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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ___________ to ___________.
COMMISSION FILE NUMBER 0-13647 *
GRUBB & ELLIS REALTY INCOME TRUST, LIQUIDATING TRUST (Exact
name of registrant as specified in its charter)
CALIFORNIA [94-6649376]
(State or other jurisdiction (I.R.S. employer identification no.)
of incorporation or organization)
351 CALIFORNIA STREET
SUITE 1150
SAN FRANCISCO, CALIFORNIA 94104
(Address of principal executive offices)(Zip code)
(415) 391-9800
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE.
(Title of class)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE.
(Title of class)
* GRUBB & ELLIS REALTY INCOME TRUST LIQUIDATING TRUST IS THE DISTRIBUTEE OF
THE ASSETS OF GRUBB & ELLIS REALTY INCOME TRUST, AND FILES REPORTS UNDER
GRUBB & ELLIS REALTY INCOME TRUST'S FORMER COMMISSION FILE NUMBER.
Total Pages: 31
Exhibit Index on Page: 30
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PART I
ITEM 1. BUSINESS.
LIQUIDATION OF REIT
Grubb & Ellis Realty Income Trust (the "REIT") was a California
corporation that elected to operate as a real estate investment trust pursuant
to Sections 856 to 860 of the Internal Revenue Code of 1986, as amended (the
"Code"). The REIT was organized in February 1985 and was designed as an
investment vehicle for income-oriented investors, including individual
retirement accounts and HR-10 Plans. Its investment objective was to provide
current income and capital appreciation and to protect shareholders' capital by
investing in a professionally managed portfolio of real estate investments. The
REIT's shares were formerly registered with the Securities and Exchange
Commission (the "Commission") under Section 12(g) of the 1934 Act and were
formerly listed on the Nasdaq National Market System ("Nasdaq").
At a meeting on January 22, 1990, the Board of Directors of the REIT
(the "Directors") determined that it was in the best interests of the REIT's
shareholders to liquidate the remaining assets of the REIT. The Directors
unanimously approved the Plan of Liquidation and Dissolution (the "Plan"), and
directed that the Plan be submitted to the REIT's shareholders for adoption at
the REIT's annual meeting of shareholders. At the annual meeting held on May 15,
1990, a majority of the REIT's shareholders approved the Plan.
FORMATION OF LIQUIDATING TRUST
The Plan authorized the Directors to dispose of all of the assets of the
REIT, wind up its affairs, pay or adequately provide for the payment of all of
its liabilities and distribute to or for the benefit of its shareholders all of
the REIT's assets, including interests in any liquidating trust established in
connection with the complete liquidation of the REIT. The Plan provided that if
24 months after the adoption of the Plan by the shareholders, the REIT still had
outstanding debts, obligations or liabilities or owned any assets, the assets
(subject to the outstanding debts, obligations and liabilities) would be
transferred to a liquidating trust known as the Grubb & Ellis Realty Income
Trust Liquidating Trust (the "Liquidating Trust").
The 24-month period provided for in the Plan ended on May 14, 1992. As
of that date, the Liquidating Trust had assigned, sold or otherwise disposed of
all of the REIT's real estate assets except for the Livermore Arcade Shopping
Center, a 110,000 square foot Shopping Center located in Livermore, California
(the "Shopping Center"), and a $5,750,000 mortgage loan on a commercial building
in Glendora, California (the "Glendora Mortgage Loan").
Accordingly, the Directors established the Liquidating Trust to continue
winding up the REIT's affairs. On May 14, 1992, the REIT transferred its
remaining assets, subject to its remaining liabilities, to the Liquidating Trust
pursuant to a liquidating trust agreement (the "Liquidating Trust Agreement").
The Directors were the initial trustees of the Liquidating Trust (the
"Trustees"). Should any of the Trustees die or become incapacitated, the
remaining Trustees may appoint replacements therefor.
On the date the assets of the REIT were transferred to the Liquidating
Trust, the REIT formally closed its stock transfer books and requested the
National Association of Securities Dealers to cease carrying quotations of the
REIT's shares on Nasdaq. On that date, the REIT filed with the California
Secretary of State a certificate indicating that the REIT had ceased doing
business and had dissolved. Upon completion of the foregoing steps, the REIT no
longer had any assets or shareholders, and filed Form 15 with the Commission to
terminate the registration of its stock under Section 12(g) of the 1934 Act and
cease filing periodic reports with respect thereto.
All shareholders of the REIT are deemed to be beneficial owners (the
"Beneficiaries") of a pro rata share of the aggregate beneficial interest of the
Liquidating Trust (the "Beneficial Interests"). The shareholders were asked to
surrender their stock certificates in the REIT, and in return the shareholders
were issued certificates evidencing
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ownership of the Beneficial Interests. The interests are nontransferable, except
by will, intestate succession or operation of law. Such certificates bear
legends that clearly indicate the prohibition against transfer.
The Liquidating Trust's activities are specifically limited to
liquidating the assets transferred to it and distributing the proceeds thereof,
including holding the assets transferred to it for the benefit of the
Beneficiaries, enforcing the rights of the Beneficiaries thereto, collecting
income therefrom, providing for the liabilities of the REIT, making liquidating
distributions to the Beneficiaries, arranging for the sale of the remaining
assets, and taking such other actions as may be necessary to conserve and
protect the Liquidating Trust corpus and provide for the orderly liquidation
thereof. To the extent the Trustees invest income, and proceeds prior to
distribution to Beneficiaries or invest cash retained to meet the Liquidating
Trust's expenses and liabilities, such investments may be made in only demand
and time deposits at banks or savings institutions, or short-term certificates
of deposit or treasury bills.
REPORTS TO BENEFICIARIES
The Trustees are required to issue annual reports to the Beneficiaries
showing the assets and liabilities of the Liquidating Trust at the end of each
fiscal year and the receipts and disbursements of the Liquidating Trust for the
period. The annual reports also describe the changes in the Liquidating Trust's
assets during the reporting period and the actions taken by the Trustees during
the period. The Trustees are also required to issue to the Beneficiaries
discretionary interim reports whenever, in the opinion of the Trustees, a
significant event relating to the Liquidating Trust's assets has occurred.
Under an arrangement with the Commission, the Liquidating Trust
previously filed with the Commission copies of the quarterly reports to
Beneficiaries under a Form 8-K cover sheet and copies of the annual report to
Beneficiaries under a Form 10-K cover sheet. The Liquidating Trust now files
such reports to Beneficiaries with the Commission along with the additional
information required by Form 10-Q and Form 10-K.
EXTENSION OF TERM OF LIQUIDATING TRUST
The original Liquidating Trust Agreement provided that the Liquidating
Trust would terminate upon the earlier of (i) the disposition of all of the
trust's assets and the distribution of the proceeds from such disposition to the
Beneficiaries of the Liquidating Trust or (ii) May 14, 1995, which was the third
anniversary of the date the assets were first transferred to the Liquidating
Trust. The Liquidating Trust Agreement could be amended by a unanimous vote of
the Trustees to extend the life of the Liquidating Trust if the events described
in (i) above had not occurred by May 14, 1995.
The Liquidating Trust was able to successfully sell the Glendora
Mortgage Loan in March 1994. As of May 14, 1995, the Liquidating Trust's sole
remaining asset was the Shopping Center. The existence of certain soil and water
contamination at the Shopping Center has severely diminished the property's
marketability. (For a description of the environmental situation, see "-
Livermore Arcade Shopping Center.") As described in the reports to Beneficiaries
previously distributed, the Trustees have taken various steps in order to
enhance the attractiveness of the Shopping Center to potential purchasers,
including but not limited to implementing an on-going environmental remediation
program to secure certain approvals and clearances from various environmental
agencies and renegotiating leases with major tenants. Notwithstanding these
efforts, the Liquidating Trust was unable to dispose of the Shopping Center
before May 14, 1995, the termination date of the Liquidating Trust. Accordingly,
the Trustees adopted a resolution approving an amendment to the Liquidating
Trust Agreement to extend the life of the Liquidating Trust for one year until
May 14, 1996. The Trustees anticipated than an additional 6 month extension
beyond May 14, 1996 was necessary in order to complete disposition of the
shopping center.
ON JUNE 28, 1996 THE TRUSTEES ENTERED INTO AN AGREEMENT TO SELL THE SHOPPING
CENTER AND THE ESCROW WAS CLOSED ON SEPTEMBER 18, 1996. THE TERMS OF THE SALE
WERE ALL CASH TO THE TRUST EXCEPT FOR $1,234,000 HELD BACK BY THE PURCHASER'S
LENDER PENDING THE COMPLETION OF THE TENANT SPACE NOT COMPLETED AS OF THE
CLOSING DATE.
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LIVERMORE ARCADE SHOPPING CENTER
General Description
The Shopping Center is located in the city of Livermore in Eastern
Alameda County which is linked to the San Francisco Bay Area by Freeway 580 and
which is one of the major growth corridors in Northern California.
Constructed in 1975 by Southern Pacific Development Company, the
Shopping Center is anchored by a Safeway supermarket, a Long's Drugs and an
Orchard Supply Hardware store. Other well established tenants include Round
Table Pizza, Radio Shack, Togo's and First Nationwide Bank. Prior to the
commencement of a rehabilitation program in July of 1995, The Shopping Center
consisted of 111,000 square feet of retail space. The project was expanded to
138,000 square feet with the completion of the rehabilitation and expansion
program.
Summary of the action steps taken to sell the Shopping Center
ENVIRONMENTAL - In anticipation of the liquidation Plan being adopted in
1990 the Directors instructed Grubb & Ellis Realty Advisors, (the "Advisor") to
solicit offers for the Shopping Center which had been purchased by the REIT in
1988. In April, 1990 a prospective purchaser's environmental consultant report
revealed that a dry cleaning store had discharged perchloroethelyne (PCE) into a
sewer line that had a separation in it due to a construction defect. The REIT
retained environmental counsel and with its environmental consultant proceeded
to investigate the cause of this contamination. When the Shopping Center was
acquired by the REIT in 1988 the environmental examination done at that time did
not indicate the property had an environmental problem. The studies initiated in
1990 and continued into 1992 determined that the PCE release occurred primarily
as a result of an equipment failure in 1982 of a defective dry cleaning machine
that released PCE into the sewer system.
Further investigation revealed that there was another dry cleaner in the
shopping center across the street and down gradient that was also releasing PCE
into the ground. Counsel confirmed this finding and determined that the parties
associated with the other shopping center were also responsible for the
underground plume of PCE that had been created by these two dry cleaners.
In 1992, the REIT filed suit against all known responsible parties for
this contamination. This suit included dry-cleaning equipment manufacturers and
operators, present owners of the adjoining shopping center, previous owners of
the Shopping Center and the environmental consultant that performed the original
Phase I investigation for the REIT that failed to identify this contamination.
Shortly after discovering this problem, the REIT made the decision to
proceed ahead immediately with proper environmental characterization and
remediation efforts. Between 1991 and 1993, approximately $1,146,000 was spent
on conducting pilot study remediation and development of a remedial action plan.
Proactive cooperation with the lead regulatory authority, the San Francisco
Regional Water Quality Control Board, ("RWQCB"), led to the issuance of a Clean
Up and Abatement Order in late 1993 which accomplished several things. First,
this order approved the Remedial Action Plan which sets forth a clear path and
approval process for site closure. Secondly, this order specifically named as
responsible 15 parties, including dry cleaning operators and past property
owners of both shopping centers.
The issuance of the Clean Up and Abatement Order was instrumental in
bringing all of the parties named in the aforementioned litigation to the table,
including substantial insurance coverage provided by the dry cleaning equipment
manufacturers and operators. The pending litigation and Clean Up and Abatement
Order resulted in voluntary mediation sessions in late 1993 and early 1994. A
global settlement agreement was reached in early 1994 that accomplished the
following. First, the Liquidating Trust was reimbursed for out of pocket costs
totaling approximately $1,000,000. Second, a clean up fund was established in
the amount of $900,000 to complete the remediation and site closure process. At
that time a lump sum clean-up contract was executed between the settling parties
and the environmental contractors to remediate the site and obtain site closure
from the RWQCB. This is an
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important contract because it puts the environmental clean up contractor at risk
for a fixed fee to obtain a no further action clearance from the RWQCB. This
settlement agreement also established an allocation framework for additional
capital contributions by the parties in the event that additional PCE
contamination is discovered in the future. This is a favorable agreement for the
Liquidating Trust because it releases all of the parties with regard to known
contamination, but does not release these parties from future unknown PCE
contamination.
The Remedial Action Plan has been in implementation since mid-1993 and
was completed in December, 1995. The environmental contractor obtained a no
further action letter from the RWQCB under its Non-Attainment Zone closure
policy, which involves submittal of a site wide risk management plan and ongoing
quarterly monitoring. The Liquidating Trust has also obtained a letter from the
RWQCB confirming the closure strategy and timing. This letter also states that
the RWQCB will not hold future lenders and owners of the Shopping Center
responsible for the PCE contamination. This letter represents a major
achievement in eliminating environmental risks associated with this property.
In addition to the PCE contamination described above, an offsite
migration of hydrocarbon has impacted a portion of the Shopping Center. It has
been determined that a major oil products conglomerate, is responsible for this
contamination. They have acknowledged their responsibility and implemented a
remediation plan pursuant to orders from Alameda County. They have also executed
an indemnification agreement for the benefit of the Liquidating Trust and have
reimbursed the Liquidating Trust for its past out of pocket costs with regard to
this issue.
In summary, the Trustees believe the Liquidating Trust has substantially
reduced its financial liability with respect to both the PCE and hydrocarbon
contamination. In the event the clean up fund is insufficient, the Liquidating
Trust is one of 15 parties that has potential liability.
CITY REDEVELOPMENT PROJECT APPROVAL - Immediately after successful
completion of the environmental litigation, negotiations began with the major
tenants to extend or renew their leases and to implement the entitlement process
for a redevelopment of the Shopping Center. The Safeway, Longs Drugs and Orchard
Supply leases were all scheduled to expire in the near future and if they had
been allowed to terminate the Trustees believed there was a strong likelihood
that the Shopping Center would have lost them to other locations with a
resulting negative impact of the value of the property. Orchard Supply advised
the Liquidating Agent that they would only stay if they could have an expanded
facility as part of a redevelopment of the entire Shopping Center. This required
the acquisition of the leased land underneath the existing Orchard store which
was facilitated by the City of Livermore Redevelopment Agency entering into a
Development Agreement with the Liquidating Trust which gave the City the right
to use its powers of eminent domain to acquire that parcel, if necessary.
Following the Liquidating Trust being selected as the Master Developer
by the City, the owners of two parcels, necessary to acquire in order to
complete an agreement with Orchard Supply, agreed to sale terms that enabled the
Liquidating Trust to complete those acquisitions.
MAJOR TENANT LEASE NEGOTIATIONS - With the site assemblage resolved, the
Liquidating Agent was able to complete a Lease/Build to Suit agreement with
Orchard Supply for a new 47,024 square foot facility to serve as the key element
of the redevelopment of the entire Shopping Center.
Both Longs Drugs and Safeway were willing to engage in lease renewal
negotiations once they had solid evidence that the environmental issue was being
resolved and the redevelopment of the Shopping Center was going to proceed. A
new 15 year Long's lease was executed in June of 1995 and an amendment to the
Safeway lease renewing it for 15 years was executed in January of 1996.
Relocation of three tenants within the Shopping Center was completed
enabling the demolition of a portion of the Shopping Center which was necessary
to accommodate the new Orchard Supply expanded facility.
ENTITLEMENTS - The revised Shopping Center design and site plan was
developed and approved by the Planning Commission and City Council, as well as
all of the tenants, during 1994. Following these approvals an
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architectural contract was executed for the working drawings for the project
which have now been completed. The contractors were then selected and the costs
for the project were value-engineered to the point that they were consistent
with the budget established for the project. Building permits for the work were
issued in July 1995 and construction commenced on July 10, 1995.
FINANCING - Construction financing for the rehabilitation and expansion
was finalized in July , 1995. (See note 6 to the financial statements for a
description of the financing.)
CURRENT STATUS OF CONSTRUCTION - Construction of the balance of the
tenant spaces was completed on March 7, 1997 and the Trust is, as of the date of
this filing, working with the Purchaser's lender to get a full release of the
loan funds held back pending the completion of construction. It is anticipated
these funds will be released in April, 1997 at which time the final liquidating
distribution to the Unitholders will be made.
SHOPPING CENTER SALE EFFORTS - Following the initial efforts to sell the
Shopping Center which resulted in the discovery of the environmental
contamination in 1990, the Trustees directed the Liquidating Agent to hold
discussions with parties who had expressed interest in purchasing the Shopping
Center. Several attempts to solicit interest resulted in the conclusion that it
would not have been possible to secure a binding agreement to sell the property
until the environmental damage had been characterized and the cost to remediate
determined. Further, the Trustees felt the most important immediate objective
was to fix the responsibility for who was going to contribute how much toward
the remediation which placed priority on pursuing a settlement to cover the
remediation costs by the responsible parties. The major tenants were also
waiting to see if these problems could be solved before they would consider
renewing their lease commitments.
The Trustees concluded in late 1993 that in order to sell the property
every effort should be made to demonstrate the viability of the Shopping Center
while the remediation program was underway by attempting to put together all of
the key elements of a redevelopment program for the property. It was felt that
these efforts, if successful, would help to retain and add value to the Shopping
Center during a time period when there were no candidates available to pay a
reasonable price for the property due to its environmental impairment. Thus,
when site closure is obtained from the RWQCB, the property would be desirable to
an investor upon completion of the redevelopment or to a developer during the
course of development. The Trustees also believed that completing all of the
tenant, site assemblage and financing commitments along with entitlements and
construction bids would add value to the property as soon as actual construction
commenced.
Construction started on July 10, 1995 and the environmental contractor
completed the site wide risk management plan and submitted it to the RWQCB on
September 13, 1995. An offering memorandum was prepared and submitted to
prospective purchasers in February, 1996 and offers to purchase the property
were received in March and April 1996 culminating in an executed Purchase and
Sale Agreement on June 28, 1996. The sale was closed on September 18, 1997.
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The property was 99.71% leased at February 29, 1997 expressed as a
percentage of the 138,173 square feet total upon completion. The following table
represents information regarding major tenants as well as all other tenants who
have executed leases.
Lease
Tenants Business Annual Minimum Rent Expiration
- ------- -------- ------------------- ----------
Safeway Stores Grocery $ 160,491 02/29/11
Long's Drug Stores Drug Sales 159,000 02/29/11
Orchard Supply Hardware Sales 473,628 03/31/16
Noah's Bagels Restaurant 46,908 04/28/06
Presto Prints Photo Services 23,400 04/28/01
Great Clips Hair Salon 27,000 04/28/01
Radio Shack Electronics Sales 39,195 06/30/05
Mike's Cleaners Dry Cleaning 31,673 05/15/05
Una Mas Taqueria Restaurant 28,980 07/30/06
Boston Market Restaurant 73,920 07/30/06
Togo's Restaurant 34,800 01/15/06
Round Table Pizza Restaurant 105,838 02/15/06
First Nationwide Bank Banking 37,922 10/01/00
Starbuck's Coffee 29,670 11/01/06
Pet Food Express Pet Food 112,464 03/07/07
VIP Cellular Electronics Sales 16,500 01/01/02
Nations Burgers Fast Food 46,569 01/15/03
Baskin Robbins Fast Food 22,529 01/15/03
ITEM 2. PROPERTIES.
[The Liquidating Trust does not lease office space.]
ITEM 3. LEGAL PROCEEDINGS.
See "Item 1 - Business" for a description of the legal proceedings
regarding the Shopping Center.
[There are no other material administrative or judicial legal
proceedings.]
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
No matters were submitted during the fourth quarter of 1996 to a vote of
security-holders, through the solicitation of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no public market for the Beneficial Interests of the
Liquidating Trust. On May 14, 1992 (the date the assets of the REIT were
transferred to the Liquidating Trust), the REIT formally closed its stock
transfer books and requested the National Association of Securities Dealers to
cease carrying quotations of the REIT's shares on Nasdaq. On that date, the REIT
filed with the California Secretary of State a certificate indicating that the
REIT had ceased doing business and had dissolved. Upon completion of the
foregoing steps, the REIT no longer had any assets or shareholders, and filed
Form 15 with the Commission to terminate the registration of its stock under
Section 12(g) of the 1934 Act and cease filing periodic reports with respect
thereto.
The Beneficial Interests are not transferable except by will, intestate
succession, or operation of law. As of December 31, 1996, the Liquidating Trust
had approximately 2,000 Beneficiaries and approximately 2,803,169 units of
Beneficial Interest outstanding.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data of the Liquidating Trust are
qualified by reference to and should be read in conjunction with the financial
statements, related notes thereto and other financial data included elsewhere
herein. These historical results are not necessarily indicative of the results
to be expected in the future.
Operating Results and Distributions
Liquidating Trust Predecessor Trust
------------------------ ------------------
Year Ended December 31,
------------------------------------------------
1996 1995 1994 1993 5/15-12/31/92 1/5-5/14/92
------- ------- ------- ------- ------------- -----------
(in thousands, except for per share/unitamounts)
Total revenue $ 732 $ 863 $ 1,109 $ 1,879 $ 1,043 653
Net (Loss) Income (1,795) (2,885) 90 708 384 204
Dividends paid -- -- -- -- -- 1,653
Liquidating distributions paid 1,626 0 5,655 348 406 1,450
Per share/unit:
Net (Loss) Income $ (.64) $ (1.03) $ .03 $ .24 $ .36 $ .23
Liquidating distributions paid $ .58 $ 0 $ 1.95 $ .12 $ .14 $ .57
Portfolio and Balance Sheet Data
Year Ended December 31,
---------------------------------------------------------------
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(in thousands, except for per share/unit amounts)
Mortgage loans, net -- -- -- $ 5,750 $ 5,750
Equity investments, net -- 8,441 7,963 7,328 7,503
Total assets 2,180 8,515 9,832 15,352 15,423
Loans payable, net -- 4,172 2,648 2,452 2,557
Beneficiaries' equity 1,139 4,287 7,172 12,638 12,278
Beneficiaries' equity per share $ .41* $ 1.53* $ 2.56* $ 4.36* $ 4.23*
- ----------
* Reflects reduction from payment of liquidating distributions of $1,450,000 or
$.61 per unit in 1992, $348,000 or $.12 per unit in 1993, $5,655,000 or $1.95
per unit in 1994 and $1,626,000 or $.58 per unit in 1996.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The following discussion of results of operations and financial
condition should be read in conjunction with the Selected Financial Data and the
Financial Statements and Notes thereto.
The financial statements contained in the reports to the Beneficiaries
since the Liquidating Trust's formation in May 1992 were not prepared in
accordance with generally accepted accounting principles ("GAAP"), as required
by the Liquidating Trust Agreement. However, the Liquidating Trust's annual
financial statements were audited by Coopers & Lybrand, L.L.P. independent
public accountants, although the Liquidating Trust was not required to have such
financial statements audited. Coopers & Lybrand, L.L.P. also served as the
independent public accountants for the REIT during its existence. The
Liquidating Trust overlooked the GAAP requirement when making the decision to
prepare such financial statements on a modified cash basis of accounting, which
was considered by the Liquidating Trust to be a more cost effective method than
GAAP because it conformed to the trust tax reporting requirements to which the
Liquidating Trust is subject. According to Coopers & Lybrand, L.L.P. there was
no material difference in the financial statements during the May, 1992 to
December 31, 1994 period between the GAAP and modified cash basis of accounting.
The financial statements contained herein have been prepared in
accordance with GAAP.
RESULTS OF OPERATIONS
1996 COMPARED TO 1995
The Trust recorded a loss of $1,795,000 in 1996 vs. a loss of $2,885,000
in 1995 primarily due to the loss resulting from the sale of the Shopping
Center.
Rental income decreased to $712,000 in 1996 from $832,000 in 1995, or
14%, due to loss of rental income from disruption from the demolition and
rehabilitation program.
Mortgage loan interest increased to $443.000 in 1996 from $361,000 in
1995 due to increased allocation of the debt borrowed to pay for construction
and development costs for the Shopping Center.
The Liquidating Agent's fee expense was $0 in 1996, down from $24,000 in
1995 as a result of the elimination of the fee effective July 1, 1995.
1995 COMPARED TO 1994
The Trust recorded a loss of $2,885,000 in 1995 vs. a profit of $90,000
in 1994 primarily due to the recording of reserves related to the Shopping
Center. A reserve of $1,300,000 was recorded to reflect a reduction in the net
book value of buildings and improvements for those assets that are being
demolished in connection with the rehabilitation of the Shopping Center to make
room for the construction of the new Orchard Supply Hardware store. The Trust
also developed an estimate of the Shopping Center's future market value after
completion of the rehabilitation and expansion, and taking into account the
repayment terms of the loan. Based on that estimate, the Trust recorded an
additional net realizable value reserve allowance of $1,300,000 as of June 30,
1995, which was increased to $1,500,000 as of December 31, 1995.
Rental income decreased to $863,000 in 1995 from $891,000 in 1994, or
3%, due to flat to declining sales experienced by several tenants resulting from
disruption from the demolition and rehabilitation program.
Rental operating expenses decreased to $284,000 in 1995 from $376,000 in
1994, or 24%, due lower occupancy in the Shopping Center from tenants leaving to
make room for the demolition and new construction.
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Mortgage loan interest increased to $361,000 in 1995 from $243,000 in
1994 due to increased allocation of the debt borrowed to pay for construction
and development costs for the Shopping Center.
The Liquidating Agent's fee expense was $24,000 in 1995, down from
$68,000 in 1994 as a result of the sale of a mortgage note asset in 1994 and the
elimination of the fee effective July 1, 1995.
General and Administrative expenses reduced to $89,000 in 1995 from
$118,000 in 1994, or 25%, resulting from lower legal and accounting expenses.
1994 COMPARED TO 1993
The Liquidating Trust's net income decreased to $90,000 in 1994 from
$708,000 in 1993, or 87%, due to reduction in interest income from the sale of
the Glendora Mortgage Loan and increased vacancy in the Shopping Center.
Rental income decreased to $891,000 in 1994 from $1,032,000 in 1993, or
14%, due to the expiration of leases in the space scheduled to be demolished to
make room for the planned new Orchard Supply Hardware store in the Shopping
Center.
Rental operating expenses decreased to $376,000 in 1994 from $448,000 in
1993, due to lower occupancy in the Shopping Center.
The Liquidating Agent's fee was reduced from $6,500 per month to $4,000
in March, 1994 reflecting the sale of the Glendora Mortgage Loan. The
Liquidating Agent was paid a disposition fee of $28,000 (.50% of the selling
price) in connection with the sale.
INFLATION
The moderate inflation environment following the 1991 recession
continued during the 1993 through 1996 time period. The Liquidating Trust's only
property, the Shopping Center, has experienced flat to declining sales volumes
from its tenants due to disruption from the redevelopment program during 1995-96
and competition from new retail development in the market. It is unlikely that
inflation in the economy in the near term will have any significant impact on
future sales figures. The Trustees believe the planned expansion and
rehabilitation of the Shopping Center will increase customer traffic and retail
sales.
POTENTIAL FACTORS AFFECTING FUTURE OPERATING RESULTS
The closing of the Shopping Center sale on September 18, 1996 occurred
prior to the completion of two building shells totaling 15,000 square feet and
tenant spaces in two other buildings. The final costs of these buildings and
tenant spaces were based on contractor bids and tenant improvement estimates.
The buildings were completed in December, 1996 and the tenant spaces in March
1997. As of March 21, 1997 final costs were being negotiated with the two
general contractors who performed work on the project.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996 the Liquidating Trust had $2,153,000 in cash and
cash equivalents of which $1,845,000 was restricted cash. These cash balances
resulted from the sale of the Shopping Center. The balance of the cash from the
sale, $1,626,000, was distributed in October, 1996. The Trustee believes that
sufficient cash is available to complete the payment for the rehabilitation and
expansion of the Shopping Center.
10
11
ESTIMATED PROCEEDS FROM LIQUIDATION
As of December 31, 1991 the REIT revised estimates for liquidation
proceeds which were based on appraisals done in December 1990. The total
estimated remaining liquidation proceeds as of December 31, 1991 were $4.17 per
share based on 2,899,999 shares of the REIT then outstanding. Since that
estimate the following liquidating distributions have been made:
Liquidating
Declaration Record Payment Distributions
Date Date Date Per Unit
01/24/92 02/07/92 02/21/92 .50
04/17/92 04/30/92 05/14/92 .07
Converted to Liquidating Trust on 5/14/92
07/31/92 08/14/92 .07
11/27/92 12/11/92 .07
02/13/93 02/27/93 .07
05/06/93 05/20/93 .05
03/14/94 04/14/94 1.95
10/04/96 10/28/96 .58
-----
Total $3.36
=====
The following table sets forth a calculation of the remaining estimated
net liquidating cash proceeds after making assumptions regarding the costs of
sale, the repayment of liabilities and collection of other assets.
Sales price of Shopping Center (net of selling costs) $14,300,000
Lender participation in net sales proceeds (1,551,000)
Cash, cash equivalents and proceeds from other assets, less repayment of
liabilities (including unsecured financing sources in the Shopping
Center which includes rehabilitation and expansion costs)
Estimated proceeds of liquidation 1,110,000
Total number of units of Beneficial Interest outstanding 2,803,169
Estimated remaining liquidation proceeds per unit $ .40
While the Trustee and the Liquidating Agent believe that the assumptions
and projections used in arriving at their estimate of net liquidating cash
proceeds are reasonable, there can be no assurance that such assumptions will in
fact prove correct. Accordingly, there can be no assurance that the actual
distribution will not be at an amount that will vary materially from the
Trustees' and Liquidating Agent's estimates of net liquidation values.
11
12
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants..........................................................14
Statements of Assets & Liabilities at December 31, 1996 and 1995...........................15
Statements of Income for the years ended December 31, 1996, 1995 and.......................16
Statements of Beneficiaries' Equity for the years ended December 31, 1996, 1995 and 1994...17
Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994..............18
Notes to Financial Statements...........................................................19-26
12
13
GRUBB & ELLIS REALTY INCOME TRUST, LIQUIDATING TRUST
-------
REPORT ON AUDITS OF FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
13
14
[LETTERHEAD]
COOPERS & LYBRAND L.L.P.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Trustees and Beneficiaries of
Grubb & Ellis Realty Income Trust,
Liquidating Trust:
We have audited the accompanying statements of assets and liabilities of Grubb &
Ellis Realty Income Trust, Liquidating Trust as of December 31, 1996 and 1995,
and the related statements of operations, beneficiaries' equity and cash flows
for the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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 assets and liabilities of Grubb & Ellis Realty Income
Trust, Liquidating Trust as of December 31, 1996 and 1995 and the results of its
operations and its cash flows for the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Coopers & Lybrand L.L.P.
San Francisco, California
February 21, 1997
14
15
GRUBB & ELLIS REALTY INCOME TRUST, LIQUIDATING TRUST
STATEMENTS OF ASSETS AND LIABILITIES
December 31, 1996 and 1995
-------
ASSETS 1996 1995
------------ ------------
Equity investment, at cost:
Land -- $ 5,795,000
Buildings and improvements -- 4,026,000
Less: Accumulated depreciation -- (1,214,000)
Real estate investment reserves -- (2,039,000)
------------ ------------
-- 6,568,000
------------ ------------
Property under development -- 1,873,000
------------ ------------
Investments in real estate -- 8,441,000
Cash and cash equivalents $ 308,000 64,000
Restricted cash 1,845,000 --
Prepaid expenses and other assets 27,000 10,000
------------ ------------
Total assets $ 2,180,000 $ 8,515,000
============ ============
LIABILITIES AND
BENEFICIARIES' EQUITY
Liabilities:
Notes payable -- $ 4,172,000
Other liabilities $ 1,041,000 56,000
------------ ------------
Total liabilities 1,041,000 4,228,000
------------ ------------
Commitments and contingencies (Note 8)
Beneficiaries' equity:
Units of beneficial interest 12,737,000 12,737,000
Notes receivable from beneficiaries (251,000) (338,000)
Reserve for beneficiaries' notes receivable 186,000 --
Distributions in excess of accumulated earnings (11,533,000) (8,112,000)
------------ ------------
Total beneficiaries' equity 1,139,000 4,287,000
------------ ------------
Total liabilities and beneficiaries' equity $ 2,180,000 $ 8,515,000
============ ============
The accompanying notes are an integral
part of these financial statements.
15
16
GRUBB & ELLIS REALTY INCOME TRUST, LIQUIDATING TRUST
STATEMENTS OF OPERATIONS
for the years ended December 31, 1996, 1995, and 1994
-------
1996 1995 1994
----------- ----------- -----------
Revenue:
Mortgage loan interest:
Base interest income -- -- $ 137,000
Participation income -- -- 21,000
Rental income $ 712,000 $ 832,000 891,000
Short-term investment interest 20,000 31,000 60,000
----------- ----------- -----------
732,000 863,000 1,109,000
----------- ----------- -----------
Expenses:
Rental operating expenses 279,000 284,000 376,000
Interest 443,000 361,000 243,000
Depreciation and amortization -- 175,000 169,000
Liquidating agent fee -- 24,000 68,000
Asset disposition fee -- -- 29,000
Directors' fees and expenses 15,000 15,000 16,000
General and administrative expenses 96,000 89,000 118,000
Real estate investment reserves -- 2,800,000 --
Reserve for beneficiaries' receivables 186,000 -- --
----------- ----------- -----------
1,019,000 3,748,000 1,019,000
----------- ----------- -----------
(Loss) income before loss on sale
of real estate investment (287,000) (2,885,000) 90,000
(Loss) on sale of real estate investment (1,508,000) -- --
----------- ----------- -----------
Net (loss) income $(1,795,000) $(2,885,000) $ 90,000
=========== =========== ===========
Net (loss) income per unit $ (.64) $ (1.03) $ .03
=========== =========== ===========
The accompanying notes are an integral
part of these financial statements.
16
17
GRUBB & ELLIS REALTY INCOME TRUST, LIQUIDATING TRUST
STATEMENTS OF BENEFICIARIES' EQUITY
for the years ended December 31, 1996, 1995 and 1994
-------
Notes Distributions Reserve for
Receivable in Excess of Beneficiaries' Total
Beneficiaries' Interest from Accumulated Note Beneficiaries'
Units Amount Beneficiaries Earnings Receivable Equity
-------------- ------------ ------------- ------------ ---------- ----------------
Balance at January 1, 1994 2,899,999 $ 12,892,000 $ (592,000) $ 338,000 -- $ 12,638,000
Net income -- -- -- 90,000 -- 90,000
Units repurchased $1.60 per unit (96,830) (155,000) -- -- -- (155,000)
Dividends paid, $1.95 per unit -- -- -- (5,655,000) -- (5,655,000)
Repayment of notes receivable from
beneficiaries -- -- 254,000 -- -- 254,000
---------- ------------ ---------- ------------ ---------- ------------
Balance at December 31, 1994 2,803,169 12,737,000 (338,000) (5,227,000) -- 7,172,000
Net loss -- -- -- (2,885,000) -- (2,885,000)
---------- ------------ ---------- ------------ ---------- ------------
Balance at December 31, 1994 2,803,169 12,737,000 (338,000) (8,112,000) -- 4,287,000
Net loss -- -- -- (1,795,000) -- (1,795,000)
Dividends paid, $.58 per unit -- -- -- (1,626,000) -- (1,626,000)
Reserve for beneficiaries'
note receivable -- -- -- -- $ 186,000 186,000
Repayment of notes receivable from
beneficiaries -- -- 87,000 -- -- 87,000
---------- ------------ ---------- ------------ ---------- ------------
Balance at December 31, 1996 2,803,169 $ 12,737,000 $ (251,000) $(11,533,000) $ 186,000 $ 1,139,000
========== ============ ========== ============ ========== ============
The accompanying notes are an integral part of these financial statements.
17
18
GRUBB & ELLIS REALTY INCOME TRUST, LIQUIDATING TRUST
STATEMENTS OF CASH FLOWS
for the years ended December 31, 1996, 1995 and 1994
-------
1996 1995 1994
------------ ------------ ------------
Cash flows from operating activities:
Net (loss) income $ (1,795,000) $ (2,885,000) $ 90,000
Adjustments to reconcile net income
to net cash provided by
operating activities:
Loss on sale of real estate investment 1,508,000 -- --
Real estate investment reserves -- 2,800,000 --
Reserve for beneficiaries' receivables 186,000 -- --
Depreciation and amortization -- 175,000 169,000
Write-off of unamortized loan discount -- 30,000 --
Changes in operating assets and liabilities:
Accounts payable 985,000 44,000 (250,000)
Prepaid expenses and other assets (17,000) 69,000 60,000
------------ ------------ ------------
Net cash provided by operating
activities 867,000 233,000 69,000
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of property 14,491,000 -- --
Proceeds from sale of mortgage receivable -- -- 5,750,000
Acquisition of land -- (1,507,000) (303,000)
Reimbursement of environmental costs
recoverable -- -- 981,000
Property placed in service -- (264,000) --
Property development costs (7,558,000) (1,682,000) (201,000)
------------ ------------ ------------
Net cash provided (used) by
investing activities 6,933,000 (3,453,000) 6,227,000
------------ ------------ ------------
Cash flows from financing activities:
Principal payments on mortgage loan
payable (7,200,000) (2,378,000) (104,000)
Proceeds from note payable 3,028,000 3,872,000 --
Dividends paid (1,626,000) -- (5,655,000)
Repurchase of beneficial interest units -- -- (155,000)
Restricted cash (1,845,000) -- --
Principal payments on notes
receivable from beneficiaries 87,000 -- 254,000
------------ ------------ ------------
Net cash provided (used) by
financing activities (7,556,000) 1,494,000 (5,660,000)
------------ ------------ ------------
Net (decrease) increase in
cash and cash equivalents 244,000 (1,726,000) 636,000
Cash and cash equivalents, beginning
of period 64,000 1,790,000 1,154,000
------------ ------------ ------------
Cash and cash equivalents, end
of period $ 308,000 $ 64,000 $ 1,790,000
============ ============ ============
Supplementary information:
Cash paid for interest, net of
amount capitalized $ 443,000 $ 266,000 $ 243,000
============ ============ ============
Noncash investing activities:
Note payable to seller for
land acquisition -- -- $ 300,000
============ ============ ============
Write-off of demolished improvements -- $ 761,000 --
============ ============ ============
The accompanying notes are an integral
part of these financial statements.
18
19
GRUBB & ELLIS REALTY INCOME TRUST, LIQUIDATING TRUST
NOTES TO FINANCIAL STATEMENTS
-------
1. Organization of the Trust:
Grubb & Ellis Realty Income Trust, Liquidating Trust (the Trust), a
California trust, was organized under an agreement dated May 14, 1992,
between the Trustees and Grubb & Ellis Realty Income Trust (the Company)
whereby the trustees received all of the assets and assumed all of the
liabilities of the Company, which was subsequently dissolved. The
purpose of the Trust was to liquidate the remaining Trust property in a
manner to conserve and protect the liquidating trust estate, and to
collect and distribute the income and proceeds to the beneficiaries of
the Trust by May 15, 1996, the date of intended termination. As further
explained in Note 3, the Trust's final remaining property, the Livermore
Arcade Shopping Center(the Livermore Property), was sold on September
18, 1996 and the Trust is in the process of liquidating all remaining
assets. Final liquidation is expected to be completed prior to the
conclusion of the second quarter 1997.
During 1992, day-to-day management of the Trust was conducted by Grubb &
Ellis Realty Advisers, Inc. (the Adviser), which was a wholly owned
subsidiary of Grubb & Ellis Company. On March 1, 1993 the Trust
terminated its management agreement with the Adviser and day-to-day
management of the Trust reverted to the Trustees. On March 23, 1993, the
Trust contracted with Ellis Partners, Inc. (the Agent), a related party,
to manage the Trust (see Note 6).
2. Summary of Significant Accounting Policies:
Depreciation:
Real estate investments were carried at historical cost to the
predecessor Company. The Trust depreciated the real estate equity
investment on the straight-line method over the estimated useful life of
40 years until December 31, 1995.
Property Under Development:
Fees and other direct and indirect construction costs, as well as
interest costs incurred on funds borrowed to finance such costs, were
capitalized as development costs, and were included in the cost of the
investment as construction was completed and the improvements were
placed in service. All costs incurred were related to expanding the
Livermore Property to enhance its ultimate sales price.
Continued
19
20
GRUBB & ELLIS REALTY INCOME TRUST, LIQUIDATING TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
-------
2. Summary of Significant Accounting Policies, continued:
Income Taxes:
There is no provision for federal and state income taxes since the Trust
is not a taxable entity. The beneficiaries are required to include their
proportionate share of income or loss in their respective income tax
returns.
Cash and Cash Equivalents:
Cash equivalents include investments in marketable securities with
original maturities of three months or less. All cash and cash
equivalents are held by a single financial institution.
Restricted Cash:
At December 31, 1996, the Trust had $1,845,000 of restricted cash held
in escrow from the sale proceeds of the Livermore Property. These funds
are held to pay final construction costs (Note 8), lender participation
(Note 4), rent guarantees made by the Trust, and legal fees related to
the sale. Any remaining amount after these payments are made will be
returned to the Trust and distributed to the beneficiaries.
Operating Cycle:
The Trusts' operating cycle is generally one year, however, certain
amounts related to the environmental clean-up program extended beyond
one year.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
Continued
20
21
GRUBB & ELLIS REALTY INCOME TRUST, LIQUIDATING TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
-------
2. Summary of Significant Accounting Policies, continued:
Reclassification of Financial Statements:
Certain amounts for prior years were reclassified to conform with the
1996 financial statement presentation and have not affected
previously reported net income or beneficiaries' equity.
3. Equity Investment:
At December 31, 1995, the equity investment consisted only of the
Livermore Property in Livermore, California which included:
(a) a fee ownership of 89,000 square feet of improvements on 9.1
acres of land;
(b) 2.4 acres of land with 21,000 square feet of improvements which
was subjected to a land lease prior to February 1996 when it was
purchased for approximately $1,500,000; and
(c) .8 acres of land contiguous to the shopping center which was
purchased in 1995.
The land purchases were made as part of the plan to expand the shopping
center. Interest costs associated with the expansion plan aggregating
$89,821 and $70,736 were capitalized during the years ended December 31,
1996 and 1995. No such costs were capitalized in prior periods.
Continued
21
22
GRUBB & ELLIS REALTY INCOME TRUST, LIQUIDATING TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
-------
3. Equity Investment, continued:
Prior to the inception of the Trust, the Livermore Property became
subject to an environmental clean-up and remediation program to remedy
soil contamination caused by a former tenant. As of May 15, 1992 (date
of inception) $241,000 had been paid in connection with the testing and
remediation program. During 1993, the procedures required to complete
the remediation were approved by the Regional Water Quality Control
Board (RWCB). The Trust had taken legal action against the former
tenant, previous owners and other related parties of the property in
order to recover all costs of the clean-up program. A settlement
agreement and general release was executed on January 18, 1994 which
shifted the liability for the clean-up to a separate entity and
incorporated the RWCB's plan approval.
As a result of the settlement agreement, the Trust's net remediation
expenses aggregated $165,000. However, during the years ended December
31, 1994 and 1993 the Trust paid remediation costs of $252,000 and
$318,000, respectively. During 1994, the Trust was reimbursed for
$981,000 of the aggregate $1,146,000 in costs paid. The accompanying
financial statements reflect the ultimate outcome of the amounts
expended by the Trust in connection with the environmental clean-up
program. Currently, the estimated costs to complete the clean-up program
are not anticipated to exceed funds made available pursuant to the
settlement agreement.
Due to the environmental clean-up program, plans to expand and
ultimately sell the Livermore Property were delayed. However, on July 7,
1995, the Trust executed a loan agreement which provided funds for
financing the rehabilitation and expansion of the shopping center. In
addition, the Trust finalized lease renewals with the three major
tenants in the center, Orchard Supply Hardware, Long's Drugs and Safeway
Stores.
The Orchard Supply lease involved a build-to-suit agreement for a new
building. Construction activities started in July 1995 and included the
demolition of a portion of the shopping center. The Trust recorded a
reserve approximating $1,300,000 in the quarter ended June 30, 1995, to
reflect a reduction in the net book value of buildings and improvements
for those assets being demolished. At December 31, 1995, $761,000 of
improvements for which the reserve was established, had been demolished.
Continued
22
23
GRUBB & ELLIS REALTY INCOME TRUST, LIQUIDATING TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
-------
3. Equity Investments, continued:
The Trust had also developed an estimate of the shopping center's future
market value after completion of the rehabilitation and expansion, and
taking into account the repayment terms of the notes payable (Note 4).
Based on that estimate, the Trust recorded an additional loss reserve
for estimated net realizable value of $1,300,000 as of June 30, 1995
which was increased to $1,500,000 as of December 31, 1995.
On September 18, 1996, the Livermore Property was sold to an unrelated
third party for $14,675,000. As discussed in Note 8, the Trust is
obligated to finish the remaining construction improvements in 1997.
4. Notes and Mortgage Loan Payable:
The Livermore Property was acquired subject to a $3,034,000 first
mortgage loan. The lender had recourse only to the property for
repayment of the loan. The loan had an interest rate of 9.5% per annum,
requiring monthly payments of interest and principal of $30,732, and a
maturity date of November 1996. This loan was fully repaid in July 1995
and the unamortized discount written off.
Continued
23
24
GRUBB & ELLIS REALTY INCOME TRUST, LIQUIDATING TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
-------
4. Notes and Mortgage Loan Payable, continued:
On July 7, 1995, the Trust entered into a new loan agreement in the
aggregate amount of $8,500,000 of which $3,872,000 was borrowed at
December 31, 1995. A portion of the proceeds were used to retire the
existing mortgage loan payable and the remainder used to fund the
development of the Livermore Property. The new financing agreement
extended through June 1, 1998 and required interest payments at a rate
equal to 11% per annum, plus an additional 2% per annum if target net
operating income levels were achieved during the first 18 months of the
loan term. The loan was collateralized by the shopping center real
property and the rents derived therefrom. Additionally, certain reserve
accounts were established including an interest reserve and a working
capital reserve which further collateralized the loan. The note terms
required a preferred return payable to the lender from excess Cash
Flows, as defined, including a specified participation and rate of
return associated with any sale or refinancing of the property. The note
stipulated that the lender would participate in sale proceeds in excess
of certain stated amounts. Restrictive covenants associated with the
financing precluded the payment of dividends until the loan was repaid.
The loan was repaid in full on September 18, 1996, in conjunction with
the sale of the Livermore Property.
5. Notes Receivable from Beneficiaries:
As consideration for the issuance of 150,000 shares on the exercise of
stock options in 1990, the Company accepted notes receivable from four
former officers of the Company totaling $1,006,000. The issued shares
and all related liquidating distributions are pledged as collateral for
the notes. The notes bear interest at 1% above the prime rate per annum,
interest only accruing quarterly and mature the later of December 31,
1995 or upon liquidation of the Trust.
The accrued interest on these notes has not been recognized in the
accompanying financial statements as its ultimate collectability is
uncertain. Additionally, based on management's current estimates
regarding the proceeds available upon the liquidation of the remaining
asset, it appears that the collateral is insufficient to ensure complete
repayment of the notes and all interest accrued thereon. Accordingly, at
December 31, 1996, the notes receivable from the beneficiaries have been
reserved in the amount of $186,000 which represents the difference
between the carried amount of the notes and the estimated final
liquidation amounts associated with the underlying units. Upon final
liquidation, it is anticipated that the carrying value of the notes will
be repaid from the liquidating dividend.
Continued
24
25
GRUBB & ELLIS REALTY INCOME TRUST, LIQUIDATING TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
-------
6. Liquidating Agent Agreement and Fees:
For the period from May 15, 1992 through February 1993, the Trust
operated under a liquidating agent agreement with the Adviser. Under
terms of the agreement, the Adviser provided investment advisory,
distribution, and administrative services for which the Adviser received
a fee equal to 0.75% per annum of the outstanding value of investments
in real estate. The liquidating agent fee was paid to the Adviser
monthly in arrears.
Commencing with March 1993, the Trust operated under a liquidating agent
agreement with the Agent under the same terms and conditions except for
the monthly fee, which was reduced to $6,500. Upon disposition of the
mortgage loan asset in 1994, the monthly fee was further reduced to
$4,000. The Agent monthly fee was paid through June, 1995 and deferred
from July 1995 through September 1996. In October 1996, the Agent agreed
to waive all deferred fees for that period.
During 1995, in conjunction with the purchase of land contiguous to the
Livermore Property, the agent was paid a fee equal to 2.5% of the
purchase price.
Commencing with the beginning of construction in July 1995, the Agent
was paid $7,000 per month for development supervision services until the
accumulated cost of these services reached 3.5% of the total hard
construction costs. For the years ended December 31, 1996 and 1995, the
agent was paid $54,000 and $159,500 for the development supervision fee.
These fees were capitalized as part of the expansion project.
During 1996, the Agent received lease commissions aggregating $142,000
in connection with negotiating leases at the Livermore Property. These
commissions were paid on tenant leases not represented by brokers, at
25% of the market rate. The Liquidating Agent Agreement allows a full
market rate to be charged.
7. Beneficiaries' Equity:
As part of the settlement of the environmental lawsuit, on March 31,
1994, the Trust received 96,830 units for a price of $1.60 per unit,
which was determined by the Board of Trustees, at that time, to be less
than the estimated final liquidating unit price.
Continued
25
26
GRUBB & ELLIS REALTY INCOME TRUST, LIQUIDATING TRUST
NOTES TO FINANCIAL STATEMENTS, Continued
-------
8. Commitments and Contingencies:
In connection with the remaining rehabilitation and expansion of the
shopping center, the Trust has entered into various construction
contracts. Services under these contracts are currently in process and
at December 31, 1996, $685,000 is accrued for the completion of the
construction. Amounts set aside to pay for these costs are included in
restricted cash.
Continued
26
27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
[None.]
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following are the names and respective ages as of December 31, 1996 of
the Trustees of the Liquidating Trust:
NAME AGE POSITION
- ---- --- --------
Harold A. Ellis, Jr. .............. 65 Trustee
Thomas J. Flynn ................... 64 Trustee
Harold A. Ellis, Jr., 65, has been a Trustee of the Liquidating Trust
since its inception in May 1992. Mr. Ellis is also the President of Ellis
Partners, Inc., the current advisor to the Liquidating Trust. He was the
Chairman of the Board of Grubb & Ellis Realty Income Trust from February, 1985
to May, 1992. Mr. Ellis was also the Chairman of the Board, President and Chief
Executive Officer of Grubb & Ellis Company from September, 1962 to May, 1992. He
was the Chairman of the Board of Grubb & Ellis Realty Advisers, Inc., the
previous advisor to the Liquidating Trust, from February, 1985 to February 1989.
Thomas J. Flynn, 64, has been a Trustee of the Liquidating Trust since
its inception in May 1992. Mr. Flynn was an unaffiliated director and Chairman
of the Audit Committee of Grubb & Ellis Realty Income Trust from February, 1985
to May, 1992. He was the Chairman of Blackman Flynn & Co., a real estate
financial services company, from July 1983 to December 31, 1991. Mr. Flynn
resigned as a Trustee effective January 1, 1997 with the completion of the sale
of the Shopping Center.
ITEM 11. EXECUTIVE COMPENSATION.
The Liquidating Trust has no officers, therefore no compensation has
been paid since its inception in May of 1992.
Trustee Thomas J. Flynn is the only unaffiliated Trustee. He received
$3,000 per quarter for his services as a Trustee, plus $750 for each day of
Trustee meetings attended. This compensation cost to the Trust was terminated as
of December 31, 1996.
Trustee Harold A. Ellis, Jr. receives no compensation from the
Liquidating Trust.
27
28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of December 31, 1995, information
with respect to the ownership of Beneficial Interests in the Liquidating Trust
by (i) all Trustees, and (ii) all Trustees as a group.
Number of Percent of
Units of Beneficial Outstanding Units of
Name and Address Interest Owned Beneficial Interest
- ---------------- -------------- -------------------
Heitman PRA Securities 189,700 6.77%
180 North La Salle St.
Chicago, IL 60601
Harold A. Ellis, Jr., Trustee 3,844 *
Thomas J. Flynn, Trustee 1,000 *
All Trustees as a 4,844
group (2 persons)
* Does not exceed 1% of total units outstanding
ITEM 13. CERTAIN RELATIONSHIPS AND CERTAIN TRANSACTIONS.
ADVISOR TO THE LIQUIDATING TRUST
Pursuant to the Liquidating Trust Agreement, the Liquidating Trust may
employ such agents and advisers (which may include the Trustees, one or more of
the Beneficiaries, or corporations or partnerships owned or controlled by the
Trustees or Beneficiaries (including Grubb & Ellis Company or its affiliates))
to operate and perform activities necessary to accomplish the purpose of the
Liquidating Trust and to confer upon them such authority as the Trustees may
deem necessary, appropriate or expedient, and to pay reasonable compensation
therefor from the Liquidating Trust estate.
Pursuant to this provision, in May 1992, the Liquidating Trust entered
into a liquidating agent agreement with Grubb & Ellis Realty Advisers, Inc.
("G&E Realty Advisers"), a wholly owned subsidiary of Grubb & Ellis Company. G&E
Realty Advisers was also the adviser for the REIT. In February 1993, Grubb &
Ellis Company sold the key assets of G&E Realty Advisers, and its key employees
also left the company. As a result of these changes, the Trustees determined
that G&E Realty Advisers could no longer satisfactorily perform its services for
the Liquidating Trust.
The Trustees then selected Ellis Partners, Inc., which was a newly
formed company headed by Harold A. Ellis, Jr. (one of the Trustees), to replace
G&E Realty Advisers. Mr. Ellis is the former chairman, president and chief
executive officer of Grubb & Ellis Company and was the chairman of G&E Realty
Advisers until May 1992 when he left Grubb & Ellis Company. Ellis Partners, Inc.
agreed to accept a general management advisory fee that was approximately 22%
lower than the fee previously charged by G&E Realty Advisers before it was
replaced as liquidating agent. (Further, the fees payable to the Trustees were
also reduced by 50% because one of the two Trustees, Mr. Ellis, no longer
accepted such fees as a result of his affiliation with Ellis Partners, Inc.)
Upon the sale in March 1994 of the Glendora Mortgage Loan held by the
Liquidating Trust, the general management advisory fee charged by Ellis
Partners, Inc. was further reduced. Effective July 1, 1995 the advisory fee was
eliminated.
The liquidating agent of the Liquidating Trust may also charge
additional fees, including those that otherwise would be charged by third-party
agents if such third-party agents had performed those activities instead of the
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liquidating agent for the Liquidating Trust. The fees chargeable by Ellis
Partners, Inc. for such activities are the same as those that would have been
charged by G&E Realty Advisers.
Information regarding the compensation arrangements with the liquidating
agents has been provided in the reports to the Beneficiaries.
The Trustees believe that the fees charged by Ellis Partners, Inc. are
significantly lower than the customary fees that would be charged by outside
advisers.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES. Page
-------
1. The financial statements are included in Item 8. 14 - 26
(c) EXHIBITS. None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GRUBB & ELLIS REALTY INCOME TRUST,
LIQUIDATING TRUST
By: /s/ HAROLD A. ELLIS, JR.
------------------------------------
Harold A. Ellis, Jr., Trustee
Dated: March 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ HAROLD A. ELLIS, JR. Trustee (principal executive, March 23, 1997
- ------------------------- financial and accounting officer)
Harold A. Ellis, Jr.
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