Index to Financial Statements
Page
----
FSP Willow Bend Office Center Corp.
Index to financial statements as of December 31, 2005, 2004 and 2003...... F-2
FSP Innsbrook Corp.
Index to financial statements as of December 31, 2005, 2004 and 2003...... F-16
Index to statements of revenue over certain operating expenses for the
period January 1, 2003 to July 16, 2003 and for the year ended
December 31, 2002................................................... F-30
FSP 380 Interlocken Corp.
Index to financial statements as of December 31, 2005, 2004 and 2003...... F-35
Index to statements of revenue over certain operating expenses for the
period January 1, 2003 to August 14, 2003 and for the year ended
December 31, 2002................................................... F-50
FSP Blue Lagoon Corp.
Index to financial statements as of December 31, 2005 and 2004............ F-55
Index to statements of revenue over certain operating expenses for the
period January 1, 2003 to November 5, 2003 and for the year ended
December 31, 2002................................................... F-69
FSP Eldridge Green Corp.
Index to financial statements as of December 31, 2005 and 2004............ F-74
Index to statements of revenue over certain operating expenses for the
period January 1, 2004 to January 15, 2004 and for the years ended
December 31, 2003 and 2002.......................................... F-88
F-1
FSP Willow Bend Office Center Corp.
Financial Statements
December 31, 2005, 2004 and 2003
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report............................................. F-3
Balance Sheets as of December 31, 2005 and 2004.......................... F-4
Statements of Operations for the years ended December 31, 2005,
2004 and 2003...................................................... F-5
Statements of Changes in Stockholders' Equity for the years ended
December 31, 2005, 2004 and 2003................................... F-6
Statements of Cash Flows for the years ended December 31, 2005,
2004 and 2003...................................................... F-7
Notes to Financial Statements............................................ F-8
F-2
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Willow Bend Office Center Corp.
Wakefield, Massachusetts
We have audited the accompanying balance sheets of FSP Willow Bend Office Center
Corp. as of December 31, 2005 and 2004 and the related statements of operations,
changes in stockholders' equity and cash flows for the years ended December 31,
2005 2004 and 2003.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 financial position of FSP Willow Bend Office Center
Corp. as of December 31, 2005, and 2004, and the results of its operations and
its cash flows for the years ended December 31, 2005, 2004 and 2003 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Braver and Company, P.C.
Newton, Massachusetts
March 1, 2006
F-3
FSP Willow Bend Office Center Corp.
Balance Sheets
December 31,
------------------------------
(in thousands,except shares and par value amounts) 2005 2004
==================================================================================================================
Assets:
Real estate investments, at cost:
Land $ 2,737 $ 2,737
Buildings and improvements 15,497 15,497
- ------------------------------------------------------------------------------------------------------------------
18,234 18,234
Less accumulated depreciation 2,095 1,545
- ------------------------------------------------------------------------------------------------------------------
Real estate investments, net 16,139 16,689
Cash and cash equivalents 677 621
Cash-funded reserves 1,041 1,062
Restricted cash 129 254
Tenant rent receivable 47 43
Step rent receivable 509 480
Deferred leasing costs, net of accumulated amortization
of $228 and $101, respectively 356 482
Prepaid expenses and other assets 23 14
- ------------------------------------------------------------------------------------------------------------------
Total assets $18,921 $19,645
==================================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 433 $ 371
Distributions payable -- 273
Tenant security deposits 129 254
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 562 898
- ------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies: -- --
Stockholders' Equity:
Preferred Stock, $.01 par value, 206 shares
authorized, issued and outstanding -- --
Common Stock, $.01 par value, 1 share
authorized, issued and outstanding -- --
Additional paid-in capital 18,900 18,900
Retained deficit and distributions in excess of earnings (541) (153)
- ------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 18,359 18,747
- ------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $18,921 $19,645
==================================================================================================================
See accompanying notes to financial statements.
F-4
FSP Willow Bend Office Center Corp.
Statements of Operations
For the Year Ended December 31,
--------------------------------------------
(in thousands, except shares and per share amounts) 2005 2004 2003
========================================================================================================================
Revenues:
Rental $2,129 $ 3,900 $1,526
- ------------------------------------------------------------------------------------------------------------------------
Total revenue 2,129 3,900 1,526
- ------------------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 860 647 647
Real estate taxes and insurance 334 348 322
Depreciation and amortization 677 490 404
- ------------------------------------------------------------------------------------------------------------------------
Total expenses 1,871 1,485 1,373
- ------------------------------------------------------------------------------------------------------------------------
Income before interest income 258 2,415 153
Interest income 48 12 16
- ------------------------------------------------------------------------------------------------------------------------
Net income attributable to preferred stockholders $306 $2,427 $169
========================================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 206 206 206
========================================================================================================================
Net income per preferred share, basic and diluted $1,485 $11,782 $ 820
========================================================================================================================
See accompanying notes to financial statements.
F-5
FSP Willow Bend Office Center Corp.
Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 2005, 2004 and 2003
Retained Deficit
Additional and Distributions Total
Preferred Common Paid-in in Excess of Stockholders'
(in thousands) Stock Stock Capital Earnings Equity
================================================================================================================
Balance, December 31, 2002 $ -- $ -- $18,900 $(1,471) $17,429
Distributions -- -- -- (607) (607)
Net income -- -- -- 169 169
- ----------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 -- -- 18,900 (1,909) 16,991
Distributions -- -- -- (671) (671)
Net income -- -- -- 2,427 2,427
- ----------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 -- -- 18,900 (153) 18,747
Distributions -- -- -- (694) (694)
Net income -- -- -- 306 306
- ----------------------------------------------------------------------------------------------------------------
Balance, December 31, 2005 $ -- $ -- $18,900 $ (541) $18,359
================================================================================================================
See accompanying notes to financial statements.
F-6
FSP Willow Bend Office Center Corp.
Statements of Cash Flows
For the Years Ended December 31,
(in thousands) 2005 2004 2003
=================================================================================================================
Cash flows from operating activities:
Net Income $ 306 $2,427 $ 169
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 677 490 404
Changes in operating assets and liabilities:
Cash-funded reserves 21 (587) 540
Restricted cash 125 (186) (53)
Tenant rent receivable (4) (43) 137
Step rent receivable (29) (400) (80)
Prepaid expenses and other assets (9) (5) 21
Accounts payable and accrued expenses 62 47 (128)
Tenant security deposits (125) 186 53
Payment of deferred leasing costs (1) (413) (170)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,023 1,516 893
- -----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets -- (863) (230)
- -----------------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- (863) (230)
- -----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Distributions to stockholders (967) (535) (618)
- -----------------------------------------------------------------------------------------------------------------
Net cash used for financing activities (967) (535) (618)
- -----------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 56 118 45
Cash and cash equivalents, beginning of year 621 503 458
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 677 $ 621 $ 503
=================================================================================================================
Supplemental disclosure of cash flow information:
Disclosure of non-cash financing activities:
Distributions declared but not paid $ -- $ 273 $ 137
See accompanying notes to financial statements.
F-7
FSP Willow Bend Office Center Corp.
Notes to Financial Statements
1. Organization
FSP Willow Bend Office Center Corp. (the "Company") was organized on December
13, 2000 as a Corporation under the laws of the State of Delaware to purchase,
own and operate a commercial building located in Plano, Texas (the "Property").
The Property consists of a two-story office building containing 116,600 total
square feet of space situated on approximately 7 acres of land. The Company
acquired the Property on December 15, 2000 and will operate in a manner intended
to qualify as a real estate investment trust ("REIT") for federal income tax
purposes.
2. Summary of Significant Accounting Policies
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain information in the 2004 and 2003 financial statements has been
reclassified to conform to the 2005 presentation.
REAL ESTATE AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized. Typical
capital items include new roofs, site improvements, various exterior building
improvements and major interior renovations. Funding for capital improvements
typically is provided by cash set aside at the time the Property was purchased.
Routine replacements and ordinary maintenance and repairs that do not extend the
life of the assets are expensed as incurred. Typical expense items include
interior painting, landscaping and minor carpet replacements. Funding for
repairs and maintenance items typically is provided by cash flows from operating
activities.
Depreciation is computed using the straight line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Building - Commercial 39
Building Improvements 15-39
Furniture and equipment 5-7
Depreciation expense amounted to $550,000, $417,000, and $376,000 for the years
ended December 31, 2005, 2004 and 2003, respectively.
The Company evaluates its assets used in operations by identifying indicators of
impairment and by comparing the sum of the estimated undiscounted future cash
flows for each asset to the asset's carrying value. When indicators of
impairment are present and the sum of the undiscounted future cash flows is less
than the carrying value of such asset, an impairment loss is recorded equal to
the difference between the asset's current carrying value and its fair value
based on discounting its estimated future cash flows. At December 31, 2005 and
2004, no such indicators of impairment were identified.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial
maturity of three months or less to be cash equivalents.
F-8
FSP Willow Bend Office Center Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
Property. Although these funds typically are used for the payment of real estate
assets and deferred leasing commissions, there is no legal restriction on their
use and they may be used for any Company purpose.
RESTRICTED CASH
Restricted cash consists of tenant security deposits.
CONCENTRATION OF CREDIT RISKS
Cash, cash equivalents and short-term investments are financial instruments that
potentially subject the Company to a concentration of credit risk. The Company
maintains its cash balances and short-term investments principally in one bank
which the Company believes to be creditworthy. The Company periodically assesses
the financial condition of the bank and believes that the risk of loss is
minimal. Cash balances held with various financial institutions frequently
exceed the insurance limit of $100,000 provided by the Federal Deposit Insurance
Corporation.
For the years ended December 31, 2005, 2004 and 2003 rental income was derived
from various tenants. Future receipts are dependent upon the financial strength
of the lessees and their ability to perform under the lease agreements.
The following tenants represent greater than 10% of total revenue:
2005 2004 2003
Quadrem US, Inc. 19% 14% 31%
Bluegreen Vacations 15% 15% --
Coastal Capital Corp. 10% 10% 13%
Prelude Systems, Inc 19% 19% 16%
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents,
cash-funded reserves and restricted cash approximate their fair values based on
their short-term maturity and prevailing interest rates.
TENANT RENT RECEIVABLE
Tenant rent receivable is reported at the amount the Company expects to collect
on balances outstanding at year-end. The Company provides an allowance for
doubtful accounts based on its estimate of a tenant's ability to make future
rent payments. The computation of this allowance is based in part on the
tenant's payment history and current credit status. In 2003, an amount of
$27,000 was written off as a bad debt.
F-9
FSP Willow Bend Office Center Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
STEP RENT RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable, which is the
cumulative revenue recognized in excess of amounts billed by the Company is
$509,000 and $480,000 at December 31, 2005 and 2004, respectively.
DEFERRED LEASING COSTS
Deferred leasing commissions represent direct and incremental external leasing
costs incurred in the leasing of commercial space. These costs are capitalized
and are amortized on a straight-line basis over the terms of the related lease
agreements. Amortization expense was $128,000, $73,000 and $28,000 for the years
ended December 31, 2005, 2004 and 2003, respectively. Detail of the deferred
leasing costs as of December 31,2005:
(in thousands) 2005 2004
-------------- ---------------------
Costs $ 584 $ 583
Accumulated Amortization (228) (101)
---------------------
Book Value $ 356 $ 482
=====================
The estimated annual amortization expense for the five years succeeding December
31, 2005 are as follows:
(in thousands)
--------------
2006 $ 121
2007 $ 111
2008 $ 80
2009 $ 42
2010 $ 2
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs, in the amount of
$1,700,167 have been reported as a reduction in Stockholders' Equity in the
Company's Balance Sheets.
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial property and accounts for its leases as
operating leases. Rental income from leases, which may include rent concessions
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenants. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below.
Years Ended
December, 31
(in thousands) 2005 2004 2003
================================================================================
Income from leases $1,872 $1,337 $1,327
Bankruptcy settlement [1] -- 2,032 --
Step rent adjustment 29 400 80
Reimbursable expenses 228 131 119
- --------------------------------------------------------------------------------
Total $2,129 $3,900 $1,526
================================================================================
(1) Bankruptcy settlement received relative to former tenant, Pacific USA
Holdings Corporation.
F-10
FSP Willow Bend Office Center Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
INTEREST INCOME
Interest income is recognized when the related services are performed and the
earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a Real Estate Investment Trust ("REIT")
under the Internal Revenue Code of 1986, as amended. As a REIT, the Company
generally is entitled to a tax deduction for dividends paid to its shareholders,
thereby effectively subjecting the distributed net income of the Company to
taxation at the shareholder level only. The Company must comply with a variety
of restrictions to maintain its status as a REIT. These restrictions include the
type of income it can earn, the type of assets it can hold, the number of
shareholders it can have and the concentration of their ownership, and the
amount of the Company's taxable income that must be distributed annually.
NET INCOME PER SHARE
The Company follows SFAS No. 128 "Earnings per Share", which specifies the
computation, presentation and disclosure requirements for the Company's net
income per share. Basic net income per share is computed by dividing net income
by the weighted average number of shares outstanding during the period. Diluted
net income per share reflects the potential dilution that could occur if
securities or other contracts to issue shares were exercised or converted into
shares. There were no potential dilutive shares outstanding at December 31,
2005, 2004 and 2003. Subsequent to the completion of the offering of preferred
shares, the holders of common stock are not entitled to share in any income nor
any related distributions.
3. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies these requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
For the period ended December 31, 2000, the Company incurred a net operating
loss for income tax purposes of approximately $236,000 that can be carried
forward until it expires in the year 2020.
At December 31, 2005, the Company's net tax basis of its real estate assets was
$16,254,000.
The following schedule reconciles GAAP net income to taxable income subject to
dividend requirements:
(in thousands) 2005 2004 2003
================================================================================
GAAP net income $ 306 $ 2,427 $ 169
Add: Book depreciation and amortization 677 490 404
Deferred Rent 39 -- --
Less: Tax depreciation and amortization (611) (2,404) (409)
Bad debts -- (480) --
Step rents (29) (400) (80)
- --------------------------------------------------------------------------------
Taxable income subject to dividend requirement $ 382 $ (367) $ 84
================================================================================
F-11
FSP Willow Bend Office Center Corp.
Notes to Financial Statements
3. Income Taxes (continued)
The following schedule summarizes the tax components of the distributions paid
for the years ended December 31:
(in thousands) 2005 2004 2003
-------------------- ------------------- -------------------
Preferred % Preferred % Preferred %
--------- --------- --------- -------- --------- --------
Ordinary income $338 35% $386 73% $100 16%
Return of Capital 629 65% 149 27% 518 84%
--------- --------- --------- -------- --------- --------
Total $967 100% $535 100% $618 100%
========= ========= ========= ======== ========= ========
4. Capital Stock
PREFERRED STOCK
Generally, each holder of shares of Preferred Stock ("Shares") is entitled to
receive ratably all dividends, if any, declared by the Board of Directors out of
funds legally available. The right to receive dividends shall be non-cumulative,
and no right to dividends shall accrue by reason of the fact that no dividend
has been declared in any prior year. Each holder of Shares will be entitled to
receive, to the extent that funds are available therefore, $100,000 per Share,
before any payment to the holder of Common Stock, out of distributions to
stockholders upon liquidation, dissolution or the winding up of the Company; the
balance of any such funds available for distribution will be distributed among
the holders of Shares and the holder of Common Stock, pro rata based on the
number of shares held by each; provided, however, that for these purposes, one
share of Common Stock will be deemed to equal one-tenth of a share of Preferred
Stock.
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
COMMON STOCK
Franklin Street Properties Corp. ("FSP"), is the sole holder of the Company's
Common Stock. FSP has the right, as one class together with the holders of
Preferred Stock, to vote to elect the directors of the Company and to vote on
all matters except those voted by the holders of Shares of Preferred Stock.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to share in any earnings nor any related
dividend.
5. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the years
ended December 31, 2005, 2004 and 2003 fees incurred under the agreement were
$22,000, $14,000, and $15,000, respectively.
F-12
FSP Willow Bend Office Center Corp.
Notes to Financial Statements
6. Commitments and Contingencies
The Company, as lessor, has minimum future rentals due under non-cancelable
operating leases as follows:
Year Ending
(in thousands) December 31, Amount
------------ -------
2006 2,098
2007 2,035
2008 1,393
2009 773
2010 91
-------
$6,390
=======
In addition, the lessees are liable for real estate taxes and certain operating
expenses of the Property.
Upon acquiring the commercial rental property in December 2000, the Company was
assigned the lease agreements between the seller of the Property and the
existing tenants. The original lease periods ranged from five to eleven years
with renewal options.
7. Subsequent Events
On January 20, 2006, the Board of Directors of the Company declared a cash
distribution of $303,000 payable on February 21, 2006 to stockholders of record
on January 31, 2006.
F-13
SCHEDULE III
FSP Willow Bend Office Center Corp.
Real Estate and Accumulated Depreciation
December 31, 2005
Initial Cost
-----------------------------------
Costs
Buildings Capitalized
Improvements (Disposals)
and Subsequent to
Description Encumbrances (1) Land Equipment Acquisition
- ----------- ---------------- ---- --------- -----------
Willow Bend Office Center, Plano, TX 2,737 14,401 1,096
Historical Costs
------------------------------------------------------------
Buildings Total Costs,
Improvements Net of Depreciable
and Accumulated Accumulated Life Date of
Description Land Equipment Total (2) Depreciation Depreciation Years Acquisition
- ----------- ---- --------- --------- ------------- ------------ ----- -----------
(in thousands)
Willow Bend Office Center, Plano, TX 2,737 15,497 18,234 2,095 16,139 39 2000
(1) There are no encumbrances on the above properties.
(2) The aggregate cost for Federal Income Tax purposes is $17,621.
F-14
FSP Willow Bend Office Center Corp.
The following table summarizes the changes in the Company's real estate
investments and accumulated depreciation:
December 31,
--------------------------------
(in thousands) 2005 2004 2003
================================================================================
Real estate investments, at cost:
Balance, beginning of period $18,234 $17,371 $17,141
Acquisitions -- -- --
Improvements -- 863 230
Dispositions -- -- --
- --------------------------------------------------------------------------------
Balance, end of period $18,234 $18,234 $17,371
================================================================================
Accumulated depreciation:
Balance, beginning of period $ 1,545 $ 1,128 $ 752
Depreciation 550 417 376
Dispositions -- -- --
- --------------------------------------------------------------------------------
Balance, end of period $ 2,095 $ 1,545 $ 1,128
================================================================================
F-15
FSP Innsbrook Corp.
Financial Statements
December 31, 2005, 2004 and 2003
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report............................................. F-17
Balance Sheets as of December 31, 2005 and 2004.......................... F-18
Statements of Operations for the years ended December 31, 2005 and
2004 and the period May 14, 2003 (date of inception) to
December 31, 2003.................................................. F-19
Statements of Changes in Stockholders' Equity for the years ended
December 31, 2005 and 2004 and the period May 14, 2003
(date of inception) to December 31, 2003........................... F-20
Statements of Cash Flows for the years ended December 31, 2005 and 2004 and
the period May 14, 2003 (date of inception) to December 31, 2003... F-21
Notes to Financial Statements............................................ F-22
F-16
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Innsbrook Corp.
Wakefield, Massachusetts
We have audited the accompanying balance sheets of FSP Innsbrook Corp. as of
December 31, 2005 and 2004, and the related statements of operations, changes in
stockholders' equity and cash flows for the years then ended and the period from
May 14, 2003 (date of inception) to December 31, 2003. 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 financial position of FSP Innsbrook Corp. as of
December 31, 2005 and 2004, and the results of its operations and its cash flows
for the years then ended and for the initial period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Braver and Company, P.C.
Newton, Massachusetts
March 1, 2006
F-17
FSP Innsbrook Corp.
Balance Sheets
December 31,
---------------------------
(in thousands, except shares and par value amounts) 2005 2004
==============================================================================================================
Assets:
Real estate investments, at cost:
Land $ 3,643 $ 3,643
Buildings and improvements 33,737 33,737
- --------------------------------------------------------------------------------------------------------------
37,380 37,380
Less accumulated depreciation 2,126 1,261
- --------------------------------------------------------------------------------------------------------------
Real estate investments, net 35,254 36,119
Acquired real estate leases, net of accumulated amortization
of $494 and $293, respectively 781 982
Cash and cash equivalents 1,469 1,392
Cash-funded reserves 2,191 2,191
Tenant rent receivable - 24
Step rent receivable 310 226
Prepaid expenses and other assets 109 118
- --------------------------------------------------------------------------------------------------------------
Total assets $40,114 $41,052
==============================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 646 $ 589
Distributions payable -- 903
- --------------------------------------------------------------------------------------------------------------
Total liabilities 646 1,492
- --------------------------------------------------------------------------------------------------------------
Commitments and Contingencies: -- --
Stockholders' Equity:
Preferred Stock, $.01 par value, 475 shares
authorized, issued and outstanding -- --
Common Stock, $.01 par value, 1 share
authorized, issued and outstanding -- --
Additional paid-in capital 43,607 43,607
Retained deficit and distributions in excess of earnings (4,139) (4,047)
- --------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 39,468 39,560
- --------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $40,114 $41,052
==============================================================================================================
See accompanying notes to financial statements.
F-18
FSP Innsbrook Corp.
Statements of Operations
For the Period
May 14, 2003
(date of
For the Year Ended December 31, inception) to
--------------------------------- December 31,
(in thousands, except shares and per share amounts) 2005 2004 2003
=======================================================================================================================
Revenues:
Rental $5,591 $5,581 $ 2,711
- -----------------------------------------------------------------------------------------------------------------------
Total revenue 5,591 5,581 2,711
- -----------------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 1,528 1,584 746
Real estate taxes and insurance 416 404 179
Depreciation and amortization 1,066 1,066 488
Interest -- -- 2,818
- -----------------------------------------------------------------------------------------------------------------------
Total expenses 3,010 3,054 4,231
- -----------------------------------------------------------------------------------------------------------------------
Income (loss) before interest income 2,581 2,527 (1,520)
Interest income 63 44 15
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) before distributions to common stockholder 2,644 2,571 (1,505)
Distributions paid to common stockholder -- -- 14
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred stockholders $2,644 $2,571 $(1,519)
=======================================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 475 475 465
=======================================================================================================================
Net income (loss) per preferred share, basic and diluted $5,566 $5,413 $(3,267)
=======================================================================================================================
See accompanying notes to financial statements.
F-19
FSP Innsbrook Corp.
Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 2005 and 2004 and for the Period May 14, 2003
(date of inception) to December 31, 2003
Retained Deficit
Additional and Distributions Total
Preferred Common Paid-in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
===========================================================================================================================
Private offering of 475 shares, net $ -- $ -- $43,607 $ -- $43,607
Distributions -- -- -- (1,521) (1,521)
Net loss -- -- -- (1,505) (1,505)
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 -- -- 43,607 (3,026) 40,581
Distributions -- -- -- (3,592) (3,592)
Net income -- -- -- 2,571 2,571
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 -- -- 43,607 (4,047) 39,560
Distributions -- -- -- (2,736) (2,736)
Net income -- -- -- 2,644 2,644
- ---------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2005 $ -- $ -- $43,607 $(4,139) $39,468
===========================================================================================================================
See accompanying notes to financial statements.
F-20
FSP Innsbrook Corp.
Statements of Cash Flows
For the Period
May 14, 2003
For the Year Ended December 31, (date of inception)
----------------------------------- to December 31,
(in thousands) 2005 2004 2003
===================================================================================================================================
Cash flows from operating activities:
Net Income (loss) $ 2,644 $ 2,571 $ (1,505)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 1,066 1,066 488
Changes in operating assets and liabilities:
Cash-funded reserves -- -- (2,191)
Tenant rent receivable 24 2 (26)
Step rent receivable (84) 3 (229)
Prepaid expenses and other assets 9 20 (138)
Accounts payable and accrued expenses 57 (1) 590
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 3,716 3,661 (3,011)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets -- -- (37,380)
Purchase of acquired real estate leases -- -- (1,275)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- -- (38,655)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- -- 47,510
Syndication costs -- -- (3,903)
Distributions to stockholders (3,639) (3,565) (645)
Proceeds from long-term debt -- -- 38,122
Principal payments on long-term debt -- -- (38,122)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (3,639) (3,565) 42,962
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 77 96 1,296
Cash and cash equivalents, beginning of period 1,392 1,296 --
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,469 $ 1,392 $ 1,296
===================================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ -- $ 2,818
Disclosure of non-cash financing activities:
Distributions declared but not paid $ -- $ 903 $ 876
See accompanying notes to financial statements.
F-21
FSP Innsbrook Corp.
Notes to Financial Statements
1. Organization
FSP Innsbrook Corp. (the "Company") was organized on May 14, 2003 as a
Corporation under the laws of the State of Delaware to purchase, own and operate
three recently constructed Class "A" suburban office buildings containing
approximately 297,789 square feet of rentable space located on approximately 17
acres of land in Glen Allen, Henrico County, VA. (the "Property"). The Company
acquired the Property on July 16, 2003.
2. Summary of Significant Accounting Policies
BASIS OF PRESENTATION
The results of operations from inception to December 31, 2003 are not
necessarily indicative of the results to be obtained for other interim periods
or for the full fiscal year.
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain information in the 2004 and 2003 financial statement has been
reclassified to conform to the 2005 presentation.
REAL ESTATE AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized. Typical
capital items include new roofs, site improvements, various exterior building
improvements and major interior renovations. Funding for capital improvements
typically is provided by cash set aside at the time the Property was purchased.
Routine replacements and ordinary maintenance and repairs that do not extend the
life of the asset are expensed as incurred. Typical expense items include
interior painting, landscaping and minor carpet replacements. Funding for
repairs and maintenance items typically is provided by cash flows from operating
activities.
Depreciation is computed using the straight-line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Building - Commercial 39
Building Improvements 15-39
Furniture & Equipment 5-7
The following schedule reconciles the cost of the Property as shown in the
Offering Memorandum as to the amounts shown on the Company's Balance Sheet:
(in thousands)
Price per Offering Memorandum $ 38,122
Plus: Acquisition fees 238
Other acquisition costs 295
-----------------------------------------------------------
Total Acquisition Costs $ 38,655
===========================================================
F-22
FSP Innsbrook Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
These costs were recorded in the Company's Balance Sheets as follows:
(in thousands)
Land $ 3,643
Building 33,737
Acquired real estate leases 1,275
----------------------------------------------------------
Total recorded on Balance Sheets $ 38,655
==========================================================
The Company evaluates its assets used in operations by identifying indicators of
impairment and by comparing the sum of the estimated undiscounted future cash
flows for each asset to the asset's carrying value. When indicators of
impairment are present and the sum of the undiscounted future cash flows is less
than the carrying value of such asset, an impairment loss is recorded equal to
the difference between the asset's current carrying value and its fair value
based on discounting its estimated future cash flows. At December 31, 2005 and
2004, no such indicators of impairment were identified.
Depreciation expense of $865,000, $865,000 and $396,000 is included in
Depreciation and Amortization in the Company's Statements of Operations for the
periods ended December 31, 2005, 2004 and 2003, respectively.
ACQUIRED REAL ESTATE LEASES
Acquired real estate leases represent the estimated value of legal and leasing
costs related to acquired leases that were included in the purchase price when
the Company acquired the Property. Under Statement of Financial Accounting
Standard ("SFAS") No. 141 "Business Combinations", which was approved by the
Financial Accounting Standards Board ("FASB") in June 2001, the Company is
required to segregate these costs from its investment in real estate. The
Company subsequently amortizes these costs on a straight-line basis over the
weighted-average remaining life of the related leases. Amortization expense of
$201,000, $201,000 and $92,000 is included in Depreciation and Amortization in
the Company's Statements of Operations for the periods ended December 31, 2005,
2004 and 2003, respectively.
Acquired real estate leases included in the purchase price of the property were
$1,275,000 and are being amortized over a period of six years in respect of the
lease assumed. Detail of the acquired real estate leases as of December 31,:
(in thousands) 2005 2004
-------------- -------- --------
Cost $ 1,275 $ 1,275
Accumulated amortization (494) (293)
-------- --------
Book value $ 781 $ 982
======== ========
The estimated annual amortization expense for the four years succeeding December
31, 2005 are as follows:
(in thousands)
--------------
2006 $ 201
2007 $ 201
2008 $ 201
2009 $ 178
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an initial maturity of
three months or less to be cash equivalents.
F-23
FSP Innsbrook Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
Property. These funds typically are used for the payment of real estate assets
and deferred leasing commissions; however, there is no legal restriction on
their use and they may be used for any Company purpose.
CONCENTRATION OF CREDIT RISKS
Cash, cash equivalents and short-term investments are financial instruments that
potentially subject the Company to a concentration of credit risk. The Company
maintains its cash balances and short-term investments principally in one bank
which the Company believes to be creditworthy. The Company periodically assesses
the financial condition of the bank and believes that the risk of loss is
minimal. Cash balances held with various financial institutions frequently
exceed the insurance limit of $100,000 provided by the Federal Deposit Insurance
Corporation.
The Property is currently leased through November 14, 2009 to Capital One
Services, Inc., a wholly owned subsidiary of Capital One Financial Corporation.
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents and
cash-funded reserves approximate their fair values based on their short-term
maturity and prevailing interest rates.
STEP RENT RECEIVABLE
The lease provides for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreement. Step rent receivable, which is the
cumulative revenue recognized in excess of amounts billed by the Company, is
$310,000 and $226,000 at December 31, 2005 and 2004, respectively.
TENANT RENT RECEIVABLE
Tenant rent receivable is reported at the amount the Company expects to collect
on balances outstanding at year-end. Management monitors outstanding balances
and tenant relationships and concluded that any realization losses would be
immaterial.
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs, in the amount of
$3,903,000 have been reported as a reduction in Stockholders' Equity in the
Company's Balance Sheets.
F-24
FSP Innsbrook Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial property and accounts for its leases as
operating lease. Rental income from leases, which may include rent concession
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenant. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below.
Year Ended Year Ended Period Ended
December 31, December 31, December, 31
(in thousands) 2005 2004 2003
================================================================================
Income from leases $3,450 $3,640 $1,652
Straight-line rent adjustment 84 (3) 229
Reimbursable expenses 2,057 1,944 830
- --------------------------------------------------------------------------------
Total $5,591 $5,581 $2,711
================================================================================
INTEREST INCOME
Interest income is recognized when the related services are performed and the
earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a Real Estate Investment Trust ("REIT")
under the Internal Revenue Code of 1986, as amended. As a REIT, the Company
generally is entitled to a tax deduction for dividends paid to its shareholders,
thereby effectively subjecting the distributed net income of the Company to
taxation at the shareholder level only. The Company must comply with a variety
of restrictions to maintain its status as a REIT. These restrictions include the
type of income it can earn, the type of assets it can hold, the number of
shareholders it can have and the concentration of their ownership, and the
amount of the Company's taxable income that must be distributed annually.
NET INCOME PER SHARE
The Company follows SFAS No. 128 "Earnings per Share", which specifies the
computation, presentation and disclosure requirements for the Company's net
income per share. Basic net income per preferred share is computed by dividing
net income by the weighted average number of preferred shares outstanding during
the period. Diluted net income per preferred share reflects the potential
dilution that could occur if securities or other contracts to issue shares were
exercised or converted into shares. There were no potential dilutive shares
outstanding at December 31, 2005, 2004 and 2003. Subsequent to the completion of
the offering of preferred shares, the holders of common stock are not entitled
to share in any income nor any related dividend.
3. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies these requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
For the period ended December 31, 2003, the Company incurred a net operating
loss for income tax purposes of approximately $1,194,000 that can be carried
forward until it expires in the year 2023.
At December 31, 2005, the Company's net tax basis of its real estate assets is
$36,449,000.
F-25
FSP Innsbrook Corp.
Notes to Financial Statements
3. Income Taxes (continued)
The following schedule reconciles net income (loss) to taxable income subject to
dividend requirements:
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
(in thousands) 2005 2004 2003
==================================================================================================
GAAP net income (loss) $2,644 $2,571 $(1,505)
Add: Book depreciation and amortization 1,066 1,066 488
Deferred rent -- (446) 446
Less: Tax depreciation and amortization (902) (900) (394)
Straight-line rents (84) 3 (229)
- --------------------------------------------------------------------------------------------------
Taxable income (loss)[1] $2,724 $2,294 $(1,194)
==================================================================================================
(1) A tax loss is not subject to a dividend requirement.
The following schedule summarizes the tax components of the distributions paid
for the period ended December 31:
(in thousands) 2005 2004 2003
------------------------------ ----------------------------- -----------------------------
Preferred Common % Preferred Common % Preferred Common %
--------- -------- --------- --------- -------- -------- --------- -------- --------
Ordinary income $2,750 $ -- 76% $2,320 $ -- 65% $ -- $ -- 0%
Return of Capital 889 -- 24% 1,245 -- 35% 631 14 100%
--------- -------- --------- --------- -------- -------- --------- -------- --------
Total $3,639 $ -- 100% $3,565 $ -- 100% $631 $ 14 100%
========= ======== ========= ========= ======== ======== ========= ======== ========
4. Capital Stock
PREFERRED STOCK
Generally, each holder of shares of Preferred Stock ("Shares") is entitled to
receive ratably all dividends, if any, declared by the Board of Directors out of
funds legally available. The right to receive dividends shall be non-cumulative,
and no right to dividends shall accrue by reason of the fact that no dividend
has been declared in any prior year. Each holder of Shares will be entitled to
receive, to the extent that funds are available therefore, $100,000 per Share,
before any payment to the holder of Common Stock, out of distributions to
stockholders upon liquidation, dissolution or the winding up of the Company; the
balance of any such funds available for distribution will be distributed among
the holders of Shares and the holder of Common Stock, pro rata based on the
number of shares held by each; provided, however, that for these purposes, one
share of Common Stock will be deemed to equal one-tenth of a share of Preferred
Stock.
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
COMMON STOCK
Franklin Street Properties Corp. ("FSP"), is the sole holder of the Company's
Common Stock. FSP has the right, as one class together with the holders of
Preferred Stock, to vote to elect the directors of the Company and to vote on
all matters except those voted by the holders of Shares of Preferred Stock.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to share in any earnings nor any related
dividend.
F-26
FSP Innsbrook Corp.
Notes to Financial Statements
5. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the periods
ended December 31, 2005, 2004 and 2003, fees incurred under the agreement were
$56,000, $56,000 and $24,500 respectively.
An acquisition fee of $237,500 and other costs of $295,000 were paid in 2003 to
an affiliate of the Common Shareholder. Such fees were included in the cost of
the real estate.
Syndication fees of $3,800,000 were paid in 2003 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
During 2003, the Company borrowed and repaid in full a note payable to FSP,
principal of $38,122,000 with interest equal to the Citizens Bank base rate.
Interest paid to FSP was $87,000. The average interest rate during the time the
loan was outstanding was 4.50%.
A commitment fee of $2,731,000 was paid in 2003 to FSP for obtaining the first
mortgage loan. Such amount is included in interest expense on the Statements of
Operations.
The Company paid a distribution in 2003 of $14,000 to the common stockholder
relating to the operations of the Company prior to the completion of the
offering of preferred shares.
6. Commitments and Contingencies
The Company, as lessor, has minimum future rentals due under a non-cancelable
operating lease as follows:
Year Ending
(in thousands) December 31, Amount
------------ --------
2006 $ 3,518
2007 3,589
2008 3,661
2009 3,090
--------
$13,858
========
In addition, the lessee is liable for real estate taxes and certain operating
expenses of the property.
Upon acquiring the commercial rental property in July 2003, the Company was
assigned the lease agreement between the seller of the Property and the existing
tenant. The original lease period expires in six years with renewal options.
7. Subsequent Events
On January 13, 2006, LandAmerica Financial Group, Inc. ("Subtenant") signed a
sublease agreement with Capital One Services, Inc. ("Sublandlord") through the
duration of the Sublandlord's lease expiring October 31, 2009. On the same date,
the Company entered into a direct lease with LandAmerica Financial Group, as
tenant, with rental operation commencing November 1, 2009. The Company is
obligated to pay an allowance of approximately $5,430,000 (the "Reimbursement
Allowance") to reimburse the tenant for the costs of alterations made upon the
tenant's continued occupancy of the premises (including alterations made prior
to the commencement date). Landlord shall not be required to pay the
Reimbursement Allowance before the commencement date of the term. An amount of
$1,264,000 will be paid in 2006 and the remaining balance of $4,166,000 is to be
paid November 1, 2009.
On January 13, 2006, related to the sublease and lease agreements mentioned
above, the Company agreed to pay a commission to CB Richard Ellis of Virginia,
Inc. ("Broker") in the amount of $911,000. An amount of $418,000 was paid to the
Broker in February 2006.
On January 20, 2006, the Board of Directors of the Company declared a cash
distribution of $934,000 payable on February 21, 2006 to stockholders of record
on January 31, 2006.
F-27
SCHEDULE III
FSP Innsbrook Corp.
Real Estate and Accumulated Depreciation
December 31, 2005
Initial Cost
-----------------------------------
Costs
Buildings Capitalized
Improvements (Disposals)
and Subsequent to
Description Encumbrances (1) Land Equipment Acquisition
- ----------- ---------------- ---- --------- -----------
Innsbrook, Glen Allen, VA 3,643 33,737 --
Historical Costs
------------------------------------------------------------
Buildings Total Costs,
Improvements Net of Depreciable
and Accumulated Accumulated Life Date of
Description Land Equipment Total (2) Depreciation Depreciation Years Acquisition
- ----------- ---- --------- --------- ------------- ------------ ----- -----------
(in thousands)
Innsbrook, Glen Allen, VA 3,643 33,737 37,380 2,126 35,254 39 2003
(1) There are no encumbrances on the above properties.
(2) The aggregate cost for Federal Income Tax purposes is $38,655.
F-28
FSP Innsbrook Corp.
The following table summarizes the changes in the Company's real estate
investments and accumulated depreciation:
December 31,
------------------------------
(in thousands) 2005 2004 2003
================================================================================
Real estate investments, at cost:
Balance, beginning of period $37,380 $37,380 $ --
Acquisitions -- -- 37,380
Improvements -- -- --
Dispositions -- -- --
- --------------------------------------------------------------------------------
Balance, end of period $37,380 $37,380 $37,380
================================================================================
Accumulated depreciation:
Balance, beginning of period $1,261 $396 $ --
Depreciation 865 865 396
Dispositions -- -- --
- --------------------------------------------------------------------------------
Balance, end of period $2,126 $1,261 $ 396
================================================================================
F-29
INNSBROOK
FINANCIAL STATEMENTS
FOR THE PERIOD
JANUARY 1, 2003 TO JULY 16, 2003 AND
FOR THE YEAR ENDED
DECEMBER 31, 2002
CONTENTS
PAGE
Independent auditors' report F-31
Statements of revenue over certain operating expenses F-32
Notes accompanying the statements of revenue over certain
operating expenses F-33
F-30
INDEPENDENT AUDITORS' REPORT
To the Stockholders
FSP Innsbrook Corp.
Wakefield, Massachusetts
We have audited the accompanying statements of revenue over certain operating
expenses (the "Statements") of Innsbrook for the period January 1, 2003 to July
16, 2003 and for the year ended December 31, 2002. These Statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 Statements
are free of material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the Statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall Statements'
presentation. We believe that our audits provide a reasonable basis for our
opinion.
The accompanying Statements were prepared to comply with the requirements of
Rule 3-14 of Regulation S-X of the Securities and Exchange Commission, and
exclude certain expenses described in Note 2 and, therefore, are not intended to
be a complete presentation of the Property's revenue and expenses.
In our opinion, these Statements referred to above present fairly, in all
material respects, the revenue over certain operating expenses (as described in
Note 2) of Innsbrook for the period January 1, 2003 to July 16, 2003 and for the
year ended December 31, 2002, in conformity with the basis of accounting
described in Note 2.
/s/ Braver and Company, P.C.
Newton, Massachusetts
June 27, 2005
F-31
INNSBROOK
STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES
FOR THE PERIOD JANUARY 1, 2003 TO JULY 16, 2003 AND
FOR YEAR ENDED DECEMBER 31, 2002
January 1, 2003 to For the Year Ended
July 16, 2003 December 31, 2002
------------- -----------------
Revenue
Rental income $2,840,645 $5,504,128
---------- ----------
Certain operating expenses (Note 2):
Taxes and insurance 192,380 348,588
Management fees 92,396 156,091
Administrative 48,848 78,062
Operating and maintenance 595,990 1,190,268
---------- ----------
929,614 1,773,009
---------- ----------
Excess of revenue over certain operating expenses $1,911,031 $3,731,119
========== ==========
The accompanying notes are an integral part of the
statements of revenue over certain operating expenses.
F-32
INNSBROOK
NOTES ACCOMPANYING STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES
FOR THE PERIOD JANUARY 1, 2003 TO JULY 16, 2003 AND
FOR YEAR ENDED DECEMBER 31, 2002
1. DESCRIPTION OF THE PROPERTY:
The accompanying statements of revenue over certain operating expenses (the
"Statements") include the operations of a commercial building located in Glen
Allen, Virginia (the "Property"). The Property consists of three Class "A"
suburban office buildings containing in the aggregate approximately 297,789
square feet of rentable space located on 17 acres of land. The Property was
owned by Highwoods Realty Limited Partnership and sold to FSP Innsbrook Corp.
(the "Company") on July 17, 2003.
2. BASIS OF ACCOUNTING:
The accompanying Statements have been prepared on the accrual basis of
accounting. The Statements have been prepared in accordance with Rule 3-14 of
Regulation S-X of the Securities and Exchange Commission for real estate
properties acquired or to be acquired. Accordingly, these Statements exclude
certain historical expenses not comparable to the operations of the Property
after acquisition such as amortization, depreciation, interest, corporate
expenses and certain other costs not directly related to future operations of
the Property.
3. REVENUE RECOGNITION:
Rental revenue includes income from the lease, certain reimbursable expenses,
and straight-line rent adjustments associated with renting the property. A
summary of rental revenue is shown in the following table:
January 1, 2003 Year Ended
to December 31,
July 16, 2003 2002
------------- ------------
Income from lease $ 1,921,969 $3,508,398
Straight-line rent adjustment (29,529) 230,938
Reimbursable expenses 948,205 1,764,792
----------- ----------
Total $ 2,840,645 $5,504,128
=========== ==========
Innsbrook has retained substantially all of the risks and benefits of the
Property and accounts for its lease as an operating lease. Rental income from
the lease, which includes rent concessions (including free rent and tenant
improvement allowances) and scheduled increases in rental rates during the lease
term, is recognized on a straight-line basis. Innsbrook does not have any
percentage rent arrangements with its tenant. Reimbursable costs are included in
rental income in the period earned.
4. USE OF ESTIMATES:
The preparation of the Statements in conformity with the basis of accounting
described in Note 2 requires management to make estimates and assumptions that
affect the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
5. CONCENTRATIONS OF RISKS:
For the period January 1, 2003 to July 16, 2003 and for the year ended December
31, 2002, rental income was received from one lessee. As such, future receipts
are dependent upon the financial strength of the lessee and its ability to
perform under the lease agreement.
F-33
INNSBROOK
NOTES ACCOMPANYING STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES
FOR THE PERIOD JANUARY 1, 2003 TO JULY 16, 2003 AND
FOR YEAR ENDED DECEMBER 31, 2002
6. LEASES:
Innsbrook, as lessor, has minimum future rentals due under a non-cancelable
operating lease as follows:
Year Ending
December 31, Amount
------------ --------
(In thousands)
2003 $ 1,651
2004 3,640
2005 3,450
2006 3,518
2007 3,589
Thereafter 6,751
-------
$22,599
=======
In addition, the lessee is liable for real estate taxes and operating expenses
as direct expenses to the lessee.
F-34
FSP 380 Interlocken Corp.
Financial Statements
December 31, 2005, 2004 and 2003
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report............................................. F-36
Balance Sheets as of December 31, 2005 and 2004 ......................... F-37
Statements of Operations for the years ended December 31, 2005 and 2004
and the period June 24, 2003 (date of inception) to
December 31, 2003.................................................. F-38
Statements of Changes in Stockholders' Equity for the years ended
December 31, 2005 and 2004 and the period June 24, 2003
(date of inception) to December 31, 2003........................... F-39
Statements of Cash Flows for the years ended December 31, 2005 and 2004
and the period June 24, 2003 (date of inception) to
December 31, 2003.................................................. F-40
Notes to Financial Statements............................................ F-41
F-35
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP 380 Interlocken Corp.
Wakefield, Massachusetts
We have audited the accompanying balance sheets of FSP 380 Interlocken Corp. as
of December 31, 2005 and 2004, and the related statements of operations, changes
in stockholders' equity and cash flows for the years ended December 31, 2005 and
2004 and the period from June 24, 2003 (date of inception) to December 31, 2003.
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 financial position of FSP 380 Interlocken Corp. as of
December 31, 2005 and 2004, and the results of its operations and its cash flows
for the years ended December 31, 2005 and 2004 and for the initial period ended
December 31, 2003 in conformity with accounting principles generally accepted in
the United States of America.
/s/ Braver and Company, P.C.
Newton, Massachusetts
March 1, 2006
F-36
FSP 380 Interlocken Corp.
Balance Sheets
December 31,
-------------------------------
(in thousands,except shares and par value amounts) 2005 2004
=====================================================================================================================
Assets:
Real estate investments, at cost:
Land $ 5,287 $ 5,287
Buildings and improvements 27,223 27,207
- ---------------------------------------------------------------------------------------------------------------------
32,510 32,494
Less accumulated depreciation 1,686 988
- ---------------------------------------------------------------------------------------------------------------------
Real estate investments, net 30,824 31,506
Acquired real estate leases, net of accumulated amortization
of $601 and $352, respectively 352 601
Acquired favorable real estate leases, net of accumulated amortization
of $3,152 and $1,848, respectively 1,848 3,152
Deferred leasing costs, net of accumulated amortization
of $1 and $0, respectively 8 --
Cash and cash equivalents 2,204 2,275
Cash-funded reserves 2,830 2,855
Restricted cash 39 32
Tenant rent receivable 242 30
Step rent receivable 247 208
Prepaid expenses and other assets 104 103
- ---------------------------------------------------------------------------------------------------------------------
Total assets $38,698 $40,762
=====================================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 1,309 $ 1,218
Distributions payable -- 1,161
Tenant security deposits 39 32
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 1,348 2,411
- ---------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies: -- --
Stockholders' Equity:
Preferred Stock, $.01 par value, 480 shares
authorized, issued and outstanding -- --
Common Stock, $.01 par value, 1 share
authorized, issued and outstanding -- --
Additional paid-in capital 44,092 44,092
Retained deficit and distributions in excess of earnings (6,742) (5,741)
- ---------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 37,350 38,351
- ---------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $38,698 $40,762
=====================================================================================================================
See accompanying notes to financial statements.
F-37
FSP 380 Interlocken Corp.
Statements of Operations
For the Period
June 24, 2003
(date of
(in thousands, except shares and per share amounts) For the Year Ended December 31, inception)
-------------------------------- to December 31,
2005 2004 2003
===================================================================================================================================
Revenues:
Rental $6,100 $5,558 $ 2,393
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenue 6,100 5,558 2,393
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 1,442 1,343 522
Real estate taxes and insurance 1,283 1,231 391
Depreciation and amortization 948 946 394
Interest -- -- 2,854
- -----------------------------------------------------------------------------------------------------------------------------------
Total expenses 3,673 3,520 4,161
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before interest income 2,427 2,038 (1,768)
Interest income 111 95 17
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) before distributions to common stockholder 2,538 2,133 (1,751)
Distributions paid to common stockholder -- -- 318
- -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred stockholders $2,538 $2,133 $(2,069)
===================================================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 480 480 392
===================================================================================================================================
Net income (loss) per preferred share, basic and diluted $5,288 $4,444 $(5,278)
===================================================================================================================================
See accompanying notes to financial statements.
F-38
FSP 380 Interlocken Corp.
Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 2005 and 2004 and for the Period June 24, 2003
(date of inception) to December 31, 2003
Retained Decifit
Additional and Distributions Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
=======================================================================================================================
Private offering of 480 shares, net $ -- $ -- $44,092 $ -- $44,092
Distributions -- -- -- (1,540) (1,540)
Net loss -- -- -- (1,751) (1,751)
- -----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 -- -- 44,092 (3,291) 40,801
Distributions -- -- -- (4,583) (4,583)
Net income -- -- -- 2,133 2,133
- -----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 -- -- 44,092 (5,741) 38,351
Distributions -- -- -- (3,539) (3,539)
Net income -- -- -- 2,538 2,538
- -----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2005 $ -- $ -- $44,092 $(6,742) $37,350
=======================================================================================================================
See accompanying notes to financial statements.
F-39
FSP 380 Interlocken Corp.
Statements of Cash Flows
For the Period
June 24, 2003
For the Year Ended December 31, (date of inception)
----------------------------------- to December 31,
(in thousands) 2005 2004 2003
====================================================================================================================================
Cash flows from operating activities:
Net income (loss) $ 2,538 $ 2,133 $ (1,751)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 948 946 394
Amortization of favorable lease 1,304 1,305 543
Changes in operating assets and liabilities:
Cash-funded reserves 25 17 (2,872)
Restricted cash (7) -- (32)
Tenant rent receivable (212) 194 (224)
Step rent receivable (39) 86 (294)
Prepaid expenses and other assets (1) (6) (97)
Accounts payable and accrued expenses 91 28 1,190
Tenant security deposits 7 -- 32
Payment of deferred leasing costs (9) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 4,645 4,703 (3,111)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets (16) (17) (32,477)
Purchase of acquired real estate leases -- -- (953)
Purchase of acquired favorable real estate leases -- -- (5,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (16) (17) (38,430)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- -- 48,010
Syndication costs -- -- (3,918)
Distributions to stockholders (4,700) (4,491) (471)
Proceeds from long-term debt -- -- 38,000
Principal payments on long-term debt -- -- (38,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used for) provided by financing activities (4,700) (4,491) 43,621
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (71) 195 2,080
Cash and cash equivalents, beginning of period 2,275 2,080 --
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 2,204 $ 2,275 $ 2,080
====================================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ -- $ 2,854
Disclosure of non-cash financing activities:
Distributions declared but not paid $ -- $ 1,161 $ 1,069
See accompanying notes to financial statements.
F-40
FSP 380 Interlocken Corp.
Notes to Financial Statements
1. Organization
FSP 380 Interlocken Corp. (the "Company") was organized on June 24, 2003 as a
Corporation under the laws of the State of Delaware to purchase, own and operate
a ten-story, multi-tenant Class "A" suburban office tower containing
approximately 240,184 square feet of rentable space located on approximately 13
acres of land in Broomfield, CO (the "Property"). The company acquired the
Property on August 15, 2003.
2. Summary of Significant Accounting Policies
BASIS OF PRESENTATION
The results of operations from inception to December 31, 2003 are not
necessarily indicative of the results to be obtained for other interim periods
or for the full fiscal year.
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATIONS
Certain information in the 2004 and 2003 financial statements has been
reclassified to conform to the 2005 presentation.
REAL ESTATE AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized. Typical
capital items include new roofs, site improvements, various exterior building
improvements and major interior renovations. Funding for capital improvements
typically is provided by cash set aside at the time the Property was purchased.
Routine replacements and ordinary maintenance and repairs that do not extend the
life of the assets are expensed as incurred. Typical expense items include
interior painting, landscaping and minor carpet replacements. Funding for
repairs and maintenance items typically is provided by cash flows from operating
activities.
Depreciation is computed using the straight-line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Building - Commercial 39
Building Improvements 15-39
Furniture & Equipment 5-7
The following schedule reconciles the cost of the Property as shown in the
Offering Memorandum as to the amounts shown on the Company's Balance Sheet:
(in thousands)
Price per Offering Memorandum $38,000
Plus: Acquisition fees 240
Plus: Other acquisition costs 190
---------------------------------------------------------------
Total Acquisition Costs $38,430
===============================================================
F-41
FSP 380 Interlocken Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
These costs were recorded in the Company's Balance Sheets as follows:
(in thousands)
Land $ 5,287
Building 27,190
Acquired real estate leases 953
Acquired favorable real estate leases 5,000
---------------------------------------------------------------
Total recorded on Balance Sheets $38,430
===============================================================
The Company evaluates its assets used in operations by identifying indicators of
impairment and by comparing the sum of the estimated undiscounted future cash
flows for each asset to the asset's carrying value. When indicators of
impairment are present and the sum of the undiscounted future cash flows is less
than the carrying value of such asset, an impairment loss is recorded equal to
the difference between the asset's current carrying value and its fair value
based on discounting its estimated future cash flows. At December 31, 2005 and
2004, no such indicators of impairment were identified.
Depreciation expense of $698,000, $698,000, and $290,000 is included in
Depreciation and Amortization in the Company's Statements of Operations for the
periods ended December 31, 2005, 2004 and 2003, respectively.
ACQUIRED REAL ESTATE LEASES
Acquired real estate leases represents the estimated value of legal and leasing
costs related to acquired leases that were included in the purchase price when
the Company acquired the Property. Under Statement of Financial Accounting
Standards ("SFAS") No. 141 "Business Combinations", which was approved by the
Financial Accounting Standards Board ("FASB") in June 2001, the Company is
required to segregate these costs from its investment in real estate. The
Company subsequently amortizes these costs on a straight-line basis over the
life of the related leases. Amortization expense of approximately $249,000,
$248,000 and $104,000 is included in Depreciation and Amortization in the
Company's Statements of Operations for the periods ended December 31, 2005, 2004
and 2003, respectively.
Acquired real estate leases included in the purchase price of the Property were
$953,000 and are being amortized over the weighted-average period of four years
in respect of the leases assumed. Detail of the acquired real estate leases as
of December 31,:
(in thousands) 2005 2004
-------------- -------- --------
Cost $ 953 $ 953
Accumulated amortization (601) (352)
-------- --------
Book value $ 352 $ 601
======== ========
The estimated annual amortization expense for the two years succeeding December
31, 2005 are as follows:
(in thousands)
--------------
2006 $ 249
2007 $ 103
ACQUIRED FAVORABLE REAL ESTATE LEASE
The acquired favorable real estate lease is the estimated benefit the Company
receives when the lease payments due under a tenant's lease exceed the market
rate of the lease at the date the property was acquired. Under SFAS 141 the
Company is required to capitalize this difference and report it separately from
its investment in real estate. The Company subsequently amortizes this amount on
a straight-line basis over the remaining life of the tenant's lease.
Amortization of $1,304,000, $1,305,000 and $543,000 is shown as a reduction of
rental income in the Company's Statements of Operations for the periods ended
December 31, 2005, 2004 and 2003, respectively.
F-42
FSP 380 Interlocken Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
ACQUIRED FAVORABLE REAL ESTATE LEASE (continued)
Acquired favorable real estate lease included in the purchase price of the
property was $5,000,000 and is being amortized over the weighted-average period
of four years in respect of the leases assumed. Details of the acquired
favorable real estate leases as of December 31,:
(in thousands) 2005 2004
-------------- -------- --------
Cost $ 5,000 $ 5,000
Accumulated amortization (3,152) (1,848)
-------- --------
Book value $ 1,848 $ 3,152
======== ========
The estimated annual amortization for the two years succeeding December 31, 2005
are as follows:
(in thousands)
--------------
2006 $ 1,304
2007 $ 544
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an initial maturity of
three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
Property. Although these funds typically are used for the payment of real estate
assets and deferred leasing commissions, there is no legal restriction on their
use and they may be used for any Company purpose.
RESTRICTED CASH
Restricted cash consists of tenant security deposits.
CONCENTRATION OF CREDIT RISKS
Cash, cash equivalents and short-term investments are financial instruments that
potentially subject the Company to a concentration of credit risk. The Company
maintains its cash balances and short-term investments principally in one bank
which the Company believes to be creditworthy. The Company periodically assesses
the financial condition of the bank and believes that the risk of loss is
minimal. Cash balances held with various financial institutions frequently
exceed the insurance limit of $100,000 provided by the Federal Deposit Insurance
Corporation.
For the periods ended December 31, 2005, 2004 and 2003, rental income was
derived from various tenants. As such, future receipts are dependent upon the
financial strength of the lessees and their ability to perform under the lease
agreements.
F-43
FSP 380 Interlocken Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CONCENTRATION OF CREDIT RISKS (continued)
The following tenants represent greater than 10% of the total revenue:
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
2005 2004 2003
===============================================================================================
Cooley Godward LLP 33% 31% 31%
Montgomery Watson Americas, Inc 15% 14% 14%
McData Corporation 44% 42% 43%
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents,
cash-funded reserves and restricted cash approximate their fair values based on
their short-term maturity and prevailing interest rates.
STEP RENT RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable, which is the
cumulative revenue recognized in excess of amounts billed by the Company, is
$247,000, and $208,000 at December 31, 2005 and 2004, respectively.
DEFERRED LEASING COSTS
Deferred leasing commissions represent direct and incremental external leasing
costs incurred in the leasing of commercial space. These costs are capitalized
and are amortized on a straight-line basis over the terms of the related lease
agreements. Amortization expense was $1,000 for the year ended December 31,
2005. Detail of the deferred leasing costs as of December 31, 2005:
(in thousands) 2005
-------------- --------
Cost $ 9
Accumulated amortization (1)
------
Book value $ 8
======
The estimated annual amortization expense for the three years succeeding
December 31, 2005 are as follows:
(in thousands)
--------------
2006 $ 3
2007 $ 3
2008 $ 2
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs, in the amount of
$3,918,000 have been reported as a reduction in Stockholders' Equity in the
Company's Balance Sheets.
TENANT RENT RECEIVABLE
Tenant rent receivable is reported at the amount the Company expects to collect
on balances outstanding at year-end. Management monitors outstanding balances
and tenant relationships and concluded that any realization losses would be
immaterial.
F-44
FSP 380 Interlocken Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial Property and accounts for its leases as
operating leases. Rental income from leases, which may include rent concession
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenants. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below.
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
(in thousands) 2005 2004 2003
==================================================================================================
Income from leases $4,713 $4,595 $1,710
Straight-line rent adjustment 39 (86) 294
Reimbursable expenses 2,652 2,354 932
Amortization of favorable lease (1,304) (1,305) (543)
- --------------------------------------------------------------------------------------------------
Total $6,100 $5,558 $2,393
==================================================================================================
INTEREST INCOME
Interest income is recognized when the related services are performed and the
earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a Real Estate Investment Trust ("REIT")
under the Internal Revenue Code of 1986, as amended. As a REIT, the Company
generally is entitled to a tax deduction for dividends paid to its shareholders,
thereby effectively subjecting the distributed net income of the Company to
taxation at the shareholder level only. The Company must comply with a variety
of restrictions to maintain its status as a REIT. These restrictions include the
type of income it can earn, the type of assets it can hold, the number of
shareholders it can have and the concentration of their ownership, and the
amount of the Company's taxable income that must be distributed annually.
NET INCOME PER SHARE
The Company follows SFAS No. 128 "Earnings per Share", which specifies the
computation, presentation and disclosure requirements for the Company's net
income per share. Basic net income per preferred share is computed by dividing
net income by the weighted average number of shares outstanding during the
period. Diluted net income per preferred share reflects the potential dilution
that could occur if securities or other contracts to issue shares were exercised
or converted into shares. There were no potential dilutive shares outstanding at
December 31, 2005, 2004 and 2003. Subsequent to the completion of the offering
of preferred shares, the holders of common stock are not entitled to share in
any income nor any related dividend.
3. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies these requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
For the period ended December 31, 2003, the Company incurred a net operating
loss for income tax purposes of approximately $1,398,000 that can be carried
forward until it expires in the year 2023.
F-45
FSP 380 Interlocken Corp.
Notes to Financial Statements
3. Income Taxes (continued)
At December 31, 2005, the Company's net tax basis of its real estate assets is
$36,460,000.
The following schedule reconciles net income (loss) to taxable income subject to
dividend requirements:
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
(in thousands) 2005 2004 2003
=====================================================================================================
GAAP net income (loss) $2,538 $2,133 $(1,751)
Add: Book depreciation and amortization 948 946 394
Add: Amortization of favorable lease 1,304 1,305 543
Less: Tax depreciation and amortization (855) (855) (290)
Straight-line rents (39) 86 (294)
- -----------------------------------------------------------------------------------------------------
Taxable income (loss)[1] $3,896 $3,615 $(1,398)
=====================================================================================================
(1) A tax loss is not subject to a dividend requirement.
The following schedule summarizes the tax components of the distributions paid
for the period ended December 31:
(in thousands) 2005 2004 2003
------------------------------ ----------------------------- -----------------------------
Preferred Common % Preferred Common % Preferred Common %
--------- -------- --------- --------- -------- -------- --------- -------- --------
Ordinary income $3,920 $ -- 83% $3,640 $ -- 81% $ -- $ -- --%
Return of Capital 780 -- 17% 851 -- 19% 153 318 100%
--------- -------- --------- --------- -------- -------- --------- -------- --------
Total $4,700 $ -- 100% $4,491 $ -- 100% $153 $318 100%
========= ======== ========= ========= ======== ======== ========= ======== ========
4. Capital Stock
PREFERRED STOCK
Generally, each holder of shares of Preferred Stock ("Shares") is entitled to
receive ratably all dividends, if any, declared by the Board of Directors out of
funds legally available. The right to receive dividends shall be non-cumulative,
and no right to dividends shall accrue by reason of the fact that no dividend
has been declared in any prior year. Each holder of Shares will be entitled to
receive, to the extent that funds are available therefore, $100,000 per Share,
before any payment to the holder of Common Stock, out of distributions to
stockholders upon liquidation, dissolution or the winding up of the Company; the
balance of any such funds available for distribution will be distributed among
the holders of Shares and the holder of Common Stock, pro rata based on the
number of shares held by each; provided, however, that for these purposes, one
share of Common Stock will be deemed to equal one-tenth of a share of Preferred
Stock.
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
COMMON STOCK
Franklin Street Properties Corp. ("FSP"), is the sole holder of the Company's
Common Stock. FSP has the right, as one class together with the holders of
Preferred Stock, to vote to elect the directors of the Company and to vote on
all matters except those voted by the holders of Shares of Preferred Stock.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to share in any income nor any related
dividend.
F-46
FSP 380 Interlocken Corp.
Notes to Financial Statements
5. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the periods
ended December 31, 2005, 2004 and 2003, fees incurred under the agreement were
$71,000, $71,000 and $26,000, respectively.
An acquisition fee of $240,000 and other costs of $190,000 were paid in 2003 to
an affiliate of the Common Shareholder. Such fees were included in the cost of
the real estate.
Syndication fees of $3,840,000 were paid in 2003 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
During 2003, the Company borrowed and repaid in full a note payable to FSP,
principal of $38,000,000 with interest equal to the Citizens Bank base rate.
Interest paid to FSP was $94,000. The average interest rate during the time the
loan was outstanding was 4.50%.
A commitment fee of $2,760,000 was paid to FSP for obtaining the first mortgage
loan. Such amount is included in interest expense on the Statements of
Operations.
The Company paid a distribution in 2003 of $318,000 to the common stockholder
relating to the operations of the Company prior to the completion of the
offering of preferred shares.
6. Commitments and Contingencies
The lease agreement with a tenant provides that 44% of the Company's rental
income expires April 30, 2006. The tenant has advised the Company that it will
not renew or extend the lease agreement. Management is currently seeking
tenant(s) to lease the space.
The Company, as lessor, has minimum future rentals due under non-cancelable
operating leases as follows:
Year Ending
(in thousands) December 31, Amount
------------ ---------
2006 $ 3,072
2007 2,391
2008 2,375
2009 1,614
2010 1,646
---------
$11,098
=========
In addition, the lessees are liable for real estate taxes and certain operating
expenses of the Property.
Upon acquiring the commercial rental property in August 2003, the Company was
assigned the lease agreements between the seller of the Property and the
existing tenants. The original lease periods range from four to ten years with
renewal options.
7. Subsequent Events
On January 20, 2006, the Board of Directors of the Company declared a cash
distribution of $1,168,000 payable on February 21, 2006 to stockholders of
record on January 31, 2006.
F-47
SCHEDULE III
FSP 380 Interlocken Corp.
Real Estate and Accumulated Depreciation
December 31, 2005
Initial Cost
-----------------------------------
Costs
Buildings Capitalized
Improvements (Disposals)
and Subsequent to
Description Encumbrances (1) Land Equipment Acquisition
- ----------- ---------------- ---- --------- -----------
380 Interlocken, Broomfield, CO 5,287 27,190 33
Historical Costs
------------------------------------------------------------
Buildings Total Costs,
Improvements Net of Depreciable
and Accumulated Accumulated Life Date of
Description Land Equipment Total (2) Depreciation Depreciation Years Acquisition
- ----------- ---- --------- --------- ------------- ------------ ----- -----------
(in thousands)
380 Interlocken, Broomfield, CO 5,287 27,223 32,510 1,686 30,824 39 2003
(1) There are no encumbrances on the above properties.
(2) The aggregate cost for Federal Income Tax purposes is $38,463.
F-48
FSP 380 Interlocken Corp.
The following table summarizes the changes in the Company's real estate
investments and accumulated depreciation:
December 31,
---------------------------------
(in thousands) 2005 2004 2003
================================================================================
Real estate investments, at cost:
Balance, beginning of period $32,494 $32,477 $ --
Acquisitions -- -- 32,477
Improvements 16 17 --
Dispositions -- -- --
- --------------------------------------------------------------------------------
Balance, end of period $32,510 $32,494 $32,477
================================================================================
Accumulated depreciation:
Balance, beginning of period $ 988 $ 290 $ --
Depreciation 698 698 290
Dispositions -- -- --
- --------------------------------------------------------------------------------
Balance, end of period $ 1,686 $ 988 $ 290
================================================================================
F-49
380 INTERLOCKEN
FINANCIAL STATEMENTS
FOR THE PERIOD
JANUARY 1, 2003 TO AUGUST 14, 2003 AND
FOR THE YEAR ENDED DECEMBER 31, 2002
CONTENTS
PAGE
Independent auditors' report F-51
Statements of revenue over certain operating expenses F-52
Notes accompanying the statements of revenue over certain
operating expenses F-53
F-50
INDEPENDENT AUDITORS' REPORT
To the Stockholders
FSP 380 Interlocken Corp.
Wakefield, Massachusetts
We have audited the accompanying statements of revenue over certain operating
expenses (the "Statements") of 380 Interlocken for the period January 1, 2003 to
August 14, 2003 and for the year ended December 31, 2002. These Statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these 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 Statements
are free of material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the Statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall Statements'
presentation. We believe that our audits provide a reasonable basis for our
opinion.
The accompanying Statements were prepared to comply with the requirements of
Rule 3-14 of Regulation S-X of the Securities and Exchange Commission, and
exclude certain expenses described in Note 2 and, therefore, are not intended to
be a complete presentation of the Property's revenue and expenses.
In our opinion, these Statements referred to above present fairly, in all
material respects, the revenue over certain operating expenses (as described in
Note 2) of 380 Interlocken for the period January 1, 2003 to August 14, 2003 and
for the year ended December 31, 2002, in conformity with the basis of accounting
described in Note 2.
/s/ Braver and Company, P.C.
Newton, Massachusetts
June 27, 2005
F-51
380 INTERLOCKEN
STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES
FOR THE PERIOD JANUARY 1, 2003 TO AUGUST 14, 2003 AND
FOR THE YEAR ENDED DECEMBER 31, 2002
January 1, 2003 Year Ended
to December 31,
August 14, 2003 2002
--------------- ------------
Revenue
Rental income $4,176,145 $6,863,127
---------- ----------
Certain operating expenses (Note 2):
Taxes and insurance 645,405 1,017,950
Management fees 123,017 183,833
Administrative 95,366 147,003
Operating and maintenance 634,999 838,905
---------- ----------
1,498,787 2,187,691
---------- ----------
Excess of revenue over certain operating expenses $2,677,358 $4,675,436
========== ==========
The accompanying notes are an integral part of the
statements of revenue over certain operating expenses.
F-52
380 INTERLOCKEN
NOTES ACCOMPANYING THE STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES
FOR THE PERIOD JANUARY 1, 2003 TO AUGUST 14, 2003 AND
FOR THE YEAR ENDED DECEMBER 31, 2002
1. DESCRIPTION OF THE PROPERTY:
The accompanying statements of revenue over certain operating expenses (the
"Statements") include the operations of a commercial building located at 380
Interlocken Crescent in Broomfield, Colorado (the "Property"). The Property is
positioned on approximately 13 acres of land within the acclaimed 963-acre
master- planned Interlocken Business Park. The Property is positioned
approximately halfway between downtown Denver and downtown Boulder. The Property
was owned by Amber Drive I, LLC and sold to FSP 380 Interlocken Corp. (the
"Company") on August 15, 2003.
2. BASIS OF ACCOUNTING:
The accompanying Statements have been prepared on the accrual basis of
accounting. The Statements have been prepared in accordance with Rule 3-14 of
Regulation S-X of the Securities and Exchange Commission for real estate
properties acquired or to be acquired. Accordingly, these Statements exclude
certain historical expenses not comparable to the operations of the Property
after acquisition such as amortization, depreciation, interest, corporate
expenses and certain other costs not directly related to future operations of
the Property.
3. REVENUE RECOGNITION
Rental revenue includes income from leases, certain reimbursable expenses, and
straight-line rent adjustments associated with renting the Property.
January 1, 2003 Year Ended
to December 31,
August 14, 2003 2002
--------------- ------------
Income from leases $2,710,310 $4,312,902
Straight-line rent adjustment 34,416 293,596
Reimbursable expenses 1,431,419 2,256,629
---------- ----------
Total $4,176,145 $6,863,127
========== ==========
380 Interlocken has retained substantially all of the risks and benefits of the
Property and accounts for its leases as operating leases. Rental income from
leases, which include rent concessions (including free rent and tenant
improvement allowances) and scheduled increases in rental rates during the lease
term, is recognized on a straight-line basis. 380 Interlocken does not have any
percentage rent arrangements with its tenants. Reimbursable costs are included
in rental income in the period earned.
4. USE OF ESTIMATES:
The preparation of the Statements in conformity with the basis of accounting
described in Note 2 requires management to make estimates and assumptions that
affect the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
5. CONCENTRATIONS OF RISKS:
For the period January 1, 2003 to August 14, 2003 and for the year ended
December 31, 2002, rental income was received from various lessees. As such,
future receipts are dependent upon the financial strength of the lessees and
their ability to perform under the lease agreements.
F-53
380 INTERLOCKEN
NOTES ACCOMPANYING THE STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES
FOR THE PERIOD JANUARY 1, 2003 TO AUGUST 14, 2003 AND
FOR THE YEAR ENDED DECEMBER 31, 2002
6. LEASES:
380 Interlocken, as lessor, has minimum future rentals due under non-cancelable
operating leases as follows:
Year Ending
December 31, Amount
------------ -------
(in thousands)
2003 $ 1,707
2004 4,592
2005 4,700
2006 3,021
2007 2,338
Thereafter 5,590
--------
$21,948
========
In addition, the lessees are liable for real estate taxes and operating expenses
as direct expenses to the lessees.
F-54
FSP Blue Lagoon Drive Corp.
Financial Statements
December 31, 2005, 2004 and 2003
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report............................................. F-56
Balance Sheets as of December 31, 2005 and 2004.......................... F-57
Statements of Operations for the years ended December 31, 2005 and 2004
and the period September 3, 2003 (date of inception)
to December 31, 2003............................................... F-58
Statements of Changes in Stockholders' Equity for the years ended
December 31, 2005 and 2004 and the period September 3, 2003
(date of inception) to December 31, 2003........................... F-59
Statements of Cash Flows for the years ended December 31, 2005 and
2004 and the period September 3, 2003 (date of inception)
to December 31, 2003............................................... F-60
Notes to Financial Statements............................................ F-61
F-55
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Blue Lagoon Drive Corp.
Wakefield, Massachusetts
We have audited the accompanying balance sheets of FSP Blue Lagoon Drive Corp.
as of December 31, 2005 and 2004, and the related statements of operations,
changes in stockholders' equity and cash flows for the years then ended. 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 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 financial position of FSP Blue Lagoon Drive Corp. as
of December 31, 2005 and 2004, and the results of its operations and its cash
flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
The 2003 financial statements were compiled by us, and our report thereon, dated
February 14, 2005, stated that we did not audit or review those financial
statements and, accordingly, expressed no opinion or other form of assurance on
them.
/s/ Braver and Company, P.C.
Newton, Massachusetts
March 1, 2006
F-56
FSP Blue Lagoon Drive Corp.
Balance Sheets
December 31,
-----------------------
(in thousands,except shares and par value amounts) 2005 2004
===================================================================================================
Assets:
Real estate investments, at cost:
Land $ 5,463 $ 5,463
Buildings and improvements 41,684 41,684
- ---------------------------------------------------------------------------------------------------
47,147 47,147
Less accumulated depreciation 2,316 1,247
- ---------------------------------------------------------------------------------------------------
Real estate investments, net 44,831 45,900
Acquired real estate leases, net of accumulated amortization
of $801 and $431 respectively 616 986
Cash and cash equivalents 1,659 1,294
Cash-funded reserves 2,982 2,989
Step rent receivable 304 243
Prepaid expenses and other assets 41 22
- ---------------------------------------------------------------------------------------------------
Total assets $50,433 $51,434
===================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 502 $ 174
Distributions payable -- 1,099
- ---------------------------------------------------------------------------------------------------
Total liabilities 502 1,273
===================================================================================================
Commitments and Contingencies: -- --
Stockholders' Equity:
Preferred Stock, $.01 par value, 599 shares
authorized, issued and outstanding -- --
Common Stock, $.01 par value, 1 share
authorized, issued and outstanding -- --
Additional paid-in capital 55,035 55,035
Retained deficit and dividends in excess of earnings (5,104) (4,874)
- ---------------------------------------------------------------------------------------------------
Total Stockholders' Equity 49,931 50,161
- ---------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $50,433 $51,434
===================================================================================================
See accompanying notes to financial statements.
F-57
FSP Blue Lagoon Drive Corp.
Statements of Operations
For the Period
September 3, 2003
For the Year Ended December 31, (date of inception) to
-------------------------------- December 31,
(in thousands, except shares and per share amounts) 2005 2004 2003
======================================================================================================================
(compiled)
Revenues:
Rental $5,371 $5,256 $ 937
- ----------------------------------------------------------------------------------------------------------------------
Total revenue 5,371 5,256 937
- ----------------------------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 325 274 62
Real estate taxes and insurance 643 622 114
Depreciation and amortization 1,439 1,438 240
Interest -- 522 3,117
- ----------------------------------------------------------------------------------------------------------------------
Total expenses 2,407 2,856 3,533
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before interest income 2,964 2,400 (2,596)
Interest income 95 69 1
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) before distributions to
common stockholder 3,059 2,469 (2,595)
Distributions paid to common stockholder -- 34 217
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred stockholders $3,059 $2,435 $ (2,812)
======================================================================================================================
Weighted average number of preferred shares
outstanding, basic and diluted 599.0 592.4 244.9
======================================================================================================================
Net income (loss) per preferred share, basic and diluted $5,107 $4,110 $(11,482)
======================================================================================================================
See accompanying notes to financial statements.
F-58
FSP Blue Lagoon Drive Corp.
Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 2005 and 2004 and for the
Period September 3, 2003
(date of inception) to
December 31, 2003
Retained Deficit
Additional and Distributions Total
Preferred Common Paid in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
=====================================================================================================================
Private offering of 510.5 shares, net $ -- $ -- $46,920 $ -- $46,920
Distributions -- -- -- (462) (462)
Net loss -- -- -- (2,595) (2,595)
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2003 (compiled) -- -- 46,920 (3,057) 43,863
Private offering of 88.5 shares, net -- -- 8,115 -- 8,115
Distributions -- -- -- (4,286) (4,286)
Net income -- -- -- 2,469 2,469
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 -- -- 55,035 (4,874) 50,161
Distributions -- -- -- (3,289) (3,289)
Net income -- -- -- 3,059 3,059
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2005 $ -- $ -- $55,035 $(5,104) $49,931
=====================================================================================================================
See accompanying notes to financial statements.
F-59
FSP Blue Lagoon Drive Corp.
Statements of Cash Flows
For the Period
September 3, 2003
For the Year Ended December 31, (date of inception) to
-------------------------------- December 31,
(in thousands) 2005 2004 2003
===================================================================================================================================
(compiled)
Cash flows from operating activities:
Net Income (loss) $ 3,059 $ 2,469 $ (2,595)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 1,439 1,438 240
Changes in operating assets and liabilities:
Cash-funded reserves 7 (2,989) --
Tenant rent receivable -- 703 (703)
Step rent receivable (61) (153) (90)
Prepaid expenses and other assets (19) 9 (31)
Accounts payable and accrued expenses 328 (355) 529
Due to former owner -- (547) 547
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 4,753 575 (2,103)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets -- -- (47,147)
Purchase of acquired real estate leases -- -- (1,417)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- -- (48,564)
- -----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- 8,850 51,060
Syndication costs -- (735) (4,140)
Distributions to stockholders (4,388) (3,649) --
Proceeds from long-term debt -- -- 48,000
Principal payments on long-term debt -- (4,117) (43,883)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (4,388) 349 51,037
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 365 924 370
Cash and cash equivalents, beginning of period 1,294 370 --
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,659 $ 1,294 $ 370
===================================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ 522 $ 3,117
Disclosure of non-cash financing activities:
Distributions declared but not paid $ -- $ 1,099 $ 462
See accompanying notes to financial statements.
F-60
FSP Blue Lagoon Drive Corp.
Notes to Financial Statements
1. Organization
FSP Blue Lagoon Drive Corp. (the "Company") was organized on September 3, 2003
as a Corporation under the laws of the State of Delaware to purchase, own and
operate a nine-story Class "A" suburban office building containing approximately
212,619 rental square feet of space located on approximately 5 acres of land in
Miami-Dade County, FL (the "Property"). The Company acquired the Property on
November 6, 2003.
2. Summary of Significant Accounting Policies
BASIS OF PRESENTATION
The results of operations from inception to December 31, 2003 are not
necessarily indicative of the results to be obtained for other interim periods
or for the full fiscal year.
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
REAL ESTATE AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized. Typical
capital items include new roofs, site improvements, various exterior building
improvements and major interior renovations. Funding for capital improvements
typically is provided by cash set aside at the time the Property was purchased.
Routine replacements and ordinary maintenance and repairs that do not extend the
life of the asset are expensed as incurred. Typical expense items include
interior painting, landscaping and minor carpet replacements. Funding for
repairs and maintenance items typically is provided by cash flows from operating
activities.
Depreciation expense of $1,069,000, $1,069,000 and $178,000 is included in
Depreciation and Amortization in the Company's Statements of Operations for the
periods ended December 31, 2005, 2004 and 2003, respectively.
Depreciation is computed using the straight-line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Building - Commercial 39
Building Improvements 15-39
Furniture & Equipment 5-7
The following schedule reconciles the cost of the Property as shown in the
Offering Memorandum as to the amounts shown on the Company's Balance Sheets:
(in thousands)
--------------
Price per Offering Memorandum $ 48,000
Plus: Acquisition fees 300
Plus: Other acquisition costs 264
------------------------------------------------------------------------
Total Acquisition Costs $ 48,564
========================================================================
F-61
FSP Blue Lagoon Drive Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
These costs were recorded in the Company's Balance Sheets as follows:
(in thousands)
--------------
Land $ 5,463
Building 41,684
Acquired real estate leases 1,417
------------------------------------------------------------------------
Total reported on Balance Sheet $ 48,564
========================================================================
The Company evaluates its assets used in operations by identifying indicators of
impairment and by comparing the sum of the estimated undiscounted future cash
flows for each asset to the asset's carrying value. When indicators of
impairment are present and the sum of the undiscounted future cash flows is less
than the carrying value of such asset, an impairment loss is recorded equal to
the difference between the asset's current carrying value and its fair value
based on discounting its estimated future cash flows. At December 31, 2005 and
2004, no such indicators of impairment were identified.
ACQUIRED REAL ESTATE LEASES
Acquired real estate leases represent the estimated value of legal and leasing
costs related to acquired leases that were included in the purchase price when
the Company acquired the Property. Under Statement of Financial Accounting
Standards ("SFAS") No. 141 "Business Combinations", which was approved by the
Financial Accounting Standards Board ("FASB") in June 2001, the Company is
required to segregate these costs from its investment in real estate. The
Company subsequently amortizes these costs on a straight-line basis over the
remaining life of the related leases. Amortization expense of $370,000, $369,000
and $62,000 is included in Depreciation and Amortization in the Company's
Statements of Operations for the periods ended December 31, 2005, 2004 and 2003,
respectively.
Acquired real estate lease costs included in the purchase price of the Property
were $1,417,000 and are being amortized over the weighted-average period of 3.8
years in respect of the leases assumed. Detail of the acquired real estate
leases as of December 31,:
(in thousands) 2005 2004
-------------- ------ ------
Cost $1,417 $1,417
Accumulated amortization (801) (431)
------ ------
Book value $ 616 $ 986
====== ======
The estimated annual amortization expense for the two years succeeding December
31, 2005 are as follows:
(in thousands)
--------------
2006 $ 373
2007 243
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an initial maturity of
three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
Property. These funds typically are used for the payment of real estate assets
and deferred leasing commissions; however, there is no legal restriction on
their use and they may be used for any Company purpose.
F-62
FSP Blue Lagoon Drive Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CONCENTRATION OF CREDIT RISKS
Cash, cash equivalents and short-term investments are financial instruments that
potentially subject the Company to a concentration of credit risk. The Company
maintains its cash balances and short-term investments principally in one bank
which the Company believes to be creditworthy. The Company periodically assesses
the financial condition of the bank and believes that the risk of loss is
minimal. Cash balances held with various financial institutions frequently
exceed the insurance limit of $100,000 provided by the Federal Deposit Insurance
Corporation.
For the period ended December 31, 2005, 2004 and 2003, rental income was derived
from one tenant. As such, future receipts are dependent upon the financial
strength of the lessee and their ability to perform under the lease agreement.
The following tenant represents greater than 10% of total revenue:
Burger King Corporation 100%
FINANCIAL INSTRUMENTS
The Company estimates that the carrying values of cash and cash equivalents and
cash-funded reserves approximate their fair values based on their short-term
maturity and prevailing interest rates.
TENANT RENT RECEIVABLE
Tenant rent receivable is reported at the amount the Company expects to collect
on balances outstanding at year-end. Management monitors outstanding balances
and tenant relationships and concluded that any realization losses would be
immaterial.
STEP RENT RECEIVABLE
The lease provides for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreement. Step rent receivable, which is the
cumulative revenue recognized in excess of amounts billed by the Company, is
$304,000 and $243,000 at December 31, 2005 and 2004, respectively.
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs, in the amount of
$4,875,000 have been reported as a reduction in Stockholders' Equity in the
Company's Balance Sheets.
F-63
FSP Blue Lagoon Drive Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial properties and accounts for its lease as
an operating lease. Rental income from the lease, which may include rent
concession (including free rent and tenant improvement allowances) and scheduled
increases in rental rates during the lease term, is recognized on a
straight-line basis. The Company does not have any percentage rent arrangements
with its commercial property tenant. Reimbursable costs are included in rental
income in the period earned. A schedule showing the components of rental revenue
is shown below.
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
2005 2004 2003
(in thousands) (compiled)
- --------------------------------------------------------------------------------------------------
Income from leases $4,432 $4,303 $653
Straight-line rent adjustment 61 153 90
Reimbursable expenses 878 800 194
- --------------------------------------------------------------------------------------------------
Total $5,371 $5,256 $937
==================================================================================================
INTEREST INCOME
Interest income is recognized when the related services are performed and the
earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a Real Estate Investment Trust ("REIT")
under the Internal Revenue Code of 1986, as amended. As a REIT, the Company
generally is entitled to a tax deduction for dividends paid to its shareholders,
thereby effectively subjecting the distributed net income of the Company to
taxation at the shareholder level only. The Company must comply with a variety
of restrictions to maintain its status as a REIT. These restrictions include the
type of income it can earn, the type of assets it can hold, the number of
shareholders it can have and the concentration of their ownership, and the
amount of the Company's taxable income that must be distributed annually.
NET INCOME PER SHARE
The Company follows SFAS No. 128 "Earnings per Share", which specifies the
computation, presentation and disclosure requirements for the Company's net
income per share. Basic net income per preferred share is computed by dividing
net income by the weighted average number of preferred shares outstanding during
the period. Diluted net income per preferred share reflects the potential
dilution that could occur if securities or other contracts to issue shares were
exercised or converted into shares. There were no potential dilutive shares
outstanding at December 31, 2005, 2004 and 2003. Subsequent to the completion of
the offering of preferred shares, the holders of common stock are not entitled
to share in any income nor in any related dividend.
3. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies these requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
F-64
FSP Blue Lagoon Drive Corp.
Notes to Financial Statements
3. Income Taxes (continued)
For the period ended December 31, 2003, the Company incurred a net operating
loss for income tax purposes of approximately $2,566,000 that can be carried
forward until it expires in the year 2023.
At December 31, 2005, the Company's net tax basis of its real estate assets was
$46,215,000.
The following schedule reconciles net income (loss) to taxable income subject to
distributions requirements:
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
(in thousands) 2005 2004 2003
========================================================================================================
(compiled)
GAAP net income (loss) $3,059 $2,469 $(2,595)
Add: Book depreciation and amortization 1,439 1,438 240
Organizational Cost write-off -- 16
Less: Tax depreciation and amortization (1,108) (1,250) (139)
Straight-line rents (61) (153) (90)
- --------------------------------------------------------------------------------------------------------
Taxable income (loss)[1] $3,329 $2,504 $(2,568)
========================================================================================================
(1) A tax loss is not subject to a distributions requirement.
The following schedule summarizes the tax components of the distributions paid
for the year ended December 31:
(in thousands) 2005 2004
------------------------------ -----------------------------
Preferred Common % Preferred Common %
--------- -------- --------- --------- -------- --------
Ordinary income $3,359 $ -- 77% $2,361 $173 69%
Return of Capital 1,029 -- 23% 1,037 78 31%
--------- -------- --------- --------- -------- --------
Total $4,388 $ -- 100% $3,398 $251 100%
========= ======== ========= ========= ======== ========
4. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all dividends, if any, declared by the Board of Directors out of funds
legally available. The right to receive dividends shall be non-cumulative, and
no right to dividends shall accrue by reason of the fact that no dividend has
been declared in any prior year. Each holder of Shares will be entitled to
receive, to the extent that funds are available therefore, $100,000 per Share,
before any payment to the holder of Common Stock, out of distributions to
stockholders upon liquidation, dissolution or the winding up of the Company; the
balance of any such funds available for distribution will be distributed among
the holders of Shares and the holder of Common Stock, pro rata based on the
number of shares held by each; provided, however, that for these purposes, one
share of Common Stock will be deemed to equal one-tenth of a share of Preferred
Stock.
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
F-65
FSP Blue Lagoon Drive Corp.
Notes to Financial Statements
4. Capital Stock (continued)
COMMON STOCK
Franklin Street Properties Corp. ("FSP"), is the sole holder of the Company's
Common Stock. FSP has the right, as one class together with the holders of
Preferred Stock, to vote to elect the directors of the Company and to vote on
all matters except those voted by the holders of Shares of Preferred Stock.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to share in any earnings nor any related
dividend.
5. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the period
ended December 31, 2005, 2004 and 2003, fees incurred under the agreement were
$52,000, $54,000 and $7,000, respectively.
An acquisition fee of $299,500 and other costs of $264,000 were paid in 2003,
respectively, to an affiliate of the Common Shareholder. Such fees and costs
were recorded in connection with the acquisition of the Property.
Syndication fees of $735,000 and $4,140,000 were paid in 2004 and 2003,
respectively, to an affiliate of the Common Shareholder for services related to
syndication of the Company's preferred stock.
During 2004 and 2003, the Company borrowed and repaid in full a note payable to
FSP, principal of $48,000,000, with interest equal to the Citizens Bank base
rate. Interest paid to FSP in 2004 and 2003 was $13,000 and $182,000,
respectively. The average interest rate during the time the loan was outstanding
was 4.0%.
A commitment fee of $509,000 and $2,935,000 was paid to FSP in 2004 and 2003,
respectively, for obtaining the first mortgage loan. Such amount is included in
interest expense on the Statements of Operations.
The Company paid distributions in 2004 of $251,000 to the common shareholder
relating to earnings of the Company prior to the completion of the offering of
preferred shares.
On January 30, 2004, FSP purchased 49.25 preferred shares (approximately 8.2%)
of the Company for $4,925,000. FSP agreed to vote its shares in any matter
presented to a vote by the stockholders of the Company in the same proportion as
shares voted by other stockholders.
6. Commitments and Contingencies
The Company, as lessor, has minimum future rentals due under non-cancelable
operating leases as follows:
Year Ending
(in thousands) December 31, Amount
----------------- ---------
2006 $ 4,565
2007 4,667
2008 3,500
---------
$12,732
=========
In addition, the lessee is liable for real estate taxes and certain operating
expenses of the Property.
Upon acquiring the commercial rental property in November 2003, the Company was
assigned the lease agreement between the seller of the Property and the existing
tenant. The original lease period expires in three years with renewal options.
During 2005, the lease was amended to extend the original term to 2008 and to
grant additional renewal options..
7. Subsequent Events
On January 20, 2006, the Board of Directors of the Company declared a cash
distribution of $1,132,000 payable on February 21, 2006 to stockholders of
record on January 31, 2006.
F-66
SCHEDULE III
FSP Blue Lagoon Drive Corp.
Real Estate and Accumulated Depreciation
December 31, 2005
Initial Cost
-----------------------------------
Costs
Buildings Capitalized
Improvements (Disposals)
and Subsequent to
Description Encumbrances (1) Land Equipment Acquisition
- ----------- ---------------- ---- --------- -----------
Blue Lagoon Drive, Miami-Dade County, FL 5,463 41,684 --
Historical Costs
------------------------------------------------------------
Buildings Total Costs,
Improvements Net of Depreciable
and Accumulated Accumulated Life Date of
Description Land Equipment Total (2) Depreciation Depreciation Years Acquisition
- ----------- ---- --------- --------- ------------- ------------ ----- -----------
(in thousands)
Blue Lagoon Drive, Miami-Dade County, FL 5,463 41,684 47,147 2,316 44,831 39 2003
(1) There are no encumbrances on the above properties.
(2) The aggregate cost for Federal Income Tax purposes is $48,564.
F-67
FSP Blue Lagoon Drive Corp.
The following table summarizes the changes in the Company's real estate
investments and accumulated depreciation:
December 31,
-----------------------------------
(in thousands) 2005 2004 2003
================================================================================
Real estate investments, at cost:
Balance, beginning of period $47,147 $47,147 $ --
Acquisitions -- -- 47,147
Improvements -- -- --
Dispositions -- -- --
- --------------------------------------------------------------------------------
Balance, end of period $47,147 $47,147 $47,147
================================================================================
Accumulated depreciation:
Balance, beginning of period $ 1,247 $ 178 $ --
Depreciation 1,069 1,069 178
Dispositions -- -- --
- --------------------------------------------------------------------------------
Balance, end of period $ 2,316 $ 1,247 $ 178
================================================================================
F-68
BLUE LAGOON DRIVE
FINANCIAL STATEMENTS
FOR THE PERIOD
JANUARY 1, 2003 TO NOVEMBER 5, 2003 AND
FOR THE YEAR ENDED
DECEMBER 31, 2002
CONTENTS
PAGE
Independent auditors' report F-70
Statements of revenue over certain operating expenses F-70
Notes accompanying the statements of revenue over certain
operating expenses F-72
F-69
INDEPENDENT AUDITORS' REPORT
To the Stockholders
FSP Blue Lagoon Drive Corp.
Wakefield, Massachusetts
We have audited the accompanying statements of revenue over certain operating
expenses (the "Statements") of Blue Lagoon Drive for the period January 1, 2003
to November 5, 2003 and for the year ended December 31, 2002. These Statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these 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 Statements
are free of material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the Statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall Statements'
presentation. We believe that our audits provide a reasonable basis for our
opinion.
The accompanying Statements were prepared to comply with the requirements of
Rule 3-14 of Regulation S-X of the Securities and Exchange Commission, and
exclude certain expenses described in Note 2 and, therefore, are not intended to
be a complete presentation of the property's revenue and expenses.
In our opinion, these Statements referred to above present fairly, in all
material respects, the revenue over certain operating expenses (as described in
Note 2) of Blue Lagoon Drive for the period January 1, 2003 to November 5, 2003
and for the year ended December 31, 2002 in conformity with the basis of
accounting described in Note 2.
/s/ Braver and Company, P.C.
Newton, Massachusetts
June 27, 2005
F-70
BLUE LAGOON DRIVE
STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES
FOR THE PERIOD JANUARY 1, 2003 TO NOVEMBER 5, 2003 AND
FOR THE YEAR ENDED DECEMBER 31, 2002
January 1, 2003
to For the Year Ended
November 5, 2003 December 31, 2002
---------------- -----------------
Revenue:
Rental income $3,955,561 $1,179,655
---------- ----------
Certain Operating Expenses (Note 2):
Taxes and insurance 651,371 73,019
Management fees 83,333 25,000
Administrative 256 297
Operating and maintenance 93,059 21,379
---------- ----------
828,019 119,695
---------- ----------
Excess of revenue over certain operating expenses $3,127,542 $1,059,960
========== ==========
The accompanying notes are an integral part of the statements of revenue over
certain operating expenses.
F-71
BLUE LAGOON DRIVE
NOTES ACCOMPANYING THE STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES
FOR THE PERIOD JANUARY 1, 2003 TO NOVEMBER 5, 2003 AND
FOR THE YEAR ENDED DECEMBER 31, 2002
1. DESCRIPTION OF THE PROPERTY:
The accompanying statements of revenue over certain operating expenses (the
"Statements") include the operations of a commercial building located in
Miami-Dade County, Florida (the "Property"). Completed in October 2002, the
Property is a nine-story Class "A" suburban office tower containing 212,619
square feet located on approximately 5 acres of land. The Property was owned by
Teacher's Insurance and Annuity Association of America and TIAA Realty, Inc. and
sold to FSP Blue Lagoon Drive Corp (the "Company") on November 6, 2003.
2. BASIS OF ACCOUNTING:
The accompanying Statements have been prepared on the accrual basis of
accounting. The Statements have been prepared in accordance with Rule 3-14 of
Regulation S-X of the Securities and Exchange Commission for real estate
properties acquired or to be acquired. Accordingly, these Statements exclude
certain historical expenses not comparable to the operations of the Property
after acquisition such as amortization, depreciation, interest, corporate
expenses and certain other costs not directly related to future operations of
the Property.
3. REVENUE RECOGNITION:
Rental revenue includes income from the lease, certain reimbursable expenses,
and straight-line rent adjustments associated with renting the property. A
summary of rental revenue is shown in the following table:
January 1, 2003 Year Ended
to December 31,
November 5, 2003 2002
---------------- ------------
Income from leases $3,524,839 $1,036,518
Straight-line rent adjustment 223,842 82,009
Reimbursable expenses 206,880 61,128
---------- ----------
Total $3,955,561 $1,179,655
========== ==========
Blue Lagoon Drive has retained substantially all of the risks and benefits of
the Property and accounts for its lease as an operating lease. Rental income
from leases, which include rent concessions (including free rent and tenant
improvement allowances) and scheduled increases in rental rates during the lease
term, is recognized on a straight-line basis. Blue Lagoon Drive does not have
any percentage rent arrangements with its tenant. Reimbursable costs are
included in rental income in the period earned.
4. USE OF ESTIMATES:
The preparation of the Statements in conformity with the basis of accounting
described in Note 2 requires management to make estimates and assumptions that
affect the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
F-72
BLUE LAGOON DRIVE
NOTES ACCOMPANYING THE STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES
FOR THE PERIOD JANUARY 1, 2003 TO NOVEMBER 5, 2003 AND
FOR THE YEAR ENDED DECEMBER 31, 2002
5. CONCENTRATIONS OF RISKS:
For the period January 1, 2003 to November 5, 2005 and for the year ended
December 31, 2002, rental income was from one lessee. As such, future receipts
are dependent upon the financial strength of the lessee and its ability to
perform under the lease agreement.
6. LEASES:
Blue Lagoon Drive, as lessor, has minimum future rentals due under a
non-cancelable operating lease as follows:
Year Ending
December 31, Amount
------------ --------
(in thousands)
2003 $ 653
2004 4,303
2005 4,432
2006 4,565
2007 3,500
--------
$ 17,453
========
In addition, the lessee is liable for real estate taxes and operating expenses
as direct expenses to the lessee.
F-73
FSP Eldridge Green Corp.
Financial Statements
December 31, 2005 and 2004
Table of Contents
Page
----
Financial Statements
Independent Auditor's Report............................................. F-75
Balance Sheets as of December 31, 2005 and 2004.......................... F-76
Statements of Operations for the years ended December 31, 2005 and 2004.. F-77
Statements of Changes in Stockholders' Equity for the years ended
December 31, 2005 and 2004......................................... F-78
Statements of Cash Flows for the years ended December 31, 2005 and 2004.. F-79
Notes to Financial Statements............................................ F-80
F-74
[LETTERHEAD OF BRAVER AND COMPANY, P.C.]
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
FSP Eldridge Green Corp.
Wakefield, Massachusetts
We have audited the accompanying balance sheets of FSP Eldridge Green Corp. as
of December 31, 2005 and 2004, and the related statements of operations, changes
in stockholders' equity and cash flows for the years then ended. 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 financial position of FSP Eldridge Green Corp. as of
December 31, 2005 and 2004; and the results of its operations and its cash flows
for the years then ended, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Braver and Company, P.C.
Newton, Massachusetts
March 1, 2006
(except for Note 7, as to which the date is March 10, 2006)
F-75
FSP Eldridge Green Corp.
Balance Sheets
December 31,
-----------------------------
(in thousands, except shares and par value amounts) 2005 2004
=====================================================================================================
Assets:
Real estate investments, at cost:
Land $ 2,356 $ 2,356
Buildings and improvements 33,054 33,054
- -----------------------------------------------------------------------------------------------------
35,410 35,410
Less accumulated depreciation 1,625 777
- -----------------------------------------------------------------------------------------------------
Real estate investments, net 33,785 34,633
Acquired real estate leases, net of accumulated amortization
of $357 and $171 1,165 1,351
Cash and cash equivalents 2,391 2,569
Cash-funded reserves 1,458 1,458
Tenant rent receivable 19 9
Step rent receivable 421 246
Deferred leasing costs, net of accumulated amortization
of $93 and $27 407 473
Prepaid expenses and other assets 23 46
- -----------------------------------------------------------------------------------------------------
Total assets $ 39,669 $ 40,785
=====================================================================================================
Liabilities and Stockholders' Equity:
Liabilities:
Accounts payable and accrued expenses $ 1,016 $ 1,539
Distributions payable -- 943
- -----------------------------------------------------------------------------------------------------
Total liabilities 1,016 2,482
- -----------------------------------------------------------------------------------------------------
Commitments and Contingencies: -- --
Stockholders' Equity:
Preferred Stock, $.01 par value, 452.5 shares
authorized, issued and outstanding -- --
Common Stock, $.01 par value, 1 share
authorized, issued and outstanding -- --
Additional paid-in capital 41,527 41,527
Retained deficit and distributions in excess of earnings (2,874) (3,224)
- -----------------------------------------------------------------------------------------------------
Total Stockholders' Equity 38,653 38,303
- -----------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 39,669 $ 40,785
=====================================================================================================
See accompanying notes to financial statements.
F-76
FSP Eldridge Green Corp.
Statements of Operations
For the Years Ended December 31,
----------------------------------
(in thousands, except shares and per share amounts) 2005 2004
==================================================================================================
Revenues:
Rental $6,452 $5,585
- --------------------------------------------------------------------------------------------------
Total revenue 6,452 5,585
- --------------------------------------------------------------------------------------------------
Expenses:
Rental operating expenses 935 673
Real estate taxes and insurance 926 1,015
Depreciation and amortization 1,100 975
Interest -- 2,814
- --------------------------------------------------------------------------------------------------
Total expenses 2,961 5,477
- --------------------------------------------------------------------------------------------------
Income before interest income 3,491 108
Interest income 67 63
- --------------------------------------------------------------------------------------------------
Net income before distributions to common stockholder 3,558 171
Distributions paid to common stockholder -- 327
- --------------------------------------------------------------------------------------------------
Net income (loss) attributable to preferred stockholders $3,558 $(156)
==================================================================================================
Weighted average number of preferred shares outstanding,
basic and diluted 452.5 451.6
==================================================================================================
Net income (loss) per preferred share, basic and diluted $7,863 $(345)
==================================================================================================
See accompanying notes to financial statements.
F-77
FSP Eldridge Green Corp.
Statement of Changes in Stockholders' Equity
For the Years Ended December 31, 2005 and 2004
Retained Deficit
Additional and Distributions Total
Preferred Common Paid-in in Excess of Stockholders'
(in thousands, except shares) Stock Stock Capital Earnings Equity
==========================================================================================================================
Private offering of 452.5 shares, net $ -- $ -- $41,527 $ -- $ 41,527
Distributions -- -- -- (3,395) (3,395)
Net income -- -- -- 171 171
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004 -- -- 41,527 (3,224) 38,303
Distributions -- -- -- (3,208) (3,208)
Net income -- -- -- 3,558 3,558
- --------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2005 $ -- $ -- $41,527 $(2,874) $ 38,653
==========================================================================================================================
See accompanying notes to financial statements.
F-78
FSP Eldridge Green Corp.
Statements of Cash Flows
For the Years Ended December 31,
--------------------------------
(in thousands) 2005 2004
================================================================================================================
Cash flows from operating activities:
Net income $ 3,558 $ 171
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,100 975
Changes in operating assets and liabilities:
Cash-funded reserves -- (1,458)
Tenant rent receivable (10) (9)
Step rent receivable (175) (246)
Prepaid expenses and other assets 23 (46)
Accounts payable and accrued expenses (523) 1,539
Payment of deferred leasing costs -- (500)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,973 426
- ----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of real estate assets -- (35,410)
Purchase of acquired real estate leases -- (1,522)
- ----------------------------------------------------------------------------------------------------------------
Net cash used for investing activities -- (36,932)
- ----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from sale of company stock -- 45,260
Syndication costs -- (3,733)
Distributions to stockholders (4,151) (2,452)
Proceeds from long-term debt -- 36,500
Principal payments on long-term debt -- (36,500)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (4,151) 39,075
- ----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (178) 2,569
Cash and cash equivalents, beginning of year 2,569 --
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 2,391 $ 2,569
================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ -- $ 2,814
Disclosure of non-cash financing activities:
Distributions declared but not paid $ -- $ 943
See accompanying notes to financial statements.
F-79
FSP Eldridge Green Corp.
Notes to Financial Statements
1. Organization
FSP Eldridge Green Corp. (the "Company") was organized on December 4, 2003 as a
Corporation under the laws of the State of Delaware to purchase, own and operate
a five-story Class "A" suburban office building containing approximately 248,399
rental square feet of space located on approximately 8 acres of land in Houston,
TX (the "Property"). The Company acquired the Property on January 16, 2004.
2. Summary of Significant Accounting Policies
BASIS OF PRESENTATION
The results of operations from purchase of Property to date are not necessarily
indicative of the results to be obtained for other interim periods or for the
full fiscal year.
ESTIMATES AND ASSUMPTIONS
The Company prepares its financial statements and related notes in conformity
with accounting principles generally accepted in the United States of America
("GAAP"). These principles require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
REAL ESTATE AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as
appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized. Typical
capital items include new roofs, site improvements, various exterior building
improvements and major interior renovations. Funding for capital improvements
typically is provided by cash set aside at the time the Property was purchased.
Routine replacements and ordinary maintenance and repairs that do not extend the
life of the asset are expensed as incurred. Typical expense items include
interior painting, landscaping and minor carpet replacements. Funding for
repairs and maintenance items typically is provided by cash flows from operating
activities.
Depreciation is computed using the straight-line method over the assets'
estimated useful lives as follows:
Category Years
-------- -----
Building - Commercial 39
Building Improvements 15-39
Furniture & Equipment 5-7
The following schedule reconciles the cost of the Property as shown in the
Offering Memorandum as to the amounts shown on the Company's Balance Sheet:
(in thousands)
--------------
Price per offering memorandum $ 36,500
Plus: Acquisition fees 226
Plus: Other acquisition costs 206
-------------------------------------------------------------------------
Total acquisition costs $ 36,932
=========================================================================
These costs are reported in the Company's Balance Sheet as follows:
(in thousands)
--------------
Land $ 2,356
Building 33,054
Acquired real estate leases 1,522
-------------------------------------------------------------------------
Total reported on balance sheet $ 36,932
=========================================================================
F-80
FSP Eldridge Green Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
REAL ESTATE AND DEPRECIATION (continued)
The Company evaluates its assets used in operations by identifying indicators of
impairment and by comparing the sum of the estimated undiscounted future cash
flows for each asset to the asset's carrying value. When indicators of
impairment are present and the sum of the undiscounted future cash flows is less
than the carrying value of such asset, an impairment loss is recorded equal to
the difference between the asset's current carrying value and its fair value
based on discounting its estimated future cash flows. At December 31, 2005 and
2004, no such indicators of impairment were identified.
Depreciation expense of $848,000 and $777,000 is included in depreciation and
amortization in the Company's Statements of Operations for the years ended
December 31, 2005 and 2004.
ACQUIRED REAL ESTATE LEASES
Acquired real estate leases represent the estimated value of legal and leasing
costs related to acquired leases that were included in the purchase price when
the Company acquired the Property. Under Statement of Financial Accounting
Standards ("SFAS") No. 141 "Business Combinations", which was approved by the
Financial Accounting Standards Board ("FASB") in June 2001, the Company is
required to segregate these costs from its investment in real estate. The
Company subsequently amortizes these costs on a straight-line basis over the
remaining life of the related lease. Amortization expense of $186,000 and
$171,000 is included in Depreciation and Amortization in the Company's
Statements of Operations for the years ended December 31, 2005 and 2004.
Acquired real estate lease costs included in the purchase price of the Property
were $1,522,000 and are being amortized over the remaining life of the related
lease assumed, which is a weighted average period of eight years. Detail of the
acquired real estate lease as of December 31, 2005 and 2004:
(in thousands) 2005 2004
------------------------------------------------------------------
Cost $1,522 $1,522
Accumulated amortization (357) (171)
------------------------------------------------------------------
Book value $1,165 $1,351
==================================================================
The estimated annual amortization expense for the five years succeeding December
31, 2005 are as follows:
(in thousands)
--------------
2006 $ 186
2007 $ 186
2008 $ 186
2009 $ 186
2010 $ 186
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an initial maturity of
three months or less to be cash equivalents.
CASH-FUNDED RESERVES
The Company has set aside funds in anticipation of future capital needs of the
Property. These funds typically are used for the payment of real estate assets
and deferred leasing commissions; however, there is no legal restriction on
their use and they may be used for any Company purpose.
F-81
FSP Eldridge Green Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
CONCENTRATION OF CREDIT RISKS
Cash, cash equivalents and short-term investments are financial instruments that
potentially subject the Company to a concentration of credit risk. The Company
maintains its cash balances and short-term investments principally in one bank
which the Company believes to be creditworthy. The Company periodically assesses
the financial condition of the bank and believes that the risk of loss is
minimal. Cash balances held with various financial institutions frequently
exceed the insurance limit of $100,000 provided by the Federal Deposit Insurance
Corporation.
For the years ended December 31, 2005 and 2004, rental income was derived from
one tenant. As such, future receipts are dependent upon the financial strength
of the lessee and its ability to perform under the lease agreement.
The following tenants represent greater than 10% of total revenue:
Citgo Petroleum Corporation 100%
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents and
cash-funded reserves approximate their fair values based on their short-term
maturity and prevailing interest rates.
TENANT RENT RECEIVABLE
Tenant rents receivable are reported at the amount the Company expects to
collect on balances outstanding at year-end. Management monitors outstanding
balances and tenant relationship and concluded that any realization losses would
be immaterial.
STEP RENT RECEIVABLE
Certain leases provide for fixed increases over the life of the lease. Rental
revenue is recognized on the straight-line basis over the related lease term;
however, billings by the Company are based on required minimum rentals in
accordance with the lease agreements. Step rent receivable, which is the
cumulative revenue recognized in excess of amounts billed by the Company, is
$421,000 and $246,000 as of December 31, 2005 and 2004.
DEFERRED LEASING COSTS
Deferred leasing commissions represent direct and incremental external leasing
costs incurred in the leasing of commercial space. These costs are capitalized
and are amortized on a straight-line basis over the terms of the related lease
agreements. Amortization expense was $66,000 and $27,000 for the years ended
December 31, 2005 and 2004. Detail of the deferred leasing costs as of December
31, 2005 and 2004:
(in thousands) 2005 2004
-------------- ----------------------
Costs $500 $500
Accumulated Amortization (93) (27)
----------------------
Book Value $407 $473
======================
F-82
FSP Eldridge Green Corp.
Notes to Financial Statements
2. Summary of Significant Accounting Policies (continued)
DEFERRED LEASING COSTS
The estimated annual amortization expense for the five years succeeding December
31, 2005 are as follows:
(in thousands)
--------------
2006 $66
2007 $66
2008 $66
2009 $66
2010 $66
SYNDICATION FEES
Syndication fees are selling commissions and other costs associated with the
initial offering of the Company's preferred shares. Such costs, in the amount of
$3,733,500 have been reported as a reduction in Stockholders' Equity in the
Company's Balance Sheets.
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of
ownership of the Company's commercial property and accounts for its lease as
operating lease. Rental income from the lease, which may include rent concession
(including free rent and tenant improvement allowances) and scheduled increases
in rental rates during the lease term, is recognized on a straight-line basis.
The Company does not have any percentage rent arrangements with its commercial
property tenant. Reimbursable costs are included in rental income in the period
earned. A schedule showing the components of rental revenue is shown below.
Year Ended Year Ended
December 31, December 31,
(in thousands) 2005 2004
==================================================================
Income from leases $4,202 $3,635
Straight-line rent adjustment 175 246
Reimbursable expenses 2,075 1,704
------------------------------------------------------------------
Total $6,452 $5,585
==================================================================
INTEREST INCOME
Interest income is recognized when the related services are performed and the
earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a Real Estate Investment Trust ("REIT")
under the Internal Revenue Code of 1986, as amended. As a REIT, the Company
generally is entitled to a tax deduction for dividends paid to its shareholders,
thereby effectively subjecting the distributed net income of the Company to
taxation at the shareholder level only. The Company must comply with a variety
of restrictions to maintain its status as a REIT. These restrictions include the
type of income it can earn, the type of assets it can hold, the number of
shareholders it can have and the concentration of their ownership, and the
amount of the Company's taxable income that must be distributed annually.
NET INCOME PER SHARE
The Company follows SFAS No. 128 "Earnings per Share", which specifies the
computation, presentation and disclosure requirements for the Company's net
income per share. Basic net income per preferred share is computed by dividing
net income by the weighted average number of preferred shares outstanding during
the period. Diluted net income per preferred share reflects the potential
dilution that could occur if securities or other contracts to issue shares were
exercised or converted into shares. There were no potential dilutive shares
outstanding at December 31, 2005 and 2004. Subsequent to the completion of the
offering of preferred shares, the holders of common stock are not entitled to
share in any income nor in any related dividend.
F-83
FSP Eldridge Green Corp.
Notes to Financial Statements
3. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code
of 1986, as amended. In order to qualify as a REIT, the Company is required to
distribute at least 90% of its taxable income to shareholders and to meet
certain asset and income tests as well as certain other requirements. The
Company will generally not be liable for federal income taxes, provided it
satisfies these requirements. Even as a qualified REIT, the Company is subject
to certain state and local taxes on its income and property.
At December 31, 2005, the Company's net tax basis of its real estate assets was
$35,604,000.
The following schedule reconciles net income to taxable income subject to
distribution requirements:
Year Ended Year Ended
December 31, December 31,
(in thousands) 2005 2004
================================================================================
GAAP net income $ 3,558 $ 171
Add: Book depreciation and amortization 1,100 975
Less: Tax depreciation and amortization (956) (823)
Straight-line rents (175) (246)
- --------------------------------------------------------------------------------
Taxable income $3,527 $77
================================================================================
The following schedule summarizes the tax components of the distributions paid
for the year ended December 31:
(in thousands) 2005 2004
------------------------------ -----------------------------
Preferred Common % Preferred Common %
--------- -------- --------- --------- -------- --------
Ordinary income $3,553 $ -- 86% $ 112 $ 17 5%
Return of Capital 598 -- 14% 2,013 310 95%
--------- -------- --------- --------- -------- --------
Total $4,151 $ -- 100% $2,125 $327 100%
========= ======== ========= ========= ======== ========
4. Capital Stock
PREFERRED STOCK
Generally, each holder of Shares of Preferred Stock is entitled to receive
ratably all dividends, if any, declared by the Board of Directors out of funds
legally available. The right to receive dividends shall be non-cumulative, and
no right to dividends shall accrue by reason of the fact that no dividend has
been declared in any prior year. Each holder of Shares will be entitled to
receive, to the extent that funds are available therefore, $100,000 per Share,
before any payment to the holder of Common Stock, out of distributions to
stockholders upon liquidation, dissolution or the winding up of the Company; the
balance of any such funds available for distribution will be distributed among
the holders of Shares and the holder of Common Stock, pro rata based on the
number of shares held by each; provided, however, that for these purposes, one
share of Common Stock will be deemed to equal one-tenth of a share of Preferred
Stock.
In addition to certain voting rights provided in the corporate agreements, the
holder of Shares, acting by consent of at least 51%, shall have the further
right to approve or disapprove a proposed sale of the Property, the merger of
the Company with any other entity and amendments to the corporate charter. A
vote of the holders of 66.67% of the Shares is required for the issue of any
additional shares of capital stock. Holders of Shares have no redemption or
conversion rights.
F-84
FSP Eldridge Green Corp.
Notes to Financial Statements
4. Capital Stock (continued)
COMMON STOCK
Franklin Street Properties Corp. ("FSP"), is the sole holder of the Company's
Common Stock. FSP has the right, as one class together with the holders of
Preferred Stock, to vote to elect the directors of the Company and to vote on
all matters except those voted by the holders of Shares of Preferred Stock.
Subsequent to the completion of the offering of the preferred shares the holders
of common shares are not entitled to share in any earnings nor any related
dividend.
5. Related Party Transactions
The Company executed a management agreement with FSP Property Management LLC, an
affiliate of FSP, that provides for a management fee equal to 1% of collected
revenues and is cancelable with 30 days notice by either party. For the years
ended December 31, 2005 and 2004, fees incurred under the agreement were $63,000
and $53,000.
An acquisition fee of $226,250 and other costs of $206,000 were paid in 2004 to
an affiliate of the Common Shareholder. Such fees and costs were recorded in
connection with the acquisition of the property.
Syndication fees of $3,733,000 were paid in 2004 to an affiliate of the Common
Shareholder for services related to syndication of the Company's preferred
stock.
During 2004, the Company borrowed and repaid in full a note payable to FSP,
principal of $36,500,000, with interest equal to the Citizens Bank base rate.
Interest paid to FSP was $212,000. The average interest rate during the time the
loan was outstanding was 4.00%.
A commitment fee of $2,602,000 was paid in 2004 to FSP for obtaining the first
mortgage loan. Such amount is included in interest expense on the Statement of
Operations.
The Company paid a dividend of $327,000 in 2004 to the common shareholder
relating to earnings of the Company prior to the completion of the offering of
preferred shares.
6. Commitments and Contingencies
The Company, as lessor, has minimum future rentals due under non-cancelable
operating leases as follows:
Year Ending
(in thousands) December 31, Amount
------------ --------
2006 $ 4,285
2007 4,285
2008 4,285
2009 4,285
2010 4,699
Thereafter 5,578
---------
$27,417
=========
In addition, the lessees are liable for real estate taxes and certain operating
expenses of the Property.
Upon acquiring the commercial rental property in January 2004, the Company was
assigned the lease agreement between the seller of the Property and the existing
tenant. The original lease period ends on February 29, 2012 with renewal
options.
7. Subsequent Events
On January 20, 2006, the Board of Directors of the Company declared a cash
distribution of $1,133,000 payable on February 21, 2006 to stockholders of
record on January 31, 2006.
On March 10, 2006, the Board of Directors of the Company approved an agreement
to redeem 10 shares of Preferred Stock from one shareholder for an aggregate
amount of $1,241,000. The transaction was completed on March 14, 2006.
F-85
SCHEDULE III
FSP Eldridge Green Corp.
Real Estate and Accumulated Depreciation
December 31, 2005
Initial Cost
-----------------------------------
Costs
Buildings Capitalized
Improvements (Disposals)
and Subsequent to
Description Encumbrances (1) Land Equipment Acquisition
- ----------- ---------------- ---- --------- -----------
Eldridge Green, Houston, TX 2,356 33,054 --
Historical Costs
------------------------------------------------------------
Buildings Total Costs,
Improvements Net of Depreciable
and Accumulated Accumulated Life Date of
Description Land Equipment Total (2) Depreciation Depreciation Years Acquisition
- ----------- ---- --------- --------- ------------- ------------ ----- -----------
(in thousands)
Eldridge Green, Houston, TX 2,356 33,054 35,410 1,625 33,785 39 2004
(1) There are no encumbrances on the above properties.
(2) The aggregate cost for Federal Income Tax purposes is $36,932.
F-86
FSP Eldridge Green Corp.
The following table summarizes the changes in the Company's real estate
investments and accumulated depreciation:
December 31,
-----------------------
(in thousands) 2005 2004
================================================================================
Real estate investments, at cost:
Balance, beginning of period $35,410 $ --
Acquisitions -- 35,410
Improvements -- --
Dispositions -- --
- --------------------------------------------------------------------------------
Balance, end of period $35,410 $35,410
================================================================================
Accumulated depreciation:
Balance, beginning of period $ 777 $ --
Depreciation 848 777
Dispositions -- --
- --------------------------------------------------------------------------------
Balance, end of period $1,625 $777
================================================================================
F-87
ELDRIDGE GREEN
FINANCIAL STATEMENTS
FOR THE PERIOD
JANUARY 1, 2004 TO JANUARY 15, 2004 AND
FOR THE YEARS ENDED
DECEMBER 31, 2003 AND 2002
CONTENTS
PAGE
Independent auditors' report F-89
Statements of revenue over certain operating expenses F-90
Notes accompanying the statements of revenue over certain operating
expenses F-91
F-88
INDEPENDENT AUDITORS' REPORT
To the Stockholders
FSP Eldridge Green Corp.
Wakefield, Massachusetts
We have audited the accompanying statements of revenue over certain operating
expenses (the "Statements") of Eldridge Green for the period January 1, 2004 to
January 15, 2004 and for the years ended December 31, 2003 and 2002. These
Statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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 Statements
are free of material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the Statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall Statements'
presentation. We believe that our audits provide a reasonable basis for our
opinion.
The accompanying Statements were prepared to comply with the requirements of
Rule 3-14 of Regulation S-X of the Securities and Exchange Commission, and
exclude certain expenses described in Note 2 and, therefore, are not intended to
be a complete presentation of the Property's revenue and expenses.
In our opinion, these Statements referred to above present fairly, in all
material respects, the revenue over certain operating expenses (as described in
Note 2) of Eldridge Green for the period January 1, 2004 to January 15, 2004 and
for the years ended December 31, 2003 and 2002, in conformity with the basis of
accounting described in Note 2.
/s/ Braver and Company, P.C.
Newton, Massachusetts
June 27, 2005
F-89
ELDRIDGE GREEN
STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES
FOR THE PERIOD JANUARY 1, 2004 TO JANUARY 15, 2004 AND
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
January 1, 2004
to For the Years Ended December 31,
January 15, 2004 2003 2002
---------------- ---------- ----------
Revenue
Rental income $ 307,768 $5,695,920 $5,993,257
---------- ---------- ----------
Certain operating expenses
Taxes and insurance 37,005 919,210 967,190
Management fees 22,858 178,147 202,185
Administrative 17,134 144,954 140,027
Operating and maintenance 40,322 226,360 411,322
---------- ---------- ----------
117,319 1,468,671 1,720,724
---------- ---------- ----------
Excess of revenue over certain operating expenses $ 190,449 $4,227,249 $4,272,533
========== ========== ==========
The accompanying notes are an integral part of the
statements of revenue over certain operating expenses.
F-90
ELDRIDGE GREEN
NOTES ACCOMPANYING THE STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES
FOR THE PERIOD JANUARY 1, 2004 TO JANUARY 15, 2004 AND
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
1. DESCRIPTION OF THE PROPERTY:
The accompanying statements of revenue over certain operating expenses (the
"Statements") include the operations of a commercial building located in
Houston, Texas (the "Property"). The Property is a five-story Class "A" suburban
office building containing approximately 248,399 rentable square feet on
approximately eight acres of land. The Property was owned by Eldridge Office
Development, L.P. and sold to FSP Eldridge Green Corp. (the "Company") on
January 16, 2004.
2. BASIS OF ACCOUNTING:
The accompanying Statements have been prepared on the accrual basis of
accounting. The Statements have been prepared in accordance with Rule 3-14 of
Regulation S-X of the Securities and Exchange Commission for real estate
properties acquired or to be acquired. Accordingly, these Statements exclude
certain historical expenses not comparable to the operations of the Property
after acquisition such as amortization, depreciation, interest, corporate
expenses and certain other costs not directly related to future operations of
the Property.
3. REVENUE RECOGNITION:
Rental revenue includes income from the lease, certain reimbursable expenses,
and straight-line rent adjustments associated with renting the Property.
January 1, 2004
to Year Ended December 31,
January 15, 2004 2003 2002
---------------- ---------- ----------
Income from leases $157,837 $3,788,088 $3,774,293
Straight-line rent adjustment 15,460 371,094 386,726
Reimbursable expenses 134,471 1,536,738 1,832,238
-------- ---------- ----------
Total $307,768 $5,695,920 $5,993,257
======== ========== ==========
Eldridge Green has retained substantially all of the risks and benefits of the
Property and accounts for its lease as an operating lease. Rental income from
the lease, which includes rent concessions (including free rent and tenant
improvement allowances) and scheduled increases in rental rates during the lease
term, is recognized on a straight-line basis. Eldridge Green does not have any
percentage rent arrangements with its tenant. Reimbursable costs are included in
rental income in the period earned.
4. USE OF ESTIMATES:
The preparation of the Statements in conformity with the basis of accounting
described in Note 2 requires management to make estimates and assumptions that
affect the reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
5. CONCENTRATIONS OF RISKS:
For the period January 1, 2004 to January 15, 2004 and for the years ended
December 31, 2003 and 2002, rental income was received from one lessee. As such,
future receipts are dependent upon the financial strength of the lessee and its
ability to perform under the lease agreement.
F-91
ELDRIDGE GREEN
NOTES ACCOMPANYING THE STATEMENTS OF REVENUE OVER CERTAIN OPERATING EXPENSES
FOR THE PERIOD JANUARY 1, 2004 TO JANUARY 15, 2004 AND
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
6. LEASES:
Eldridge Green, as lessor, has minimum future rentals due under the
non-cancelable operating lease as follows:
Year Ending
December 31, Amount
------------ --------
(in thousands)
2004 $ 3,635
2005 4,202
2006 4,285
2007 4,285
2008 4,285
Thereafter 14,563
---------
$35,255
=========
In addition, the lessee is liable for real estate taxes and operating expenses
as direct expenses to the lessee.
F-92