | 19,228 | $ | 21,398 | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 2000 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | 31,976 | $ | 172,875 | $ | 95,941 | $ | 28,043 | $ | 130,984 | $ | 40,467 | $ | 38,567 | $ | 90,636 | ||||||||||||||||||
| Asset Management Fees | 8,421 | 123,475 | — | 8,291 | 138,938 | 26,800 | — | 174,420 | ||||||||||||||||||||||||||
| Leasing Commissions | 2,074 | 29,021 | 45,922 | — | 25,591 | 18,394 | 1,980 | 20,000 | ||||||||||||||||||||||||||
| Totals | $ | 42,471 | $ | 325,371 | $ | 141,863 | $ | 36,334 | $ | 295,513 | $ | 85,661 | $ | 40,547 | $ | 285,056 | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 2001 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | 44,088 | $ | 198,351 | $ | 178,444 | $ | 27,808 | $ | 178,402 | $ | 54,256 | $ | 52,624 | $ | 121,510 | ||||||||||||||||||
| Asset Management Fees | 33,812 | — | 179,653 | 2,764 | 30,622 | — | — | 110,160 | ||||||||||||||||||||||||||
| Leasing Commissions | 4,990 | 27,538 | 36,364 | — | 259,687 | 125,112 | 49,328 | 337,495 | ||||||||||||||||||||||||||
| Totals | $ | 82,890 | $ | 225,889 | $ | 394,461 | $ | 30,572 | $ | 468,711 | $ | 179,368 | $ | 101,952 | $ | 569,165 | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 2002 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | 34,200 | $ | 190,598 | $ | 180,613 | $ | 31,265 | $ | 148,806 | $ | 278,119 | $ | — | $ | 8,708 | ||||||||||||||||||
| Asset Management Fees | (1,218 | ) | — | 128,500 | 5,894 | — | — | — | 104,346 | |||||||||||||||||||||||||
| Leasing Commissions | — | 27,721 | — | — | 57,979 | — | — | 45,682 | ||||||||||||||||||||||||||
| Totals | $ | 32,982 | $ | 218,319 | $ | 309,113 | $ | 37,159 | $ | 206,785 | $ | 278,119 | $ | — | $ | 158,736 | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 2003 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | 38,625 | $ | 71,318 | $ | 11,940 | $ | 78,350 | $ | 34,098 | $ | — | $ | — | ||||||||||||||||||
| Asset Management Fees | — | — | — | 14,340 | 518,008 | 59,126 | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | — | 22,402 | 7,530 | — | 35,106 | 91,873 | — | 35,106 | ||||||||||||||||||||||||||
| Totals | $ | — | $ | 61,027 | $ | 78,848 | $ | 26,280 | $ | 631,464 | $ | 185,097 | $ | — | $ | 35,106 | ||||||||||||||||||
A-10
Table of Contents
TABLE II
| NNN | NNN | NNN | NNN | Kiwi | NNN | NNN | ||||||||||||||||||||||||||||
| Exchange | Tech Fund, | Horizon | Westway, | Associates, | 2000 Value | Rocky Mountain | ||||||||||||||||||||||||||||
| Fund III, LLC | LLC | T REIT, Inc. | Fund LLC | LLC | LLC | Fund, LLC | Exchange, LLC | |||||||||||||||||||||||||||
| Date Offering Commenced | 15-Sep-99 | 21-Feb-00 | 22-Feb-00 | 30-Mar-00 | 26-Apr-00 | 9-Jun-00 | 15-Jul-00 | 25-Jul-00 | ||||||||||||||||||||||||||
| Dollar Amount Raised to Sponsor From Proceeds of Offering | $ | 6,300,000 | $ | 3,698,750 | $ | 46,395,000 | $ | 3,573,000 | $ | 3,278,250 | $ | 2,681,352 | $ | 5,899,000 | $ | 2,670,000 | ||||||||||||||||||
| Amounts Paid to Sponsor from Proceeds of Offering: | ||||||||||||||||||||||||||||||||||
| Selling Commissions to Selling Group Members | $ | 630,000 | $ | 295,900 | $ | 2,065,056 | $ | 303,705 | $ | 262,260 | $ | 214,508 | $ | 560,405 | $ | 226,950 | ||||||||||||||||||
| Marketing Support & Due Diligence Reimbursement | — | 73,975 | 1,567,000 | 71,460 | 65,565 | 53,627 | — | 53,400 | ||||||||||||||||||||||||||
| Organization & Marketing Expenses | 220,500 | 129,456 | 620,000 | 35,730 | 114,739 | 93,847 | 235,960 | 106,800 | ||||||||||||||||||||||||||
| Due Diligence Allowance | 31,500 | 18,494 | — | — | 16,391 | 13,407 | 29,495 | — | ||||||||||||||||||||||||||
| Acquisition Fees | 283,500 | 166,444 | — | — | 147,521 | 120,661 | 265,455 | 120,150 | ||||||||||||||||||||||||||
| Totals | $ | 1,165,500 | $ | 684,269 | $ | 4,252,056 | $ | 410,895 | $ | 606,476 | $ | 496,050 | $ | 1,091,315 | $ | 507,300 | ||||||||||||||||||
| Dollar Amount of Cash Generated from Operations Before Deducting Payments to Sponsor | $ | 2,107,556 | $ | 2,087,720 | $ | 4,037,101 | $ | 9,854 | $ | 1,477,496 | $ | 497,429 | $ | 1,258,934 | $ | 1,381,677 | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 1998 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Totals | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 1999 | $ | — | $ | — | ||||||||||||||||||||||||||||||
| Property Management Fees | $ | 8,701 | $ | — | $ | — | $ | — | $ | — | $ | — | — | — | ||||||||||||||||||||
| Asset Management Fees | 10,983 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Totals | $ | 19,684 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 2000 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | 61,999 | $ | 49,820 | $ | — | $ | — | $ | 7,296 | $ | 12,602 | $ | — | $ | — | ||||||||||||||||||
| Asset Management Fees | 178,313 | 7,250 | — | — | 20,794 | 26,121 | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | 20,748 | 8,459 | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Totals | $ | 261,060 | $ | 65,529 | $ | — | $ | — | $ | 28,090 | $ | 38,723 | $ | — | $ | — | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 2001 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | 71,108 | $ | 106,000 | $ | — | $ | 28,184 | $ | 43,828 | $ | 63,600 | $ | 65,625 | ||||||||||||||||||
| Asset Management Fees | — | 6,643 | — | — | 110,248 | 30,750 | — | 21,073 | ||||||||||||||||||||||||||
| Leasing Commissions | 13,390 | 99,110 | 68,427 | — | 10,115 | 12,876 | 121,481 | — | ||||||||||||||||||||||||||
| Totals | $ | 13,390 | $ | 176,861 | $ | 174,427 | $ | — | $ | 148,547 | $ | 87,454 | $ | 185,081 | $ | 86,698 | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 2002 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | — | $ | 225,000 | $ | — | $ | 34,726 | $ | 79,956 | $ | 38,290 | $ | 66,964 | ||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | 9,098 | ||||||||||||||||||||||||||
| Leasing Commissions | 21,699 | — | 17,896 | — | — | 45,452 | 2,738 | — | ||||||||||||||||||||||||||
| Totals | $ | 21,699 | $ | — | $ | 242,896 | $ | — | $ | 34,726 | $ | 125,408 | $ | 41,028 | $ | 76,062 | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 2003 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | 95,000 | $ | 274,737 | $ | — | $ | 21,707 | $ | 14,951 | $ | 7,465 | $ | 30,991 | ||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | 125,000 | — | 19,132 | ||||||||||||||||||||||||||
| Leasing Commissions | 6,294 | — | 41,700 | — | — | 5,116 | — | 3,842 | ||||||||||||||||||||||||||
| Totals | $ | 6,294 | $ | 95,000 | $ | 316,437 | $ | — | $ | 21,707 | $ | 145,067 | $ | 7,465 | $ | 53,965 | ||||||||||||||||||
A-11
Table of Contents
TABLE II
| NNN | NNN | NNN | NNN | NNN | NNN | NNN | ||||||||||||||||||||||||||||
| 2004 Notes | Market | 2005 Notes | Sacramento | Dry Creek | Camelot | 2001 Value | Washington | |||||||||||||||||||||||||||
| Program, LLC | Center, LLC | Program, LLC | Corp Ctr, LLC | Centre, LLC | Plaza, LLC | Fund, LLC | Square, LLC | |||||||||||||||||||||||||||
| Date Offering Commenced | 29-Aug-00 | 1-Sep-00 | 15-Sep-00 | 8-Nov-00 | 15-Nov-00 | 30-Mar-01 | 12-Mar-01 | 1-May-01 | ||||||||||||||||||||||||||
| Dollar Amount Raised to Sponsor From Proceeds of Offering | $ | 5,000,000 | $ | 1,000,000 | $ | 2,300,000 | $ | 12,000,000 | $ | 3,500,000 | $ | 2,400,000 | $ | 10,992,321 | $ | 3,000,000 | ||||||||||||||||||
| Amounts Paid to Sponsor from Proceeds of Offering: | ||||||||||||||||||||||||||||||||||
| Selling Commissions to Selling Group Members | $ | 400,000 | $ | 80,000 | $ | 184,000 | $ | 960,000 | $ | 280,000 | $ | 192,000 | $ | 879,386 | $ | 240,000 | ||||||||||||||||||
| Marketing Support & Due Diligence Reimbursement | 75,000 | 15,000 | 34,500 | 180,000 | 52,500 | 60,000 | 274,808 | 75,000 | ||||||||||||||||||||||||||
| Organization & Marketing Expenses | 75,000 | 15,000 | 34,500 | 480,000 | 122,500 | 120,000 | 384,731 | 120,000 | ||||||||||||||||||||||||||
| Due Diligence Allowance | — | 5,000 | — | 60,000 | — | — | — | — | ||||||||||||||||||||||||||
| Acquisition Fees | — | — | — | 540,000 | — | — | 549,616 | — | ||||||||||||||||||||||||||
| Totals | $ | 550,000 | $ | 115,000 | $ | 253,000 | $ | 2,220,000 | $ | 455,000 | $ | 372,000 | $ | 2,088,541 | $ | 435,000 | ||||||||||||||||||
| Dollar Amount of Cash Generated from Operations Before Deducting Payments to Sponsor | $ | (319,512 | ) | $ | (25,938 | ) | $ | 54,717 | $ | 3,972,883 | $ | 1,605,378 | $ | 787,180 | $ | 1,093,980 | $ | 588,556 | ||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 1998 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Totals | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 1999 | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||||||||
| Property Management Fees | — | — | — | — | — | $ | — | $ | — | $ | — | |||||||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Totals | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 2000 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | 7,938 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Totals | $ | — | $ | 7,938 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 2001 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | — | $ | — | $ | 187,429 | $ | 67,306 | $ | 15,643 | $ | 17,505 | $ | — | ||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | — | 30,398 | — | 35,067 | — | — | — | — | ||||||||||||||||||||||||||
| Totals | $ | — | $ | 30,398 | $ | — | $ | 222,496 | $ | 67,306 | $ | 15,643 | $ | 17,505 | $ | — | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 2002 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | — | $ | — | $ | 167,796 | $ | 111,245 | $ | 49,822 | $ | 164,560 | $ | 49,797 | ||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | — | — | — | — | — | — | 11,829 | — | ||||||||||||||||||||||||||
| Totals | $ | — | $ | — | $ | — | $ | 167,796 | $ | 111,245 | $ | 49,822 | $ | 176,389 | $ | 49,797 | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 2003 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | — | $ | — | $ | 196,587 | $ | 50,387 | $ | 24,639 | $ | 39,281 | $ | 24,181 | ||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | — | — | — | — | — | — | 28,547 | 1,553 | ||||||||||||||||||||||||||
| Totals | $ | — | $ | — | $ | — | $ | 196,587 | $ | 50,387 | $ | 24,639 | $ | 67,828 | $ | 25,734 | ||||||||||||||||||
A-12
Table of Contents
TABLE II
| NNN | NNN | NNN | NNN LV | NNN | NNN | NNN | NNN | |||||||||||||||||||||||||||
| Reno | One Gateway | Gateway | 1900 Aerojet | Timberhills | Addison Com | County Center | Arapahoe Svc. | |||||||||||||||||||||||||||
| Trademark, LLC | Plaza, LLC | Aurora, LLC | Way, LLC | Shop Ctr, LLC | Center, LLC | Drive, LLC | Center, LLC | |||||||||||||||||||||||||||
| Date Offering Commenced | 30-May-01 | 8-Jun-01 | 10-Jul-01 | 26-Jul-01 | 31-Jul-01 | 16-Aug-01 | 18-Sep-01 | 11-Feb-02 | ||||||||||||||||||||||||||
| Dollar Amount Raised to Sponsor From Proceeds of Offering | $ | 3,850,000 | $ | 4,197,500 | $ | 1,054,000 | $ | 2,000,000 | $ | 3,695,375 | $ | 3,650,000 | $ | 3,093,750 | $ | 4,000,000 | ||||||||||||||||||
| Amounts Paid to Sponsor from Proceeds of Offering: | ||||||||||||||||||||||||||||||||||
| Selling Commissions to Selling Group Members | $ | 327,250 | $ | 335,800 | $ | 84,320 | $ | 150,000 | $ | 295,630 | $ | 292,000 | $ | 247,500 | $ | 320,000 | ||||||||||||||||||
| Marketing Support & Due Diligence Reimbursement | 77,000 | 62,963 | 15,810 | 40,000 | 92,384 | 91,250 | 77,344 | 100,000 | ||||||||||||||||||||||||||
| Organization & Marketing Expenses | 154,000 | 167,900 | 31,620 | 60,000 | 147,815 | 146,000 | 123,750 | 160,000 | ||||||||||||||||||||||||||
| Due Diligence Allowance | — | 41,975 | 10,540 | — | — | — | — | — | ||||||||||||||||||||||||||
| Acquisition Fees | — | 167,900 | — | — | — | — | — | 100,000 | ||||||||||||||||||||||||||
| Totals | $ | 558,250 | $ | 776,538 | $ | 142,290 | $ | 250,000 | $ | 535,829 | $ | 529,250 | $ | 448,594 | $ | 680,000 | ||||||||||||||||||
| Dollar Amount of Cash Generated from Operations Before Deducting Payments to Sponsor | $ | 777,986 | $ | 1,636,880 | $ | 753,994 | $ | 427,593 | $ | 818,397 | $ | 728,198 | $ | 513,832 | $ | 787,613 | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 1998 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Totals | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 1999 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Totals | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 2000 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Totals | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 2001 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | 11,531 | $ | 20,152 | $ | 48,987 | $ | 7,443 | $ | — | $ | 1,379 | $ | 5,239 | $ | — | ||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | — | — | 20,040 | — | 4,150 | — | — | — | ||||||||||||||||||||||||||
| Totals | $ | 11,531 | $ | 20,152 | $ | 69,027 | $ | 7,443 | $ | 4,150 | $ | 1,379 | $ | 5,239 | $ | — | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 2002 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | 68,100 | $ | 53,156 | $ | 27,211 | $ | 32,935 | $ | 81,230 | $ | 1,746 | $ | 40,777 | ||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | — | 20,736 | 15,410 | — | — | — | — | — | ||||||||||||||||||||||||||
| Totals | $ | — | $ | 88,836 | $ | 68,566 | $ | 27,211 | $ | 32,935 | $ | 81,230 | $ | 1,746 | $ | 40,777 | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 2003 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | 4,105 | $ | 27,757 | $ | 20,320 | $ | 11,812 | $ | 18,902 | $ | 33,749 | $ | 3,709 | $ | 28,917 | ||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | — | 3,170 | 14,327 | — | 1,852 | — | — | — | ||||||||||||||||||||||||||
| Totals | $ | 4,105 | $ | 30,927 | $ | 34,647 | $ | 11,812 | $ | 20,754 | $ | 33,749 | $ | 3,709 | $ | 28,917 | ||||||||||||||||||
A-13
Table of Contents
TABLE II
COMPENSATION TO SPONSOR (UNAUDITED) — (Continued)
| NNN | VC/RE | NNN | NNN | NNN | NNN | NNN | NNN | |||||||||||||||||||||||||||
| Titan Bldg. & | Balanced Fund II, | City Center | Union | City Center | Pacific Corporate | North Reno | Brookhollow | |||||||||||||||||||||||||||
| Plaza, LLC | LLC | West ‘B’, LLC | Square, LLC | West ‘A’, LLC | Park 1, LLC | LLC | LLC | |||||||||||||||||||||||||||
| Date Offering Commenced | 18-Feb-02 | 1-Nov-01 | 31-Oct-01 | 28-Jan-02 | 12-Feb-02 | 11-Mar-02 | 31-Mar-02 | 12-Apr-02 | ||||||||||||||||||||||||||
| Dollar Amount Raised to Sponsor From Proceeds of Offering | $ | 2,219,808 | $ | — | $ | 8,200,000 | $ | 578,000 | $ | 1,237,803 | $ | 5,800,000 | $ | 2,750,000 | $ | 6,550,000 | ||||||||||||||||||
| Amounts Paid to Sponsor from Proceeds of Offering: | ||||||||||||||||||||||||||||||||||
| Selling Commissions to Selling Group Members | $ | 177,585 | $ | — | $ | 656,000 | $ | 46,240 | $ | 99,024 | $ | — | $ | 220,000 | $ | 524,000 | ||||||||||||||||||
| Marketing Support & Due Diligence Reimbursement | 55,495 | — | 205,000 | 15,606 | 30,945 | 58,000 | 68,750 | 163,750 | ||||||||||||||||||||||||||
| Organization & Marketing Expenses | 66,594 | — | 328,000 | 10,404 | 49,512 | 58,000 | 110,000 | 262,000 | ||||||||||||||||||||||||||
| Due Diligence Allowance | 42,176 | — | 328,000 | 11,560 | — | 145,000 | — | — | ||||||||||||||||||||||||||
| Acquisition Fees | 88,792 | — | — | — | 49,512 | — | 85,250 | 229,250 | ||||||||||||||||||||||||||
| Totals | $ | 430,642 | $ | — | $ | 1,517,000 | $ | 83,810 | $ | 228,994 | $ | 261,000 | $ | 484,000 | $ | 1,179,000 | ||||||||||||||||||
| Dollar Amount of Cash Generated from Operations Before Deducting Payments to Sponsor | $ | 785,103 | $ | — | $ | 1,782,000 | $ | 146,808 | $ | 1,612,396 | $ | 646,280 | $ | 374,736 | $ | 1,205,898 | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 1998 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Totals | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 1999 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Totals | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 2000 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Totals | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 2001 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Totals | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 2002 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | 86,102 | $ | — | $ | 9,460 | $ | 19,164 | $ | 110,202 | $ | 106,644 | $ | 30,780 | $ | 71,181 | ||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | 3,833 | — | — | — | 6,722 | — | — | — | ||||||||||||||||||||||||||
| Totals | $ | 89,935 | $ | — | $ | 9,460 | $ | 19,164 | $ | 116,924 | $ | 106,644 | $ | 30,780 | $ | 71,181 | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 2003 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | 39,817 | $ | — | $ | 35,000 | $ | 4,025 | $ | 89,973 | $ | 19,868 | $ | 26,275 | $ | 62,191 | ||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | 1,344 | — | — | — | 8,781 | 11,882 | — | 618 | ||||||||||||||||||||||||||
| Totals | $ | 41,161 | $ | — | $ | 35,000 | $ | 4,025 | $ | 98,754 | $ | 31,750 | $ | 26,275 | $ | 62,809 | ||||||||||||||||||
A-14
Table of Contents
TABLE II
| NNN | NNN | NNN | NNN | NNN | NNN | NNN | NNN | |||||||||||||||||||||||||||
| 2002 Value | 1397 Galleria | Bryant Ranch, | 4241 Bowling | Wolf Pen | Alamosa Plaza, | Saddleback, | Kahana | |||||||||||||||||||||||||||
| Fund, LLC | Drive, LLC | LLC | Green, LLC | Plaza, LLC | LLC | LLC | Gateway, LLC | |||||||||||||||||||||||||||
| Date Offering Commenced | 15-May-02 | 24-May-02 | 10-Jun-02 | 14-Jun-02 | 1-Jul-02 | 18-Jul-02 | 30-Aug-02 | 9-Oct-02 | ||||||||||||||||||||||||||
| Dollar Amount Raised to Sponsor From Proceeds of Offering | $ | 29,799,260 | $ | 1,950,000 | $ | 5,000,000 | $ | 2,850,000 | $ | 5,500,000 | $ | 6,650,000 | $ | 3,865,800 | $ | 8,140,000 | ||||||||||||||||||
| Amounts Paid to Sponsor from Proceeds of Offering: | ||||||||||||||||||||||||||||||||||
| Selling Commissions to Selling Group Members | $ | 2,383,941 | $ | 156,000 | $ | 400,000 | $ | 228,000 | $ | 440,000 | $ | 532,000 | $ | 309,264 | $ | 651,200 | ||||||||||||||||||
| Marketing Support & Due Diligence Reimbursement | 744,982 | 48,750 | 125,000 | 71,250 | 137,500 | 166,250 | 96,645 | 203,500 | ||||||||||||||||||||||||||
| Organization & Marketing Expenses | 744,982 | 78,000 | 200,000 | 114,000 | 220,000 | 266,000 | 154,632 | 325,600 | ||||||||||||||||||||||||||
| Due Diligence Allowance | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Acquisition Fees | 1,638,959 | 48,750 | 125,000 | 71,250 | 165,000 | 166,250 | 96,645 | 162,800 | ||||||||||||||||||||||||||
| Totals | $ | 5,512,864 | $ | 331,500 | $ | 850,000 | $ | 484,500 | $ | 962,500 | $ | 1,130,500 | $ | 657,186 | $ | 1,343,100 | ||||||||||||||||||
| �� | ||||||||||||||||||||||||||||||||||
| Dollar Amount of Cash Generated from Operations Before Deducting Payments to Sponsor | $ | 1,171,916 | $ | 163,128 | $ | 483,390 | $ | 267,467 | $ | 640,927 | $ | 583,155 | $ | 490,398 | $ | 541,093 | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 1998 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Totals | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 1999 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Totals | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 2000 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Totals | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 2001 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Totals | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 2002 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | 9,495 | $ | 5,291 | $ | 10,807 | $ | 5,340 | $ | 28,718 | $ | 17,114 | $ | 20,571 | $ | — | ||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | — | — | — | — | — | — | 1,636 | — | ||||||||||||||||||||||||||
| Totals | $ | 9,495 | $ | 5,291 | $ | 10,807 | $ | 5,340 | $ | 28,718 | $ | 17,114 | $ | 22,207 | $ | — | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 2003 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | 113,845 | $ | 12,228 | $ | 22,570 | $ | 23,900 | $ | 50,962 | $ | 40,783 | $ | 15,149 | $ | 913 | ||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | — | — | 7,339 | — | 1,630 | — | 4,082 | — | ||||||||||||||||||||||||||
| Totals | $ | 113,845 | $ | 12,228 | $ | 29,909 | $ | 23,900 | $ | 52,592 | $ | 40,783 | $ | 19,231 | $ | 913 | ||||||||||||||||||
A-15
Table of Contents
TABLE II
| NNN | NNN | NNN | ||||||||||||||||||||||||||||||||
| NNN | NNN | NNN | Parkwood | 2006 Notes | NNN | Beltline/ | ||||||||||||||||||||||||||||
| Springtown Mall | Congress | Park Sahara, | Complex | G REIT, | Program, | Buschwood, | Royal Ridge, | |||||||||||||||||||||||||||
| Investors, LLC | Center LLC | LLC | LLC | Inc. | LLC | LLC | LLC | |||||||||||||||||||||||||||
| Date Offering Commenced | 10-Oct-02 | 15-Oct-02 | 25-Oct-02 | 28-Oct-02 | 22-Jul-02 | 1-Aug-02 | 20-Dec-02 | 8-Nov-02 | ||||||||||||||||||||||||||
| Dollar Amount Raised to Sponsor From Proceeds of Offering | $ | 2,550,000 | $ | 39,067,812 | $ | 4,953,000 | $ | 7,472,000 | $ | 71,777,833 | $ | 1,044,881 | $ | 3,200,000 | $ | 4,490,500 | ||||||||||||||||||
| Amounts Paid to Sponsor from Proceeds of Offering: | ||||||||||||||||||||||||||||||||||
| Selling Commissions to Selling Group Members | $ | 204,000 | $ | 3,125,425 | $ | 396,240 | $ | 597,760 | $ | 5,882,810 | $ | 67,917 | $ | 256,000 | $ | 359,240 | ||||||||||||||||||
| Marketing Support & Due Diligence Reimbursement | 63,750 | 976,695 | 123,825 | 186,800 | 1,917,082 | 10,449 | 80,000 | 112,263 | ||||||||||||||||||||||||||
| Organization & Marketing Expenses | 102,000 | 1,562,712 | 198,120 | 298,880 | — | 5,224 | 128,000 | 179,620 | ||||||||||||||||||||||||||
| Due Diligence Allowance | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Acquisition Fees | 63,750 | 859,492 | 123,825 | 186,800 | — | — | 96,000 | 112,263 | ||||||||||||||||||||||||||
| Totals | $ | 433,500 | $ | 6,524,325 | $ | 842,010 | $ | 1,270,240 | $ | 7,799,892 | $ | 83,591 | $ | 560,000 | $ | 763,385 | ||||||||||||||||||
| Dollar Amount of Cash Generated from Operations Before Deducting Payments to Sponsor | $ | 322,462 | $ | 1,510,400 | $ | 300,116 | $ | 990,794 | $ | 1,279,358 | $ | (2,501 | ) | $ | 151,292 | $ | 226,281 | |||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 1998 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Totals | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 1999 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Totals | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 2000 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Totals | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 2001 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Totals | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 2002 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Totals | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 2003 | ||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | 23,504 | $ | 145,250 | $ | 6,076 | $ | — | $ | 236,193 | $ | — | $ | 11,156 | $ | — | ||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Leasing Commissions | — | — | — | 471 | 5,964 | — | — | — | ||||||||||||||||||||||||||
| Totals | $ | 23,504 | $ | 145,250 | $ | 6,076 | $ | 471 | $ | 242,157 | $ | — | $ | 11,156 | $ | — | ||||||||||||||||||
A-16
Table of Contents
TABLE II
| NNN | ||||||||||||||||||||||||||||||||||||||
| NNN | NNN | NNN | NNN | Arapahoe | ||||||||||||||||||||||||||||||||||
| Parkway | NNN | NNN | Xerox | Jamboree | Jefferson | Bus. | NNN | Total | ||||||||||||||||||||||||||||||
| Towers, | Netpark, | 602 Sawyer, | Centre, | Promenade, | Square, | Park, | 901 Corporate, | All | ||||||||||||||||||||||||||||||
| LLC | LLC | LLC | LLC | LLC | LLC | LLC | LLC | Programs | ||||||||||||||||||||||||||||||
| Date Offering Commenced | 18-Nov-02 | 18-Mar-03 | 28-Mar-03 | 14-Feb-03 | 20-Jun-03 | 1-May-03 | 13-Jun-03 | 13-Jun-03 | ||||||||||||||||||||||||||||||
| Dollar Amount Raised to Sponsor From Proceeds of Offering | $ | 6,713,762 | $ | 23,492,250 | $ | 4,207,625 | $ | 20,468,500 | $ | — | $ | — | $ | — | $ | — | $ | 468,882,660 | ||||||||||||||||||||
| Amounts Paid to Sponsor from Proceeds of Offering: | ||||||||||||||||||||||||||||||||||||||
| Selling Commissions to Selling Group Members | $ | 537,101 | $ | 1,879,380 | $ | 336,610 | $ | 1,637,480 | $ | — | $ | — | $ | — | $ | — | $ | 36,461,420 | ||||||||||||||||||||
| Marketing Support & Due Diligence Reimbursement | 167,844 | 587,306 | 105,191 | 511,713 | — | — | — | — | 10,242,925 | |||||||||||||||||||||||||||||
| Organization & Marketing Expenses | 268,550 | 939,690 | 168,305 | 818,740 | — | — | — | — | 13,284,618 | |||||||||||||||||||||||||||||
| Due Diligence Allowance | — | 1,386,043 | — | — | — | — | — | — | 2,396,409 | |||||||||||||||||||||||||||||
| Acquisition Fees | 167,844 | 657,783 | 96,775 | 204,685 | — | — | — | — | 9,401,126 | |||||||||||||||||||||||||||||
| Totals | $ | 1,141,340 | $ | 5,450,202 | $ | 706,881 | $ | 3,172,618 | $ | — | $ | — | $ | — | $ | — | $ | 71,786,498 | ||||||||||||||||||||
| Dollar Amount of Cash Generated from Operations Before Deducting Payments to Sponsor | $ | 175,979 | $ | 98,084 | $ | — | $ | 272,786 | $ | — | $ | — | $ | — | $ | — | $ | 69,011,560 | ||||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 1998 | ||||||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 62,999 | ||||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | 48,263 | |||||||||||||||||||||||||||||
| Leasing Commissions | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Totals | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 111,262 | ||||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 1999 | ||||||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 564,738 | ||||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | 519,667 | |||||||||||||||||||||||||||||
| Leasing Commissions | — | — | — | — | — | — | — | — | 361,089 | |||||||||||||||||||||||||||||
| Totals | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1,445,494 | ||||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 2000 | ||||||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 769,144 | ||||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | 712,823 | |||||||||||||||||||||||||||||
| Leasing Commissions | — | — | — | — | — | — | — | — | 172,189 | |||||||||||||||||||||||||||||
| Totals | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1,654,156 | ||||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 2001 | ||||||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 1,616,442 | ||||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | 525,725 | |||||||||||||||||||||||||||||
| Leasing Commissions | — | — | — | — | — | — | — | — | 1,255,568 | |||||||||||||||||||||||||||||
| Totals | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 3,397,735 | ||||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 2002 | ||||||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 2,696,489 | ||||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | 246,620 | |||||||||||||||||||||||||||||
| Leasing Commissions | — | — | — | — | — | — | — | — | 276,333 | |||||||||||||||||||||||||||||
| Totals | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 3,219,442 | ||||||||||||||||||||
| Amounts Paid to Sponsor from Operations — Year 2003 | ||||||||||||||||||||||||||||||||||||||
| Property Management Fees | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 2,143,206 | ||||||||||||||||||||
| Asset Management Fees | — | — | — | — | — | — | — | — | 735,606 | |||||||||||||||||||||||||||||
| Leasing Commissions | — | — | — | — | — | — | — | — | 340,529 | |||||||||||||||||||||||||||||
| Totals | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 3,219,341 | ||||||||||||||||||||
A-17
Table of Contents
TABLE III
| Truckee | ||||||||||||||||||
| Telluride | WREIT, | River Office | Total | |||||||||||||||
| Barstow, LLC | Inc. | Tower, LLC | All Programs | |||||||||||||||
| Gross Revenues | $ | 497,240 | $ | 594,158 | $ | 195,692 | $ | 1,287,090 | ||||||||||
| Profit on Sale of Properties | — | — | — | — | ||||||||||||||
| Less: Operating Expenses | 209,494 | 258,680 | 42,840 | 511,014 | ||||||||||||||
| Interest Expense | 177,908 | 208,078 | 88,346 | 474,332 | ||||||||||||||
| Depreciation & Amortization | 47,183 | 77,537 | 15,417 | 140,137 | ||||||||||||||
| Net Income — GAAP Basis | 62,655 | 49,863 | 49,089 | 161,607 | ||||||||||||||
| Taxable Income From: | ||||||||||||||||||
| Operations | 62,655 | 49,863 | 49,089 | 161,607 | ||||||||||||||
| Gain on Sale | — | — | — | — | ||||||||||||||
| Cash Generated From: | ||||||||||||||||||
| Operations | 109,838 | 127,400 | 64,506 | 301,744 | ||||||||||||||
| Sales | — | — | — | — | ||||||||||||||
| Refinancing | — | — | — | — | ||||||||||||||
| Cash Generated From Operations, Sales & Refinancing | 109,838 | 127,400 | 64,506 | 301,744 | ||||||||||||||
| Less: Cash Distributions to Investors From: | ||||||||||||||||||
| Operating Cash Flow | 77,052 | 89,971 | — | 167,023 | ||||||||||||||
| Sales & Refinancing | — | — | — | — | ||||||||||||||
| Other | — | — | — | — | ||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions | 32,786 | 37,429 | 64,506 | 134,721 | ||||||||||||||
| Less: Special Items (not including Sales & Refinancing) | — | — | — | — | ||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions and Special Items | $ | 32,786 | $ | 37,429 | $ | 64,506 | $ | 134,721 | ||||||||||
Tax and Distribution Data Per $1,000 Invested | ||||||||||||||||||
| Federal Income Tax Results: | ||||||||||||||||||
| Ordinary Income (Loss) | ||||||||||||||||||
| — from operations | $ | 38.68 | $ | 14.64 | $ | 8.84 | ||||||||||||
| — from recapture | — | — | — | |||||||||||||||
| Capital Gain (Loss) | — | — | — | |||||||||||||||
| Cash Distributions to Investors | ||||||||||||||||||
| Sources (on GAAP basis) | — | — | — | |||||||||||||||
| — Investment Income | — | — | — | |||||||||||||||
| — Return of Capital | — | — | — | |||||||||||||||
| Sources (on Cash basis) | ||||||||||||||||||
| — Sales | — | — | — | |||||||||||||||
| — Refinancing | — | — | — | |||||||||||||||
| — Operations | $ | 47.56 | $ | 26.42 | $ | 16.21 | ||||||||||||
A-18
Table of Contents
TABLE III
| Truckee | ||||||||||||||||||||||||||||||||||||||||||
| River | Yerington | NNN | NNN | NNN | NNN | NNN | ||||||||||||||||||||||||||||||||||||
| Telluride | Office | Shopping | Fund | Town & | ‘A’ Credit | Redevelopment | Exchange | Total | ||||||||||||||||||||||||||||||||||
| Barstow, | WREIT, | Tower, | Center, | VIII, | Country, | TIC, | Fund, | Fund III, | All | |||||||||||||||||||||||||||||||||
| LLC | Inc. | LLC | LLC | LLC | LLC | LLC | LLC | LLC | Programs | |||||||||||||||||||||||||||||||||
| Gross Revenues | $ | 721,168 | $ | 4,726,712 | $ | 2,598,280 | $ | 393,367 | $ | 1,821,793 | $ | 1,727,435 | $ | 157,783 | $ | 2,149,377 | $ | 119,731 | $ | 14,415,646 | ||||||||||||||||||||||
| Profit on Sale of Properties | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
| Less: Operating Expenses | 366,116 | 1,904,986 | 999,301 | 90,371 | 896,924 | 404,167 | 51,239 | 46,345 | 14,938 | 4,774,387 | ||||||||||||||||||||||||||||||||
| Interest Expense | 244,781 | 2,305,776 | 924,827 | 188,529 | 504,872 | 924,805 | 34,049 | 14,644 | 48,819 | 5,191,102 | ||||||||||||||||||||||||||||||||
| Depreciation & Amortization | 97,330 | 707,842 | 366,688 | 67,598 | 227,102 | 284,211 | 17,127 | 21,056 | — | 1,788,954 | ||||||||||||||||||||||||||||||||
| Net Income — GAAP Basis | $ | 12,941 | $ | (191,892 | ) | $ | 307,464 | $ | 46,869 | $ | 192,895 | $ | 114,252 | $ | 55,368 | $ | 2,067,332 | $ | 55,974 | $ | 2,661,203 | |||||||||||||||||||||
| Taxable Income From: | ||||||||||||||||||||||||||||||||||||||||||
| Operations | $ | 12,941 | $ | (191,892 | ) | $ | 307,464 | $ | 46,869 | $ | 192,895 | $ | 114,252 | $ | 55,368 | $ | 2,067,332 | $ | 55,974 | $ | 2,661,203 | |||||||||||||||||||||
| Gain on Sale | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
| Cash Generated From: | ||||||||||||||||||||||||||||||||||||||||||
| Operations | 110,271 | 515,950 | 674,152 | 114,467 | 419,997 | 398,463 | 72,495 | 2,088,388 | 55,974 | 4,450,157 | ||||||||||||||||||||||||||||||||
| Sales | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
| Refinancing | — | 526,326 | — | — | — | — | — | — | — | 526,326 | ||||||||||||||||||||||||||||||||
| Cash Generated From Operations, Sales & Refinancing | 110,271 | 1,042,276 | 674,152 | 114,467 | 419,997 | 398,463 | 72,495 | 2,088,388 | 55,974 | 4,976,483 | ||||||||||||||||||||||||||||||||
| Less: Cash Distributions to Investors From: | ||||||||||||||||||||||||||||||||||||||||||
| Operating Cash Flow | 110,271 | 515,950 | 477,187 | 110,232 | 210,592 | 173,253 | 8,927 | 286 | — | 1,606,698 | ||||||||||||||||||||||||||||||||
| Sales & Refinancing | — | 93,660 | — | — | — | — | — | — | — | 93,660 | ||||||||||||||||||||||||||||||||
| Other | 68,879 | — | — | — | — | — | — | — | — | 68,879 | ||||||||||||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions | (68,879 | ) | 432,666 | 196,965 | 4,235 | 209,405 | 225,210 | 63,568 | 2,088,102 | 55,974 | 3,207,246 | |||||||||||||||||||||||||||||||
| Less: Special Items (not including Sales & Refinancing) | — | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions and Special Items* | $ | (68,879 | ) | $ | 432,666 | $ | 196,965 | $ | 4,235 | $ | 209,405 | $ | 225,210 | $ | 63,568 | $ | 2,088,102 | $ | 55,974 | $ | 3,207,246 | |||||||||||||||||||||
Tax and Distribution Data Per $1,000 Invested | ||||||||||||||||||||||||||||||||||||||||||
| Federal Income Tax Results: | ||||||||||||||||||||||||||||||||||||||||||
| Ordinary Income (Loss) | ||||||||||||||||||||||||||||||||||||||||||
| — from operations | $ | 7.99 | $ | (23.34 | ) | $ | 55.40 | $ | 29.31 | $ | 24.40 | $ | 16.15 | $ | 32.40 | $ | 586.85 | $ | 13.44 | |||||||||||||||||||||||
| — from recapture | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
| Capital Gain (Loss) | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
| Cash Distributions to Investors | ||||||||||||||||||||||||||||||||||||||||||
| Sources (on GAAP basis) | ||||||||||||||||||||||||||||||||||||||||||
| — Investment Income | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
| — Return of Capital | 42.52 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
| Sources (on Cash basis) | ||||||||||||||||||||||||||||||||||||||||||
| — Sales | — | 11.39 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
| — Refinancing | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
| — Operations | $ | 68.07 | $ | 62.76 | $ | 85.98 | $ | 68.94 | $ | 26.64 | $ | 24.49 | $ | 5.22 | $ | 0.08 | $ | — | ||||||||||||||||||||||||
| * | The cash deficiency results from distributions in excess of operating cash flow for this year, which represents a partial return of capital. |
A-19
Table of Contents
TABLE III
| Truckee | Yerington | NNN | NNN | |||||||||||||||||||||||
| Telluride | WREIT, | River Office | Shopping | Fund VIII, | Town & | |||||||||||||||||||||
| Barstow, LLC | Inc. | Tower, LLC | Center, LLC | LLC | Country, LLC | |||||||||||||||||||||
| Gross Revenues | $ | 803,386 | $ | 5,273,301 | $ | 2,464,508 | $ | 552,572 | $ | 3,676,500 | $ | 3,566,136 | ||||||||||||||
| Profit on Sale of Properties | — | 2,129,054 | — | — | — | — | ||||||||||||||||||||
| Less: Operating Expenses | 333,226 | 2,059,845 | 790,677 | 125,306 | 2,147,409 | 1,130,517 | ||||||||||||||||||||
| Interest Expense | 243,349 | 2,445,182 | 1,223,147 | 255,493 | 1,406,062 | 2,521,820 | ||||||||||||||||||||
| Depreciation & Amortization | 103,333 | 805,225 | 495,568 | 94,293 | 305,629 | 716,017 | ||||||||||||||||||||
| Net Income — GAAP Basis | 123,478 | 2,092,103 | (44,884 | ) | 77,480 | (182,600 | ) | (802,218 | ) | |||||||||||||||||
| Taxable Income From: | ||||||||||||||||||||||||||
| Operations | 123,478 | (36,913 | ) | (44,884 | ) | 77,480 | (182,600 | ) | (802,218 | ) | ||||||||||||||||
| Gain on Sale | — | 2,129,016 | — | — | — | — | ||||||||||||||||||||
| Cash Generated From: | ||||||||||||||||||||||||||
| Operations | 226,811 | 768,312 | 450,684 | 171,773 | 123,029 | (86,201 | ) | |||||||||||||||||||
| Sales | — | 2,129,016 | — | — | — | — | ||||||||||||||||||||
| Refinancing | — | — | — | — | — | — | ||||||||||||||||||||
| Cash Generated From Operations, Sales & Refinancing | 226,811 | 2,897,328 | 450,684 | 171,773 | 123,029 | (86,201 | ) | |||||||||||||||||||
| Less: Cash Distributions to Investors From: | ||||||||||||||||||||||||||
| Operating Cash Flow | 205,709 | 768,312 | 450,684 | 164,301 | 123,029 | — | ||||||||||||||||||||
| Sales & Refinancing | — | 2,129,016 | — | — | — | — | ||||||||||||||||||||
| Other | — | 2,998,223 | 64,839 | — | 348,894 | 512,827 | ||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions | 21,102 | (2,998,223 | ) | (64,839 | ) | 7,472 | (348,894 | ) | (599,028 | ) | ||||||||||||||||
| Less: Special Items (not including Sales & Refinancing) | — | — | — | — | — | — | ||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions and Special Items | $ | 21,102 | $ | (2,998,223 | )* | $ | (64,839 | )* | $ | 7,472 | $ | (348,894 | )* | $ | (599,028 | )* | ||||||||||
Tax and Distribution Data Per $1,000 Invested | ||||||||||||||||||||||||||
| Federal Income Tax Results: | ||||||||||||||||||||||||||
| Ordinary Income (Loss) | ||||||||||||||||||||||||||
| — from operations | $ | 76.22 | $ | 254.49 | $ | (8.09 | ) | $ | 48.45 | $ | (22.83 | ) | $ | (111.42 | ) | |||||||||||
| — from recapture | — | — | — | — | — | — | ||||||||||||||||||||
| Capital Gain (Loss) | — | 258.98 | — | — | — | — | ||||||||||||||||||||
| Cash Distributions to Investors | ||||||||||||||||||||||||||
| Sources (on GAAP basis) | ||||||||||||||||||||||||||
| — Investment Income | — | — | — | — | — | — | ||||||||||||||||||||
| — Return of Capital | — | 364.71 | 11.68 | — | 43.61 | 71.23 | ||||||||||||||||||||
| Sources (on Cash basis) | ||||||||||||||||||||||||||
| — Sales | — | 258.98 | — | — | — | — | ||||||||||||||||||||
| — Refinancing | — | — | — | — | — | — | ||||||||||||||||||||
| — Operations | $ | 126.98 | $ | 93.46 | $ | 81.20 | $ | 102.75 | $ | 15.38 | $ | — | ||||||||||||||
* The cash deficiency results from distributions in excess of operating cash flow for this year, which represents a partial return of capital.
A-20
Table of Contents
TABLE III
| NNN | NNN | NNN | NNN | |||||||||||||||||||||||||||
| ‘A’ Credit | Redevelopment | Exchange | NNN Tech | T REIT, | Horizon | NNN | ||||||||||||||||||||||||
| TIC, LLC | Fund, LLC | Fund III, LLC | Fund, LLC | Inc. | Fund, LLC | Westway, LLC | ||||||||||||||||||||||||
| Gross Revenues | $ | 926,128 | $ | 3,189,950 | $ | 2,462,661 | $ | 1,111,917 | $ | 298,621 | $ | 9,854 | $ | 565,153 | ||||||||||||||||
| Profit on Sale of Properties | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Less: Operating Expenses | 267,829 | 1,423,608 | 990,918 | 400,408 | 192,826 | — | 186,988 | |||||||||||||||||||||||
| Interest Expense | 445,545 | 1,287,181 | 959,575 | 383,370 | 168,205 | — | 215,018 | |||||||||||||||||||||||
| Depreciation & Amortization | 147,875 | 212,247 | 336,574 | 207,023 | 38,373 | — | 38,716 | |||||||||||||||||||||||
| Net Income — GAAP Basis | 64,879 | 266,914 | 175,594 | 121,116 | (100,783 | ) | 9,854 | 124,431 | ||||||||||||||||||||||
| Taxable Income From: | ||||||||||||||||||||||||||||||
| Operations | 64,879 | 266,914 | 175,594 | 121,116 | (76,705 | ) | 9,854 | 124,431 | ||||||||||||||||||||||
| Gain on Sale | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Cash Generated From: | — | — | — | — | ||||||||||||||||||||||||||
| Operations | 212,754 | 479,161 | 512,168 | 328,139 | 278,602 | 9,854 | 163,147 | |||||||||||||||||||||||
| Sales | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Refinancing | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Cash Generated From Operations, Sales & Refinancing | 212,754 | 479,161 | 512,168 | 328,139 | 278,602 | 9,854 | 163,147 | |||||||||||||||||||||||
| Less: Cash Distributions to Investors From: | ||||||||||||||||||||||||||||||
| Operating Cash Flow | 135,334 | 479,161 | 453,523 | 157,118 | 149,207 | 9,854 | 92,210 | |||||||||||||||||||||||
| Sales & Refinancing | — | — | — | — | — | — | ||||||||||||||||||||||||
| Other | — | 80,670 | — | — | — | 28,260 | — | |||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions | 77,420 | (80,670 | ) | 58,645 | 171,021 | 129,395 | (28,260 | ) | 70,937 | |||||||||||||||||||||
| Less: Special Items (not including Sales & Refinancing) | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions and Special Items | $ | 77,420 | $ | (80,670 | )* | $ | 58,645 | $ | 171,021 | $ | 129,395 | $ | (28,260 | )* | $ | 70,937 | ||||||||||||||
Tax and Distribution Data Per $1,000 Invested | ||||||||||||||||||||||||||||||
| Federal Income Tax Results: | ||||||||||||||||||||||||||||||
| Ordinary Income (Loss) | ||||||||||||||||||||||||||||||
| — from operations | $ | 26.16 | $ | 35.22 | $ | 27.87 | $ | 32.75 | $ | (15.34 | ) | $ | 2.76 | $ | 38.54 | |||||||||||||||
| — from recapture | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Capital Gain (Loss) | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Cash Distributions to Investors | ||||||||||||||||||||||||||||||
| Sources (on GAAP basis) | ||||||||||||||||||||||||||||||
| — Investment Income | — | — | — | — | — | — | — | |||||||||||||||||||||||
| — Return of Capital | — | 10.64 | — | — | 22.72 | 7.91 | — | |||||||||||||||||||||||
| Sources (on Cash basis) | ||||||||||||||||||||||||||||||
| — Sales | — | — | — | — | — | — | — | |||||||||||||||||||||||
| — Refinancing | — | — | — | — | — | — | — | |||||||||||||||||||||||
| — Operations | $ | 54.57 | $ | 63.22 | $ | 71.99 | $ | 42.48 | $ | — | $ | 2.76 | $ | 28.56 | ||||||||||||||||
* The cash deficiency results from distributions in excess of operating cash flow for this year, which represents a partial return of capital.
A-21
Table of Contents
TABLE III
| Kiwi | NNN | NNN | NNN | Market | NNN | |||||||||||||||||||||||||
| Assoc., | 2000 Value | Rocky Mount. | 2004 Notes | Center, | 2005 Notes | Total | ||||||||||||||||||||||||
| LLC | Fund, LLC | Exchange, LLC | Program, LLC | LLC | Program, LLC | All Programs | ||||||||||||||||||||||||
| Gross Revenues | $ | 475,950 | $ | 16,241 | $ | 109,173 | $ | 1,515 | $ | 214,991 | $ | 1,406 | $ | 25,719,963 | ||||||||||||||||
| Profit on Sale of Properties | — | — | — | — | — | 2,129,054 | ||||||||||||||||||||||||
| Less: Operating Expenses | 188,497 | 4,168 | 14,777 | — | 171,603 | — | 10,428,602 | |||||||||||||||||||||||
| Interest Expense | 219,788 | 53,583 | 13,431 | — | 21,454 | — | 11,862,203 | |||||||||||||||||||||||
| Depreciation & Amortization | 73,998 | 12,138 | 17,493 | — | 39,903 | — | 3,644,405 | |||||||||||||||||||||||
| Net Income — GAAP Basis | (6,333 | ) | (53,648 | ) | 63,472 | 1,515 | (17,969 | ) | 1,406 | 1,913,807 | ||||||||||||||||||||
| Taxable Income From: | ||||||||||||||||||||||||||||||
| Operations | (6,333 | ) | (53,648 | ) | 63,472 | 1,515 | (17,969 | ) | 1,406 | (191,131 | ) | |||||||||||||||||||
| Gain on Sale | — | — | — | — | — | — | 2,129,016 | |||||||||||||||||||||||
| Cash Generated From: | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Operations | 67,665 | (41,510 | ) | 80,965 | 1,515 | 21,934 | 1,406 | 3,770,208 | ||||||||||||||||||||||
| Sales | — | — | — | — | — | — | 2,129,016 | |||||||||||||||||||||||
| Refinancing | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Cash Generated From Operations, Sales & Refinancing | 67,665 | (41,510 | ) | 80,965 | 1,515 | 21,934 | 1,406 | 5,899,224 | ||||||||||||||||||||||
| Less: Cash Distributions to Investors From: | ||||||||||||||||||||||||||||||
| Operating Cash Flow | 67,665 | — | 17,266 | — | 13,467 | — | 3,286,840 | |||||||||||||||||||||||
| Sales & Refinancing | — | — | — | — | — | — | 2,129,016 | |||||||||||||||||||||||
| Other | 23,252 | 7,907 | — | 27,031 | — | 2,681 | 4,094,584 | |||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions | (23,252 | ) | (49,417 | ) | 63,699 | (25,516 | ) | 8,467 | (1,275 | ) | (3,611,215 | ) | ||||||||||||||||||
| Less: Special Items (not including Sales & Refinancing) | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions and Special Items | $ | (23,252 | )* | $ | (49,417 | )* | $ | 63,699 | $ | (25,516 | ) | $ | 8,467 | $ | (1,275 | ) | $ | (3,611,215 | ) | |||||||||||
Tax and Distribution Data Per $1,000 Invested | ||||||||||||||||||||||||||||||
| Federal Income Tax Results: | ||||||||||||||||||||||||||||||
| Ordinary Income (Loss) | ||||||||||||||||||||||||||||||
| — from operations | $ | (2.55 | ) | $ | (9.09 | ) | $ | 24.51 | $ | 1.42 | $ | (17.97 | ) | $ | 2.21 | |||||||||||||||
| — from recapture | — | — | — | — | — | — | ||||||||||||||||||||||||
| Capital Gain (Loss) | — | — | — | — | — | — | ||||||||||||||||||||||||
| Cash Distributions to Investors | ||||||||||||||||||||||||||||||
| Sources (on GAAP basis) | ||||||||||||||||||||||||||||||
| — Investment Income | — | — | — | — | — | — | ||||||||||||||||||||||||
| — Return of Capital | 9.37 | 1.34 | — | 25.40 | — | 4.22 | ||||||||||||||||||||||||
| Sources (on Cash basis) | ||||||||||||||||||||||||||||||
| — Sales | — | — | — | — | — | — | ||||||||||||||||||||||||
| — Refinancing | — | — | — | — | — | — | ||||||||||||||||||||||||
| — Operations | $ | 27.27 | $ | — | $ | 6.67 | $ | — | $ | 13.47 | $ | — | ||||||||||||||||||
* The cash deficiency results from distributions in excess of operating cash flow for this year, which represents a partial return of capital.
A-22
Table of Contents
TABLE III
| Truckee | ||||||||||||||||||||||||||||||||||
| Telluride | River Office | Yerington | NNN | NNN | NNN | NNN | ||||||||||||||||||||||||||||
| Barstow, | WREIT, | Tower, | Shopping | Fund VIII, | Town & | ‘A’ Credit | Redevelopment | |||||||||||||||||||||||||||
| LLC | Inc. | LLC | Center, LLC | LLC | Country, LLC | TIC, LLC | Fund, LLC | |||||||||||||||||||||||||||
| Gross Revenues | $ | 878,454 | $ | 4,260,466 | $ | 3,505,582 | $ | 562,750 | $ | 4,126,402 | $ | 3,922,624 | $ | 1,049,490 | $ | 3,817,950 | ||||||||||||||||||
| Profit on Sale of Properties | ||||||||||||||||||||||||||||||||||
| Less: Operating Expenses | 339,035 | 1,503,530 | 1,090,394 | 108,111 | 2,041,339 | 926,932 | 357,680 | 1,969,733 | ||||||||||||||||||||||||||
| Interest Expense | 240,268 | 1,723,598 | 1,005,675 | 252,719 | 1,460,949 | 2,106,163 | 438,999 | 1,697,320 | ||||||||||||||||||||||||||
| Depreciation & Amortization | 100,579 | 579,217 | 537,003 | 94,015 | 526,427 | 768,602 | 145,016 | 484,980 | ||||||||||||||||||||||||||
| Net Income — GAAP Basis | 198,572 | 454,121 | 872,510 | 107,905 | 97,687 | 120,927 | 107,795 | (334,083 | ) | |||||||||||||||||||||||||
| Taxable Income From: | ||||||||||||||||||||||||||||||||||
| Operations | 198,572 | 454,121 | 872,510 | 107,905 | 97,687 | 120,927 | 107,795 | (334,083 | ) | |||||||||||||||||||||||||
| Gain on Sale | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cash Generated From: | ||||||||||||||||||||||||||||||||||
| Operations | 299,151 | 1,033,338 | 1,409,513 | 201,920 | 624,114 | 889,529 | 252,811 | 150,897 | ||||||||||||||||||||||||||
| Sales | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Refinancing | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cash Generated From Operations, Sales & Refinancing | 299,151 | 1,033,338 | 1,409,513 | 201,920 | 624,114 | 889,529 | 252,811 | 150,897 | ||||||||||||||||||||||||||
| Less: Cash Distributions to Investors From: | ||||||||||||||||||||||||||||||||||
| Operating Cash Flow | 129,537 | 827,265 | 436,211 | 138,977 | 401,441 | 330,000 | 160,244 | 150,897 | ||||||||||||||||||||||||||
| Sales & Refinancing | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Other | — | — | — | — | — | — | — | 469,813 | ||||||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions | 169,614 | 206,073 | 973,302 | 62,943 | 222,673 | 559,529 | 92,567 | (469,813 | ) | |||||||||||||||||||||||||
| Less: Special Items (not including Sales & Refinancing) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions and Special Items | $ | 169,614 | $ | 206,073 | $ | 973,302 | $ | 62,943 | $ | 222,673 | $ | 559,529 | $ | 92,567 | $ | (469,813 | )* | |||||||||||||||||
Tax and Distribution Data Per $1,000 Invested | ||||||||||||||||||||||||||||||||||
| Federal Income Tax Results: | ||||||||||||||||||||||||||||||||||
| Ordinary Income (Loss) | ||||||||||||||||||||||||||||||||||
| — from operations | $ | 122.58 | $ | 32.32 | $ | 157.21 | $ | 66.40 | $ | 12.21 | $ | 16.80 | $ | 43.12 | $ | (44.08 | ) | |||||||||||||||||
| — from recapture | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Capital Gain (Loss) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cash Distributions to Investors | ||||||||||||||||||||||||||||||||||
| Sources (on GAAP basis) | ||||||||||||||||||||||||||||||||||
| — Investment Income | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| — Return of Capital | — | — | — | — | — | — | — | 61.98 | ||||||||||||||||||||||||||
| Sources (on Cash basis) | ||||||||||||||||||||||||||||||||||
| — Sales | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| — Refinancing | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| — Operations | $ | 79.96 | $ | 58.88 | $ | 78.60 | $ | 85.52 | $ | 50.18 | $ | 45.83 | $ | 64.10 | $ | 19.91 | ||||||||||||||||||
| * | The cash deficiency results from distributions in excess of operating cash flow for this year, which represents a partial return of capital. |
A-23
Table of Contents
TABLE III
| NNN | NNN | NNN | NNN | Kiwi | NNN | NNN | ||||||||||||||||||||||||||||
| Exchange | Tech | T REIT, | Horizon | Westway, | Associates, | 2000 Value | Rocky Mount. | |||||||||||||||||||||||||||
| Fund III, LLC | Fund, LLC | Inc. | Fund LLC | LLC | LLC | Fund, LLC | Exchange, LLC | |||||||||||||||||||||||||||
| Gross Revenues | $ | 2,517,985 | $ | 2,064,930 | $ | 4,142,782 | $ | — | $ | 1,595,133 | $ | 1,199,341 | $ | 3,037,590 | $ | 1,280,417 | ||||||||||||||||||
| Profit on Sale of Properties | (177,948 | ) | — | |||||||||||||||||||||||||||||||
| Less: Operating Expenses | 1,022,907 | 854,112 | 1,761,590 | — | 599,959 | 523,597 | 1,173,655 | 563,911 | ||||||||||||||||||||||||||
| Interest Expense | 1,039,123 | 831,655 | 2,117,069 | — | 625,527 | 868,304 | 1,066,850 | 375,515 | ||||||||||||||||||||||||||
| Depreciation & Amortization | 345,264 | 283,718 | 611,765 | — | 185,539 | 165,797 | 388,313 | 184,025 | ||||||||||||||||||||||||||
| Net Income — GAAP Basis | 110,691 | 95,445 | (525,590 | ) | — | 184,108 | (358,357 | ) | 408,772 | 156,966 | ||||||||||||||||||||||||
| Taxable Income From: | ||||||||||||||||||||||||||||||||||
| Operations | 110,691 | 95,445 | (347,642 | ) | — | 184,108 | (358,357 | ) | 408,772 | 156,966 | ||||||||||||||||||||||||
| Gain on Sale | — | — | (177,948 | ) | — | — | — | — | — | |||||||||||||||||||||||||
| Cash Generated From: | ||||||||||||||||||||||||||||||||||
| Operations | 455,955 | 379,163 | (1,469,058 | ) | — | 369,647 | (192,560 | ) | 797,085 | 340,991 | ||||||||||||||||||||||||
| Sales | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Refinancing | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cash Generated From Operations, Sales & Refinancing | 455,955 | 379,163 | (1,469,058 | ) | — | 369,647 | (192,560 | ) | 797,085 | 340,991 | ||||||||||||||||||||||||
| Less: Cash Distributions to Investors From: | ||||||||||||||||||||||||||||||||||
| Operating Cash Flow | 351,749 | 273,090 | 16,637 | — | 239,979 | — | 468,621 | 197,105 | ||||||||||||||||||||||||||
| Sales & Refinancing | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Other | — | — | 1,145,621 | — | — | 194,886 | — | — | ||||||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions | 104,206 | 106,073 | (2,614,679 | ) | — | 129,668 | (387,446 | ) | 328,464 | 143,886 | ||||||||||||||||||||||||
| Less: Special Items (not including Sales & Refinancing) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions and Special Items | $ | 104,206 | $ | 106,073 | $ | (2,614,679 | ) | $ | — | $ | 129,668 | $ | (387,446 | )* | $ | 328,464 | $ | 143,886 | ||||||||||||||||
Tax and Distribution Data Per $1,000 Invested | ||||||||||||||||||||||||||||||||||
| Federal Income Tax Results: | ||||||||||||||||||||||||||||||||||
| Ordinary Income (Loss) | ||||||||||||||||||||||||||||||||||
| — from operations | $ | 17.57 | $ | 25.80 | $ | (21.65 | ) | $ | — | $ | 56.16 | $ | (133.65 | ) | $ | 69.30 | $ | 58.79 | ||||||||||||||||
| — from recapture | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Capital Gain (Loss) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cash Distributions to Investors | ||||||||||||||||||||||||||||||||||
| Sources (on GAAP basis) | ||||||||||||||||||||||||||||||||||
| — Investment Income | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| — Return of Capital | — | — | 47.19 | — | — | 72.68 | — | — | ||||||||||||||||||||||||||
| Sources (on Cash basis) | ||||||||||||||||||||||||||||||||||
| — Sales | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| — Refinancing | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| — Operations | $ | 55.83 | $ | 73.83 | $ | — | $ | — | $ | 73.20 | $ | — | $ | 79.44 | $ | 73.82 | ||||||||||||||||||
| * | The cash deficiency results from distributions in excess of operating cash flow for this year, which represents a partial return of capital. |
A-24
Table of Contents
TABLE III
| NNN | NNN | NNN | NNN | NNN | ||||||||||||||||||||||||||||||
| 2004 Notes | Market | 2005 Notes | Sacramento | NNN | NNN | 2001 Value | Washington | |||||||||||||||||||||||||||
| Program, | Center, | Program, | Corp Ctr, | Dry Creek | Camelot | Fund, | Square, | |||||||||||||||||||||||||||
| LLC | LLC | LLC | LLC | Centre, LLC | Plaza, LLC | LLC | LLC | |||||||||||||||||||||||||||
| Gross Revenues | $ | 290,038 | $ | 875,500 | $ | 251,235 | $ | 3,416,107 | $ | 1,171,154 | $ | 328,020 | $ | 437,688 | $ | 127,273 | ||||||||||||||||||
| Profit on Sale of Properties | — | — | — | |||||||||||||||||||||||||||||||
| Less: Operating Expenses | 24,252 | 705,967 | 8,602 | 1,125,024 | 456,795 | 189,205 | 201,382 | 21,056 | ||||||||||||||||||||||||||
| Interest Expense | 390,423 | 365,559 | 238,688 | 1,377,834 | 527,073 | 94,541 | 139,719 | 57,050 | ||||||||||||||||||||||||||
| Depreciation & Amortization | 166,500 | 159,613 | 62,225 | 553,848 | 247,019 | 12,669 | 12,134 | 16,798 | ||||||||||||||||||||||||||
| Net Income — GAAP Basis | (291,137 | ) | (355,639 | ) | (58,280 | ) | 359,401 | (59,733 | ) | 31,605 | 84,453 | 32,369 | ||||||||||||||||||||||
| Taxable Income From: | ||||||||||||||||||||||||||||||||||
| Operations | (291,137 | ) | (355,639 | ) | (58,280 | ) | 359,401 | (59,733 | ) | 31,605 | 84,453 | 32,369 | ||||||||||||||||||||||
| Gain on Sale | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cash Generated From: | ||||||||||||||||||||||||||||||||||
| Operations | (124,637 | ) | (196,026 | ) | 3,945 | 913,249 | 187,286 | 44,274 | 96,587 | 49,167 | ||||||||||||||||||||||||
| Sales | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Refinancing | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cash Generated From Operations, Sales & Refinancing | (124,637 | ) | (196,026 | ) | 3,945 | 913,249 | 187,286 | 44,274 | 96,587 | 49,167 | ||||||||||||||||||||||||
| Less: Cash Distributions to Investors From: | ||||||||||||||||||||||||||||||||||
| Operating Cash Flow | — | — | — | 682,579 | 187,286 | 44,274 | 18,349 | 17,717 | ||||||||||||||||||||||||||
| Sales & Refinancing | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Other | — | 97,533 | — | — | 47,504 | 21,037 | — | — | ||||||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions | (124,637 | ) | (293,559 | ) | 3,945 | 230,670 | (47,504 | ) | (21,037 | ) | 78,238 | 31,450 | ||||||||||||||||||||||
| Less: Special Items (not including Sales & Refinancing) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions and Special Items | $ | (124,637 | ) | $ | (293,559 | )* | $ | 3,945 | $ | 230,670 | $ | (47,504 | )* | $ | (21,037 | )* | $ | 78,238 | $ | 31,450 | ||||||||||||||
Tax and Distribution Data Per $1,000 Invested | ||||||||||||||||||||||||||||||||||
| Federal Income Tax Results: | ||||||||||||||||||||||||||||||||||
| Ordinary Income (Loss) | ||||||||||||||||||||||||||||||||||
| — from operations | $ | (58.23 | ) | $ | (355.64 | ) | $ | (25.34 | ) | $ | 29.95 | $ | (17.07 | ) | $ | 13.17 | $ | 33.01 | $ | 10.79 | ||||||||||||||
| — from recapture | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Capital Gain (Loss) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cash Distributions to Investors | ||||||||||||||||||||||||||||||||||
| Sources (on GAAP basis) | ||||||||||||||||||||||||||||||||||
| — Investment Income | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| — Return of Capital | — | 97.53 | — | — | 13.57 | 8.77 | — | — | ||||||||||||||||||||||||||
| Sources (on Cash basis) | ||||||||||||||||||||||||||||||||||
| — Sales | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| — Refinancing | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| — Operations | $ | — | $ | — | $ | — | $ | 56.88 | $ | 53.51 | $ | 18.45 | $ | 7.17 | $ | 5.91 | ||||||||||||||||||
| * | The cash deficiency results from distributions in excess of operating cash flow for this year, which represents a partial return of capital. |
A-25
Table of Contents
TABLE III
| NNN | NNN | NNN | NNN | NNN | NNN | |||||||||||||||||||||||||||||
| Reno | One | Gateway | LV 1900 | Timberhills | NNN | County | ||||||||||||||||||||||||||||
| Trademark, | Gateway | Aurora, | Aerojet Way, | Shop Ctr, | Addison Com | Center | Total | |||||||||||||||||||||||||||
| LLC | Plaza, LLC | LLC | LLC | LLC | Center, LLC | Drive, LLC | All Programs | |||||||||||||||||||||||||||
| Gross Revenues | $ | 265,375 | $ | 842,361 | $ | 913,035 | $ | 166,726 | $ | 77,703 | $ | 173,552 | $ | 138,063 | $ | 47,435,726 | ||||||||||||||||||
| Profit on Sale of Properties | — | — | — | — | — | — | — | (177,948 | ) | |||||||||||||||||||||||||
| Less: Operating Expenses | 37,572 | 267,796 | 303,713 | 23,027 | 8,661 | 33,924 | 26,648 | 18,270,109 | ||||||||||||||||||||||||||
| Interest Expense | 36,922 | 238,740 | 379,951 | 68,696 | 13,135 | 46,823 | 47,051 | 19,871,939 | ||||||||||||||||||||||||||
| Depreciation & Amortization | 46,769 | 136,490 | 115,621 | 34,491 | 10,545 | 33,654 | 27,395 | 7,036,032 | ||||||||||||||||||||||||||
| Net Income — GAAP Basis | 144,112 | 199,335 | 113,750 | 40,512 | 45,362 | 59,151 | 36,969 | 2,079,698 | ||||||||||||||||||||||||||
| Taxable Income From: | ||||||||||||||||||||||||||||||||||
| Operations | 144,112 | 199,335 | 113,750 | 40,512 | 45,362 | 59,151 | 36,969 | 2,257,646 | ||||||||||||||||||||||||||
| Gain on Sale | — | — | — | — | — | — | — | (177,948 | ) | |||||||||||||||||||||||||
| Cash Generated From: | — | |||||||||||||||||||||||||||||||||
| Operations | 190,881 | 335,825 | 229,371 | 75,003 | 55,907 | 92,805 | 64,364 | 7,560,497 | ||||||||||||||||||||||||||
| Sales | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Refinancing | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cash Generated From Operations, Sales & Refinancing | 190,881 | 335,825 | 229,371 | 75,003 | 55,907 | 92,805 | 64,364 | 7,560,497 | ||||||||||||||||||||||||||
| Less: Cash Distributions to Investors From: | — | |||||||||||||||||||||||||||||||||
| Operating Cash Flow | 69,398 | 106,446 | 6,120 | 40,000 | — | 18,385 | 4,010 | 5,299,680 | ||||||||||||||||||||||||||
| Sales & Refinancing | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Other | — | — | — | — | — | — | — | 1,976,394 | ||||||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions | 121,483 | 229,379 | 223,251 | 35,003 | 55,907 | 74,420 | 60,354 | 284,423 | ||||||||||||||||||||||||||
| Less: Special Items (not including Sales & Refinancing) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions and Special Items | $ | 121,483 | $ | 229,379 | $ | 223,251 | $ | 35,003 | $ | 55,907 | $ | 74,420 | $ | 60,354 | $ | 284,423 | ||||||||||||||||||
Tax and Distribution Data Per $1,000 Invested | ||||||||||||||||||||||||||||||||||
| Federal Income Tax Results: | ||||||||||||||||||||||||||||||||||
| Ordinary Income (Loss) | ||||||||||||||||||||||||||||||||||
| — from operations | $ | 37.43 | $ | 47.49 | $ | 56.88 | ** | $ | 20.26 | $ | 12.28 | $ | 17.66 | $ | 34.67 | |||||||||||||||||||
| — from recapture | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Capital Gain (Loss) | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Cash Distributions to Investors | ||||||||||||||||||||||||||||||||||
| Sources (on GAAP basis) | ||||||||||||||||||||||||||||||||||
| — Investment Income | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| — Return of Capital | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Sources (on Cash basis) | ||||||||||||||||||||||||||||||||||
| — Sales | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| — Refinancing | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| — Operations | $ | 18.03 | $ | 25.36 | $ | 3.06 | $ | 20.00 | $ | — | $ | 5.49 | $ | 3.76 | ||||||||||||||||||||
| ** | Gateway Aurora’s tax and distribution data is adjusted for the 52.7% of the program that was actually sold. |
A-26
Table of Contents
TABLE III
| Truckee | Yerington | NNN | NNN | NNN | ||||||||||||||||||||||||||||||
| Telluride | WREIT, | River Office | Shopping | NNN Fund | Town & | ‘A’ Credit | Redevelopment | |||||||||||||||||||||||||||
| Barstow, LLC | Inc. | Tower, LLC | Center, LLC | VIII, LLC | Country, LLC | TIC, LLC | Fund, LLC | |||||||||||||||||||||||||||
| Gross Revenues | $ | 787,786 | $ | 2,656,537 | $ | 3,118,927 | $ | 561,557 | $ | 3,554,830 | $ | 4,448,323 | $ | 916,337 | $ | 4,216,654 | ||||||||||||||||||
| Profit on Sale of Properties | 3,895,402 | |||||||||||||||||||||||||||||||||
| Less: Operating Expenses | 362,943 | 1,130,976 | 1,087,554 | 128,858 | 2,220,655 | 1,239,771 | 253,748 | 1,689,828 | ||||||||||||||||||||||||||
| Interest Expense | 237,642 | 914,694 | 625,777 | 250,000 | 1,065,260 | 2,070,594 | 437,908 | 1,455,140 | ||||||||||||||||||||||||||
| Depreciation & Amortization | 103,709 | 471,458 | 542,389 | 94,016 | 417,388 | 841,251 | 168,888 | 757,357 | ||||||||||||||||||||||||||
| Net Income — GAAP Basis | 83,492 | 139,409 | 863,207 | 88,683 | 3,746,929 | 296,707 | 55,793 | 314,329 | ||||||||||||||||||||||||||
| Taxable Income From: | ||||||||||||||||||||||||||||||||||
| Operations | 83,492 | 139,409 | 863,207 | 88,683 | (148,473 | ) | 296,707 | 55,793 | 314,329 | |||||||||||||||||||||||||
| Gain on Sale | — | — | — | — | 3,895,402 | — | — | — | ||||||||||||||||||||||||||
| Cash Generated From: | ||||||||||||||||||||||||||||||||||
| Operations | 187,201 | 610,867 | 1,405,596 | 182,699 | 268,915 | 1,137,958 | 224,681 | 1,071,686 | ||||||||||||||||||||||||||
| Sales | — | — | — | — | 3,895,402 | — | — | — | ||||||||||||||||||||||||||
| Refinancing | — | — | — | — | — | 4,778,700 | — | — | ||||||||||||||||||||||||||
| Cash Generated From Operations, Sales & Refinancing | 187,201 | 610,867 | 1,405,596 | 182,699 | 4,164,317 | 5,916,658 | 224,681 | 1,071,686 | ||||||||||||||||||||||||||
| Less: Cash Distributions to Investors From: | ||||||||||||||||||||||||||||||||||
| Operating Cash Flow | 133,298 | 610,867 | 480,630 | 151,613 | 411,142 | 394,920 | 175,000 | 869,309 | ||||||||||||||||||||||||||
| Sales & Refinancing | — | 1,676,037 | — | — | 3,705,524 | 492,000 | — | — | ||||||||||||||||||||||||||
| Other | — | 216,111 | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions | 53,903 | (1,892,148 | ) | 924,966 | 31,086 | 47,651 | 5,029,738 | 49,681 | 202,377 | |||||||||||||||||||||||||
| Less: Special Items (not including Sales & Refinancing) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions and Special Items | $ | 53,903 | $ | (1,892,148 | )* | $ | 924,966 | $ | 31,086 | $ | 47,651 | $ | 5,029,738 | $ | 49,681 | $ | 202,377 | |||||||||||||||||
Tax and Distribution Data Per $1,000 Invested | ||||||||||||||||||||||||||||||||||
| Federal Income Tax Results: | ||||||||||||||||||||||||||||||||||
| Ordinary Income (Loss) | ||||||||||||||||||||||||||||||||||
| — from operations | $ | 51.54 | $ | 9.92 | $ | 155.53 | $ | 54.57 | $ | (18.56 | ) | $ | 41.21 | $ | 22.32 | 41.47 | ||||||||||||||||||
| — from recapture | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Capital Gain (Loss) | — | — | — | — | 486.93 | — | — | — | ||||||||||||||||||||||||||
| Cash Distributions to Investors | ||||||||||||||||||||||||||||||||||
| Sources (on GAAP basis) | ||||||||||||||||||||||||||||||||||
| — Investment Income | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| — Return of Capital | — | 15.38 | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Sources (on Cash basis) | ||||||||||||||||||||||||||||||||||
| — Sales | — | — | — | — | 463.19 | — | — | — | ||||||||||||||||||||||||||
| — Refinancing | — | 119.28 | — | — | — | 68.33 | — | — | ||||||||||||||||||||||||||
| — Operations | $ | 82.28 | $ | 43.47 | $ | 86.60 | $ | 93.30 | $ | 51.39 | $ | 54.85 | $ | 70.00 | $ | 114.69 | ||||||||||||||||||
| * | The cash deficiency results from distributions in excess of operating cash flow for this year, which represents a partial return of capital. |
A-27
Table of Contents
TABLE III
| NNN | NNN | NNN | Kiwi | NNN | NNN | |||||||||||||||||||||||||||||
| Exchange | Tech Fund, | T REIT, | Horizon | NNN | Associates, | 2000 Value | Rocky Mount. | |||||||||||||||||||||||||||
| Fund III, LLC | LLC | Inc. | Fund, LLC | Westway, LLC | LLC | Fund, LLC | Exchange, LLC | |||||||||||||||||||||||||||
| Gross Revenues | $ | 2,534,151 | $ | 2,010,089 | $ | 6,799,384 | $ | — | $ | 1,599,920 | $ | 1,191,304 | $ | 1,280,857 | $ | 1,383,040 | ||||||||||||||||||
| Profit on Sale of Properties | 213,352 | — | $ | 4,910,117 | ||||||||||||||||||||||||||||||
| Less: Operating Expenses | 1,051,188 | 626,095 | 2,302,438 | — | 534,971 | 480,819 | 670,294 | 580,334 | ||||||||||||||||||||||||||
| Interest Expense | 1,032,014 | 657,112 | 1,756,835 | — | 624,375 | 557,862 | 377,308 | 294,155 | ||||||||||||||||||||||||||
| Depreciation & Amortization | 337,387 | 262,282 | 659,705 | — | 193,044 | 170,737 | 298,886 | 189,548 | ||||||||||||||||||||||||||
| Net Income — GAAP Basis | 113,562 | 464,600 | 2,293,758 | — | 247,530 | (18,114 | ) | 4,844,486 | 319,003 | |||||||||||||||||||||||||
| Taxable Income From: | ||||||||||||||||||||||||||||||||||
| Operations | 113,562 | 464,600 | 2,080,406 | — | 247,530 | (18,114 | ) | (65,631 | ) | 319,003 | ||||||||||||||||||||||||
| Gain on Sale | — | — | 213,352 | — | — | — | 4,910,117 | — | ||||||||||||||||||||||||||
| Cash Generated From: | ||||||||||||||||||||||||||||||||||
| Operations | 450,949 | 726,882 | 2,475,805 | — | 440,574 | 152,623 | 233,255 | 508,551 | ||||||||||||||||||||||||||
| Sales | — | — | 1,502,197 | — | — | — | 4,910,117 | — | ||||||||||||||||||||||||||
| Refinancing | — | — | — | — | — | 476,658 | — | — | ||||||||||||||||||||||||||
| Cash Generated From Operations, Sales & Refinancing | 450,949 | 726,882 | 3,978,002 | — | 440,574 | 629,281 | 5,143,372 | 508,551 | ||||||||||||||||||||||||||
| Less: Cash Distributions to Investors From: | ||||||||||||||||||||||||||||||||||
| Operating Cash Flow | 317,599 | 307,100 | 2,475,805 | — | 264,000 | 152,623 | 233,255 | 170,221 | ||||||||||||||||||||||||||
| Sales & Refinancing | — | — | — | — | — | 5,225,000 | — | |||||||||||||||||||||||||||
| Other | — | — | 386,794 | — | — | 73,211 | 14,831 | — | ||||||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions | 133,350 | 419,782 | 1,115,403 | — | 176,574 | 403,447 | (329,714 | ) | 338,330 | |||||||||||||||||||||||||
| Less: Special Items (not including Sales & Refinancing) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions and Special Items | $ | 133,350 | $ | 419,782 | $ | 1,115,403 | $ | — | $ | 176,574 | $ | 403,447 | $ | (329,714 | )* | $ | 338,330 | |||||||||||||||||
Tax and Distribution Data Per $1,000 Invested | ||||||||||||||||||||||||||||||||||
| Federal Income Tax Results: | ||||||||||||||||||||||||||||||||||
| Ordinary Income (Loss) | ||||||||||||||||||||||||||||||||||
| — from operations | $ | 18.03 | $ | 125.61 | $ | 44.84 | $ | — | $ | 75.51 | $ | (6.76 | ) | $ | (11.13 | ) | 119.48 | |||||||||||||||||
| — from recapture | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Capital Gain (Loss) | — | — | — | — | — | — | 832.36 | — | ||||||||||||||||||||||||||
| Cash Distributions to Investors | ||||||||||||||||||||||||||||||||||
| Sources (on GAAP basis) | ||||||||||||||||||||||||||||||||||
| — Investment Income | — | — | 53.36 | — | — | — | — | — | ||||||||||||||||||||||||||
| — Return of Capital | — | — | 8.34 | — | — | 27.30 | 2.51 | — | ||||||||||||||||||||||||||
| Sources (on Cash basis) | ||||||||||||||||||||||||||||||||||
| — Sales | — | — | — | — | — | — | 885.74 | — | ||||||||||||||||||||||||||
| — Refinancing | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
| — Operations | $ | 50.41 | $ | 83.03 | $ | 53.36 | $ | — | $ | 80.53 | $ | 56.92 | $ | 39.54 | $ | 63.75 | ||||||||||||||||||
| * | The cash deficiency results from distributions in excess of operating cash flow for this year, which represents a partial return of capital. |
A-28
Table of Contents
TABLE III
| NNN | NNN | NNN | NNN | NNN | NNN | NNN | ||||||||||||||||||||||||||||
| 2004 Notes | Market | 2005 Notes | Sacramento | Dry Creek | Camelot | 2001 Value | Washington | |||||||||||||||||||||||||||
| Program, LLC | Center, LLC | Program, LLC | Corp Ctr, LLC | Centre, LLC | Plaza, LLC | Fund, LLC | Square, LLC | |||||||||||||||||||||||||||
| Gross Revenues | $ | 518,478 | $ | 853,613 | $ | 304,795 | $ | 4,980,958 | $ | 1,811,897 | $ | 988,383 | $ | 2,149,060 | $ | 827,109 | ||||||||||||||||||
| Profit on Sale of Properties | ||||||||||||||||||||||||||||||||||
| Less: Operating Expenses | 15,400 | 716,281 | 2,880 | 1,389,347 | 542,658 | 340,306 | 911,964 | 189,342 | ||||||||||||||||||||||||||
| Interest Expense | 547,696 | 82,182 | 232,299 | 1,829,477 | 627,970 | 237,811 | 689,985 | 370,182 | ||||||||||||||||||||||||||
| Depreciation & Amortization | 169,189 | 150,788 | 65,728 | 710,744 | 256,762 | 145,325 | 380,986 | 150,819 | ||||||||||||||||||||||||||
| Net Income — GAAP Basis | (213,807 | ) | (95,638 | ) | 3,888 | 1,051,390 | 384,507 | 264,941 | 166,124 | 116,766 | ||||||||||||||||||||||||
| Taxable Income From: | — | |||||||||||||||||||||||||||||||||
| Operations | (213,807 | ) | (95,638 | ) | 3,888 | 1,051,390 | 384,507 | 264,941 | 166,124 | 116,766 | ||||||||||||||||||||||||
| Gain on Sale | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cash Generated From: | ||||||||||||||||||||||||||||||||||
| Operations | (44,618 | ) | 55,150 | 69,616 | 1,762,134 | 641,269 | 410,266 | 547,110 | 267,585 | |||||||||||||||||||||||||
| Sales | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Refinancing | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cash Generated From Operations, Sales & Refinancing | (44,618 | ) | 55,150 | 69,616 | 1,762,134 | 641,269 | 410,266 | 547,110 | 267,585 | |||||||||||||||||||||||||
| Less: Cash Distributions to Investors From: | ||||||||||||||||||||||||||||||||||
| Operating Cash Flow | — | — | — | 945,800 | 288,750 | 203,984 | 520,357 | 240,000 | ||||||||||||||||||||||||||
| Sales & Refinancing | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Other | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions | (44,618 | ) | 55,150 | 69,616 | 816,334 | 352,519 | 206,282 | 26,753 | 27,585 | |||||||||||||||||||||||||
| Less: Special Items (not including Sales & Refinancing) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions and Special Items | $ | (44,618 | ) | $ | 55,150 | $ | 69,616 | $ | 816,334 | $ | 352,519 | $ | 206,282 | $ | 26,753 | $ | 27,585 | |||||||||||||||||
Tax and Distribution Data Per $1,000 Invested | ||||||||||||||||||||||||||||||||||
| Federal Income Tax Results: | ||||||||||||||||||||||||||||||||||
| Ordinary Income (Loss) | ||||||||||||||||||||||||||||||||||
| — from operations | $ | (42.76 | ) | $ | (95.64 | ) | $ | 1.69 | $ | 87.62 | $ | 109.86 | $ | 110.39 | $ | 15.11 | $ | 38.92 | ||||||||||||||||
| — from recapture | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Capital Gain (Loss) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cash Distributions to Investors | ||||||||||||||||||||||||||||||||||
| Sources (on GAAP basis) | ||||||||||||||||||||||||||||||||||
| — Investment Income | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| — Return of Capital | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Sources (on Cash basis) | ||||||||||||||||||||||||||||||||||
| — Sales | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| — Refinancing | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| — Operations | $ | — | $ | — | $ | — | $ | 78.82 | $ | 82.50 | $ | 84.99 | $ | 47.34 | $ | 80.00 | ||||||||||||||||||
A-29
Table of Contents
TABLE III
| NNN | NNN | |||||||||||||||||||||||||||||||||
| Reno | NNN | NNN | LV 1900 | NNN | NNN | NNN | NNN | |||||||||||||||||||||||||||
| Trademark, | One Gateway | Gateway | Aerojet | Timberhills | Addison Com | County Center | Arapahoe Svc. | |||||||||||||||||||||||||||
| LLC | Plaza, LLC | Aurora, LLC | Way, LLC | Shop Ctr, LLC | Center, LLC | Drive, LLC | Center, LLC | |||||||||||||||||||||||||||
| Gross Revenues | $ | 491,591 | $ | 2,264,441 | $ | 1,175,777 | $ | 565,241 | $ | 1,148,693 | $ | 1,292,237 | $ | 664,872 | $ | 837,160 | ||||||||||||||||||
| Profit on Sale of Properties | ||||||||||||||||||||||||||||||||||
| Less: Operating Expenses | 73,528 | 714,827 | 476,298 | 77,190 | 209,085 | 171,434 | 105,116 | 98,357 | ||||||||||||||||||||||||||
| Interest Expense | 117,964 | 698,362 | 565,018 | 271,488 | 477,577 | 566,963 | 257,059 | 223,398 | ||||||||||||||||||||||||||
| Depreciation & Amortization | 135,903 | 289,181 | 167,521 | 117,861 | 191,684 | 231,570 | 122,895 | 128,761 | ||||||||||||||||||||||||||
| Net Income — GAAP Basis | 164,197 | 562,071 | (33,060 | ) | 98,702 | 270,347 | 322,270 | 179,802 | 386,644 | |||||||||||||||||||||||||
| Taxable Income From: | ||||||||||||||||||||||||||||||||||
| Operations | 164,197 | 562,071 | (33,060 | ) | 98,702 | 270,347 | 322,270 | 179,802 | 386,644 | |||||||||||||||||||||||||
| Gain on Sale | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cash Generated From: | ||||||||||||||||||||||||||||||||||
| Operations | 300,100 | 851,252 | 134,461 | 216,563 | 462,031 | 553,840 | 302,697 | 515,405 | ||||||||||||||||||||||||||
| Sales | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Refinancing | 1,863,754 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cash Generated From Operations, Sales & Refinancing | 2,163,854 | 851,252 | 134,461 | 216,563 | 462,031 | 553,840 | 302,697 | 515,405 | ||||||||||||||||||||||||||
| Less: Cash Distributions to Investors From: | ||||||||||||||||||||||||||||||||||
| Operating Cash Flow | 300,100 | 378,000 | 90,470 | 160,000 | 296,216 | 286,869 | 202,415 | 192,562 | ||||||||||||||||||||||||||
| Sales & Refinancing | 1,837,502 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Other | 208,168 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions | (181,916 | ) | 473,252 | 43,991 | 56,563 | 165,815 | 266,971 | 100,282 | 322,843 | |||||||||||||||||||||||||
| Less: Special Items (not including Sales & Refinancing) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions and Special Items | $ | (181,916 | )* | $ | 473,252 | $ | 43,991 | $ | 56,563 | $ | 165,815 | $ | 266,971 | $ | 100,282 | $ | 322,843 | |||||||||||||||||
Tax and Distribution Data Per $1,000 Invested | ||||||||||||||||||||||||||||||||||
| Federal Income Tax Results: | ||||||||||||||||||||||||||||||||||
| Ordinary Income (Loss) | ||||||||||||||||||||||||||||||||||
| — from operations | $ | 42.65 | $ | 133.91 | $ | (31.37 | ) | $ | 49.35 | $ | 73.16 | $ | 88.29 | $ | 58.12 | $ | 96.66 | |||||||||||||||||
| — from recapture | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Capital Gain (Loss) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cash Distributions to Investors | ||||||||||||||||||||||||||||||||||
| Sources (on GAAP basis) | ||||||||||||||||||||||||||||||||||
| — Investment Income | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| — Return of Capital | 54.07 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Sources (on Cash basis) | ||||||||||||||||||||||||||||||||||
| — Sales | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| — Refinancing | 477.27 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| — Operations | $ | 77.95 | $ | 90.05 | $ | 85.83 | $ | 80.00 | $ | 80.16 | $ | 78.59 | $ | 65.43 | $ | 48.14 | ||||||||||||||||||
| * | The cash deficiency results from distributions in excess of operating cash flow for this year, which represents a partial return of capital. |
A-30
Table of Contents
TABLE III
| NNN | VC/RE | NNN | NNN | NNN | NNN | NNN | NNN | |||||||||||||||||||||||||||
| Titan Bldg. & | Balanced | City Center | Union | City Center | Pacific Corporate | North Reno, | Brookhollow, | |||||||||||||||||||||||||||
| Plaza, LLC | Fund II, LLC | West ‘B’, LLC | Square, LLC | West ‘A’, LLC | Park 1, LLC | LLC | LLC | |||||||||||||||||||||||||||
| Gross Revenues | $ | 717,816 | $ | — | $ | 2,586,229 | $ | 428,880 | $ | 2,094,718 | $ | 1,280,537 | $ | 512,841 | $ | 1,207,913 | ||||||||||||||||||
| Profit on Sale of Properties | 415,165 | |||||||||||||||||||||||||||||||||
| Less: Operating Expenses | 212,115 | — | 447,042 | 138,157 | 676,665 | 553,318 | 189,951 | 280,790 | ||||||||||||||||||||||||||
| Interest Expense | 99,392 | — | 1,013,811 | 201,091 | 619,744 | 363,077 | 180,471 | 294,527 | ||||||||||||||||||||||||||
| Depreciation & Amortization | 140,097 | — | 442,907 | 67,784 | 244,553 | 248,224 | 79,801 | 154,898 | ||||||||||||||||||||||||||
| Net Income — GAAP Basis | 266,212 | — | 682,469 | 21,848 | 553,756 | 531,084 | 62,618 | 477,698 | ||||||||||||||||||||||||||
| Taxable Income From: | ||||||||||||||||||||||||||||||||||
| Operations | 266,212 | — | 682,469 | 21,848 | 553,756 | 115,919 | 62,618 | 477,698 | ||||||||||||||||||||||||||
| Gain on Sale | — | — | — | — | — | 415,165 | — | — | ||||||||||||||||||||||||||
| Cash Generated From: | ||||||||||||||||||||||||||||||||||
| Operations | 406,309 | — | 1,125,376 | 89,632 | 798,309 | 364,143 | 142,419 | 632,596 | ||||||||||||||||||||||||||
| Sales | — | — | — | — | — | 415,165 | — | — | ||||||||||||||||||||||||||
| Refinancing | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cash Generated From Operations, Sales & Refinancing | 406,309 | — | 1,125,376 | 89,632 | 798,309 | 779,308 | 142,419 | 632,596 | ||||||||||||||||||||||||||
| Less: Cash Distributions to Investors From: | ||||||||||||||||||||||||||||||||||
| Operating Cash Flow | 93,658 | — | 550,538 | — | 517,067 | 222,337 | 98,773 | 216,447 | ||||||||||||||||||||||||||
| Sales & Refinancing | — | — | — | — | — | 312,288 | — | — | ||||||||||||||||||||||||||
| Other | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions | 312,651 | — | 574,838 | 89,632 | 281,242 | 244,683 | 43,646 | 416,149 | ||||||||||||||||||||||||||
| Less: Special Items (not including Sales & Refinancing) | — | — | — | — | — | — | ||||||||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions and Special Items | $ | 312,651 | $ | — | $ | 574,838 | $ | 89,632 | $ | 281,242 | $ | 244,683 | $ | 43,646 | $ | 416,149 | ||||||||||||||||||
Tax and Distribution Data Per $1,000 Invested | ||||||||||||||||||||||||||||||||||
| Federal Income Tax Results: | ||||||||||||||||||||||||||||||||||
| Ordinary Income (Loss) | ||||||||||||||||||||||||||||||||||
| — from operations | $ | 119.93 | $ | — | $ | 83.23 | $ | 37.80 | $ | 447.37 | $ | 19.99 | $ | 22.77 | $ | 72.93 | ||||||||||||||||||
| — from recapture | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Capital Gain (Loss) | — | — | — | — | — | 71.58 | — | — | ||||||||||||||||||||||||||
| Cash Distributions to Investors | ||||||||||||||||||||||||||||||||||
| Sources (on GAAP basis) | ||||||||||||||||||||||||||||||||||
| — Investment Income | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| — Return of Capital | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Sources (on Cash basis) | ||||||||||||||||||||||||||||||||||
| — Sales | — | — | — | — | — | 53.84 | — | — | ||||||||||||||||||||||||||
| — Refinancing | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| — Operations | $ | 42.19 | $ | — | $ | 67.14 | $ | — | $ | 417.73 | $ | 38.33 | $ | 35.92 | $ | 33.05 | ||||||||||||||||||
A-31
Table of Contents
TABLE III
| NNN | NNN | NNN | NNN | NNN | NNN | NNN | NNN | |||||||||||||||||||||||||||
| 2002 Value | 1397 Galleria | Bryant Ranch, | 4241 Bowling | Wolf Pen | Alamosa Plaza, | Saddleback, | Kahana | |||||||||||||||||||||||||||
| Fund, LLC | Drive, LLC | LLC | Green, LLC | Plaza, LLC | LLC | LLC | Gateway, LLC | |||||||||||||||||||||||||||
| Gross Revenues | $ | 647,573 | $ | 121,309 | $ | 413,680 | $ | 167,621 | $ | 478,878 | $ | 285,594 | $ | 343,607 | $ | — | ||||||||||||||||||
| Profit on Sale of Properties | ||||||||||||||||||||||||||||||||||
| Less: Operating Expenses | 129,066 | 20,904 | 122,539 | 46,407 | 48,249 | 68,188 | 102,751 | — | ||||||||||||||||||||||||||
| Interest Expense | 253,137 | 30,521 | 103,781 | 36,759 | 148,222 | 124,538 | 71,805 | — | ||||||||||||||||||||||||||
| Depreciation & Amortization | 160,072 | 22,022 | 76,852 | 33,136 | 91,965 | 74,730 | 46,416 | — | ||||||||||||||||||||||||||
| Net Income — GAAP Basis | 105,298 | 47,862 | 110,508 | 51,319 | 190,442 | 18,138 | 122,636 | — | ||||||||||||||||||||||||||
| Taxable Income From: | ||||||||||||||||||||||||||||||||||
| Operations | 105,298 | 47,862 | 110,508 | 51,319 | 190,442 | 18,138 | 122,636 | — | ||||||||||||||||||||||||||
| Gain on Sale | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cash Generated From: | ||||||||||||||||||||||||||||||||||
| Operations | 265,370 | 69,884 | 187,360 | 84,455 | 282,407 | 92,868 | 169,052 | — | ||||||||||||||||||||||||||
| Sales | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Refinancing | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cash Generated From Operations, Sales & Refinancing | 265,370 | 69,884 | 187,360 | 84,455 | 282,407 | 92,868 | 169,052 | — | ||||||||||||||||||||||||||
| Less: Cash Distributions to Investors From: | ||||||||||||||||||||||||||||||||||
| Operating Cash Flow | 18,049 | 520 | 69,949 | 1,646 | 81,687 | 78,565 | 50,684 | — | ||||||||||||||||||||||||||
| Sales & Refinancing | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Other | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions | 247,321 | 69,364 | 117,411 | 82,809 | 200,720 | 14,303 | 118,368 | — | ||||||||||||||||||||||||||
| Less: Special Items (not including Sales & Refinancing) | ||||||||||||||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions and Special Items | $ | 247,321 | $ | 69,364 | $ | 117,411 | $ | 82,809 | $ | 200,720 | $ | 14,303 | $ | 118,368 | $ | — | ||||||||||||||||||
Tax and Distribution Data Per $1,000 Invested | ||||||||||||||||||||||||||||||||||
| Federal Income Tax Results: | ||||||||||||||||||||||||||||||||||
| Ordinary Income (Loss) | ||||||||||||||||||||||||||||||||||
| — from operations | $ | 3.53 | $ | 24.54 | $ | 22.10 | $ | 18.01 | $ | 34.63 | $ | 2.73 | $ | 31.72 | $ | — | ||||||||||||||||||
| — from recapture | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Capital Gain (Loss) | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Cash Distributions to Investors | ||||||||||||||||||||||||||||||||||
| Sources (on GAAP basis) | ||||||||||||||||||||||||||||||||||
| — Investment Income | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| — Return of Capital | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| Sources (on Cash basis) | ||||||||||||||||||||||||||||||||||
| — Sales | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| — Refinancing | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
| — Operations | $ | 0.61 | $ | 0.27 | $ | 13.99 | $ | 0.58 | $ | 14.85 | $ | 11.81 | $ | 13.11 | $ | — | ||||||||||||||||||
A-32
Table of Contents
TABLE III
| NNN | NNN | NNN | NNN | NNN | |||||||||||||||||||||||||
| Springtown Mall | Congress Center | Park Sahara, | Parkwood | G REIT, | 2006 Notes | Total | |||||||||||||||||||||||
| Investors, LLC | LLC | LLC | Complex LLC | Inc. | Program, LLC | All Programs | |||||||||||||||||||||||
| Gross Revenues | $ | 26,980 | $ | — | $ | — | $ | — | $ | 750,501 | $ | — | $ | 69,998,679 | |||||||||||||||
| Profit on Sale of Properties | — | 9,937,215 | |||||||||||||||||||||||||||
| Less: Operating Expenses | 10,176 | — | — | — | 374,093 | — | 23,814,895 | ||||||||||||||||||||||
| Interest Expense | 20,570 | — | — | — | 248,609 | — | 23,962,162 | ||||||||||||||||||||||
| Depreciation & Amortization | 10,401 | — | — | — | 102,149 | — | 10,919,768 | ||||||||||||||||||||||
| Net Income — GAAP Basis | (14,167 | ) | — | — | — | 25,650 | — | 21,239,068 | |||||||||||||||||||||
| Taxable Income From: | |||||||||||||||||||||||||||||
| Operations | (14,167 | ) | — | — | — | 25,650 | — | 11,301,853 | |||||||||||||||||||||
| Gain on Sale | — | — | — | — | — | — | 9,937,215 | ||||||||||||||||||||||
| Cash Generated From: | |||||||||||||||||||||||||||||
| Operations | (3,766 | ) | — | — | — | (608,907 | ) | — | 21,220,610 | ||||||||||||||||||||
| Sales | — | — | — | — | — | — | 11,226,060 | ||||||||||||||||||||||
| Refinancing | — | — | — | — | — | — | 7,119,112 | ||||||||||||||||||||||
| Cash Generated From Operations, Sales & Refinancing | (3,766 | ) | — | — | — | (608,907 | ) | — | 39,565,781 | ||||||||||||||||||||
| Less: Cash Distributions to Investors From: | |||||||||||||||||||||||||||||
| Operating Cash Flow | — | — | — | — | — | — | 13,252,827 | ||||||||||||||||||||||
| Sales & Refinancing | — | — | — | — | — | — | 13,248,351 | ||||||||||||||||||||||
| Other | — | — | — | — | 169,820 | — | 1,068,935 | ||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions | (3,766 | ) | — | — | — | (778,727 | ) | — | 11,995,669 | ||||||||||||||||||||
| Less: Special Items (not including Sales & Refinancing) | — | ||||||||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions and Special Items | $ | (3,766 | ) | $ | — | $ | — | $ | — | $ | (778,727 | ) | $ | — | $ | 11,995,669 | |||||||||||||
Tax and Distribution Data Per $1,000 Invested | |||||||||||||||||||||||||||||
| Federal Income Tax Results: | |||||||||||||||||||||||||||||
| Ordinary Income (Loss) | |||||||||||||||||||||||||||||
| — from operations | $ | (5.56 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
| — from recapture | — | — | — | — | — | — | |||||||||||||||||||||||
| Capital Gain (Loss) | — | — | — | — | — | — | |||||||||||||||||||||||
| Cash Distributions to Investors | |||||||||||||||||||||||||||||
| Sources (on GAAP basis) | |||||||||||||||||||||||||||||
| — Investment Income | — | — | — | — | — | — | |||||||||||||||||||||||
| — Return of Capital | — | — | — | — | 7.88 | — | |||||||||||||||||||||||
| Sources (on Cash basis) | |||||||||||||||||||||||||||||
| — Sales | — | — | — | — | — | — | |||||||||||||||||||||||
| — Refinancing | — | — | — | — | — | — | |||||||||||||||||||||||
| — Operations | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||||||||
A-33
Table of Contents
TABLE III
| Telluride | Truckee | Yerington | NNN | NNN | NNN | ||||||||||||||||||||||||
| Barstow, | WREIT, | River Office | Shopping | Fund VIII, | Town & | ‘A’ Credit | |||||||||||||||||||||||
| LLC | Inc. | Tower, LLC | Center, LLC | LLC | Country, LLC | TIC, LLC | |||||||||||||||||||||||
| Gross Revenues | $ | 102,238 | $ | 962,955 | $ | 1,430,158 | $ | 287,374 | $ | 1,382,338 | $ | 2,215,609 | $ | 451,226 | |||||||||||||||
| Profit on Sale of Properties | 265,893 | 5,483,360 | |||||||||||||||||||||||||||
| Less: Operating Expenses | 55,257 | 483,514 | 579,007 | 57,698 | 949,714 | 732,962 | 65,317 | ||||||||||||||||||||||
| Interest Expense | 52,869 | 327,341 | 274,077 | 123,938 | 404,032 | 1,247,585 | 215,258 | ||||||||||||||||||||||
| Depreciation & Amortization | 13,451 | 154,179 | 245,076 | 47,010 | 150,505 | 436,578 | 84,683 | ||||||||||||||||||||||
| Net Income — GAAP Basis | 246,554 | (2,079 | ) | 331,998 | 58,728 | 5,361,447 | (201,516 | ) | 85,968 | ||||||||||||||||||||
| Taxable Income From: | |||||||||||||||||||||||||||||
| Operations | (19,339 | ) | (2,079 | ) | 331,998 | 58,728 | (121,913 | ) | (201,516 | ) | 85,968 | ||||||||||||||||||
| Gain on Sale | 265,893 | — | — | — | 5,483,360 | — | — | ||||||||||||||||||||||
| Cash Generated From: | |||||||||||||||||||||||||||||
| Operations | (5,888 | ) | 152,100 | 577,074 | 105,738 | 28,592 | 235,062 | 170,651 | |||||||||||||||||||||
| Sales | 265,893 | — | — | — | 5,483,360 | — | — | ||||||||||||||||||||||
| Refinancing | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Cash Generated From Operations, Sales & Refinancing | 260,005 | 152,100 | 577,074 | 105,738 | 5,511,952 | 235,062 | 170,651 | ||||||||||||||||||||||
| Less: Cash Distributions to Investors From: | |||||||||||||||||||||||||||||
| Operating Cash Flow | — | 114,900 | 240,315 | 75,806 | 28,592 | 235,062 | 88,448 | ||||||||||||||||||||||
| Sales & Refinancing | 1,582,095 | — | — | — | 6,121,678 | — | — | ||||||||||||||||||||||
| Other | 22,748 | — | — | — | 110,663 | 77,103 | — | ||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions | — | 37,200 | 336,759 | 29,932 | (748,981 | ) | (77,103 | ) | 82,203 | ||||||||||||||||||||
| Less: Special Items (not including Sales & Refinancing) | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions and Special Items | $ | — | $ | 37,200 | $ | 336,759 | $ | 29,932 | $ | (748,981 | )* | $ | (77,103 | )* | $ | 82,203 | |||||||||||||
Tax and Distribution Data Per $1,000 Invested | |||||||||||||||||||||||||||||
| Federal Income Tax Results: | |||||||||||||||||||||||||||||
| Ordinary Income (Loss) | |||||||||||||||||||||||||||||
| — from operations | $ | (11.94 | ) | $ | (0.15 | ) | $ | 59.82 | $ | 36.14 | $ | (15.24 | ) | $ | (27.99 | ) | $ | 34.39 | |||||||||||
| — from recapture | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Capital Gain (Loss) | 164.13 | — | — | — | 685.42 | — | — | ||||||||||||||||||||||
| Cash Distributions to Investors | |||||||||||||||||||||||||||||
| Sources (on GAAP basis) | |||||||||||||||||||||||||||||
| — Investment Income | — | — | — | — | — | — | — | ||||||||||||||||||||||
| — Return of Capital | 14.04 | — | — | — | 13.83 | 10.71 | — | ||||||||||||||||||||||
| Sources (on Cash basis) | |||||||||||||||||||||||||||||
| — Sales | 976.60 | — | — | — | 765.21 | — | — | ||||||||||||||||||||||
| — Refinancing | — | — | — | — | — | — | — | ||||||||||||||||||||||
| — Operations | $ | — | $ | 8.18 | $ | 43.30 | $ | 46.65 | $ | 3.57 | $ | 32.65 | $ | 35.38 | |||||||||||||||
| * | The cash deficiency results from distributions in excess of operating cash flow for this year, which represents a partial return of capital. |
A-34
Table of Contents
TABLE III
| NNN | NNN | NNN | NNN | NNN | Kiwi | ||||||||||||||||||||||||
| Redevelopment | Exchange | Tech Fund, | T REIT, | Horizon | Westway, | Associates, | |||||||||||||||||||||||
| Fund, LLC | Fund III, LLC | LLC | Inc. | Fund, LLC | LLC | LLC | |||||||||||||||||||||||
| Gross Revenues | $ | 1,809,394 | $ | 1,321,310 | $ | 1,124,655 | $ | 4,285,126 | $ | — | $ | 891,885 | $ | 290,077 | |||||||||||||||
| Profit on Sale of Properties | 23,617 | 283,650 | |||||||||||||||||||||||||||
| Less: Operating Expenses | 606,940 | 499,365 | 483,191 | 1,252,831 | — | 304,391 | 105,559 | ||||||||||||||||||||||
| Interest Expense | 825,527 | 511,563 | 325,318 | 990,686 | — | 316,436 | 111,469 | ||||||||||||||||||||||
| Depreciation & Amortization | 357,116 | 169,146 | 172,582 | 372,555 | — | 99,151 | 28,456 | ||||||||||||||||||||||
| Net Income — GAAP Basis | 19,811 | 141,236 | 143,564 | 1,692,671 | — | 171,907 | 328,243 | ||||||||||||||||||||||
| Taxable Income From: | |||||||||||||||||||||||||||||
| Operations | 19,811 | 141,236 | 143,564 | 1,669,054 | — | 171,907 | 44,593 | ||||||||||||||||||||||
| Gain on Sale | — | — | — | 23,617 | — | — | 283,650 | ||||||||||||||||||||||
| Cash Generated From: | |||||||||||||||||||||||||||||
| Operations | 376,927 | 310,382 | 316,146 | 2,041,609 | — | 271,058 | 73,049 | ||||||||||||||||||||||
| Sales | — | — | — | 23,617 | — | — | 283,650 | ||||||||||||||||||||||
| Refinancing | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Cash Generated From Operations, Sales & Refinancing | 376,927 | 310,382 | 316,146 | 2,065,226 | — | 271,058 | 356,699 | ||||||||||||||||||||||
| Less: Cash Distributions to Investors From: | |||||||||||||||||||||||||||||
| Operating Cash Flow | 351,174 | 157,500 | 148,624 | 1,802,563 | — | 132,000 | 42,000 | ||||||||||||||||||||||
| Sales & Refinancing | — | — | — | — | — | — | 143,952 | ||||||||||||||||||||||
| Other | — | — | — | — | — | — | 2,681,352 | ||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions | 25,753 | 152,882 | 167,522 | 262,663 | — | 139,058 | — | ||||||||||||||||||||||
| Less: Special Items (not including Sales & Refinancing) | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions and Special Items | $ | 25,753 | $ | 152,882 | $ | 167,522 | $ | 262,663 | $ | — | $ | 139,058 | $ | — | |||||||||||||||
Tax and Distribution Data Per $1,000 Invested | |||||||||||||||||||||||||||||
| Federal Income Tax Results: | |||||||||||||||||||||||||||||
| Ordinary Income (Loss) | |||||||||||||||||||||||||||||
| — from operations | $ | 2.61 | $ | 22.42 | $ | 38.81 | $ | 35.97 | $ | — | $ | 52.44 | $ | 16.63 | |||||||||||||||
| — from recapture | — | — | — | — | — | — | — | ||||||||||||||||||||||
| Capital Gain (Loss) | — | — | — | 0.51 | — | — | 105.79 | ||||||||||||||||||||||
| Cash Distributions to Investors | |||||||||||||||||||||||||||||
| Sources (on GAAP basis) | |||||||||||||||||||||||||||||
| — Investment Income | — | — | — | 38.85 | — | — | — | ||||||||||||||||||||||
| — Return of Capital | — | — | — | — | — | — | 1,000.00 | ||||||||||||||||||||||
| Sources (on Cash basis) | |||||||||||||||||||||||||||||
| — Sales | — | — | — | — | — | — | 53.69 | ||||||||||||||||||||||
| — Refinancing | — | — | — | — | — | — | — | ||||||||||||||||||||||
| — Operations | $ | 46.33 | $ | 25.00 | $ | 40.18 | $ | 38.85 | $ | — | $ | 40.27 | $ | 15.66 | |||||||||||||||
A-35
Table of Contents
TABLE III
| NNN | NNN | NNN | Market | NNN | NNN | NNN | ||||||||||||||||||||||||
| 2000 Value | Rocky Mount. | 2004 Notes | Center, | 2005 Notes | Sacramento | Dry Creek | ||||||||||||||||||||||||
| Fund, LLC | Exchange, LLC | Program, LLC | LLC | Program, LLC | Corp Ctr, LLC | Centre, LLC | ||||||||||||||||||||||||
| Gross Revenues | $ | 44,588 | $ | 558,738 | $ | 499,499 | $ | 419,283 | $ | 151,290 | $ | 2,438,963 | $ | 987,908 | ||||||||||||||||
| Profit on Sale of Properties | ||||||||||||||||||||||||||||||
| Less: Operating Expenses | 8,058 | 177,620 | 6,549 | 364,615 | 4,688 | 819,331 | 129,009 | |||||||||||||||||||||||
| Interest Expense | — | 146,674 | 644,722 | — | 166,852 | 909,011 | 311,014 | |||||||||||||||||||||||
| Depreciation & Amortization | — | 97,699 | 84,595 | 75,394 | 32,864 | 355,455 | 128,386 | |||||||||||||||||||||||
| Net Income — GAAP Basis | 36,530 | 136,745 | (236,367 | ) | (20,726 | ) | (53,114 | ) | 355,166 | 419,499 | ||||||||||||||||||||
| Taxable Income From: | ||||||||||||||||||||||||||||||
| Operations | 36,530 | 136,745 | (236,367 | ) | (20,726 | ) | (53,114 | ) | 355,166 | 419,499 | ||||||||||||||||||||
| Gain on Sale | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Cash Generated From: | ||||||||||||||||||||||||||||||
| Operations | 36,530 | 234,444 | (151,772 | ) | 54,668 | (20,250 | ) | 710,621 | 547,885 | |||||||||||||||||||||
| Sales | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Refinancing | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Cash Generated From Operations, Sales & Refinancing | 36,530 | 234,444 | (151,772 | ) | 54,668 | (20,250 | ) | 710,621 | 547,885 | |||||||||||||||||||||
| Less: Cash Distributions to Investors From: | ||||||||||||||||||||||||||||||
| Operating Cash Flow | — | 56,738 | — | — | — | 499,800 | 145,833 | |||||||||||||||||||||||
| Sales & Refinancing | 266,692 | — | — | — | — | — | — | |||||||||||||||||||||||
| Other | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions | (230,162 | ) | 177,706 | (151,772 | ) | 54,668 | (20,250 | ) | 210,821 | 402,052 | ||||||||||||||||||||
| Less: Special Items (not including Sales & Refinancing) | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions and Special Items | $ | (230,162 | )** | $ | 177,706 | $ | (151,772 | ) | $ | 54,668 | $ | (20,250 | ) | $ | 210,821 | $ | 402,052 | |||||||||||||
Tax and Distribution Data Per $1,000 Invested | ||||||||||||||||||||||||||||||
| Federal Income Tax Results: | ||||||||||||||||||||||||||||||
| Ordinary Income (Loss) | ||||||||||||||||||||||||||||||
| — from operations | $ | 6.19 | $ | 51.22 | $ | (47.27 | ) | $ | (20.73 | ) | $ | (23.09 | ) | $ | 29.60 | $ | 119.86 | |||||||||||||
| — from recapture | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Capital Gain (Loss) | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Cash Distributions to Investors | ||||||||||||||||||||||||||||||
| Sources (on GAAP basis) | ||||||||||||||||||||||||||||||
| — Investment Income | — | — | — | — | — | — | — | |||||||||||||||||||||||
| — Return of Capital | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Sources (on Cash basis) | ||||||||||||||||||||||||||||||
| — Sales | 45.21 | — | — | — | — | — | — | |||||||||||||||||||||||
| — Refinancing | — | — | — | — | — | — | — | |||||||||||||||||||||||
| — Operations | $ | — | $ | 21.25 | $ | — | $ | — | $ | — | $ | 41.65 | $ | 41.67 | ||||||||||||||||
| ** | The cash deficiency results from distribution of cash from a prior year transaction. |
A-36
Table of Contents
TABLE III
| NNN | NNN | NNN | ||||||||||||||||||||||||||||
| NNN | NNN | NNN | Reno | NNN | Gateway | LV 1900 | ||||||||||||||||||||||||
| Camelot | 2001 Value | Washington | Trademark, | One Gateway | Aurora, | Aerojet Way, | ||||||||||||||||||||||||
| Plaza, LLC | Fund, LLC | Square, LLC | LLC | Plaza, LLC | LLC | LLC | ||||||||||||||||||||||||
| Gross Revenues | $ | 486,134 | $ | 933,293 | $ | 448,982 | $ | 410,910 | $ | 1,111,617 | $ | 696,433 | $ | 300,298 | ||||||||||||||||
| Profit on Sale of Properties | 283,218 | |||||||||||||||||||||||||||||
| Less: Operating Expenses | 138,514 | 477,670 | 67,079 | 16,277 | 398,699 | 190,974 | 76,446 | |||||||||||||||||||||||
| Interest Expense | 105,084 | 267,062 | 185,630 | 123,264 | 403,031 | 287,538 | 134,291 | |||||||||||||||||||||||
| Depreciation & Amortization | 128,381 | 199,494 | 75,410 | 67,952 | 149,542 | 91,800 | — | |||||||||||||||||||||||
| Net Income — GAAP Basis | 114,155 | 272,285 | 120,863 | 203,418 | 160,345 | 126,121 | 89,561 | |||||||||||||||||||||||
| Taxable Income From: | ||||||||||||||||||||||||||||||
| Operations | 114,155 | (10,933 | ) | 120,863 | 203,418 | 160,345 | 126,121 | 89,561 | ||||||||||||||||||||||
| Gain on Sale | — | 283,218 | — | — | — | — | — | |||||||||||||||||||||||
| Cash Generated From: | ||||||||||||||||||||||||||||||
| Operations | 242,536 | 188,561 | 196,273 | 271,369 | 309,887 | 217,921 | 89,561 | |||||||||||||||||||||||
| Sales | — | 283,218 | — | — | — | — | — | |||||||||||||||||||||||
| Refinancing | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Cash Generated From Operations, Sales & Refinancing | 242,536 | 471,779 | 196,273 | 271,369 | 309,887 | 217,921 | 89,561 | |||||||||||||||||||||||
| Less: Cash Distributions to Investors From: | ||||||||||||||||||||||||||||||
| Operating Cash Flow | 102,000 | 188,561 | 120,000 | 171,618 | 189,000 | 20,300 | 80,000 | |||||||||||||||||||||||
| Sales & Refinancing | — | 604,800 | — | — | — | — | — | |||||||||||||||||||||||
| Other | — | 286,056 | — | — | — | — | — | |||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions | 140,536 | (607,638 | ) | 76,273 | 99,751 | 120,887 | 197,621 | 9,561 | ||||||||||||||||||||||
| Less: Special Items (not including Sales & Refinancing) | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions and Special Items | $ | 140,536 | $ | (607,638 | )* | $ | 76,273 | $ | 99,751 | $ | 120,887 | $ | 197,621 | $ | 9,561 | |||||||||||||||
Tax and Distribution Data Per $1,000 Invested | ||||||||||||||||||||||||||||||
| Federal Income Tax Results: | ||||||||||||||||||||||||||||||
| Ordinary Income (Loss) | ||||||||||||||||||||||||||||||
| — from operations | $ | 47.56 | $ | (0.99 | ) | $ | 40.29 | $ | 52.84 | $ | 38.20 | $ | 119.66 | $ | 44.78 | |||||||||||||||
| — from recapture | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Capital Gain (Loss) | — | 25.77 | — | — | — | — | — | |||||||||||||||||||||||
| Cash Distributions to Investors | ||||||||||||||||||||||||||||||
| Sources (on GAAP basis) | ||||||||||||||||||||||||||||||
| — Investment Income | — | — | — | — | — | — | — | |||||||||||||||||||||||
| — Return of Capital | — | 26.02 | — | — | — | — | — | |||||||||||||||||||||||
| Sources (on Cash basis) | ||||||||||||||||||||||||||||||
| — Sales | — | 55.02 | — | — | — | — | — | |||||||||||||||||||||||
| — Refinancing | — | — | — | — | — | — | — | |||||||||||||||||||||||
| — Operations | $ | 42.50 | $ | 17.15 | $ | 40.00 | $ | 44.58 | $ | 45.03 | $ | 19.26 | $ | 40.00 | ||||||||||||||||
| * | The cash deficiency results from distributions in excess of operating cash flow for this year, which represents a partial return of capital. |
A-37
Table of Contents
TABLE III
| NNN | ||||||||||||||||||||||||||||||
| Timberhills | NNN | NNN | NNN | NNN | VC/RE | NNN | ||||||||||||||||||||||||
| Shop Ctr, | Addison Com | County Center | Arapahoe Svc. | Titan Bldg. & | Balanced | City Center | ||||||||||||||||||||||||
| LLC | Center, LLC | Drive, LLC | Center, LLC | Plaza, LLC | Fund II, LLC | West ‘B’, LLC | ||||||||||||||||||||||||
| Gross Revenues | $ | 641,500 | $ | 605,957 | $ | 327,525 | $ | 579,727 | $ | 907,921 | $ | — | $ | 1,437,942 | ||||||||||||||||
| Profit on Sale of Properties | ||||||||||||||||||||||||||||||
| Less: Operating Expenses | 123,366 | 359,950 | 65,353 | 197,560 | 510,118 | — | 254,828 | |||||||||||||||||||||||
| Interest Expense | 275,513 | 280,812 | 126,095 | 179,653 | 150,105 | — | 570,950 | |||||||||||||||||||||||
| Depreciation & Amortization | 96,342 | 115,785 | 62,422 | 93,100 | 71,049 | — | 232,636 | |||||||||||||||||||||||
| Net Income — GAAP Basis | 146,279 | (150,590 | ) | 73,655 | 109,414 | 176,649 | — | 379,528 | ||||||||||||||||||||||
| Taxable Income From: | ||||||||||||||||||||||||||||||
| Operations | 146,279 | (150,590 | ) | 73,655 | 109,414 | 176,649 | — | 379,528 | ||||||||||||||||||||||
| Gain on Sale | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Cash Generated From: | ||||||||||||||||||||||||||||||
| Operations | 242,621 | (34,805 | ) | 136,077 | 202,514 | 247,698 | — | 612,164 | ||||||||||||||||||||||
| Sales | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Refinancing | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Cash Generated From Operations, Sales & Refinancing | 242,621 | (34,805 | ) | 136,077 | 202,514 | 247,698 | — | 612,164 | ||||||||||||||||||||||
| Less: Cash Distributions to Investors From: | ||||||||||||||||||||||||||||||
| Operating Cash Flow | 148,185 | — | 125,000 | 160,833 | 161,440 | — | 327,500 | |||||||||||||||||||||||
| Sales & Refinancing | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Other | — | 52,408 | — | — | — | — | — | |||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions | 94,436 | (87,213 | ) | 11,077 | 41,681 | 86,258 | — | 284,664 | ||||||||||||||||||||||
| Less: Special Items (not including Sales & Refinancing) | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions and Special Items | $ | 94,436 | $ | (87,213 | )* | $ | 11,077 | $ | 41,681 | $ | 86,258 | $ | — | $ | 284,664 | |||||||||||||||
Tax and Distribution Data Per $1,000 Invested | ||||||||||||||||||||||||||||||
| Federal Income Tax Results: | ||||||||||||||||||||||||||||||
| Ordinary Income (Loss) | ||||||||||||||||||||||||||||||
| — from operations | $ | 39.58 | $ | (41.26 | ) | $ | 23.81 | $ | 27.35 | $ | 79.58 | $ | — | $ | 46.28 | |||||||||||||||
| — from recapture | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Capital Gain (Loss) | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Cash Distributions to Investors | ||||||||||||||||||||||||||||||
| Sources (on GAAP basis) | ||||||||||||||||||||||||||||||
| — Investment Income | — | — | — | — | — | — | — | |||||||||||||||||||||||
| — Return of Capital | — | 14.36 | — | — | — | — | — | |||||||||||||||||||||||
| Sources (on Cash basis) | ||||||||||||||||||||||||||||||
| — Sales | — | — | — | — | — | — | — | |||||||||||||||||||||||
| — Refinancing | — | — | — | — | — | — | — | |||||||||||||||||||||||
| — Operations | $ | 40.10 | $ | — | $ | 40.40 | $ | 40.21 | $ | 72.73 | $ | — | $ | 39.94 | ||||||||||||||||
| * | The cash deficiency results from distributions in excess of operating cash flow for this year, which represents a partial return of capital. |
A-38
Table of Contents
TABLE III
| NNN | NNN | NNN | NNN | NNN | NNN | NNN | ||||||||||||||||||||||||
| Union | City Center | Pacific Corporate | North Reno, | Brookhollow, | 2002 Value | 1397 Galleria | ||||||||||||||||||||||||
| Square, LLC | West ‘A’, LLC | Park 1, LLC | LLC | LLC | Fund, LLC | Drive, LLC | ||||||||||||||||||||||||
| Gross Revenues | $ | 292,936 | $ | 1,531,935 | $ | 522,578 | $ | 529,085 | $ | 1,225,177 | $ | 2,508,101 | $ | 196,863 | ||||||||||||||||
| Profit on Sale of Properties | 424,826 | |||||||||||||||||||||||||||||
| Less: Operating Expenses | 122,895 | 516,215 | 254,292 | 155,554 | 449,855 | 769,310 | 52,883 | |||||||||||||||||||||||
| Interest Expense | 136,054 | 417,311 | 124,542 | 198,269 | 336,010 | 955,585 | 68,255 | |||||||||||||||||||||||
| Depreciation & Amortization | 34,892 | 122,277 | 121,230 | 70,598 | 182,357 | 603,862 | 37,695 | |||||||||||||||||||||||
| Net Income — GAAP Basis | (905 | ) | 476,132 | 447,340 | 104,664 | 256,955 | 179,344 | 38,030 | ||||||||||||||||||||||
| Taxable Income From: | ||||||||||||||||||||||||||||||
| Operations | (905 | ) | 476,132 | 22,514 | 104,664 | 256,955 | 179,344 | 38,030 | ||||||||||||||||||||||
| Gain on Sale | — | — | 424,826 | — | — | — | — | |||||||||||||||||||||||
| Cash Generated From: | ||||||||||||||||||||||||||||||
| Operations | 33,987 | 598,409 | 143,744 | 175,262 | 439,312 | 783,206 | 75,725 | |||||||||||||||||||||||
| Sales | — | — | 424,826 | — | — | — | — | |||||||||||||||||||||||
| Refinancing | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Cash Generated From Operations, Sales & Refinancing | 33,987 | 598,409 | 568,570 | 175,262 | 439,312 | 783,206 | 75,725 | |||||||||||||||||||||||
| Less: Cash Distributions to Investors From: | ||||||||||||||||||||||||||||||
| Operating Cash Flow | — | 364,645 | 143,744 | 110,000 | 262,000 | 320,811 | 75,725 | |||||||||||||||||||||||
| Sales & Refinancing | — | — | 424,826 | — | — | — | — | |||||||||||||||||||||||
| Other | — | — | 642,475 | — | — | — | 2,275 | |||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions | 33,987 | 233,764 | (642,474 | ) | 65,262 | 177,312 | 462,395 | (2,275 | ) | |||||||||||||||||||||
| Less: Special Items (not including Sales & Refinancing) | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions and Special Items | $ | 33,987 | $ | 233,764 | $ | (642,474 | )* | $ | 65,262 | $ | 177,312 | $ | 462,395 | $ | (2,275 | )* | ||||||||||||||
Tax and Distribution Data Per $1,000 Invested | ||||||||||||||||||||||||||||||
| Federal Income Tax Results: | ||||||||||||||||||||||||||||||
| Ordinary Income (Loss) | ||||||||||||||||||||||||||||||
| — from operations | $ | (1.57 | ) | $ | 41.83 | $ | 3.88 | $ | 38.06 | $ | 39.23 | $ | 6.02 | $ | 19.50 | |||||||||||||||
| — from recapture | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Capital Gain (Loss) | — | — | 73.25 | — | — | — | — | |||||||||||||||||||||||
| Cash Distributions to Investors | ||||||||||||||||||||||||||||||
| Sources (on GAAP basis) | ||||||||||||||||||||||||||||||
| — Investment Income | — | — | — | — | — | — | — | |||||||||||||||||||||||
| — Return of Capital | — | — | 110.77 | — | — | — | 1.17 | |||||||||||||||||||||||
| Sources (on Cash basis) | ||||||||||||||||||||||||||||||
| — Sales | — | — | 73.25 | — | — | — | — | |||||||||||||||||||||||
| — Refinancing | — | — | — | — | — | — | — | |||||||||||||||||||||||
| — Operations | $ | — | $ | 32.04 | $ | 24.78 | $ | 40.00 | $ | 40.00 | $ | 10.77 | $ | 38.83 | ||||||||||||||||
| * | The cash deficiency results from distributions in excess of operating cash flow for this year, which represents a partial return of capital. |
A-39
Table of Contents
TABLE III
| NNN | NNN | NNN | NNN | NNN | NNN | NNN | ||||||||||||||||||||||||
| Bryant Ranch, | 4241 Bowling | Wolf Pen | Alamosa Plaza, | Saddleback, | Kahana | Springtown Mall | ||||||||||||||||||||||||
| LLC | Green, LLC | Plaza, LLC | LLC | LLC | Gateway, LLC | Investors, LLC | ||||||||||||||||||||||||
| Gross Revenues | $ | 626,941 | $ | 465,039 | $ | 1,005,520 | $ | 992,697 | $ | 789,127 | $ | 1,291,329 | $ | 499,925 | ||||||||||||||||
| Profit on Sale of Properties | ||||||||||||||||||||||||||||||
| Less: Operating Expenses | 161,073 | 211,557 | 333,004 | 141,944 | 308,259 | 402,111 | 77,971 | |||||||||||||||||||||||
| Interest Expense | 210,554 | 99,710 | 395,306 | 418,363 | 200,959 | 349,038 | 119,230 | |||||||||||||||||||||||
| Depreciation & Amortization | 138,567 | 66,662 | 177,212 | 72,436 | 152,688 | 195,342 | 7,642 | |||||||||||||||||||||||
| Net Income — GAAP Basis | 116,747 | 87,110 | 99,998 | 359,954 | 127,221 | 344,838 | 295,082 | |||||||||||||||||||||||
| Taxable Income From: | ||||||||||||||||||||||||||||||
| Operations | 116,747 | 87,110 | 99,998 | 359,954 | 127,221 | 344,838 | 295,082 | |||||||||||||||||||||||
| Gain on Sale | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Cash Generated From: | ||||||||||||||||||||||||||||||
| Operations | 255,314 | 153,772 | 277,210 | 432,390 | 279,909 | 540,180 | 302,724 | |||||||||||||||||||||||
| Sales | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Refinancing | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Cash Generated From Operations, Sales & Refinancing | 255,314 | 153,772 | 277,210 | 432,390 | 279,909 | 540,180 | 302,724 | |||||||||||||||||||||||
| Less: Cash Distributions to Investors From: | ||||||||||||||||||||||||||||||
| Operating Cash Flow | 197,458 | 126,851 | 220,000 | 266,000 | 206,162 | 285,031 | 65,824 | |||||||||||||||||||||||
| Sales & Refinancing | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Other | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions | 57,856 | 26,921 | 57,210 | 166,390 | 73,747 | 255,149 | 236,900 | |||||||||||||||||||||||
| Less: Special Items (not including Sales & Refinancing) | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions and Special Items | $ | 57,856 | $ | 26,921 | $ | 57,210 | $ | 166,390 | $ | 73,747 | $ | 255,149 | $ | 236,900 | ||||||||||||||||
Tax and Distribution Data Per $1,000 Invested | ||||||||||||||||||||||||||||||
| Federal Income Tax Results: | ||||||||||||||||||||||||||||||
| Ordinary Income (Loss) | ||||||||||||||||||||||||||||||
| — from operations | $ | 23.35 | $ | 30.56 | $ | 18.18 | $ | 54.13 | $ | 32.91 | $ | 42.36 | $ | 115.72 | ||||||||||||||||
| — from recapture | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Capital Gain (Loss) | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Cash Distributions to Investors | ||||||||||||||||||||||||||||||
| Sources (on GAAP basis) | ||||||||||||||||||||||||||||||
| — Investment Income | — | — | — | — | — | — | — | |||||||||||||||||||||||
| — Return of Capital | — | — | — | — | — | — | — | |||||||||||||||||||||||
| Sources (on Cash basis) | ||||||||||||||||||||||||||||||
| — Sales | — | — | — | — | — | — | — | |||||||||||||||||||||||
| — Refinancing | — | — | — | — | — | — | — | |||||||||||||||||||||||
| — Operations | $ | 39.49 | $ | 44.51 | $ | 40.00 | $ | 40.00 | $ | 53.33 | $ | 35.02 | $ | 25.81 | ||||||||||||||||
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TABLE III
| NNN | NNN | NNN | NNN | NNN | ||||||||||||||||||||||
| Congress Center | Park Sahara, | Parkwood Complex | G REIT, | 2006 Notes | Buschwood, | |||||||||||||||||||||
| LLC | LLC | LLC | Inc. | Program, LLC | LLC | |||||||||||||||||||||
| Gross Revenues | $ | 3,158,082 | $ | 537,830 | $ | 1,832,991 | $ | 3,673,524 | $ | 968 | $ | 283,002 | ||||||||||||||
| Profit on Sale of Properties | ||||||||||||||||||||||||||
| Less: Operating Expenses | 1,048,933 | 116,602 | 430,483 | 1,834,656 | — | 88,491 | ||||||||||||||||||||
| Interest Expense | 743,998 | 127,188 | 412,185 | 866,791 | 3,469 | 54,375 | ||||||||||||||||||||
| Depreciation & Amortization | 869,084 | 78,610 | 252,816 | 405,454 | — | 44,655 | ||||||||||||||||||||
| Net Income — GAAP Basis | 496,067 | 215,430 | 737,507 | 566,623 | (2,501 | ) | 95,481 | |||||||||||||||||||
| Taxable Income From: | ||||||||||||||||||||||||||
| Operations | 496,067 | 215,430 | 737,507 | 566,623 | (2,501 | ) | 95,481 | |||||||||||||||||||
| Gain on Sale | — | — | — | — | — | — | ||||||||||||||||||||
| Cash Generated From: | ||||||||||||||||||||||||||
| Operations | 1,365,151 | 294,040 | 990,323 | 1,037,201 | (2,501 | ) | 140,136 | |||||||||||||||||||
| Sales | — | — | — | — | — | — | ||||||||||||||||||||
| Refinancing | — | — | — | — | — | — | ||||||||||||||||||||
| Cash Generated From Operations, Sales & Refinancing | 1,365,151 | 294,040 | 990,323 | 1,037,201 | (2,501 | ) | 140,136 | |||||||||||||||||||
| Less: Cash Distributions to Investors From: | ||||||||||||||||||||||||||
| Operating Cash Flow | 530,233 | 86,667 | 264,524 | 1,037,201 | — | 45,941 | ||||||||||||||||||||
| Sales & Refinancing | — | — | — | — | — | — | ||||||||||||||||||||
| Other | — | — | — | 251,963 | — | — | ||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions | 834,917 | 207,373 | 725,799 | (251,963 | ) | (2,501 | ) | 94,195 | ||||||||||||||||||
| Less: Special Items (not including Sales & Refinancing) | — | — | — | — | — | |||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions and Special Items | $ | 834,917 | $ | 207,373 | $ | 725,799 | $ | (251,963 | )* | $ | (2,501 | ) | $ | 94,195 | ||||||||||||
Tax and Distribution Data Per $1,000 Invested | ||||||||||||||||||||||||||
| Federal Income Tax Results: | ||||||||||||||||||||||||||
| Ordinary Income (Loss) | ||||||||||||||||||||||||||
| — from operations | $ | 12.70 | $ | 43.49 | $ | 98.70 | $ | 7.89 | $ | (2.39 | ) | $ | 29.84 | |||||||||||||
| — from recapture | — | — | — | — | — | — | ||||||||||||||||||||
| Capital Gain (Loss) | — | — | — | — | — | — | ||||||||||||||||||||
| Cash Distributions to Investors | ||||||||||||||||||||||||||
| Sources (on GAAP basis) | ||||||||||||||||||||||||||
| — Investment Income | — | — | — | 14.45 | — | — | ||||||||||||||||||||
| — Return of Capital | — | — | — | 3.51 | — | — | ||||||||||||||||||||
| Sources (on Cash basis) | ||||||||||||||||||||||||||
| — Sales | — | — | — | — | — | — | ||||||||||||||||||||
| — Refinancing | — | — | — | — | — | — | ||||||||||||||||||||
| — Operations | $ | 13.57 | $ | 17.50 | $ | 35.40 | $ | 14.45 | $ | — | $ | 14.36 | ||||||||||||||
| * | The cash deficiency results from distributions in excess of operating cash flow for this year, which represents a partial return of capital. |
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TABLE III
| NNN | NNN | NNN | NNN | NNN | ||||||||||||||||||||||
| Beltline/Royal Ridge, | Parkway Towers, | 602 Sawyer, | Netpark, | Xerox Centre, | Total | |||||||||||||||||||||
| LLC | LLC | LLC | LLC | LLC | All Programs | |||||||||||||||||||||
| Gross Revenues | $ | 317,574 | $ | 283,601 | $ | 105,928 | $ | — | $ | 298,463 | $ | 53,512,069 | ||||||||||||||
| Profit on Sale of Properties | 6,764,564 | |||||||||||||||||||||||||
| Less: Operating Expenses | 28,834 | 77,372 | 2,725 | — | 25,677 | 18,173,147 | ||||||||||||||||||||
| Interest Expense | 62,459 | 30,250 | 5,119 | — | — | 17,328,420 | ||||||||||||||||||||
| Depreciation & Amortization | 52,510 | 34,510 | — | — | 55,723 | 8,265,614 | ||||||||||||||||||||
| Net Income — GAAP Basis | 173,771 | 141,469 | 98,084 | — | 217,064 | 16,509,452 | ||||||||||||||||||||
| Taxable Income From: | ||||||||||||||||||||||||||
| Operations | 173,771 | 141,469 | 98,084 | — | 217,064 | 9,744,889 | ||||||||||||||||||||
| Gain on Sale | — | — | — | — | — | 6,764,564 | ||||||||||||||||||||
| Cash Generated From: | ||||||||||||||||||||||||||
| Operations | 226,281 | 175,979 | 98,084 | — | 272,786 | 18,075,627 | ||||||||||||||||||||
| Sales | — | — | — | — | — | 6,764,564 | ||||||||||||||||||||
| Refinancing | — | — | — | — | — | — | ||||||||||||||||||||
| Cash Generated From Operations, Sales & Refinancing | 226,281 | 175,979 | 98,084 | — | 272,786 | 24,840,190 | ||||||||||||||||||||
| Less: Cash Distributions to Investors From: | ||||||||||||||||||||||||||
| Operating Cash Flow | 65,333 | 17,915 | — | — | — | 10,605,857 | ||||||||||||||||||||
| Sales & Refinancing | — | — | — | — | — | 9,144,044 | ||||||||||||||||||||
| Other | — | — | — | — | — | 4,127,042 | ||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions | 160,948 | 158,064 | 98,084 | — | 272,786 | 963,247 | ||||||||||||||||||||
| Less: Special Items (not including Sales & Refinancing) | — | — | — | — | — | — | ||||||||||||||||||||
| Cash Generated (Deficiency) after Cash Distributions and Special Items | $ | 160,948 | $ | 158,064 | $ | 98,084 | $ | — | $ | 272,786 | $ | 963,247 | ||||||||||||||
Tax and Distribution Data Per $1,000 Invested | ||||||||||||||||||||||||||
| Federal Income Tax Results: | ||||||||||||||||||||||||||
| Ordinary Income (Loss) | ||||||||||||||||||||||||||
| — from operations | $ | 38.70 | $ | 21.07 | $ | 14.61 | $ | — | $ | 10.60 | ||||||||||||||||
| — from recapture | — | — | — | — | — | |||||||||||||||||||||
| Capital Gain (Loss) | — | — | — | — | — | |||||||||||||||||||||
| Cash Distributions to Investors | ||||||||||||||||||||||||||
| Sources (on GAAP basis) | ||||||||||||||||||||||||||
| — Investment Income | — | — | — | — | — | |||||||||||||||||||||
| — Return of Capital | — | — | — | — | — | |||||||||||||||||||||
| Sources (on Cash basis) | ||||||||||||||||||||||||||
| — Sales | — | — | — | — | — | |||||||||||||||||||||
| — Refinancing | — | — | — | — | — | |||||||||||||||||||||
| — Operations | $ | 14.55 | $ | 2.67 | $ | — | $ | — | $ | — | ||||||||||||||||
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TABLE IV
None.
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TABLE V
| Selling Price, Net of Closing Costs & GAAP Adjustments | ||||||||||||||||||||||||||||
| Purchase | Adjustments | |||||||||||||||||||||||||||
| Cash Received | Mortgage | Mortgage | Resulting from | |||||||||||||||||||||||||
| Date | Date of | Net of Closing | Balance at | Taken Back | Application of | |||||||||||||||||||||||
| Property | Acquired | Sale(1) | Costs(2) | Time of Sale | by Program | GAAP | Total | |||||||||||||||||||||
| Huron Mall, Huron, SD | Mar-99 | Apr-00 | $ | 2,080,564 | $ | 1,322,623 | N/A | N/A | $ | 3,403,187 | ||||||||||||||||||
| Crossroads Shopping Ctr, Kona, HI | Aug-98 | Aug-00 | $ | 3,876,701 | $ | 11,180,445 | N/A | N/A | $ | 15,057,146 | ||||||||||||||||||
| Christie Street, Lufkin, TX | Sep-00 | Nov-01 | $ | (297,537 | ) | $ | 779,726 | $ | 595,000 | N/A | $ | 1,077,189 | ||||||||||||||||
| Village Fashion Center | Jul-99 | Mar-02 | $ | 3,965,749 | $ | 6,751,978 | N/A | N/A | $ | 10,717,727 | ||||||||||||||||||
| Bryant Ranch Shopping Center | Dec-98 | Sep-02 | $ | 3,618,970 | $ | 6,501,207 | N/A | N/A | $ | 10,120,177 | ||||||||||||||||||
| Phelan Village Shopping Center | Oct-98 | Dec-02 | $ | 1,636,485 | $ | 3,464,414 | N/A | N/A | $ | 5,100,899 | ||||||||||||||||||
| Plaza Del Rey | Nov-00 | Sep-02 | $ | 471,000 | $ | 4,932,000 | N/A | N/A | $ | 5,403,000 | ||||||||||||||||||
| Seguin Corners | Nov-00 | Aug-02 | $ | 763,261 | $ | 1,693,700 | N/A | N/A | $ | 2,456,961 | ||||||||||||||||||
| Titan Land | Nov-02 | Oct-02 | $ | 110,862 | $ | 0 | N/A | N/A | $ | 110,862 | ||||||||||||||||||
| Northstar Crossing | Oct-00 | Jan-03 | $ | 976,005 | $ | 2,866,579 | N/A | N/A | $ | 3,842,584 | ||||||||||||||||||
| Palm Court | Aug-99 | May-03 | $ | 5,572,100 | $ | 8,397,134 | N/A | N/A | $ | 13,969,234 | ||||||||||||||||||
| Barstow Road Center | May-98 | Feb-03 | $ | 1,505,020 | $ | 3,153,151 | N/A | N/A | $ | 4,658,172 | ||||||||||||||||||
| Orange Street | Jul-00 | Feb-03 | $ | 2,879,144 | $ | 7,388,682 | N/A | N/A | $ | 10,267,827 | ||||||||||||||||||
| (1) No sales were to affiliated parties. | |
| (2) Net cash received plus assumption of certain liabilities by buyer. |
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TABLE V
| Cost of Properties Including Closing & Soft Costs | ||||||||||||||||||||
| Excess | ||||||||||||||||||||
| Total | (Deficiency) | |||||||||||||||||||
| Acquisition | of Property | |||||||||||||||||||
| Costs, Capital | Operating | |||||||||||||||||||
| Original | Improvements | Gain on | Cash Receipts | |||||||||||||||||
| Mortgage | Closing & Soft | Sale of | over Cash | |||||||||||||||||
| Property | Financing(3) | Costs(3) | Total | Investment | Expenditures(4) | |||||||||||||||
| Huron Mall, Huron, SD | $ | 1,440,000 | $ | 403,893 | $ | 1,843,893 | $ | 1,559,293 | $ | (8,936 | ) | |||||||||
| Crossroads Shopping Ctr, Kona, HI | $ | 13,605,097 | $ | 880,187 | $ | 14,485,284 | $ | 571,862 | $ | (496,841 | ) | |||||||||
| Christie Street, Lufkin, TX | $ | 750,000 | $ | 505,137 | $ | 1,255,137 | $ | (177,949 | )(5) | $ | 124,290 | |||||||||
| Village Fashion Center | $ | 6,600,000 | $ | 2,956,152 | $ | 9,556,152 | $ | 1,161,575 | $ | 849,618 | ||||||||||
| Bryant Ranch Shopping Center | $ | 7,950,000 | $ | 1,181,373 | $ | 9,131,373 | $ | 988,804 | $ | 20,293 | ||||||||||
| Phelan Village Shopping Center | $ | 3,625,000 | $ | 1,385,084 | $ | 5,010,084 | $ | 90,815 | $ | 653,174 | ||||||||||
| Plaza Del Rey | $ | 3,995,000 | $ | 738,089 | $ | 4,733,089 | $ | 669,911 | $ | 471,224 | ||||||||||
| Seguin Corners | $ | 545,000 | $ | 720,300 | $ | 1,265,300 | $ | 1,191,661 | $ | 251,785 | ||||||||||
| Titan Land | $ | 0 | $ | 76,109 | $ | 76,109 | $ | 34,753 | $ | 0 | ||||||||||
| Northstar Crossing | $ | 2,695,000 | $ | 1,123,967 | $ | 3,818,967 | $ | 23,617 | $ | 386,063 | ||||||||||
| Palm Court | $ | 8,500,000 | $ | 1,499,111 | $ | 9,999,111 | $ | 3,970,123 | $ | 193,028 | ||||||||||
| Barstow Road Center | $ | 3,450,000 | $ | 1,473,215 | $ | 4,923,215 | $ | (265,043 | ) | $ | 532,751 | |||||||||
| Orange Street | $ | 6,500,000 | $ | 2,140,974 | $ | 8,640,974 | $ | 1,626,853 | $ | 667,896 | ||||||||||
| (3) | Does not include pro-rata share of original offering costs. |
| (4) | May reflect paydown of debt from operating cash flow. |
| (5) | After a $50,000 real estate commission refund from the Advisor |
| * | Partial sales of the Bowling Green property (2000 Value Fund), Pacific Corporate Park and the Moreno property have occurred, however a portion of the original acquisitions still remain in the program. No reporting of these sales will occur until the entire original acquisition has been disposed of in order to obtain a true picture of over-all performance. |
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EXHIBIT B
SUBSCRIPTION AGREEMENT
| To: | G REIT, Inc. |
Ladies and Gentlemen:
The undersigned, by signing and delivering a copy of the attached Subscription Agreement Signature Page, hereby tenders this subscription and applies for the purchase of the number of shares of common stock (“Shares”) in G REIT, Inc., a Virginia corporation (the “Company”), set forth on such Subscription Agreement Signature Page. Payment for the Shares is hereby made by check payable to “PriVest Bank, as Escrow Agent for G REIT, Inc.”
Payments for all Shares are placed in an escrow account pending their use for the specific purposes described in the Prospectus (for example, acquisition of interests in real estate). All monies in the escrow account are held in trust for the benefit of the subscribers and will not be commingled with the funds of, or become an asset of, the Company until such time as they are released from the escrow account for the purposes stated in the Prospectus. Funds in the escrow account will not be subject to attachment, levy or other encumbrance in any legal action by a third party against the Company. In the event any funds are not released from the escrow account in consummation of the transactions and purposes stated in the Prospectus, such monies will be returned to subscribers pro rata. The escrow account is maintained at PriVest Bank in South Coast Metro, California.
I hereby acknowledge receipt of the Prospectus for the offering of the Shares dated 2004, as supplemented to date (the “Prospectus”).
I agree that if this subscription is accepted, it will be held, together with the accompanying payment, and disbursed on the terms described in the Prospectus. I agree that subscriptions may be rejected in whole or in part by the Company in its sole and absolute discretion. In addition, I understand and agree that subscriptions are irrevocable, and I will not have the right to cancel or rescind my subscription, except as required under applicable law.
Any person selling Shares on behalf of the Company may not complete a sale of Shares to me until at least five business days after the date that I receive a copy of the final prospectus. Moreover, any person selling Shares on behalf of the Company must send me a confirmation of my purchase.
Prospective investors are hereby advised of the following:
| (a) The assignability and transferability of the Shares is restricted and will be governed by the Third Amended and Restated Articles of Incorporation and the Amended and Restated Bylaws and all applicable laws as described in the Prospectus. | |
| (b) Prospective investors should not invest in Shares unless they have an adequate means of providing for their current needs and personal contingencies and have no need for liquidity in this investment. | |
| (c) There will be no public market for the Shares, and accordingly, it may not be possible to readily liquidate their investment in the Shares. |
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SPECIAL NOTICE FOR SOUTH DAKOTA RESIDENTS ONLY
This subscription is made pursuant to, and is subject to, the terms and conditions of the registration approved by the director of the Division of Securities of the State of South Dakota for G REIT, Inc. under the date of , 2004.
SPECIAL NOTICE FOR CALIFORNIA RESIDENTS ONLY
In connection with secondary trading of the Shares, the Commissioner of the State of California Department of Corporations will withhold the Section 25104(h) exemption which permits secondary trading of the Shares for 18 months from the date of qualification of the Shares.
STANDARD REGISTRATION REQUIREMENTS
The following requirements have been established for the various forms of registration. Accordingly, complete Subscription Agreements and such supporting material as may be necessary must be provided.
TYPE OF OWNERSHIP AND SIGNATURE(S) REQUIRED
(1) INDIVIDUAL: One signature required.
(2) JOINT TENANTS WITH RIGHT OF SURVIVORSHIP: All parties must sign.
(3) TENANTS IN COMMON: All parties must sign.
(4) COMMUNITY PROPERTY: Only one investor signature required.
(5) PENSION OR PROFIT SHARING PLANS: The trustee signs the Signature Page.
(6) TRUST: The trustee signs the Signature Page. Provide the name of the trust, the name of the trustee and the name of the beneficiary.
(7) COMPANY: Identify whether the entity is a general or limited partnership. The general partners must be identified and their signatures obtained on the Signature Page. In the case of an investment by a general partnership, all partners must sign (unless a “managing partner”) has been designated for the partnership, in which case he may sign on behalf of the partnership if a certified copy of the document granting him authority to invest on behalf of the partnership is submitted).
(8) CORPORATION: The Subscription Agreement must be accompanied by (1) a certified copy of the resolution of the Board of Directors designation of the officer(s) of the corporation authorized to sign on behalf of the corporation and (2) a certified copy of the Board’s resolution authorizing the investment.
(9) IRA AND IRA ROLLOVERS: Requires signature of authorized signer (e.g., an officer) of the bank, trust company, or other fiduciary. The address of the trustee must be provided in order for the trustee to receive checks and other pertinent information regarding the investment.
(10) KEOGH (HR 10): Same rules as those applicable to IRAs.
(11) UNIFORM GIFT TO MINORS ACT (UGMA) or UNIFORM TRANSFERS TO MINORS ACT (UTMA): The required signature is that of the custodian, not of the parent (unless the parent has been designated as the custodian). Only one child is permitted in each investment under UGMA or UTMA. In addition, designate the state under which the gift is being made.
(12) PARTNERSHIP: Include evidence of partnership authority for person who executes subscription agreement.
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Table of Contents
INSTRUCTIONS TO SUBSCRIPTION AGREEMENT SIGNATURE PAGE
Investment Instructions
Please follow these instructions carefully. Failure to do so may result in the rejection of your subscription. All information on the Subscription Agreement Signature Page should be completed as follows:
| 1. INVESTMENT | A minimum investment of $1,000 (100 Shares) is required, except for Minnesota which requires a $2,500 (250 Shares) minimum investment and North Carolina which requires a $5,000 (500 Shares) minimum investment. A CHECK FOR THE FULL PURCHASE PRICE OF THE SHARES SUBSCRIBED FOR SHOULD BE MADE PAYABLE TO THE ORDER OF “PRIVEST BANK, AS ESCROW AGENT FOR G REIT, INC.” Shares may be purchased only by persons meeting the standards set forth under the Section of the Prospectus entitled “INVESTOR SUITABILITY STANDARDS.” (Certain states have imposed special financial suitability standards as set forth in the Prospectus and on page 8 below). Please indicate the state in which the sale was made. | |
| All additional investments must be increments of at least $100 (10 Shares). If additional investments in the Company are made, the investor agrees to notify the Company and the Broker-Dealer named on the Subscription Agreement Signature Page in writing if at any time he fails to meet the applicable suitability standards or he is unable to make any other representations or warranties set forth in the Prospectus or the Subscription Agreement. The investor acknowledges that the Broker-Dealer named in the Subscription Agreement Signature Page may receive a commission not to exceed 7.5% of any such additional investments in the Company. | ||
| 2. TYPE OF OWNERSHIP | Please check the appropriate box to indicate the type of entity or type of individuals subscribing. If you check the Individual Ownership box and you wish to designate a Transfer on Death beneficiary, you may check the “TOD” box and you must fill out the Transfer on Death Form in order to effect the designation. | |
| 3. REGISTRATION NAME AND ADDRESS | Please enter the exact name in which the Shares are to be held. For joint tenants with right of survivorship or tenants in common, include the names of both investors. In the case of partnerships or corporations include the name of an individual to whom correspondence will be addressed. Trusts should include the name of the trustee. All investors must complete the space provided for taxpayer identification number or social security number. By signing in Section 6, the investor is certifying that this number is correct. Enter the mailing address and telephone numbers of the registered owner of this investment. In the case of a Qualified Plan or trust, this will be the address of the trustee. Indicate the birthday and occupation of the registered |
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Table of Contents
| owner unless the registered owner is a partnership, corporation or trust. | ||
| 3. INVESTOR NAME AND ADDRESS | Complete this Section only if the investor’s name and address is different from the registration name and address provided in Section 4. If the Shares are registered in the name of a trust, enter the name, address, telephone number, social security number, birth date and occupation of the beneficial owner of the trust. | |
| 5. SUBSCRIBER SIGNATURE | Please separately initial each representation made by the investor where indicated. Each investor must sign and date this Section. If title is to be held jointly, all parties must sign. If the registered owner is a partnership, corporation or trust, a general partner, officer or trustee of the entity must sign. PLEASE NOTE THAT THESE SIGNATURES DO NOT HAVE TO BE NOTARIZED. | |
| 6. DISTRIBUTIONS | a. DIVIDEND REINVESTMENT PLAN: By electing the Dividend Reinvestment Program, the investor elects to reinvest dividends in the Company. The investor agrees to notify the Company and the Broker-Dealer named on the Subscription Agreement Signature Page in writing if at any time he fails to meet the applicable suitability standards or he is unable to make any other representations and warranties as set forth in the Prospectus or Subscription Agreement. | |
| b. DIVIDEND ADDRESS: If cash dividends are to be sent to an address other than that provided in Section 5 (i.e., a bank, brokerage firm or savings and loan, etc.), please provide the name, account number and address. | ||
| 7. BROKER-DEALER | This Section is to be completed by the Registered Representative. Please complete all BROKER-DEALER information contained in Section 8 including suitability certification. SIGNATURE PAGE MUST BE SIGNED BY AN AUTHORIZED REPRESENTATIVE. |
The Subscription Agreement Signature Page, which has been delivered with this Prospectus, together with a check for the full purchase price, should be delivered or mailed to your Broker-Dealer. Only original, completed copies of Subscription Agreements can be accepted. Photocopied or otherwise duplicated Subscription Agreements cannot be accepted by the Company.
SPECIAL SUITABILITY STANDARDS
Certain states have imposed special financial suitability standards for subscribers who purchase Shares.
California: Investors must have either (1) a minimum net worth of at least $60,000 and a gross income of at least $60,000 or (2) a minimum net worth of at least $250,000.
Iowa, Massachusetts, Michigan, North Carolina and Oregon: Investors must have either (1) a net worth of at least $225,000 or (2) gross annual income of $60,000 and a net worth of at least $60,000.
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Maine: Investors must have either (1) a minimum net worth of at least $50,000 and gross annual income of at least $50,000 or (2) a minimum net worth of at least $200,000.
Missouri, Ohio and Pennsylvania: An Investor’s investment in our Shares cannot exceed 10% of that investor’s net worth.
IF YOU NEED FURTHER ASSISTANCE IN COMPLETING THIS
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G REIT, INC.
SUBSCRIPTION AGREEMENT SIGNATURE PAGE
1.
INVESTMENT
| Make Investment Check Payable to: | ||||
| PriVest Bank as Escrow Agent for G REIT, Inc. | ||||
| # of Shares | Total $ Invested |
| (# Shares x $10.00) = $ Invested) Minimum purchase = 100 Shares or $1,000 | o | Initial Investment (Minimum $1,000) (except in Minnesota, which requires a minimum investment of $2,500 and North Carolina, which requires a minimum investment of 5,000) | ||
| (250 Shares or $2,500 in Minnesota) (500 Shares or $5,000 in North Carolina) | o | Additional Investment (Minimum $100.00) | ||
2.
TYPE OF OWNERSHIP
| o | Individual (01) | o | IRA (09) | |||
| o | Joint Tenants With Right of Survivorship (02) | o | Keogh (10) | |||
| o | Community Property (04) | o | Qualified Pension Plan (05) | |||
| o | Tenants in Common (03) | o | Qualified Profit Sharing Plan (05) | |||
| o | Custodian: A Custodian for under the Uniform | o | Other Trust | |||
| Gift to Minors Act or the Uniform Transfers to Minors Act | For the Benefit of | |||||
| of the State of (11) | o | Partnership (12) | ||||
| o | Other | o | TOD (Fill out TOD Form to Effect Designation) |
3.
REGISTRATION NAME AND ADDRESS
Please print name(s) in which Shares are to be registered. Include trust name, if applicable.
o Mr. o Mrs. o Ms. o MD o Ph.D. o DDS o Other
| Taxpayer Identification Number | oo-ooooooo |
| Social Security Number | ooo-oo-oooo |
State
Zip Code
Business Telephone No. ( ____)
Occupation
BY SIGNING THIS AGREEMENT, YOU ARE NOT WAIVING ANY RIGHTS
| Signature of Investor or Custodian | Signature of Joint Owner, if applicable | Date | ||
(MUST BE SIGNED BY CUSTODIAN(S) IF IRA, KEOGH OR QUALIFIED PLAN).
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INVESTOR NAME AND ADDRESS
(Complete only if different from registration name and address).
o Mr. o Mrs. o Ms. o MD o Ph.D. o DDS o Other
| Name |
| Taxpayer Identification Number | oo-ooooooo |
| Social Security Number | ooo-oo-oooo |
State
Zip Code
Business Telephone No. ( ____)
Occupation
5.
INVESTOR SIGNATURE
| Please separately initial each of the representations below. In order to induce the Company to accept this subscription, I hereby represent and warrant to you as follows: |
| (a) | I have received the Prospectus not less than five (5) business days prior to signing this Subscription Agreement. | Initials | Initials | |||
| (b) | I accept and agree to be bound by the terms and conditions of the Third Amended and Restated Articles of Incorporation. | Initials | Initials | |||
| (c) | I have (i) a net worth (exclusive of home, home furnishings and automobiles) of $150,000 or more, or (ii) a net worth (as described above) of at least $45,000 and had during the last tax year or estimate that I will have during the current tax year a minimum of $45,000 annual gross income, or that I meet the higher suitability requirements imposed by my state of primary residence as set forth in the Prospectus under “INVESTOR SUITABILITY STANDARDS” and page B-4 above. | Initials | Initials | |||
| (d) | I am purchasing the Shares for my own account. | Initials | Initials | |||
| (e) | I acknowledge that the Shares are not liquid. | Initials | Initials | |||
| (f) | If I am a California resident or if the Person to whom I subsequently propose to assign or transfer any Shares is a California resident, I may not consummate a sale or transfer of my Shares, or any interest therein, or receive any consideration therefor, without the prior written consent of the Commissioner of the Department of Corporations of the State of California, except as permitted in the Commissioner’s Rules, and I understand that my Shares, or any document evidencing my Shares, will bear a legend reflecting the substance of the foregoing understanding. | Initials | Initials | |||
| I declare that the information supplied above is true and correct and may be relied upon the Company in connection with my investment in the Company. Under penalties of perjury, by signing this Signature Page, I hereby certify that (a) I have provided herein my correct Taxpayer Identification Number, and (b) I am not subject to back-up withholding as a result of a failure to report all interest or dividends, or the Internal Revenue Service has notified me that I am no longer subject to back-up withholding. |
BY SIGNING THIS AGREEMENT, YOU ARE NOT WAIVING ANY RIGHTS
| Signature of Investor or Trustee | Signature of Joint Owner, if applicable | Date | ||
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DISTRIBUTIONS
| 7(a) Check the following box to participate in the Dividend Reinvestment Program o | |
| 7(b) Complete following section only to direct distributions to a party other than registered owner: |
State
Zip Code
Return of Capital Distributions: | Send to registered owner address of record o | |||
| Send to distribution address o |
7.
BROKER-DEALER
(TO BE COMPLETED BY REGISTERED REPRESENTATIVE)
| The Broker-Dealer or authorized representative must sign below to complete the subscription. The Broker-Dealer warrants that it is a duly licensed Broker-Dealer and may lawfully offer Shares in the state designated as the investor’s address or the state in which the sale was made, if different. The Broker-Dealer or authorized representative warrants that he has reasonable grounds to believe this investment is suitable for the subscriber as set forth in the Section of the Prospectus entitled “INVESTOR SUITABILITY STANDARDS” and that he has informed the subscriber of all aspects of liquidity and marketability of this investment as required by the Dealer Manager Agreement and/or the Participating Broker-Dealer Agreement. |
Broker-Dealer Name
Telephone No.
State
Zip Code
Telephone No.
E-Mail Address
State
Zip Code
I hereby certify that I am registered in ________________, the State of Sale.
| Broker-Dealer Signature, if applicable | Registered Representative Signature | |
Please mail completed Subscription Agreement (with all signatures) and check(s) made payable to
PriVest Bank, as Escrow Agent for:
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ENROLLMENT FORM
G REIT, Inc.
DIVIDEND REINVESTMENT PLAN
To Join the Dividend Reinvestment Plan (the “DRIP”):
(1) Complete this card. Be sure to include your social security or tax identification number and signature.
(2) Staple or tape the card closed so that your signature is enclosed.
Please indicate your participation below. Return this card only if you wish to participate in the DRIP.
I hereby appoint G REIT, Inc. (the “Company”) (or any designee or successor), acting as DRIP Administrator, as my agent to receive cash dividends that may hereafter become payable to me on shares of Common Stock of the Company registered in my name as set forth below, and authorize the Company to apply such dividends to the purchase of full shares and fractional interests in shares of the Common Stock.
I understand that the purchases will be made under the terms and conditions of the DRIP as described in the Prospectus and that I may revoke this authorization at any time by notifying the DRIP Administrator, in writing, of my desire to terminate my participation.
| o | Yes, I would like to participate in the Dividend Reinvestment Plan for 100% of my shares of Common Stock. |
| o | No, I do not wish to participate in the Dividend Reinvestment Plan. |
| Signature | Date | |||
| Please Print Full Legal Name(s) | Social Security or Tax Identification Number |
If your shares are held of record by a broker or nominee, you must make appropriate arrangements with the broker or nominee to participate in the DRIP.
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EXHIBIT C
G REIT, INC.
AMENDED AND RESTATED
G REIT, Inc., a Virginia corporation (the “Company”) adopted a Dividend Reinvestment Plan which is hereby amended and restated in its entirety as set forth below. The effective date of this Amended and Restated Dividend Reinvestment Plan (the “DRIP”) shall be the date that the Second Offering (as defined below) becomes effective with the Securities and Exchange Commission.
The DRIP offers to holders of the Company’s common stock, $.01 par value per share (the “Common Stock”) the opportunity to purchase, through reinvestment of dividends, additional shares of Common Stock, on the terms, subject to the conditions and at the prices herein stated.
The DRIP is available to shareholders who (a) purchased shares of the Company’s Common Stock pursuant to the Company’s initial public offering, which commenced on July 22, 2002 and will terminate on or before the effective date of the Second Offering, or (b) purchase shares pursuant to the Company’s second public offering, which will be implemented in connection with the Company’s Registration Statement under the Securities Act of 1933 on Form S-11, including the prospectus contained therein (the “Prospectus”) and the registered offering of 28,500,000 shares of the Company’s Common Stock (the “Second Offering”), of which amount 1,500,000 shares will be registered and reserved for distribution pursuant to the DRIP.
Dividends reinvested pursuant to the DRIP will be applied to the purchase of shares of Common Stock at a fixed price per share of $9.50 (the “DRIP Price”) until the earlier of (a) all 1,500,000 shares reserved for the DRIP (the “DRIP Shares”) have been purchased or (b) the termination of the Second Offering. Thereafter, the Company may, in its sole discretion, effect additional registrations of common stock for use in the DRIP. In any case, the per share purchase price under the DRIP for such additionally acquired shares will equal the DRIP Price.
The DRIP
The DRIP provides you with a simple and convenient way to invest your cash dividends in additional shares of Common Stock. As a participant in the DRIP, you may purchase shares at the DRIP Price until all 1,500,000 DRIP Shares have been purchased or until the Company elects to terminate the DRIP. The Company may, in its sole discretion, effect registration of additional shares of Common Stock for issuance under the DRIP.
Shares for the DRIP will be purchased directly from the Company. Such shares will be authorized and may be either previously issued or unissued shares. Proceeds from the sale of the DRIP Shares provide the Company with funds for general corporate purposes. You receive free custodial service for the shares you hold through the DRIP.
Eligibility
Holders of record of Common Stock are eligible to participate in the DRIP with respect to any whole number of their shares. If your shares are held of record by a broker or nominee and you want to participate in the DRIP, you must make appropriate arrangements with your broker or nominee.
The Company may refuse participation in the DRIP to shareholders residing in states where shares offered pursuant to the DRIP are neither registered under applicable securities laws nor exempt from registration.
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Administration
As of the date of this Prospectus, the DRIP will be administered by the Company or an affiliate of the Company (the “DRIP Administrator”), but a different entity may act as DRIP Administrator in the future. The DRIP Administrator will keep all records of your DRIP account and send statements of your account to you. Shares of Common Stock purchased under the DRIP will be registered in the name of each participating shareholder.
Enrollment
You must own shares of Common Stock in order to participate in the DRIP. You may become a participant in the DRIP by completing and signing the enrollment form enclosed with this Prospectus and returning it to us at the time you subscribe for shares. If you receive a copy of the Prospectus or a separate prospectus relating solely to the DRIP and have not previously elected to participate in the DRIP, then you may so elect at any time by completing the enrollment form attached to such prospectus or by other appropriate written notice to the Company of your desire to participate in the DRIP.
Your participation in the DRIP will begin with the first dividend payment after your signed enrollment form is received, provided such form is received on or before ten days prior to the record date established for that dividend. If your enrollment form is received after the record date for any dividend and before payment of that dividend, that dividend will be paid to you in cash and reinvestment of your dividends will not begin until the next dividend payment date.
Costs
Purchases under the DRIP will not be subject to selling commissions or the marketing and due diligence reimbursement fees. All costs of administration of the DRIP will be paid by the Company. However, any interest earned on dividends on shares within the DRIP will be paid to the Company to defray certain costs relating to the DRIP.
Purchases and Price of Shares
Common Stock dividends will be invested within 30 days after the date on which Common Stock dividends are paid (the “Investment Date”). Payment dates for Common Stock dividends will be ordinarily on or about the last calendar day of each month , but may be changed from time to time in the sole discretion of the Company. Any dividends not so invested will be returned to participants in the DRIP.
You become an owner of shares purchased under the DRIP as of the Investment Date. Dividends paid on shares held in the DRIP (less any required withholding tax) will be credited to your DRIP account. Dividends will be paid on both full and fractional shares held in your account and are automatically reinvested.
Reinvested Distributions. The Company will use the aggregate amount of dividends to all participants for each dividend period to purchase shares for the participants. If the aggregate amount of dividends to participants exceeds the amount required to purchase all shares then available for purchase, the Company will purchase all available shares and will return all remaining dividends to the participants within 30 days after the date such dividends are made. The Company will allocate the purchased shares among the participants based on the portion of the aggregate dividends received on behalf of each participant, as reflected on the Company’s books.
You may only elect dividend reinvestment with respect to any 100% of the shares registered in your name on the records of the Company. Dividends on all shares purchased pursuant to the DRIP will be automatically reinvested. The number of shares purchased for you as a participant in the DRIP will depend on the amount of your dividends on these shares (less any required withholding tax) and the DRIP Price. Your account will be credited with the number of shares, including fractions computed to four decimal places, equal to the total amount invested divided by the DRIP Price.
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Optional Cash Purchases. Until determined otherwise by the Company, DRIP participants may not make additional cash payments for the purchase of Common Stock under the DRIP.
Dividends on Shares Held in the DRIP
Dividends paid on shares held in the DRIP (less any required withholding tax) will be credited to your DRIP account. Dividends will be paid on both full and fractional shares held in your account and will be automatically reinvested.
Account Statements
You will receive a statement of your account within 90 days after the end of the fiscal year. The statements will contain a report of all transactions with respect to your account since the last statement, including information with respect to the dividends reinvested during the year, the number of shares purchased during the year, the per share purchase price for such shares, the total administrative charge retained by the Company or Plan Administrator on your behalf and the total number of shares purchased on your behalf pursuant to the DRIP. In addition, tax information with respect to income earned on shares under the DRIP for the year will be included in the account statements. These statements are your continuing record of the cost of your purchase and should be retained for income tax purposes.
Certificates for Shares
The ownership of shares purchased under the DRIP will be noted in book-entry form. The number of shares purchased will be shown on your statement of account. This feature permits ownership of fractional shares, protects against loss, theft or destruction of stock certificates and reduces the costs of the DRIP.
Certificates for any number of whole shares credited to your account may be issued in your name upon written request to the DRIP Administrator. Certificates for fractional shares will not be issued. Should you want your certificates issued in a different name, you must notify the DRIP Administrator in writing and comply with applicable transfer requirements. If you wish to sell any whole shares credited to your account under the DRIP, you will have to receive a certificate for such whole number of shares and arrange for the sale yourself. If you wish to pledge shares credited to your account, you must first have the certificate for those shares issued in your name.
Termination of Participation
You may discontinue reinvestment of dividends under the DRIP with respect to all, but not less than all, of your shares (including shares held for your account in the DRIP) at any time without penalty by notifying the DRIP Administrator in writing no less than ten days prior to the next record date. A notice of termination received by the DRIP Administrator after such cutoff date will not be effective until the next following Investment Date. Participants who terminate their participation in the DRIP may thereafter rejoin the DRIP by notifying the Company and completing all necessary forms and otherwise as required by the Company.
If you notify the DRIP Administrator of your termination of participation in the DRIP or if your participation in the DRIP is terminated by the Company, the stock ownership records will be updated to include the number of whole shares in your DRIP account. For any fractional shares of stock in your DRIP account, the DRIP Administrator may either (i) send you a check in payment for any fractional shares in your account, or (ii) credit your stock ownership account with any such fractional shares.
A participant who changes his or her address must promptly notify the DRIP Administrator. If a participant moves his or her residence to a state where shares offered pursuant to the DRIP are neither registered nor exempt from registration under applicable securities laws, the Company may deem the participant to have terminated participation in the DRIP.
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The Company reserves the right to prohibit certain employee benefit plans from participating in the DRIP if such participation could cause the underlying assets of the Company to constitute “plan assets” of such plans.
Amendment and Termination of the DRIP
The Board of Directors may, in its sole discretion, terminate the DRIP or amend any aspect of the DRIP without the consent of participants or other shareholders, provided that written notice of any material amendment is sent to participants at least 10 days prior to the effective date thereof. You will be notified if the DRIP is terminated or materially amended. The Board of Directors also may terminate any participant’s participation in the DRIP at any time by notice to such participant if continued participation will, in the opinion of the Board of Directors, jeopardize the status of the Company as a real estate investment trust under the Internal Revenue Code.
Voting of Shares Held Under the DRIP
You will be able to vote all shares of Common Stock (including fractional shares) credited to your account under the DRIP at the same time that you vote the shares registered in your name on the records of the Company.
Stock Dividends, Stock Splits and Rights Offerings
Your DRIP account will be amended to reflect the effect of any stock dividends, splits, reverse splits or other combinations or recapitalizations by the Company on shares held in the DRIP for you. If the Company issues to its shareholders rights to subscribe to additional shares, such rights will be issued to you based on your total share holdings, including shares held in your DRIP account.
Responsibility of the DRIP Administrator and the Company Under the DRIP
The DRIP Administrator will not be liable for any claim based on an act done in good faith or a good faith omission to act. This includes, without limitation, any claim of liability arising out of failure to terminate a participant’s account upon a participant’s death, the prices at which shares are purchased, the times when purchases are made, or fluctuations in the market price of Common Stock.
All notices from the DRIP Administrator to a participant will be mailed to the participant at his or her last address of record with the DRIP Administrator, which will satisfy the DRIP Administrator’s duty to give notice. Participants must promptly notify the DRIP Administrator of any change in address.
You should recognize that neither the Company nor the DRIP Administrator can provide any assurance of a profit or protection against loss on any shares purchased under the DRIP.
Interpretation and Regulation of the DRIP
The Company reserves the right, without notice to participants, to interpret and regulate the DRIP as it deems necessary or desirable in connection with its operation. Any such interpretation and regulation shall be conclusive.
Federal Income Tax Consequences of Participation in the DRIP
The following discussion summarizes the principal federal income tax consequences, under current law, of participation in the DRIP. It does not address all potentially relevant federal income tax matters, including consequences peculiar to persons subject to special provisions of federal income tax law (such as tax-exempt organizations, insurance companies, financial institutions, broker-dealers and foreign persons). The discussion is based on various rulings of the Internal Revenue Service regarding several types of dividend reinvestment plans. No ruling, however, has been issued or requested regarding the DRIP. The following discussion is for your general information only, and you must consult your own tax advisor to
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Reinvested Dividends. Shareholders subject to federal income taxation who elect to participate in the DRIP will incur a tax liability for distributions allocated to them even though they have elected not to receive their dividends in cash but rather to have their dividends reinvested pursuant to the DRIP. Specifically, participants will be treated as if they received the distribution from the Company and then applied such distribution to purchase the shares in the DRIP. To the extent that a shareholder purchases shares through the DRIP at a discount to fair market value, the shareholders will be treated for tax purposes as receiving an additional distribution equal to the amount of such discount. A shareholder designating a distribution for reinvestment will be taxed on the amount of such distribution as ordinary income to the extent such distribution is from current or accumulated earnings and profits, unless the Company has designated all or a portion of the distribution as a capital gain dividend. In such case, such designated portion of the distribution will be taxed as a capital gain. The amount treated as a distribution to you will constitute a dividend for federal income tax purposes to the same extent as a cash distribution.
Receipt of Share Certificates and Cash. You will not realize any income if you receive certificates for whole shares credited to your account under the DRIP. Any cash received for a fractional share held in your account will be treated as an amount realized on the sale of the fractional share. You therefore will recognize gain or loss equal to any difference between the amount of cash received for a fractional share and your tax basis in the fractional share.
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ENROLLMENT FORM
G REIT, INC.
DIVIDEND REINVESTMENT PLAN
To Join the Dividend Reinvestment Plan:
(l) Complete this card. Be sure to include your social security or tax identification number and signature.
(2) Staple or tape the card closed so that your signature is enclosed.
Please indicate your participation below. Return this card only if you wish to participate in the DRIP.
I hereby appoint G REIT, Inc. (the “Company”) (or any designee or successor), acting as DRIP Administrator, as my agent to receive cash dividends that may hereafter become payable to me on shares of Common Stock of the Company registered in my name as set forth below, and authorize the Company to apply such dividends to the purchase of full shares and fractional interests in shares of the Common Stock.
I understand that the purchases will be made under the terms and conditions of the DRIP as described in the Prospectus and that I may revoke this authorization at any time by notifying the DRIP Administrator, in writing, of my desire to terminate my participation.
| o | Yes, I would like to participate in the Dividend Reinvestment Plan for of my shares of Common Stock (you may elect dividend reinvestment only with respect to a whole number of shares). |
| Signature | Date | |||
| Please Print Full Legal Name(s) | Social Security or Tax Identification Number | |||
If your shares are held of record by a broker or nominee, you must make appropriate arrangements with the broker or nominee to participate in the DRIP.
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EXHIBIT D
G REIT, INC.
AMENDED AND RESTATED REPURCHASE PLAN
The Board of Directors (the “Board”) of G REIT, Inc., a Virginia corporation (the “Company”), adopted effective July 22, 2002, a Repurchase Plan which is hereby amended and restated in its entirety as set forth below. The effective date of this Amended and Restated Purchase Plan (the “Repurchase Plan”) shall be the date that the Company’s second public offering, which will be implemented in connection with the Company’s registration statement under the Securities Act of 1933 on Form S-11/ A, including the prospectus contained therein, in the amount of 28,500,000 shares of the Company’s common stock (“Shares”) is declared effective by the SEC.
The Repurchase Plan provides the mechanism by which Shares may be repurchased by the Company from shareholders subject to certain conditions and limitations. The purpose of this Repurchase Plan is to provide limited interim liquidity for shareholders (under the conditions and limitations set forth below) until a liquidity event occurs. No shareholder is required to participate in the Repurchase Plan.
1. Repurchase of Shares. The Company may, at its sole option, and in its sole discretion, repurchase Shares presented to the Company for cash to the extent it has sufficient proceeds to do so. Any and all Shares repurchased by the Company shall be canceled, and will have the status of authorized but unissued Shares. Shares acquired by the Company through the Repurchase Plan will not be reissued unless they are first registered with the Securities and Exchange Commission under the Securities Act of 1933 and other appropriate state securities laws or otherwise issued in compliance with such laws.
2. Repurchase Price.
| (a) During Public Offerings. For the period during which the Company is engaged in a public offering of Shares (the “Offering”), the repurchase price for Shares shall be equal to the current offering price, less a discount for payment of selling commissions, due diligence and marketing support, and other applicable fees and expenses, such that the repurchase price shall approximate the per Share net proceeds received by the Company in the Offering. | |
| (b) Non-Offering Periods. During the twelve-month period immediately following the termination of the Offering (the “First Period”), the repurchase price for Shares will be $9.25 per Share. During the twelve-month period immediately following the termination of the First Period (the “Second Period”), the repurchase price for Shares will be $9.50 per Share. During the twelve-month period immediately following the termination of the Second Period (the “Third Period”), the repurchase price per Share will be $9.75 per Share. After the termination of the Third Period, the repurchase price per Share will be the greater of: (i) $10.00 per Share; or (ii) a price equal to 10 times the Company’s “funds available for distribution” per weighted average Share outstanding for the prior calendar year. |
3. Funding and Operation of Repurchase Plan. The Company will make purchases under the Repurchase Plan, if requested, at least once quarterly on a first-come, first-served basis. Subject to funds being available, the Company will limit the number of Shares repurchased during any calendar year to five percent (5%) of the weighted average number of Shares outstanding during the prior calendar year. Funding for the Repurchase Plan will come exclusively from proceeds received from the sale of Shares under the Company’s Dividend Reinvestment Plan and other operating funds, if any, as the Company’s Board of Directors, in its sole discretion, may reserve for this purpose.
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4. Shareholder Requirements. Any shareholder may elect to participate in the Repurchase Plan with respect to all or a designated portion of this Shares, subject to the following conditions and limitations:
| (a) Holding Period. Only Shares that have been held by the presenting shareholder for at least one (1) year are eligible for repurchase by the Company. | |
| (b) Minimum — Maximum. A shareholder must present for repurchase a minimum of 25%, and a maximum of 100%, of the Shares owned by the shareholder on the date of presentment. Fractional shares may not be presented for repurchase unless the shareholder is presenting 100% of his Shares. | |
| (c) No Encumbrances. All Shares presented for repurchase must be owned by the shareholder(s) making the presentment, or the party presenting the Shares must be authorized to do so by the owner(s) of the Shares. Such Shares must be fully transferable and not subject to any liens or other encumbrances. | |
| (d) Stock Repurchase Form. The presentment of Shares must be accompanied by a completed Stock Repurchase Request form, a copy of which is attached hereto as Exhibit “A”. All Share certificates must be properly endorsed. | |
| (e) Deadline for Presentment. The Company will repurchase Shares on or about the last day of each calendar quarter. All Shares presented and all completed Stock Repurchase Request forms must be received by the Repurchase Agent (as defined below) on or before the last day of the second month of each calendar quarter in order to have such Shares eligible for repurchase in that same quarter. |
5. Repurchase Agent. All repurchases will be effected on behalf of the Company by a registered broker-dealer (the “Repurchase Agent”), who shall contract with the Company for such services. All recordkeeping and administrative functions required to be performed in connection with the Repurchase Plan will be performed by the Repurchase Agent.
6. Termination of Plan. The Board of Directors of the Company, in its sole discretion, may suspend or terminate the Repurchase Plan after the termination of the Offering, or reduce the number of Shares purchased hereunder, if it determines that the funds allocated to the Repurchase Plan are needed for other purposes. A determination by the Company’s Board of Directors to terminate or reduce the Repurchase Plan will require the unanimous affirmative vote of the independent directors. If the Company terminates, reduces, or otherwise amends the Repurchase Plan, the Company will notify the shareholders of such changes, and the Company will disclose the changes in quarterly reports filed with the Securities and Exchange Commission on Form 10-Q.
7. Amendment. This Repurchase Plan may be amended in whole or in part by the Board, in its sole discretion, at any time or from time to time.
8. Miscellaneous.
| (a) Advisor Ineligible. The Advisor to the Company, Triple Net Properties, L.L.C., shall not be permitted to participate in the Repurchase Plan. | |
| (b) Liability. Neither the Company nor the Repurchase Agent shall have any liability to any shareholder for the value of the shareholder’s Shares, the repurchase price of the shareholder’s Shares, or for any damages resulting from the shareholder’s presentation of his Shares or the repurchase of the Shares under this Repurchase Plan, except as result from the Company’s or the Repurchase Agent’s gross negligence, recklessness, or violation of applicable law; provided, however, that nothing contained herein shall constitute a waiver or limitation of any rights or claims a shareholder may have under federal or state securities laws. | |
| (c) Taxes. Shareholders shall have complete responsibility for payment of all taxes, assessments, and other applicable obligations resulting from the Company’s repurchase of Shares. |
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EXHIBIT “A”
STOCK REPURCHASE REQUEST
The undersigned shareholder of G REIT, Inc. (the “Company”) hereby requests that, pursuant to the Company’s Repurchase Plan, the Company repurchase the number of shares of Company Common Stock (the “Shares”) indicated below.
SHAREHOLDER NAME:
SHAREHOLDER’S ADDRESS:
TOTAL SHARES OWNED BY SHAREHOLDER:
NUMBER OF SHARES PRESENTED FOR REPURCHASE:
By signing and submitting this form, the undersigned hereby acknowledges and represents to each of the Company and the Repurchase Agent the following:
| 1. The undersigned is the owner (or duly authorized agent of the owner) of the Shares presented for repurchase, and thus is authorized to present the Shares for repurchase. | |
| 2. The Shares presented for repurchase are eligible for repurchase pursuant to the Repurchase Plan. The Shares are fully transferable and have not been assigned, pledged, or otherwise encumbered in any way. | |
| 3. The undersigned hereby indemnifies and holds harmless the Company, the Repurchase Agent, and each of their respective officers, directors, and employees from and against any liabilities, damages, expenses, including reasonable attorneys’ fees, arising out of or in connection with any misrepresentation made herein. | |
| 4. Stock certificates for the Shares presented for repurchase (if applicable) are enclosed, properly endorsed with signature guaranteed. |
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It is recommended that this Stock Repurchase Request and any attached stock certificates be sent to the Repurchase Agent, at the address below, via overnight courier, certified mail, or other means of guaranteed delivery.
NNN Capital Corp.
Date:
Shareholder Signature:
Office Use Only
| Date Request Received: |
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1-877-888-7348
Dealer Prospectus Delivery Requirements
All dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
Advised by Triple Net Properties, LLC
| * | Our web site is not part of this prospectus. |
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
| Item 30. | Quantitative and Qualitative Disclosure About Market Risk |
The Company is exposed to interest rate changes primarily as a result of its long-term debt used to maintain liquidity, fund capital expenditures and finance expansion of the Company’s operations and real estate portfolio. In managing the Company’s interest rate risk, management’s objectives are to limit the impact of interest rate changes on operations and cash flows, and to lower its overall borrowing costs. To achieve these objectives, the Company borrows primarily at interest rates with the lowest margins available and, in some cases, with the ability to convert variable interest rates to fixed rates. On May 2, 2003, the Company entered into an interest rate swap with LaSalle to hedge its exposure to $26,400,000 in variable rate borrowings under its credit facility with LaSalle. In the future, the Company may enter into additional derivative financial instruments such as interest rate swaps, caps and treasury locks in order to mitigate its interest rate risk on a given financial instrument. The Company does not enter into derivative or interest rate transactions for speculative purposes.
The tables below present the principal amounts and weighted average interest rates of fixed and variable interest rate debt by year of scheduled maturity to evaluate the expected cash flows and sensitivity to interest rate changes as of December 31, 2002 and September 30, 2003.
| As of December 31, 2002 | ||||||||||||||||||||
| 2003 | 2004 | 2005 | 2006 | 2007 | ||||||||||||||||
| Fixed rate debt | $ | 127,265 | $ | 135,007 | $ | 143,220 | $ | 151,933 | $ | 9,602,575 | ||||||||||
| Average interest rate on maturing debt | 5.92 | % | 5.92 | % | 5.92 | % | 5.92 | % | 5.92 | |||||||||||
| Variable rate debt | $ | 6,700,000 | $ | — | — | — | — | |||||||||||||
| Average interest rate on maturing debt | 5.50 | % | — | % | — | % | — | % | — | % | ||||||||||
| As of September 30, 2003 | ||||||||||||||||||||||||
| 2003 | 2004 | 2005 | 2006 | 2007 | Thereafter | |||||||||||||||||||
| Fixed rate debt | $ | 28,964 | $ | 125,492 | $ | 133,235 | $ | 141,456 | $ | 9,643,320 | $ | — | ||||||||||||
| Average interest rate on maturing fixed rate debt | 5.92 | % | 5.92 | % | 5.92 | % | 5.92 | % | 5.92 | % | — | |||||||||||||
| Variable rate debt | $ | — | $ | — | $ | — | $ | 1,135,000 | $ | — | $ | — | ||||||||||||
| Average interest rate on maturing variable rate debt | — | — | — | 4.00 | % | — | — | |||||||||||||||||
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| Item 31. | Other Expenses of Issuance and Distribution |
Set forth below is an estimate of the approximate amount of the fees and expenses (other than underwriting commissions and discounts) payable by the Registrant in connection with the issuance and distribution of the Shares.
| Securities and Exchange Commission registration fee | $ | 23,000 | |||
| NASD filing fee | 28,925 | ||||
| Printing and postage | |||||
| Legal fees and expenses | |||||
| Accounting fees and expenses | |||||
| Advertising | |||||
| Blue Sky Expenses | |||||
| Miscellaneous | |||||
| Total | $ | ||||
| Item 32. | Sales to Special Parties |
None.
| Item 33. | Recent Sales of Unregistered Securities |
On December 18, 2001, the Company was capitalized with the issuance to Louis J. Rogers of 10 shares of common stock for a purchase price of $10 per share for an aggregate purchase of $100. The shares were purchased for investment and for the purpose of organizing the Company. The Company issued this common stock in reliance on an exemption from registration under Section 4(2) of the Securities Act.
| Item 34. | Indemnification of Directors and Officers |
The Virginia Stock Corporation Act permits a Virginia corporation to include in its articles of incorporation a provision limiting the liability of its Directors and Officers for monetary damages to the Company or the shareholders of the Company with respect to any transaction, occurrence or course of conduct, except for liability resulting from such person’s having engaged in willful misconduct or a knowing violation of the criminal law or any federal or state securities law. The Articles of Incorporation of the Company contain such a provision that eliminates such liability to the maximum extent permitted by the Virginia Stock Corporation Act.
The Articles of Incorporation of the Company provide that in any proceeding brought by or in the right of the Company or brought by or on behalf of the shareholders, the Company shall indemnify any of the Directors and Officers for any liability or loss suffered by such party seeking indemnification and shall hold harmless any of the Directors and Officers for any loss or liability suffered by the Company, provided, that:
| • | the party seeking indemnification has determined, in good faith, that the course of conduct which caused the loss or liability was in the best interest of the Company; | |
| • | the party seeking indemnification was acting on behalf of or performing services on the part of the Company; | |
| • | such indemnification or agreement to be held harmless is recoverable only out of the Company’s net assets and not from the shareholders; and | |
| • | such liability or loss was not the result of: | |
| • | negligence or misconduct by the Officers or Directors, excluding the Independent Directors; or |
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| • | gross negligence or willful misconduct by the Independent Directors. |
The Company shall not indemnify any of the Directors or Officers for losses, liabilities or expenses arising from or out of an alleged violation of federal or state securities laws by such party unless one or more of the following conditions are met:
| • | there has been a successful adjudication on the merits of each count involving alleged securities law violations as to the party seeking indemnification; | |
| • | such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the party seeking indemnification; or | |
| • | a court of competent jurisdiction approves a settlement of the claims and finds that indemnification of the settlement and related costs should be made and the court considering the request has been advised of the position of the Securities and Exchange Commission and the published opinions of any state securities regulatory authority in which shares of a company’s stock were offered and sold as to indemnification for securities law violations. |
The Company may pay for or reimburse amounts to persons entitled to indemnification for reasonable expenses and costs incurred as a result of any proceeding for which indemnification is being sought in advance of a final disposition of the proceeding only if all of the following conditions are satisfied:
| • | the legal proceeding relates to acts or omissions with respect to the performance of duties or services by the indemnified party for or on behalf of the Company; | |
| • | the legal proceeding is initiated by a third party and a court of competent jurisdiction specifically approves such advancement; | |
| • | the party receiving such advances furnishes the Company with a written statement of his or her good faith belief that he or she has met the standard of conduct described above; and | |
| • | the indemnified party receiving such advances furnishes to the Company a written undertaking, personally executed on his or her behalf, to repay the advanced funds to the Company, together with the applicable legal rate of interest thereon, if it is ultimately determined that he or she did not meet the standard of conduct described above. |
Authorizations of payments shall be made by a majority vote of a quorum of disinterested Directors.
The Company may, but shall not be required or obligated to, purchase and maintain insurance to indemnify it against the liability assumed by it in accordance with the Articles.
The indemnification provided in the Articles is not exclusive to any other right to which any person may be entitled, including any right under policies of insurance that may be purchased and maintained by the Company or others, with respect to claims, issues, or matters in relation to which the Company would not have obligation or right to indemnify such person under the provisions of the Articles.
| Item 35. | Treatment of Proceeds from Stock Being Registered |
None.
| Item 36. | Financial Statements and Exhibits |
(a) Index to Financial Statements
| The following financial statements of the Registrant are filed as part of this Registration Statement and included in the Prospectus: |
| Unaudited Financial Statements |
| (1) Unaudited Consolidated Financial Statements for the Three and Nine Months Ended September 30, 2003 |
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| (2) Notes to Unaudited Consolidated Financial Statements |
| Audited Financial Statements |
| (1) Report of Independent Certified Public Accountants | |
| (2) Audited Consolidated Financial Statements for the years ended December 31, 2002 and 2001 | |
| (3) Notes to Consolidated Financial Statements |
| (b) | Exhibits: |
| Exhibit | ||||
| Number | Exhibit | |||
| 1 | .1 | Form of Dealer Manager Agreement between G REIT, Inc. and NNN Capital Corp. | ||
| 1 | .2 | Form of Participating Broker-Dealer Agreement | ||
| 3 | .1 | Third Amended and Restated Articles of Incorporation of the Registrant (included as Exhibit 3.6 to Amendment No. 3 to our Registration Statement on Form S-11 filed on July 7, 2002 (File No. 333-76498) and incorporated herein by reference). | ||
| 3 | .2 | Amended and Restated Bylaws of the Registrant (included as Exhibit 3.4 to Amendment No. 1 to our Registration Statement on Form S-11 filed on April 29, 2002 (File No. 333-76498) and incorporated herein by reference). | ||
| 4 | .1 | Form of our Common Stock Certificate (included as Exhibit 4.1 to our Registration Statement on Form S-11 filed on January 9, 2002 (File No. 333-76498) and incorporated herein by reference). | ||
| 5 | .1* | Opinion of Hirschler Fleischer, a Professional Corporation | ||
| 8 | .1* | Opinion of Hirschler Fleischer, a Professional Corporation as to Tax Matters | ||
| 10 | .1 | Form of Agreement of Limited Partnership of G REIT, L.P. (included as Exhibit 10.1 to our Registration Statement on Form S-11 filed on January 9, 2002 (File No. 333-76498) and incorporated herein by reference). | ||
| 10 | .2 | Amended and Restated Dividend Reinvestment Plan (included as Exhibit C to the Prospectus) | ||
| 10 | .3 | Amended and Restated Stock Repurchase Plan (included as Exhibit D to the Prospectus) | ||
| 10 | .4 | Independent Director Stock Option Plan (included as Exhibit 10.4 to Amendment No. 1 to our Registration Statement on Form S-11 filed on April 29, 2002 (File No. 333-76498) and incorporated herein by reference). | ||
| 10 | .5 | Officer and Employee Stock Option Plan (included as Exhibit 10.5 to Amendment No. 1 to our Registration Statement on Form S-11 filed on April 29, 2002 (File No. 333-76498) and incorporated herein by reference). | ||
| 10 | .6 | Advisory Agreement between G REIT, Inc. and Triple Net Properties, LLC (included as Exhibit 10.6 to our Registration Statement on Form S-11 filed on January 9, 2002 (File No. 333-76498) and incorporated herein by reference). | ||
| 10 | .7 | Amended and Restated Real Estate Purchase and Sale Agreement dated June 19, 2002 by and between MFPB 290 West, Ltd. And Triple Net Properties, LLC, as assigned to G REIT — 55 Highway 290 West, LP (included as Exhibit 10.8 to the Current Report on Form 8-K filed on January 24, 2003 and incorporated herein by reference). | ||
| 10 | .8 | First Amendment to Advisory Agreement between G REIT, Inc. and Triple Net Properties, LLC (included as Exhibit 10.8 to Post Effective Amendment No. 1 to our Registration Statement on Form S-11 filed on December 18, 2002 (File No. 333-76498) and incorporated herein by reference). | ||
| 10 | .9 | Agreement of Sale and Purchase dated as of August 14, 2002 by and between ASP Two Corporate Plaza, P.P. and Triple Net Properties, LLC, as amended and reinstated, and as assigned to G REIT — Two Corporate Plaza (included as Exhibit 10.9 to the Current Report on Form 8-K filed on December 13, 2002 and incorporated herein by reference). | ||
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| Exhibit | ||||
| Number | Exhibit | |||
| 10 | .10 | Purchase Agreement dated October 10, 2002 between Congress Center, LLC and Triple Net Properties, LLC, as assigned to NNN Congress Center, LLC, GREIT — Congress Center, LLC and WREIT — Congress Center, LLC (included as Exhibit 10.10 to the Current Report on Form 8-K filed on January 24, 2003 and incorporated herein by reference). | ||
| 10 | .11 | Agreement of Sale and Purchase dated September 9, 2002 between 1200 N Street, Ltd. And Triple Net Properties, LLC, as assigned to GREIT — Atrium Building LLC (included as Exhibit 10.12 to Post Effective Amendment No. 2 to our Registration Statement on Form S-11 filed on March 13, 2003 (File No. 333-76498) and incorporated herein by reference). | ||
| 10 | .12 | Agreement of Sale and Purchase dated August 16, 2002 by and between Park Sahara Office Center, Ltd., LLC and Triple Net Properties, LLC, as partially assigned to G REIT — Park Sahara, LLC (included as Exhibit 10.1 to the Current Report on Form 8-K filed on March 28, 2003 and incorporated herein by reference). | ||
| 10 | .13 | Form of Escrow Agreement with Bank dated , 2003. | ||
| 10 | .14 | Agreement of Purchase and Sale dated as of April 22, 2003 by and between Procacci Financial Group, Ltd. F/ K/ A Procacci Real Estate Management Co. Ltd. and GREIT — DCF Campus, LLC (included as Exhibit 10.1 to the Current Report on Form 8-K filed on May 5, 2003 and incorporated herein by reference). | ||
| 10 | .15 | Agreement of Purchase and Sale effective as of January 10, 2003 by and between CCI-1150 Gemini, Ltd. and Triple Net Properties, LLC (included as Exhibit 10.2 to the Current Report on Form 8-K filed on May 5, 2003 and incorporated herein by reference). | ||
| 10 | .16 | Agreement of Purchase and Sale and Joint Escrow Instructions dated as of May 6, 2003 between LNR Harbor Bay, LLC and Triple Net Properties, LLC (included as Exhibit 10.1 to the Current Report on Form 8-K filed on August 12, 2003 and incorporated herein by reference). | ||
| 10 | .17 | Real Property Purchase and Sale Agreement and Escrow Instructions dated as of July 2, 2003 by and between Government Property Fund IV, LLC and Triple Net Properties, LLC (included as Exhibit 10.2 to the Current Report on Form 8-K filed on August 12, 2003 and incorporated herein by reference). | ||
| 23 | .1* | Consent of Hirschler Fleischer, a Professional Corporation (included in Exhibits 5.1 and 8.1) | ||
| 23 | .2 | Consent of Grant Thornton LLP | ||
| 24 | .1* | Powers of Attorney | ||
| * | To be filed by amendment. |
| Item 37. | Undertakings |
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the “Act”) may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions referred to in Item 34 of this registration statement, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer, or controlling person of the Registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question as to whether such indemnification by it is against public policy as expressed in the Act, and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to provide to the dealer manager at the closing specified in the Dealer Manager Agreement certificates in such denominations and registered in such names as required by the dealer manager to permit prompt delivery to each purchaser.
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The undersigned Registrant hereby undertakes that:
| (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: |
| (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933, as amended (the “Act”); | |
| (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; and | |
| (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. |
| (2) That, for the purpose of determining liability under the Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. | |
| (3) That, all post-effective amendments will comply with the applicable forms, rules and regulations of the U.S. Securities and Exchange Commission (the “Commission”) in effect at the time such post-effective amendments are filed. | |
| (4) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. |
The undersigned Registrant undertakes to send to its shareholders, within forty-five (45) days after the close of each quarterly fiscal period, the information specified in Form 10-Q, if such report is required to be filed with the Commission.
The Registrant undertakes to send to each shareholder at least on an annual basis a detailed statement of any transactions with the advisor or its affiliates, and of fees, commissions, compensation and other benefits paid, or accrued to the advisor or its affiliates for the fiscal year completed, showing the amount paid or accrued to each recipient and the services performed.
The Registrant undertakes to provide to the shareholders the financial statements required by Form 10-K for the first full year of operations of the Company.
The Registrant undertakes to file a sticker supplement pursuant to Rule 424(c) under the Act during the distribution period describing each property not identified in the prospectus at such time as there arises a reasonable probability that such property will be acquired and to consolidate all such stickers into a post-effective amendment filed at least once every three months, with the information contained in such amendment provided simultaneously to the existing shareholders. Each sticker supplement should disclose all compensation and fees received by the advisor and its affiliates in connection with any such acquisition. The post-effective amendment shall include audited financial statements meeting the requirements of Rule 3-14 of Regulation S-X only for properties acquired during the distribution period.
The Registrant also undertakes to file, after the end of the distribution period, a current report on Form 8-K containing the financial statements and any additional information required by Rule 3-14 of Regulation S-X, to reflect each commitment (i.e., the signing of a binding purchase agreement) made after the end of the distribution period involving the use of 10 percent or more (on a cumulative basis) of the net proceeds of the offering and to provide the information contained in such report to the shareholders at least once each quarter after the distribution period of the offering has ended.
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TABLE VI
Public Programs
| Program: | T REIT, Inc. | T REIT, Inc. | ||||||
| Name, location, type of property | Christie Street | Northstar Shopping Center | ||||||
| Lufkin, Texas | Garland, Texas | |||||||
| Office | Retail | |||||||
| Gross leasable square footage | 17,141 | 67,500 | ||||||
| Date of purchase: | 9/26/2000 | 10/26/2000 | ||||||
| Mortgage financing at date of purchase | $ | 750,000 | $ | 2,695,000 | ||||
| Cash down payment | $ | 500,000 | $ | 1,235,000 | ||||
| Contract purchase price plus acquisition fee | $ | 1,250,000 | $ | 3,930,000 | ||||
| Other cash expenditures expensed | $ | (29,342 | ) | $ | 5,313 | |||
| Other cash expenditures capitalized | $ | 1,839 | $ | 1,070 | ||||
| Total acquisition cost | $ | 1,222,497 | $ | 3,936,383 | ||||
| Program: | T REIT, Inc.(1) | T REIT, Inc.(2) | ||||||
| Name, location, type of property | Plaza Del Ray Shopping Center | Seguin Corners | ||||||
| Seguin, Texas | Seguin, Texas | |||||||
| Retail | Retail | |||||||
| Gross leasable square footage | 126,322 | 21,000 | ||||||
| Date of purchase: | 11/17/2000 | 11/22/2000 | ||||||
| Mortgage financing at date of purchase | $ | 3,995,000 | $ | 1,735,000 | ||||
| Cash down payment | $ | 1,055,000 | $ | 715,000 | ||||
| Contract purchase price plus acquisition fee | $ | 5,050,000 | $ | 2,450,000 | ||||
| Other cash expenditures expensed | $ | (12,936 | ) | $ | (4,062 | ) | ||
| Other cash expenditures capitalized | $ | 8,924 | $ | 16,642 | ||||
| Total acquisition cost | $ | 5,045,988 | $ | 2,462,580 | ||||
| Program: | T REIT, Inc. | T REIT, Inc. | ||||||
| Name, location, type of property | Thousand Oaks Shopping Center | Pahrump Valley | ||||||
| San Antonio, Texas | Pahrump, Nevada | |||||||
| Retail | Retail | |||||||
| Gross leasable square footage | 162,864 | 105,721 | ||||||
| Date of purchase: | 12/6/2000 | 5/11/2001 | ||||||
| Mortgage financing at date of purchase | $ | 10,837,500 | $ | 12,434,618 | ||||
| Cash down payment | $ | 2,162,500 | $ | 4,715,382 | ||||
| Contract purchase price plus acquisition fee | $ | 13,000,000 | $ | 17,150,000 | ||||
| Other cash expenditures expensed | $ | (55,894 | ) | $ | (75,292 | ) | ||
| Other cash expenditures capitalized | $ | 138,795 | $ | 133,934 | ||||
| Total acquisition cost | $ | 13,082,901 | $ | 17,208,642 | ||||
| (1) | 16.5% tenant in common interest |
| (2) | 26% tenant in common interest |
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Public Programs
| Program: | T REIT, Inc.(1) | T REIT, Inc.(2) | ||||||
| Name, location, type of property | Reno Trademark | Pacific Corp. Park | ||||||
| Reno, NV | Lake Forest, CA | |||||||
| Office/Service | Office | |||||||
| Gross leasable square footage | 75,257 | 167,486 | ||||||
| Date of purchase: | 9/4/01 | 3/25/2002 | ||||||
| Mortgage financing at date of purchase | $ | 2,700,000 | $ | 9,300,000 | ||||
| Cash down payment | $ | 4,596,110 | $ | 4,934,100 | ||||
| Contract purchase price plus acquisition fee | $ | 7,296,110 | $ | 14,234,100 | ||||
| Other cash expenditures expensed | $ | 11,809 | $ | 37,883 | ||||
| Other cash expenditures capitalized | $ | 99,334 | $ | 436,454 | ||||
| Total acquisition cost | $ | 7,407,253 | $ | 14,708,437 | ||||
| Program: | T REIT, Inc. | T REIT, Inc.(3) | ||||||
| Name, location, type of property | City Center West ‘A’ | Titan Bldg. & Plaza | ||||||
| Las Vegas, NV | San Antonio, TX 78217 | |||||||
| Office | Office | |||||||
| Gross leasable square footage | 105,964 | 131,527 | ||||||
| Date of purchase: | 3/15/2002 | 4/17/2002 | ||||||
| Mortgage financing at date of purchase | $ | 13,000,000 | $ | 2,910,000 | ||||
| Cash down payment | $ | 8,670,000 | $ | 1,535,995 | ||||
| Contract purchase price plus acquisition fee | $ | 21,670,000 | $ | 4,445,995 | ||||
| Other cash expenditures expensed | $ | — | $ | 78,069 | ||||
| Other cash expenditures capitalized | $ | 180,710 | $ | 102,887 | ||||
| Total acquisition cost | $ | 21,850,710 | $ | 4,626,951 | ||||
| Program: | T REIT, Inc.(4) | T REIT, Inc.(5) | ||||||
| Name, location, type of property | County Center Drive | Saddleback Financial Center | ||||||
| Temecula, California | Laguna Hills, CA | |||||||
| Office/Service | Office | |||||||
| Gross leasable square footage | 77,582 | 71,243 | ||||||
| Date of purchase: | 9/28/2001 | 9/25/2002 | ||||||
| Mortgage financing at date of purchase | $ | 3,210,000 | $ | 7,650,000 | ||||
| Cash down payment | $ | 2,184,691 | $ | 3,422,500 | ||||
| Contract purchase price plus acquisition fee | $ | 5,394,691 | $ | 11,072,500 | ||||
| Other cash expenditures expensed/ (credited) | $ | (2,732 | ) | $ | (30,759 | ) | ||
| Other cash expenditures capitalized | $ | 306,278 | $ | 285,751 | ||||
| Total acquisition cost | $ | 5,698,237 | $ | 11,327,492 | ||||
| (1) | 40% tenant in common interest |
| (2) | 37.93% LLC member in PCP1, LLC, which owns 60% of Pacific Corporate Park. |
| (3) | 48.5% tenant in common interest |
| (4) | 16.0% tenant in common interest |
| (5) | 25.0% tenant in common interest |
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Public Programs
| Program: | T REIT, Inc.(1) | T REIT, Inc. | ||||||
| Name, location, type of property | Congress Center | University Heights | ||||||
| Chicago, IL | San Antonio, TX | |||||||
| Office | Office | |||||||
| Gross leasable square footage | 525,784 | 68,400 | ||||||
| Date of purchase: | 1/9/2003 | 8/22/2002 | ||||||
| Mortgage financing at date of purchase | $ | 9,795,549 | $ | — | ||||
| Cash down payment | $ | 4,110,606 | $ | 6,750,000 | ||||
| Contract purchase price plus acquisition fee | $ | 13,906,154 | $ | 6,750,000 | ||||
| Other cash expenditures expensed/ (credited) | $ | (14,108 | ) | $ | (22,562 | ) | ||
| Other cash expenditures capitalized | $ | 273,090 | $ | 12,704 | ||||
| Total acquisition cost | $ | 14,165,137 | $ | 6,740,142 | ||||
| Program: | T REIT, Inc. | G REIT, Inc.(2) | ||||||
| Name, location, type of property | Gateway Mall | Congress Center | ||||||
| Bismarck, ND | Chicago, IL | |||||||
| Retail | Office | |||||||
| Gross leasable square footage | 333,210 | 525,784 | ||||||
| Date of purchase: | 1/29/2003 | 1/9/2003 | ||||||
| Mortgage financing at date of purchase | $ | 5,000,000 | $ | 28,762,500 | ||||
| Cash down payment | $ | 4,000,000 | $ | 12,190,180 | ||||
| Contract purchase price plus acquisition fee | $ | 9,000,000 | $ | 40,952,680 | ||||
| Other cash expenditures expensed/ (credited) | $ | 276,186 | $ | (41,424 | ) | |||
| Other cash expenditures capitalized | $ | 83,554 | $ | 801,869 | ||||
| Total acquisition cost | $ | 9,359,740 | $ | 41,713,126 | ||||
| Program: | G REIT, Inc.(3) | G REIT, Inc. | ||||||
| Name, location, type of property | Park Sahara | 5508 Hwy. 290 West | ||||||
| Las Vegas, NV | Austin, TX | |||||||
| Office | Office | |||||||
| Gross leasable square footage | 123,709 | 74,804 | ||||||
| Date of purchase: | 3/18/2003 | 9/13/2002 | ||||||
| Mortgage financing at date of purchase | $ | 399,000 | $ | 6,700,000 | ||||
| Cash down payment | $ | 188,381 | $ | 3,525,000 | ||||
| Contract purchase price plus acquisition fee | $ | 587,381 | $ | 10,225,000 | ||||
| Other cash expenditures expensed/ (credited) | $ | (1,621 | ) | $ | (61,500 | ) | ||
| Other cash expenditures capitalized | $ | 7,881 | $ | 159,450 | ||||
| Total acquisition cost | $ | 593,641 | $ | 10,322,950 | ||||
| (1) | 38% LLC member in Congress Center, LLC, which owns 62.53% of Congress Center. |
| (2) | 30% tenant in common interest |
| (3) | 4.75% tenant in common interest |
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Public Programs
| Program: | G REIT, Inc. | G REIT, Inc. | ||||||
| Name, location, type of property | Two Corporate Plaza | The Atrium Building | ||||||
| Houston, TX | Lincoln, NE | |||||||
| Office/Retail | Office | |||||||
| Gross leasable square footage | 161,331 | 166,868 | ||||||
| Date of purchase: | 11/27/2002 | 1/31/2003 | ||||||
| Mortgage financing at date of purchase | $ | 10,160,000 | $ | 2,890,000 | ||||
| Cash down payment | $ | 3,423,578 | $ | 1,397,496 | ||||
| Contract purchase price plus acquisition fee | $ | 13,583,578 | $ | 4,287,496 | ||||
| Other cash expenditures expensed/ (credited) | $ | 33,591 | $ | (4,050 | ) | |||
| Other cash expenditures capitalized | $ | 76,052 | $ | 317,839 | ||||
| Total acquisition cost | $ | 13,693,220 | $ | 4,601,286 | ||||
| Program: | G REIT, Inc. | G REIT, Inc. | ||||||
| Name, location, type of property | Dept. of Children & Families Bldg. | Gemini Plaza | ||||||
| Plantation, FL | Houston, TX | |||||||
| Office | Office | |||||||
| Gross leasable square footage | 124,037 | 158,627 | ||||||
| Date of purchase: | 4/25/2003 | 5/2/2003 | ||||||
| Mortgage financing at date of purchase | $ | 7,605,000 | $ | 9,815,000 | ||||
| Cash down payment | $ | 3,981,333 | $ | 7,440,841 | ||||
| Contract purchase price plus acquisition fee | $ | 11,586,333 | $ | 17,255,841 | ||||
| Other cash expenditures expensed/ (credited) | $ | (48,659 | ) | $ | 4,120 | |||
| Other cash expenditures capitalized | $ | 77,510 | $ | 214,207 | ||||
| Total acquisition cost | $ | 11,615,183 | $ | 17,474,168 | ||||
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TABLE VI
Private Programs
| Western Real Estate | Western Real Estate | |||||||
| Program: | Investment Trust, Inc. | Investment Trust, Inc. | ||||||
| Name, location, type of property | Kress Energy Center | Phelan Village | ||||||
| Wichita, Kansas | Shopping Center | |||||||
| Office Building | Phelan, California | |||||||
| Retail Shopping Center | ||||||||
| Gross leasable square footage | 53,895 | 93,849 | ||||||
| Date of purchase: | 7/13/1998 | 10/16/1998 | ||||||
| Mortgage financing at date of purchase | $ | 925,000 | $ | 3,625,000 | ||||
| Cash down payment | $ | 925,000 | $ | 1,320,600 | ||||
| Contract purchase price plus acquisition fee | $ | 1,850,000 | $ | 4,945,600 | ||||
| Other cash expenditures expensed | $ | 7,439 | $ | 14,273 | ||||
| Other cash expenditures capitalized | $ | 24,284 | $ | 111,032 | ||||
| Total acquisition cost | $ | 1,881,723 | $ | 5,070,905 | ||||
| Western Real Estate | Western Real Estate | |||||||
| Program: | Investment Trust, Inc. | Investment Trust, Inc. | ||||||
| Name, location, type of property | Century Plaza East | Bryant Ranch | ||||||
| Shopping Center | Shopping Center | |||||||
| Lancaster, California | Yorba Linda, California | |||||||
| Retail Shopping Center | Retail Shopping Center | |||||||
| Gross leasable square footage | 121,192 | 93,892 | ||||||
| Date of purchase: | 11/3/1998 | 12/18/1998 | ||||||
| Mortgage financing at date of purchase | $ | 6,937,000 | $ | 7,950,000 | ||||
| Cash down payment | $ | 2,163,000 | $ | 1,590,000 | ||||
| Contract purchase price plus acquisition fee | $ | 9,100,000 | $ | 9,540,000 | ||||
| Other cash expenditures expensed | $ | 18,746 | $ | 642 | ||||
| Other cash expenditures capitalized | $ | 131,793 | $ | 127,031 | ||||
| Total acquisition cost | $ | 9,250,539 | $ | 9,667,673 | ||||
| Western Real Estate | Western Real Estate | |||||||
| Program: | Investment Trust, Inc. | Investment Trust, Inc. | ||||||
| Name, location, type of property | Brookings Mall | Huron Mall | ||||||
| Brookings, South Dakota | Shopping Center | |||||||
| Retail | Huron, South Dakota | |||||||
| Retail Shopping Center | ||||||||
| Gross leasable square footage | 142,826 | 208,650 | ||||||
| Date of purchase: | 5/1/2000 | 3/31/1999 | ||||||
| Mortgage financing at date of purchase | $ | 962,330 | $ | 1,440,000 | ||||
| Cash down payment | $ | 3,187,670 | $ | 360,000 | ||||
| Contract purchase price plus acquisition fee | $ | 4,150,000 | $ | 1,800,000 | ||||
| Other cash expenditures expensed | $ | (84,512 | ) | $ | (24,278 | ) | ||
| Other cash expenditures capitalized | $ | 3,875 | $ | 30,959 | ||||
| Total acquisition cost | $ | 4,069,363 | $ | 1,806,681 | ||||
II-11
Table of Contents
Private Programs
| Program: | Western Real Estate Investment | Telluride Barstow, LLC | ||||||
| Name, location, type of property | Trust, Inc. | Barstow Road | ||||||
| Crossroads Shopping Center | Shopping Center | |||||||
| Kona, Hawaii | Barstow, California | |||||||
| Retail Shopping Center | Retail Shopping Center | |||||||
| Gross leasable square footage | 74,974 | 77,950 | ||||||
| Date of purchase: | 7/29/1999 | 5/1/1998 | ||||||
| Mortgage financing at date of purchase | $ | 13,605,097 | $ | 3,450,000 | ||||
| Cash down payment | $ | 800,000 | $ | 1,175,000 | ||||
| Contract purchase price plus acquisition fee | $ | 14,300,000 | $ | 4,625,000 | ||||
| Other cash expenditures expensed/(credited) | $ | 83,598 | $ | 9,722 | ||||
| Other cash expenditures capitalized | $ | 234,695 | $ | 107,485 | ||||
| Total acquisition cost | $ | 14,618,293 | $ | 4,742,207 | ||||
| Truckee River | Yerington | |||||||
| Program: | Office Tower, LLC | Shopping Center, LLC | ||||||
| Name, location, type of property | Truckee River Office Tower | Yerington Shopping Center | ||||||
| Reno, Nevada | Yerington, Nevada | |||||||
| Office Building | Retail Shopping Center | |||||||
| Gross leasable square footage | 138,729 | 55,531 | ||||||
| Date of purchase: | 12/1/1998 | 3/8/1999 | ||||||
| Mortgage financing at date of purchase | $ | 12,000,000 | $ | 3,316,200 | ||||
| Cash down payment | $ | 4,030,000 | $ | 1,105,800 | ||||
| Contract purchase price plus acquisition fee | $ | 16,030,000 | $ | 4,422,000 | ||||
| Other cash expenditures expensed/(credited) | $ | 9,715 | $ | 1,542 | ||||
| Other cash expenditures capitalized | $ | 320,904 | $ | 66,404 | ||||
| Total acquisition cost | $ | 16,360,619 | $ | 4,489,946 | ||||
| Program: | NNN Fund VIII, LLC | NNN Fund VIII, LLC | ||||||
| Name, location, type of property | Belmont Shopping Center | Village Fashion Centre | ||||||
| Pueblo, Colorado | Wichita, Kansas | |||||||
| Retail Shopping Center | Retail Shopping Center | |||||||
| Gross leasable square footage | 81,289 | 129,973 | ||||||
| Date of purchase: | 6/11/1999 | 6/18/1999 | ||||||
| Mortgage financing at date of purchase | $ | 2,840,000 | $ | 7,200,000 | ||||
| Cash down payment | $ | 664,879 | $ | 1,600,000 | ||||
| Contract purchase price plus acquisition fee | $ | 3,504,879 | $ | 8,800,000 | ||||
| Other cash expenditures expensed/(credited) | $ | — | $ | — | ||||
| Other cash expenditures capitalized | $ | 159,399 | $ | 283,555 | ||||
| Total acquisition cost | $ | 3,664,278 | $ | 9,083,555 | ||||
II-12
Table of Contents
Private Programs
| Program: | NNN Fund VIII, LLC | NNN Town & Country, LLC | ||||||
| Name, location, type of property | Palm Court | Town & Country Shopping | ||||||
| Fontana, California | Center | |||||||
| Retail Shopping Center | Sacramento, California | |||||||
| Retail Shopping Center | ||||||||
| Gross leasable square footage | 266,641 | 234,738 | ||||||
| Date of purchase: | 8/3/1999 | 7/1/1999 | ||||||
| Mortgage financing at date of purchase | $ | 7,116,000 | $ | 25,775,000 | ||||
| Cash down payment | $ | 1,872,000 | $ | 6,225,000 | ||||
| Contract purchase price plus acquisition fee | $ | 8,988,000 | $ | 32,000,000 | ||||
| Other cash expenditures expensed/(credited) | $ | 32,960 | $ | (207,633 | ) | |||
| Other cash expenditures capitalized | $ | 213,303 | $ | 302,173 | ||||
| Total acquisition cost | $ | 9,234,263 | $ | 32,094,540 | ||||
| NNN Redevelopment Fund, | ||||||||
| Program: | NNN ‘A’ Credit TIC, LLC | LLC | ||||||
| Name, location, type of property | Pueblo Shopping Center | Bank One Building | ||||||
| Pueblo, Colorado | Colorado Springs, Colorado | |||||||
| Retail Shopping Center | Office Building | |||||||
| Gross leasable square footage | 106,264 | 127,427 | ||||||
| Date of purchase: | 11/3/1999 | 11/22/1999 | ||||||
| Mortgage financing at date of purchase | $ | 5,306,300 | $ | 6,000,000 | ||||
| Cash down payment | $ | 1,784,843 | $ | 2,730,000 | ||||
| Contract purchase price plus acquisition fee | $ | 7,091,143 | $ | 8,730,000 | ||||
| Other cash expenditures expensed/(credited) | $ | — | $ | (251,013 | ) | |||
| Other cash expenditures capitalized | $ | — | $ | 115,067 | ||||
| Total acquisition cost | $ | 7,091,143 | $ | 8,594,054 | ||||
| NNN Exchange Fund III, | ||||||||
| Program: | NNN Redevelopment Fund, LLC | LLC | ||||||
| Name, location, type of property | White Lakes Shopping Center | County Fair | ||||||
| Topeka, Kansas | Woodland, California | |||||||
| Retail Shopping Center | Retail | |||||||
| Gross leasable square footage | 436,500 | 403,063 | ||||||
| Date of purchase: | 3/31/2000 | 12/15/1999 | ||||||
| Mortgage financing at date of purchase | $ | 12,200,000 | $ | 11,835,000 | ||||
| Cash down payment | $ | 2,488,000 | $ | 4,015,000 | ||||
| Contract purchase price plus acquisition fee | $ | 14,688,000 | $ | 15,850,000 | ||||
| Other cash expenditures expensed/(credited) | $ | (39,605 | ) | $ | (65,974 | ) | ||
| Other cash expenditures capitalized | $ | 355,078 | $ | 273,483 | ||||
| Total acquisition cost | $ | 15,003,473 | $ | 16,057,509 | ||||
II-13
Table of Contents
Private Programs
| NNN Westway | ||||||||
| Program: | NNN Tech Fund, LLC | Shopping Center, LLC | ||||||
| Name, location, type of property | Moreno Corporate Center | Westway Shopping Center | ||||||
| Moreno Valley, California | Wichita, Kansas | |||||||
| Office, Retail, Industrial | Retail | |||||||
| Gross leasable square footage | 226,053 | 220,010 | ||||||
| Date of purchase: | 6/16/2000 | 8/8/2000 | ||||||
| Mortgage financing at date of purchase | $ | 8,425,000 | $ | 7,125,000 | ||||
| Cash down payment | $ | 3,341,500 | $ | 2,573,500 | ||||
| Contract purchase price plus acquisition fee | $ | 11,766,500 | $ | 9,698,500 | ||||
| Other cash expenditures expensed/(credited) | $ | (106,440 | ) | $ | (40,757 | ) | ||
| Other cash expenditures capitalized | $ | 369,487 | $ | 372,775 | ||||
| Total acquisition cost | $ | 12,029,547 | $ | 10,030,518 | ||||
| Program: | Kiwi Associates, LLC | NNN 2000 Value Fund, LLC | ||||||
| Name, location, type of property | Orange Street Plaza | Bowling Green | ||||||
| Redlands, California | Financial Park | |||||||
| Retail | Sacramento, California | |||||||
| Office | ||||||||
| Gross leasable square footage | 127,443 | 234,551 | ||||||
| Date of purchase: | 7/14/2000 | 12/28/2000 | ||||||
| Mortgage financing at date of purchase | $ | 6,500,000 | $ | 12,290,000 | ||||
| Cash down payment | $ | 1,826,000 | $ | 3,966,500 | ||||
| Contract purchase price plus acquisition fee | $ | 8,326,000 | $ | 16,256,500 | ||||
| Other cash expenditures expensed/(credited) | $ | 15,305 | $ | 11,053 | ||||
| Other cash expenditures capitalized | $ | 381,984 | $ | 598,795 | ||||
| Total acquisition cost | $ | 8,723,289 | $ | 16,866,348 | ||||
| NNN Rocky Mountain | ||||||||
| Program: | Exchange, LLC | Market Centre, LLC | ||||||
| Name, location, type of property | Galena Street Building | Market Centre Building | ||||||
| Denver, Colorado | Wichita, KS | |||||||
| Office | Office | |||||||
| Gross leasable square footage | 71,298 | 121,868 | ||||||
| Date of purchase: | 11/30/2000 | 11/18/1998 | ||||||
| Mortgage financing at date of purchase | $ | 5,275,000 | $ | — | ||||
| Cash down payment | $ | 2,070,150 | $ | 1,309,242 | ||||
| Contract purchase price plus acquisition fee | $ | 7,345,150 | $ | 1,250,000 | ||||
| Other cash expenditures expensed/(credited) | $ | 10,128 | $ | 11,200 | ||||
| Other cash expenditures capitalized | $ | 404,555 | $ | 48,042 | ||||
| Total acquisition cost | $ | 7,759,833 | $ | 1,309,242 | ||||
II-14
Table of Contents
Private Programs
| NNN Sacramento Corporate | ||||||||
| Program: | NNN Dry Creek Centre, LLC | Center, LLC | ||||||
| Name, location, type of property | Dry Creek Centre | Sacramento | ||||||
| Denver, Colorado | Corporate Center | |||||||
| Office | Sacramento, California | |||||||
| Office | ||||||||
| Gross leasable square footage | 85,760 | 192,779 | ||||||
| Date of purchase: | 1/31/2001 | 3/12/2001 | ||||||
| Mortgage financing at date of purchase | $ | 8,350,000 | $ | 22,250,000 | ||||
| Cash down payment | $ | 2,750,000 | $ | 9,290,000 | ||||
| Contract purchase price plus acquisition fee | $ | 11,100,000 | $ | 31,540,000 | ||||
| Other cash expenditures expensed/(credited) | $ | (8,949 | ) | $ | 211,899 | |||
| Other cash expenditures capitalized | $ | 302,971 | $ | 940,248 | ||||
| Total acquisition cost | $ | 11,394,022 | $ | 32,692,147 | ||||
| Program: | NNN 2001 Value Fund, LLC | NNN 2001 Value Fund, LLC | ||||||
| Name, location, type of property | 1840 Aerojet Way (Val-Pak) | Western Plaza | ||||||
| North Las Vegas, NVC | Amarillo, Texas | |||||||
| Office/Service | Office/Service | |||||||
| Gross leasable square footage | 102,948 | 412,127 | ||||||
| Date of purchase: | 9/27/2001 | 7/31/2001 | ||||||
| Mortgage financing at date of purchase | $ | 2,938,000 | $ | 4,250,000 | ||||
| Cash down payment | $ | 2,322,368 | $ | 920,000 | ||||
| Contract purchase price plus acquisition fee | $ | 5,260,368 | $ | 5,170,000 | ||||
| Other cash expenditures expensed/(credited) | $ | 6,009 | $ | (862 | ) | |||
| Other cash expenditures capitalized | $ | 77,997 | $ | 349 | ||||
| Total acquisition cost | $ | 5,344,375 | $ | 5,169,487 | ||||
| Program: | NNN Camelot Plaza, LLC | One Gateway Plaza | ||||||
| Name, location, type of property | Camelot Plaza Shopping Center | One Gateway Plaza | ||||||
| San Antonio, Texas | Colorado Springs, Colorado | |||||||
| Retail | Office | |||||||
| Gross leasable square footage | 91,266 | 113,139 | ||||||
| Date of purchase: | 8/1/2001 | 7/30/2001 | ||||||
| Mortgage financing at date of purchase | $ | 4,127,500 | $ | 9,375,000 | ||||
| Cash down payment | $ | 2,222,500 | $ | 3,175,000 | ||||
| Contract purchase price plus acquisition fee | $ | 6,350,000 | $ | 12,550,000 | ||||
| Other cash expenditures expensed/(credited) | $ | (1 | ) | $ | 3,164 | |||
| Other cash expenditures capitalized | $ | 69,435 | $ | 77,471 | ||||
| Total acquisition cost | $ | 6,419,434 | $ | 12,630,635 | ||||
II-15
Table of Contents
Private Programs
| Program: | NNN Washington Square, LLC | NNN Reno Trademark, LLC | ||||||
| Name, location, type of property | Washington Square | Reno Trademark | ||||||
| Stephenville, Texas | Reno, Nevada | |||||||
| Retail | Office/Service | |||||||
| Gross leasable square footage | 71,502 | 75,257 | ||||||
| Date of purchase: | 10/16/2001 | 9/4/2001 | ||||||
| Mortgage financing at date of purchase | $ | 4,890,000 | $ | 2,700,000 | ||||
| Cash down payment | $ | 2,373,000 | $ | 4,596,110 | ||||
| Contract purchase price plus acquisition fee | $ | 7,263,000 | $ | 7,296,110 | ||||
| Other cash expenditures expensed/(credited) | $ | 57,190 | $ | 11,809 | ||||
| Other cash expenditures capitalized | $ | 361,504 | $ | 99,334 | ||||
| Total acquisition cost | $ | 7,681,694 | $ | 7,407,253 | ||||
| NNN LV 1900 Aerojet Way, | ||||||||
| Program: | NNN Gateway Aurora, LLC | LLC | ||||||
| Name, location, type of property | 1900 Aerojet Way | |||||||
| Gateway Plaza Shopping Center | (Walmart) | |||||||
| Aurora, Colorado | North Las Vegas, Nevada | |||||||
| Shopping Center | Office/Service | |||||||
| Gross leasable square footage | 101,048 | 106,717 | ||||||
| Date of purchase: | 4/5/2001 | 8/31/2001 | ||||||
| Mortgage financing at date of purchase | $ | 6,400,219 | $ | 3,625,000 | ||||
| Cash down payment | $ | 1,362,781 | $ | 1,442,128 | ||||
| Contract purchase price plus acquisition fee | $ | 7,763,000 | $ | 5,067,128 | ||||
| Other cash expenditures expensed/(credited) | $ | 73,072 | $ | (587 | ) | |||
| Other cash expenditures capitalized | $ | — | $ | 314,074 | ||||
| Total acquisition cost | $ | 7,836,072 | $ | 5,380,615 | ||||
| NNN County Center Drive, | NNN Addison Com Center, | |||||||
| Program: | LLC | LLC | ||||||
| Name, location, type of property | County Center Drive | Addison Com Center | ||||||
| Temecula, California | Addison, Texas | |||||||
| Office/Service | Office | |||||||
| Gross leasable square footage | 77,582 | 96,396 | ||||||
| Date of purchase: | 9/28/2001 | 11/1/2001 | ||||||
| Mortgage financing at date of purchase | $ | 3,210,000 | $ | 7,750,000 | ||||
| Cash down payment | $ | 2,184,691 | $ | 2,750,000 | ||||
| Contract purchase price plus acquisition fee | $ | 5,394,691 | $ | 10,500,000 | ||||
| Other cash expenditures expensed/(credited) | $ | (2,732 | ) | $ | — | |||
| Other cash expenditures capitalized | $ | 306,278 | $ | 151,983 | ||||
| Total acquisition cost | $ | 5,698,237 | $ | 10,651,983 | ||||
II-16
Table of Contents
Private Programs
| NNN Timberhills | NNN Pacific | |||||||
| Program: | Shopping Center, LLC | Corporate Park 1, LLC | ||||||
| Name, location, type of property | Timberhills Shopping Center | Pacific Corporate Park | ||||||
| Sonora, California | Lake Forest, CA | |||||||
| Shopping Center | Office | |||||||
| Gross leasable square footage | 102,304 | 166,818 | ||||||
| Date of purchase: | 11/21/2001 | 3/25/2002 | ||||||
| Mortgage financing at date of purchase | $ | 6,390,000 | $ | 9,300,000 | ||||
| Cash down payment | $ | 2,790,000 | $ | 4,937,100 | ||||
| Contract purchase price plus acquisition fee | $ | 9,180,000 | $ | 14,237,100 | ||||
| Other cash expenditures expensed/(credited) | $ | 8,276 | $ | 37,883 | ||||
| Other cash expenditures capitalized | $ | 290,705 | $ | 741,183 | ||||
| Total acquisition cost | $ | 9,478,982 | $ | 15,016,166 | ||||
| NNN Arapahoe Svc. Center, | NNN Titan Bldg. & Plaza, | |||||||
| Program: | LLC | LLC | ||||||
| Name, location, type of property | Arapahoe Service Center II | The Titan Building | ||||||
| Englewood, CO | San Antonio, TX 78217 | |||||||
| Office | Office | |||||||
| Gross leasable square footage | 79,200 | 131,527 | ||||||
| Date of purchase: | 4/19/2002 | 4/17/2002 | ||||||
| Mortgage financing at date of purchase | $ | 5,000,000 | $ | 3,090,000 | ||||
| Cash down payment | $ | 2,938,000 | $ | 1,631,005 | ||||
| Contract purchase price plus acquisition fee | $ | 7,938,000 | $ | 4,721,005 | ||||
| Other cash expenditures expensed/(credited) | $ | (23,174 | ) | $ | 624 | |||
| Other cash expenditures capitalized | $ | 145,786 | $ | 109,251 | ||||
| Total acquisition cost | $ | 8,060,612 | $ | 4,830,880 | ||||
| NNN City Center West ‘A’, | ||||||||
| Program: | NNN Union Square, LLC | LLC | ||||||
| Name, location, type of property | Union Square | City Center West ‘A’ | ||||||
| Colorado Springs, CO | Las Vegas, NV | |||||||
| Retail | Office | |||||||
| Gross leasable square footage | 130,066 | 105,964 | ||||||
| Date of purchase: | 3/8/2002 | 3/15/2002 | ||||||
| Mortgage financing at date of purchase | $ | 4,047,500 | $ | 13,000,000 | ||||
| Cash down payment | $ | 682,500 | $ | 8,670,000 | ||||
| Contract purchase price plus acquisition fee | $ | 4,730,000 | $ | 21,670,000 | ||||
| Other cash expenditures expensed/(credited) | $ | (4,822 | ) | $ | 1,378 | |||
| Other cash expenditures capitalized | $ | 136,458 | $ | 32,293 | ||||
| Total acquisition cost | $ | 4,861,636 | $ | 21,703,671 | ||||
II-17
Table of Contents
Private Programs
| NNN City Center West ‘B’, | ||||||||
| Program: | LLC | NNN North Reno, LLC | ||||||
| Name, location, type of property | City Center West ‘B’ | North Reno Plaza | ||||||
| Las Vegas, NV | Reno, NV | |||||||
| Office | Office | |||||||
| Gross leasable square footage | 104,427 | 129,960 | ||||||
| Date of purchase: | 1/23/2002 | 6/19/2002 | ||||||
| Mortgage financing at date of purchase | $ | 14,650,000 | $ | 5,400,000 | ||||
| Cash down payment | $ | 6,150,000 | $ | 1,800,000 | ||||
| Contract purchase price plus acquisition fee | $ | 20,800,000 | $ | 7,200,000 | ||||
| Other cash expenditures expensed/(credited) | $ | 55,637 | $ | (5,329 | ) | |||
| Other cash expenditures capitalized | $ | 187,965 | $ | 148,019 | ||||
| Total acquisition cost | $ | 21,043,602 | $ | 7,342,690 | ||||
| Program: | NNN Brookhollow, LLC | NNN 2002 Value Fund, LLC | ||||||
| Name, location, type of property | Brookhollow Office Park | Bank of America | ||||||
| San Antonio, TX | West Las Vegas, NV | |||||||
| Office | Office | |||||||
| Gross leasable square footage | 102,413 | 82,255 | ||||||
| Date of purchase: | 7/3/2002 | 9/20/2002 | ||||||
| Mortgage financing at date of purchase | $ | 10,250,000 | $ | 14,199,619 | ||||
| Cash down payment | $ | 5,110,000 | $ | 2,700,381 | ||||
| Contract purchase price plus acquisition fee | $ | 15,360,000 | $ | 16,900,000 | ||||
| Other cash expenditures expensed/(credited) | $ | (180,933 | ) | $ | 5,415 | |||
| Other cash expenditures capitalized | $ | 124,978 | $ | 279,112 | ||||
| Total acquisition cost | $ | 15,304,045 | $ | 17,184,528 | ||||
| Program: | NNN 1397 Galleria Drive, | NNN Bryant Ranch, LLC | ||||||
| Name, location, type of property | LLC | Bryant Ranch Shopping | ||||||
| Galleria Medical Building | Center | |||||||
| Henderson, NV | Yorba Linda, CA | |||||||
| Medical | Retail | |||||||
| Gross leasable square footage | 13,810 | 93,892 | ||||||
| Date of purchase: | 9/11/2002 | 9/5/2002 | ||||||
| Mortgage financing at date of purchase | $ | 1,962,000 | $ | 6,222,000 | ||||
| Cash down payment | $ | 1,458,000 | $ | 3,858,000 | ||||
| Contract purchase price plus acquisition fee | $ | 3,420,000 | $ | 10,080,000 | ||||
| Other cash expenditures expensed/(credited) | $ | (20,899 | ) | $ | (36,330 | ) | ||
| Other cash expenditures capitalized | $ | 39,084 | $ | 249,214 | ||||
| Total acquisition cost | $ | 3,438,185 | $ | 10,292,884 | ||||
II-18
Table of Contents
Private Programs
| NNN 4241 Bowling Green, | ||||||||
| Program: | LLC | NNN Wolf Pen Plaza, LLC | ||||||
| Name, location, type of property | 4241 Bowling Drive | Wolf Pen Plaza | ||||||
| Sacramento, CA | College Station, TX | |||||||
| Office | Retail | |||||||
| Gross leasable square footage | �� | 28,985 | 169,989 | |||||
| Date of purchase: | 9/25/2002 | 9/25/2002 | ||||||
| Mortgage financing at date of purchase | $ | 3,092,139 | $ | 12,265,000 | ||||
| Cash down payment | $ | 2,107,861 | $ | 3,925,000 | ||||
| Contract purchase price plus acquisition fee | $ | 5,200,000 | $ | 16,190,000 | ||||
| Other cash expenditures expensed/(credited) | $ | (23,828 | ) | $ | (93,446 | ) | ||
| Other cash expenditures capitalized | $ | 4,715 | $ | 607,606 | ||||
| Total acquisition cost | $ | 5,180,887 | $ | 16,704,160 | ||||
| Program: | NNN Alamosa Plaza, LLC | NNN Saddleback, LLC | ||||||
| Name, location, type of property | Alamosa Plaza | Saddleback Financial Center | ||||||
| Las Vegas, NV | Laguna Hills, CA | |||||||
| Retail | Office | |||||||
| Gross leasable square footage | 77,650 | 71,243 | ||||||
| Date of purchase: | 10/8/2002 | 9/25/2002 | ||||||
| Mortgage financing at date of purchase | $ | 13,500,000 | $ | 7,650,000 | ||||
| Cash down payment | $ | 5,000,000 | $ | 3,422,500 | ||||
| Contract purchase price plus acquisition fee | $ | 18,500,000 | $ | 11,072,500 | ||||
| Other cash expenditures expensed/(credited) | $ | 157,927 | $ | (30,759 | ) | |||
| Other cash expenditures capitalized | $ | 166,959 | $ | 285,751 | ||||
| Total acquisition cost | $ | 18,824,885 | $ | 11,327,492 | ||||
| NNN Kahana Gateway | ||||||||
| Program: | Center, LLC | NNN Springtown Mall, DST | ||||||
| Name, location, type of property | Kahana Gateway Center | Springtown Mall | ||||||
| Maui, HI | San Marcos, TX | |||||||
| Retail/Office | Retail | |||||||
| Gross leasable square footage | 80,069 | 96,423 | ||||||
| Date of purchase: | 12/20/2002 | 12/9/2002 | ||||||
| Mortgage financing at date of purchase | $ | 13,041,000 | $ | 4,700,000 | ||||
| Cash down payment | $ | 6,359,000 | $ | 1,790,000 | ||||
| Contract purchase price plus acquisition fee | $ | 19,400,000 | $ | 6,490,000 | ||||
| Other cash expenditures expensed/(credited) | $ | (3,039 | ) | $ | 3,767 | |||
| Other cash expenditures capitalized | $ | 267,980 | $ | 413,011 | ||||
| Total acquisition cost | $ | 19,664,941 | $ | 6,906,778 | ||||
II-19
Table of Contents
Private Programs
| Program: | NNN Parkwood Complex, LLC | NNN Buschwood III, LLC | ||||||
| Name, location, type of property | Parkwood I & II | Buschwood III | ||||||
| The Woodlands, TX | Tampa, FL | |||||||
| Office | Office | |||||||
| Gross leasable square footage | 196,128 | 77,095 | ||||||
| Date of purchase: | 12/31/2002 | 3/25/2003 | ||||||
| Mortgage financing at date of purchase | $ | 13,921,600 | $ | 4,600,000 | ||||
| Cash down payment | $ | 6,414,400 | $ | 2,303,400 | ||||
| Contract purchase price plus acquisition fee | $ | 20,336,000 | $ | 6,903,400 | ||||
| Other cash expenditures expensed/(credited) | $ | (483,875 | ) | $ | (10,735 | ) | ||
| Other cash expenditures capitalized | $ | 16,666 | $ | 121,004 | ||||
| Total acquisition cost | $ | 19,868,791 | $ | 7,013,669 | ||||
| NNN Beltline/ | ||||||||
| Program: | Royal Ridge, LLC | NNN Parkway Towers, LLC | ||||||
| Name, location, type of property | Beltline/Royal Ridge | Parkway Towers | ||||||
| Irving, TX | Nashville, TN | |||||||
| Office | Office | |||||||
| Gross leasable square footage | 83,514 | 203,703 | ||||||
| Date of purchase: | 4/1/2003 | 5/9/2003 | ||||||
| Mortgage financing at date of purchase | $ | 6,150,000 | $ | 6,000,000 | ||||
| Cash down payment | $ | 3,400,000 | $ | 6,450,000 | ||||
| Contract purchase price plus acquisition fee | $ | 9,550,000 | $ | 12,450,000 | ||||
| Other cash expenditures expensed/(credited) | $ | (81,259 | ) | $ | (45,906 | ) | ||
| Other cash expenditures capitalized | $ | 86,233 | $ | 244,283 | ||||
| Total acquisition cost | $ | 9,554,974 | $ | 12,648,377 | ||||
| Program: | NNN 602 Sawyer, LLC | NNN Netpark, LLC | ||||||
| Name, location, type of property | 602 Sawyer | Netpark | ||||||
| Houston, TX | Tampa, FL | |||||||
| Office | Office | |||||||
| Gross leasable square footage | 85,923 | 226,053 | ||||||
| Date of purchase: | 6/5/2003 | 6/11/2003 | ||||||
| Mortgage financing at date of purchase | $ | 5,850,000 | $ | 31,500,000 | ||||
| Cash down payment | $ | 3,220,000 | $ | 15,250,000 | ||||
| Contract purchase price plus acquisition fee | $ | 9,070,000 | $ | 46,750,000 | ||||
| Other cash expenditures expensed/(credited) | $ | (102,490 | ) | $ | (453,658 | ) | ||
| Other cash expenditures capitalized | $ | 106,757 | $ | 2,622,429 | ||||
| Total acquisition cost | $ | 9,074,267 | $ | 48,918,771 | ||||
II-20
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Private Programs
| Program: | NNN Xerox Centre, LLC | |||||||
| Name, location, type of property | Xerox Centre | |||||||
| Santa Ana, CA | ||||||||
| Office | ||||||||
| Gross leasable square footage | 321,836 | |||||||
| Date of purchase: | 6/17/2003 | |||||||
| Mortgage financing at date of purchase | $ | 45,375,000 | ||||||
| Cash down payment | $ | 15,125,000 | ||||||
| Contract purchase price plus acquisition fee | $ | 60,500,000 | ||||||
| Other cash expenditures expensed/(credited) | $ | (275,395 | ) | |||||
| Other cash expenditures capitalized | $ | 975,013 | ||||||
| Total acquisition cost | $ | 61,199,618 | ||||||
II-21
Table of Contents
SIGNATURE PAGE
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunder duly authorized, in the County of Orange, State of California, on the 21st day of November, 2003.
| G REIT, INC. |
| By: | /s/ ANTHONY W. THOMPSON |
| Anthony W. Thompson, | |
| President |
Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
| Signature | Title | Date | ||||
| /s/ ANTHONY W. THOMPSON Anthony W. Thompson | Chairman of the Board of Directors, President, Chief Executive Officer and Director | November 21, 2003 | ||||
| /s/ RICHARD T. HUTTON, JR. Richard T. Hutton, Jr. | Interim Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | November 21, 2003 | ||||
| /s/ GARY T. WESCOMBE Gary T. Wescombe | Director | November 21, 2003 | ||||
| /s/ EDWARD A. JOHNSON Edward A. Johnson | Director | November 21, 2003 | ||||
| /s/ D. FLEET WALLACE D. Fleet Wallace | Director | November 21, 2003 | ||||
| /s/ W. BRAND INLOW W. Brand Inlow | Director | November 21, 2003 | ||||
II-22
Table of Contents
EXHIBIT LIST
| Exhibit | ||||
| Number | Exhibit | |||
| 1 | .1 | Form of Dealer Manager Agreement between G REIT, Inc. and NNN Capital Corp. | ||
| 1 | .2 | Form of Participating Broker-Dealer Agreement | ||
| 3 | .1 | Third Amended and Restated Articles of Incorporation of the Registrant (included as Exhibit 3.6 to Amendment No. 3 to our Registration Statement on Form S-11 filed on July 7, 2002 (File No. 333-76498) and incorporated herein by reference). | ||
| 3 | .2 | Amended and Restated Bylaws of the Registrant (included as Exhibit 3.4 to Amendment No. 1 to our Registration Statement on Form S-11 filed on April 29, 2002 (File No. 333-76498) and incorporated herein by reference). | ||
| 4 | .1 | Form of our Common Stock Certificate (included as Exhibit 4.1 to our Registration Statement on Form S-11 filed on January 9, 2002 (File No. 333-76498) and incorporated herein by reference). | ||
| 5 | .1* | Opinion of Hirschler Fleischer, a Professional Corporation | ||
| 8 | .1* | Opinion of Hirschler Fleischer, a Professional Corporation as to Tax Matters | ||
| 10 | .1 | Form of Agreement of Limited Partnership of G REIT, L.P. (included as Exhibit 10.1 to our Registration Statement on Form S-11 filed on January 9, 2002 (File No. 333-76498) and incorporated herein by reference). | ||
| 10 | .2 | Amended and Restated Dividend Reinvestment Plan (included as Exhibit C to the Prospectus) | ||
| 10 | .3 | Amended and Restated Stock Repurchase Plan (included as Exhibit D to the Prospectus) | ||
| 10 | .4 | Independent Director Stock Option Plan (included as Exhibit 10.4 to Amendment No. 1 to our Registration Statement on Form S-11 filed on April 29, 2002 (File No. 333-76498) and incorporated herein by reference). | ||
| 10 | .5 | Officer and Employee Stock Option Plan (included as Exhibit 10.5 to Amendment No. 1 to our Registration Statement on Form S-11 filed on April 29, 2002 (File No. 333-76498) and incorporated herein by reference). | ||
| 10 | .6 | Advisory Agreement between G REIT, Inc. and Triple Net Properties, LLC (included as Exhibit 10.6 to our Registration Statement on Form S-11 filed on January 9, 2002 (File No. 333-76498) and incorporated herein by reference). | ||
| 10 | .7 | Amended and Restated Real Estate Purchase and Sale Agreement dated June 19, 2002 by and between MFPB 290 West, Ltd. And Triple Net Properties, LLC, as assigned to G REIT — 55 Highway 290 West, LP (included as Exhibit 10.8 to the Current Report on Form 8-K filed on January 24, 2003 and incorporated herein by reference). | ||
| 10 | .8 | First Amendment to Advisory Agreement between G REIT, Inc. and Triple Net Properties, LLC (included as Exhibit 10.8 to Post Effective Amendment No. 1 to our Registration Statement on Form S-11 filed on December 18, 2002 (File No. 333-76498) and incorporated herein by reference). | ||
| 10 | .9 | Agreement of Sale and Purchase dated as of August 14, 2002 by and between ASP Two Corporate Plaza, P.P. and Triple Net Properties, LLC, as amended and reinstated, and as assigned to G REIT — Two Corporate Plaza (included as Exhibit 10.9 to the Current Report on Form 8-K filed on December 13, 2002 and incorporated herein by reference). | ||
| 10 | .10 | Purchase Agreement dated October 10, 2002 between Congress Center, LLC and Triple Net Properties, LLC, as assigned to NNN Congress Center, LLC, GREIT — Congress Center, LLC and WREIT — Congress Center, LLC (included as Exhibit 10.10 to the Current Report on Form 8-K filed on January 24, 2003 and incorporated herein by reference). | ||
| 10 | .11 | Agreement of Sale and Purchase dated September 9, 2002 between 1200 N Street, Ltd. And Triple Net Properties, LLC, as assigned to GREIT — Atrium Building LLC (included as Exhibit 10.12 to Post Effective Amendment No. 2 to our Registration Statement on Form S-11 filed on March 13, 2003 (File No. 333-76498) and incorporated herein by reference). | ||
| 10 | .12 | Agreement of Sale and Purchase dated August 16, 2002 by and between Park Sahara Office Center, Ltd., LLC and Triple Net Properties, LLC, as partially assigned to G REIT — Park Sahara, LLC (included as Exhibit 10.1 to the Current Report on Form 8-K filed on March 28, 2003 and incorporated herein by reference). | ||
| 10 | .13 | Form of Escrow Agreement with Bank dated , 2003. | ||
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| Exhibit | ||||
| Number | Exhibit | |||
| 10 | .14 | Agreement of Purchase and Sale dated as of April 22, 2003 by and between Procacci Financial Group, Ltd. F/ K/ A Procacci Real Estate Management Co. Ltd. and GREIT — DCF Campus, LLC (included as Exhibit 10.1 to the Current Report on Form 8-K filed on May 5, 2003 and incorporated herein by reference). | ||
| 10 | .15 | Agreement of Purchase and Sale effective as of January 10, 2003 by and between CCI-1150 Gemini, Ltd. and Triple Net Properties, LLC (included as Exhibit 10.2 to the Current Report on Form 8-K filed on May 5, 2003 and incorporated herein by reference). | ||
| 10 | .16 | Agreement of Purchase and Sale and Joint Escrow Instructions dated as of May 6, 2003 between LNR Harbor Bay, LLC and Triple Net Properties, LLC (included as Exhibit 10.1 to the Current Report on Form 8-K filed on August 12, 2003 and incorporated herein by reference). | ||
| 10 | .17 | Real Property Purchase and Sale Agreement and Escrow Instructions dated as of July 2, 2003 by and between Government Property Fund IV, LLC and Triple Net Properties, LLC (included as Exhibit 10.2 to the Current Report on Form 8-K filed on August 12, 2003 and incorporated herein by reference). | ||
| 23 | .1* | Consent of Hirschler Fleischer, a Professional Corporation (included in Exhibits 5.1 and 8.1) | ||
| 23 | .2 | Consent of Grant Thornton LLP | ||
| 24 | .1* | Powers of Attorney | ||
| * | To be filed by amendment. |