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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________.
COMMISSION FILE NUMBER: 333-106838
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CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 80-0067704
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
50 ROCKEFELLER PLAZA 10020
NEW YORK, NEW YORK (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBERS:
INVESTOR RELATIONS (212) 492-8920
(212) 492-1100
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained in this report, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [ ].
Registrant has no active market for its common stock at March 9, 2005.
Non-affiliates held 55,846,864 shares of common stock, $.001 par value
outstanding at March 9, 2005.
As of March 9, 2005, there are 55,867,561 shares of common stock of
Registrant outstanding.
The Registrant incorporates by reference its definitive Proxy Statement
with respect to its 2005 Annual Meeting of Shareholders, to be filed with the
Securities and Exchange Commission within 120 days following the end of its
fiscal year, into Part III of this Report.
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
This Annual Report on Form 10-K contains certain forward-looking statements
relating to Corporate Property Associates 16 - Global Incorporated. As used in
this Annual Report on Form 10-K, the terms "the Company," "we," "us" and "our"
include Corporate Property Associates 16 - Global Incorporated, its consolidated
subsidiaries and predecessors, unless otherwise indicated. Forward-looking
statements discuss matters that are not historical facts. Because they discuss
future events or conditions, forward-looking statements may include words such
as "anticipate," "believe," "expect," "estimate," "intend," "could," "should,"
"would," "may," "seeks," "plans" or similar expressions. Do not unduly rely on
forward-looking statements. They give our expectations about the future and are
not guarantees, and speak only as of the date they are made. Such statements
involve known and unknown risks, uncertainties and other factors that may cause
our actual results, performance or achievement to be materially different from
the results of operations or plan expressed or implied by such forward-looking
statements. While we cannot predict all of the risks and uncertainties, they
include, but are not limited to, those described below in "Factors Affecting
Future Operating Results." Accordingly, such information should not be regarded
as representations that the results or conditions described in such statements
or that our objectives and plans will be achieved.
(In thousands except share and per share amounts)
ITEM 1. BUSINESS.
(a) GENERAL DEVELOPMENT OF BUSINESS
Overview
We intend to qualify as a Real Estate Investment Trust ("REIT") for Federal
income tax purposes for the 2004 tax year pursuant to a filing of our federal
income tax return by its extended due date. As of December 31, 2004,
our portfolio consisted of 106 properties leased to 15 tenants and totaled more
than 6.2 million square feet.
Our core investment strategy is to invest in properties domestically and
internationally, leased to a diversified group of companies on a single tenant
net lease basis. These leases generally place the economic burden of ownership
on the tenant by requiring the tenant to pay the costs of maintenance,
insurance, taxes, structural repairs and other operating expenses.
We also generally seek to include in our leases:
- clauses providing for mandated rent increases or periodic rent
increases tied to increases in the consumer price index ("CPI") or
other indices for the jurisdiction in which the property is located
or, when appropriate, increases tied to the volume of sales at the
property;
- indemnification for environmental and other liabilities; and
- guarantees from parent companies.
We were formed as a Maryland corporation in June, 2003. Effective December 12,
2003, we registered for sale with the United States Securities and Exchange
Commission ("SEC") up to 110,000,000 shares of our common stock for an aggregate
gross sales price of $1,100,000 (the "Offering"). We have also registered up to
50,000,000 shares for our Distribution Reinvestment and Share Purchase plan.
These shares were offered through Carey Financial Corporation ("Carey
Financial"), an affiliate. From inception through December 31, 2004, we sold a
total of 51,133,332 shares of our common stock for a total of $511,333 in gross
Offering proceeds, in addition to the 20,000 shares purchased by Carey Asset
Management Corporation to initially capitalize us, and shares issued through the
Distribution Reinvestment and Share Purchase Plan. We have used, and will
continue to use the proceeds of this Offering, combined with limited recourse
mortgage debt, to invest in commercial properties for lease to companies
domestically and internationally. (See Significant Developments in 2004 below
and Subsequent Events in Item 7 for related information about our Offering.)
As a REIT, we will not be subject to federal income taxation as long as we
satisfy certain requirements relating to the nature of our income, the level of
our distributions and other factors.
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CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
W. P. Carey & Co. LLC ("WPC"), our advisor, provides both strategic and
day-to-day management for us, including acquisition services, research,
investment analysis, asset management, capital funding services, disposition of
assets, investor relations and administrative services. WPC also provides office
space and other facilities for us. We pay asset management fees and certain
transactional fees to WPC and also reimburse WPC for certain expenses. WPC also
serves in this capacity for Corporate Property Associates 12 Incorporated
("CPA(R):12), Corporate Property Associates 14 Incorporated ("CPA(R):14"),
Corporate Property Associates 15 Incorporated ("CPA(R):15") and Carey
Institutional Properties Incorporated ("CIP(R)") until its merger with CPA(R):15
in September 2004 (collectively, including us, the "CPA(R) REITs"). WPC is a
publicly-traded company listed on the New York Stock Exchange under the symbol
"WPC."
Our principal executive offices are located at 50 Rockefeller Plaza, New York,
NY 10020 and our telephone number is (212) 492-1100. As of December 31, 2004, we
had no employees. WPC employs 129 individuals who are available to perform
services for us.
Significant Developments During 2004
FUNDRAISING ACTIVITIES. During 2004, we sold a total of 51,133,332 shares of
common stock for a total of $511,333 in gross Offering proceeds. In December
2004, we ceased active fundraising through our Offering in order to bring into
balance the rates of fundraising and investment. We subsequently withdrew the
Offering in March 2005 (see Subsequent Events in Item 7). We believed that it
was prudent to cease taking in additional funds until we have been able to
complete a sufficient amount of new real estate acquisitions to substantially
reduce our uninvested cash balance.
In September 2004, we filed a registration statement with the SEC for a second
offering of shares of common stock that has not yet been declared effective. The
second offering will be for a maximum of 80,000,000 shares at a price of $10 per
share and will register up to 40,00,000 shares for the Distribution Reinvestment
and Share Purchase Plan.
ACQUISITIONS. On April 29, 2004, along with two affiliates, CPA(R):15 and
CPA(R):14, through a limited partnership in which we own a 30.77% limited
partnership interest, we purchased 78 retail self-storage and truck rental
facilities and entered into master lease agreements with two lessees that
operate the facilities under the U-Haul brand name. The self-storage facilities
are leased to Mercury Partners, LP ("Mercury"), and the truck rental facilities
are leased to U-Haul Moving Partners, Inc. ("U-Haul"). The total cost of the
facilities was $312,445. In connection with the purchase, the limited
partnership obtained $183,000 of limited recourse mortgage financing. The loan
matures in May 2014, at which time a balloon payment is scheduled.
The Mercury lease has an initial term of 20 years with two ten-year renewal
options and provides for annual rent of $18,551. The U-Haul lease has an initial
term of ten years with two ten-year renewal options and provides for annual rent
of $9,990. If U-Haul does not renew its lease, Mercury will assume the lease
obligation for the truck rental facilities. Each lease provides for rent
increases every five years based on a formula indexed to the CPI.
On May 5, 2004 we purchased land and buildings in Leeds, England for $27,921
(based on the exchange rate of the British Pound on the date of acquisition) and
entered into a net lease with Polestar Petty Ltd. The lease has an initial term
through May 2029 and provides for initial annual rent of $2,116 with annual
increases of 2.5%. In connection with the purchase, we obtained a limited
recourse mortgage loan of $18,840. The loan matures in May 2014, at which time a
balloon payment is scheduled.
On June 1, 2004 we purchased land and buildings in Englewood, Colorado and
Chandler, Arizona for $13,765 and entered into a net lease with Castle Rock
Industries, Inc. The lease has an initial term of 20 years with four five-year
renewal options and provides for initial annual rent of $1,328 with annual rent
increases based on increases in the CPI, capped at 5%. In October 2004, we
obtained $9,300 of limited recourse mortgage financing on the properties, which
will fully amortize in October 2024.
On June 7, 2004, we exercised an option to increase to 50% our interest in a
limited partnership which owns land and buildings in Kahl am Main, Germany
leased to Actuant Corporation, having a total cost of $16,769 (based on the
exchange rate of the Euro on date of acquisition). We paid $2,962 to CPA(R):15
which had initially owned a 99.99% interest and which was contributed after a
mortgage was placed on the property. CPA(R):15 owns the remaining interest in
the facility. The lease has an initial term of 17 years, with two five-year
renewal options, and provides for initial aggregate annual rent of $1,596 with
annual increases based on a formula indexed to increases in the German CPI. In
connection with the purchase, the limited partnership obtained limited recourse
mortgage financing of $11,232.
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CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
In July 2004, we purchased land and buildings in Hampton, New Hampshire for
$32,171 and entered into a net lease with Foss Manufacturing Company, Inc. The
lease has an initial term of 20 years with two ten-year renewal options and
provides for initial annual rent of $3,195 with rent increases every three years
based on increases in the CPI. In connection with the purchase, we obtained a
limited recourse mortgage loan of $17,000, which fully amortizes in July 2024.
In July 2004, through a 40% interest in a limited liability company in which
CPA(R):15 owns the remaining 60% interest, we purchased land and buildings in
Finland for $97,568 (based on exchange rate of the Euro on the date of
acquisition) and entered into two net leases with TietoEnator Plc. The leases
have initial terms of 12.5 years with three five-year renewal options at an
initial aggregate annual rent of $6,985 and provide for annual rent increases
based on a formula indexed to a Finnish cost of living index. In connection with
the purchase, the limited liability company obtained limited recourse mortgage
loans of $70,739, which mature in July 2014, at which time balloon payments are
scheduled.
Between July 26, 2004 and August 3, 2004 in two separate transactions, we and
CPA(R):15 with 35% and 65% interests, respectively, purchased five properties in
France for $103,006 (based on the exchange rates of the Euro on the dates of
acquisition) and assumed existing net leases with Thales S.A. Four of the leases
expire in December 2011 and one lease expires in December 2010, with each lease
providing for a nine-year renewal term. Initial aggregate annual rent is $9,774
with annual increases based on the INSEE, a French construction cost index. In
connection with the purchases, we and CPA(R):15 obtained limited recourse
mortgage loans of $76,835, which mature in July 2011, at which time balloon
payments are scheduled.
On August 27, 2004, we purchased properties in Kearney, Missouri; Martinsburg,
West Virginia; Valencia, Pennsylvania; Calgary, Alberta; Toledo, Ohio; York,
Nebraska; Fair Bluff, North Carolina and Rocky Mount, Virginia for $37,885 and
entered into net leases with Ply Gem Industries, Inc. The leases have initial
terms of 20 years, with two ten-year renewal terms at an initial annual rent of
$2,981 for the domestic properties and $529 (based on the exchange rate of the
Canadian Dollar on date of acquisition) for the Canadian property. The leases
provide for annual rent increases based on the increases in their respective
CPI. In October 2004, we obtained $17,650 of limited recourse mortgage financing
on the domestic properties, which fully amortizes in November 2024. In December
2004, we obtained limited recourse mortgage financing for the property located
in Canada in the amount of $3,536, which matures in December 2014, at which time
a balloon payment is scheduled.
On September 16, 2004, we purchased property in Tinton Falls, New Jersey for
$15,522 and assumed an existing net lease with Xpedite Systems, Inc. The Xpedite
lease has a remaining initial term through June 2016 with two five-year renewal
options. Annual rent is $1,395, with stated rent increases in June 2006 and June
2011. In connection with the purchase, we obtained a limited recourse mortgage
loan of $10,250, which matures in October 2016, at which time a balloon payment
is scheduled.
On September 30, 2004, we purchased property in Woodlands, Texas and entered
into a build-to-suit commitment and net lease with Huntsman LLC, to finance the
construction of three research and development facilities. Our share of the
total construction costs are projected to be approximately $38,025. Upon
completion, expected to be in September 2005, an initial lease term of 17 years
will commence with four five-year renewal terms. Based on the projected
construction costs, initial annual rent will be approximately $3,545 with annual
increases of 2%.
On December 22, 2004, we acquired a $20,000 subordinated interest in a $165,000
mortgage loan collateralized by the distribution facilities of Atlanta,
Georgia-based BlueLinx Holdings Inc. The cost of the interest acquired was
$20,300 inclusive of fees of $300. The acquired interest represents the junior
position in a five-year floating rate first mortgage loan against BlueLinx's
real estate portfolio. Our note bears annual interest at the sum of (i) the
higher of the one-month London Interbank Offering Rate ("LIBOR") or 2%, and (ii)
4.5%. We will receive monthly interest
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CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
payments on the loan. The maturity date is November 9, 2007; however, the
maturity may be extended for two 1-year periods. We are scheduled to receive our
$20,000 upon maturity of the loan.
On December 27, 2004, we purchasd properties in Vantaa (Helsinki), Finland and
Linkoping, Sweden for $20,832 (based on the exchange rate of the Euro on the
date of acquisition) and $10,075 (based on the exchange rate of the Swedish
Kroner on the date of acquisition), respectively, and entered into net lease
agreements with Plantasjen ASA. The Vantaa lease has an initial term of 20 years
with two ten-year renewal options and provides for initial annual rent of
$1,462. The Linkoping lease has an initial term of 25 years with two ten-year
renewal options and provides for initial annual rent of $699. Both leases
provide for annual rent increases based on the cost of living index of each
respective country. In connection with the purchase of the Vantaa and Linkoping
properties, we obtained $13,575 and $6,355, respectively, of limited recourse
mortgage loans, which mature in December 2014, at which time balloon payments
are scheduled.
SEC INVESTIGATION. As previously reported by WPC, WPC and Carey Financial, the
wholly-owned broker-dealer subsidiary of WPC, are currently subject to an SEC
investigation into payments made to third party broker dealers in connection
with the distribution of REITs managed by WPC and other matters. Although no
regulatory action has been initiated against WPC or Carey Financial in
connection with the matters being investigated, it is possible that the SEC may
pursue an action in the future. The potential timing of any such action and the
nature of the relief or remedies the SEC may seek cannot be predicted at this
time. If such an action is brought, it could materially affect WPC and the REITs
managed by WPC. See Item 3-Legal Proceedings for a discussion of this
investigation.
(b) FINANCIAL INFORMATION ABOUT SEGMENTS
We currently operate in one industry segment, investment in net leased real
property. For the year ended December 31, 2004, U-Haul Moving Partners, Inc. and
Mercury Partners, LP, Polestar Petty Ltd, Foss Manufacturing Company, Inc. and
Thales S.A., each represented more than 10% of our total lease revenues. U-Haul
and Mercury are tenants of 78 properties pursuant to a net lease with UH Storage
(DE) Limited Partnership, a material equity investee of the Company. Separate
audited financial statements of UH Storage (DE) Limited Partnership are included
in this Form 10-K. (See Item 15 (a) 2)
(c) NARRATIVE DESCRIPTION OF BUSINESS
Business Objectives and Strategy
Our purpose is to provide shareholders with an opportunity to diversify their
investment holdings by providing an exposure to both domestic and international
income producing real estate. We seek to invest in commercial real estate
properties, which are either under development or construction, newly
constructed or have been constructed and have operating histories.
Our primary objectives are to:
- own a diversified portfolio of net-leased real estate that will
increase in value;
- provide increasing revenue rental streams by typically including
scheduled rent increases in our leases;
- fund dividends to shareholders; and
- increase the value of the equity in our real estate by making
regular mortgage principal payments.
We seek to achieve these objectives by investing in and holding industrial and
commercial properties each net leased to a single corporate tenant. We intend
our portfolio to be diversified by tenant and tenant industry.
Investment Opportunities
In addition to opportunities in the domestic real estate market, including the
net lease market, we believe that international real estate markets provide
investors with an opportunity to diversify their portfolio with an investment
that may provide returns that are less correlated to the returns of the equity,
bond and real estate markets of the United States. Although primarily focusing
international investments on properties in the European Union, we plan
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CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
to evaluate potential investments on a case-by-case basis and have no
predetermined limitations or targets for geographical location.
Although commercial real estate markets in the European Union are quite diverse,
we believe that there are certain characteristics that generally differentiate
these markets from the United States real estate market. We also believe that
these factors provide an opportunity for enhanced returns and diversification as
compared to the commercial real estate market in the United States.
Differentiating factors include:
HIGHER OWNER OCCUPANCY. The investment in corporate real estate on a
net-lease basis has been a common practice in the United States for a
number of years. This has resulted in a level of owner-occupation in the
United States in the range of 24% of the total commercial real estate
market. In the European Union real estate market, the level of
owner-occupation is approximately 67%. We believe that these statistics
support the premise that the European Union real estate market may provide
us with a larger pool of investment opportunities than would be available
solely in the United States.
LESS AVAILABLE LAND AND GREATER RESTRICTIONS ON EXPANSION. The economy of
the European Union is 15% smaller than the United States economy but has
66% less available land and a 35% greater population. Furthermore, the
countries in the European Union have numerous restrictions limiting
commercial real estate development. As a result of these factors, we
believe that long-term economic or social growth in the European Union has
the potential to increase the value of commercial real estate rates to
levels that exceed those in the United States.
The commercial real estate markets of certain countries within the European
Union or other countries or geographic locations where we may invest in
properties may have different characteristics than those described above. We
will evaluate each transaction on a case-by-case basis and will, as a part of
this evaluation, examine current characteristics and market conditions.
Loan Acquisition
As an alternative to investing in properties directly, we may invest in certain
mortgage loan participations. The participation interests would generally be
collateralized by underlying properties and owned by or leased to single
corporate occupants.
Investment Strategies
We seek to invest primarily in single-tenant commercial real property, either
existing or under construction. Generally, the properties are net leased to
tenants that the investment committee deems creditworthy based on leases that
will be full recourse obligations of the tenants or their affiliates. In most
cases, leases will require the initial tenant to pay all the costs of
maintenance, insurance and real estate taxes. We may also invest in other types
of income-producing property.
In analyzing potential investments, WPC reviews all aspects of a transaction,
including tenant and real estate fundamentals to determine whether a potential
investment and lease can be structured to satisfy our investment criteria. The
aspects of a transaction which are reviewed by WPC include the following:
TENANT EVALUATION. WPC evaluates each potential tenant for its credit,
management, position within its industry, operating history and profitability.
WPC seeks tenants it believes will have stable or improving credit. By leasing
properties to these types of tenants, we can generally charge rent that is
higher than the rent charged to tenants with recognized credit and, thereby,
enhance its current return from these properties as compared with properties
leased to companies whose credit potential has already been recognized by the
market. Furthermore, if a tenant's credit does improve, the value of our
properties leased to that tenant will likely increase (if all other factors
affecting value remain unchanged). WPC may also seek to enhance the likelihood
of a tenant's lease obligations being satisfied, such as through a security
deposit which may be in the form of a letter of credit or cash, or through a
guarantee of lease obligations from the tenant's corporate parent. While WPC
will select tenants it believes are creditworthy, tenants will not be required
to meet any minimum rating established by an independent credit rating agency.
WPC's and the investment committee's standards for determining whether a
particular tenant is creditworthy vary in accordance
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CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
with a variety of factors relating to specific prospective tenants. The
creditworthiness of a tenant is determined on a tenant by tenant, case by case
basis. Therefore, general standards for creditworthiness cannot be applied.
LEASES WITH INCREASING RENT. WPC seeks to include clauses in our leases that
provide for increases in rent over the term of the leases. These increases are
generally tied to increases in certain indices such as the CPI, or mandated
rental increases on specific dates, or in the case of retail stores,
participation in gross sales above a stated level.
PROPERTIES IMPORTANT TO TENANT OPERATIONS. WPC generally seeks to invest in
properties that it believes are essential or important to the ongoing operations
of the tenant. WPC believes that these properties provide better protection in
the event a tenant files for bankruptcy, since leases on properties essential or
important to the operations of a bankrupt tenant are less likely to be
terminated by a bankrupt tenant.
LEASE PROVISIONS THAT ENHANCE AND PROTECT VALUE. When available, WPC attempts to
include provisions in our leases that require our consent to specified tenant
activity or require the tenant to satisfy specific operating tests. These
provisions include, for example, operational and financial covenants of the
tenant, prohibitions on a change in control of the tenant without our consent
and indemnification from the tenant against environmental and other contingent
liabilities.
DIVERSIFICATION. WPC seeks to diversify our portfolio to avoid
dependence on any one particular tenant or tenant industry, which also generally
results in diversification by type of facility and geographic location.
Diversification, to the extent achieved, helps to reduce the adverse effect of a
single under-performing tenant or downturn in any particular industry or
geographic location.
INVESTMENT COMMITTEE. WPC has an investment committee that provides services to
both the CPA(R) REITs and WPC. As a transaction is structured, it is evaluated
by the chairman of the investment committee with respect to the potential
tenant's credit, business prospects, position within its industry and other
characteristics important to the long-term value of the property and the
capability of the tenant to meet its lease obligations. Before a property is
acquired, the transaction is reviewed by the investment committee to ensure that
it satisfies the investment criteria. For transactions that meet the investment
criteria, the investment committee has sole discretion as to which CPA(R) REIT
or if WPC will hold the investment. In cases where the investment committee
determines that two or more CPA(R) REITs (which may include WPC holding an
interest in the investment) should hold the investment, the independent
directors of each CPA(R) REIT (or WPC) must also approve the transaction.
The investment committee is not directly involved in originating or negotiating
potential acquisitions, but instead functions as a separate and final step in
the acquisition process. WPC places special emphasis on having experienced
individuals serve on its investment committee and we do not invest in a
transaction unless it is approved by the investment committee.
The following people serve on the investment committee:
- George E. Stoddard, Chairman (1), was formerly responsible for the
direct corporate investments of The Equitable Life Assurance Society
of the United States and has been involved with the CPA(R) programs
for over 20 years.
- Frank J. Hoenemeyer, Vice Chairman, was formerly Vice Chairman,
Director and Chief Investment Officer of The Prudential Insurance
Company of America. As Chief Investment Officer, Mr. Hoenemeyer was
responsible for all of Prudential's investments, including stocks,
bonds, private placements, real estate and mortgages.
- Nathaniel S. Coolidge (1) previously served as Senior Vice President
-- Head of Bond & Corporate Finance Department of the John Hancock
Mutual Life Insurance Company. His responsibilities included
overseeing fixed income investments for Hancock, its affiliates and
outside clients.
- Lawrence R. Klein (1) is the Benjamin Franklin Professor of
Economics Emeritus at the University of Pennsylvania and its Wharton
School. Dr. Klein has been awarded the Alfred Nobel Memorial Prize
in Economic Sciences and currently advises various governments and
government agencies.
- Ralph F. Verni (1) is a private investor and business consultant and
formerly Chief Investment Officer of The New England Mutual Life
Insurance Company.
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CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
- Karsten von Koller (1) was formerly Chairman and Member of the Board
of Managing Directors of Eurohypo AG, the leading commercial real
estate financing company in Europe.
(1) Investment committee member also serves as a director of WPC.
Each property we invest in has been and future investments will be appraised by
a third-party appraiser. We will not invest in any property that has a total
property cost (the purchase price of the property inclusive of acquisition fees)
which is in excess of its appraised value. These appraisals may take into
consideration, among other things, the terms and conditions of the particular
lease transaction, the quality of the lessee's credit and the conditions of the
credit markets at the time the lease transaction is negotiated. The appraised
value may be greater than the construction cost or the replacement cost of a
property, and the actual sale price of a property if sold by us may be greater
or less than the appraised value.
WPC's practices include obtaining evaluations of the physical condition of
properties and obtaining environmental surveys in an attempt to determine
potential environmental liabilities associated with a property prior to its
investment in such property. WPC will also consider factors peculiar to the laws
of foreign countries, in addition to the risks normally associated with real
property investments, when considering an investment located outside the United
States.
Types of Investments
Substantially all of our investments will be income-producing properties, which
are, upon acquisition, improved or being developed or which will be developed
within a reasonable period of time after their acquisition. Investments will not
be restricted as to geographical areas, and therefore, it is expected that the
portfolio will be more diverse than prior REITs managed by WPC (see "Factors
Affecting Future Operating Results").
We expect that many of our investments will be through sale-leaseback
transactions, in which we invest in properties from companies that
simultaneously lease the properties back from us. Many of our properties will be
subject to long-term leases. These sale-leaseback transactions provide the
lessee company with a source of capital that is an alternative to other
financing sources such as corporate borrowing, mortgaging real property, or
selling shares of common stock. We anticipate that some of our sale-leasebacks
will be in conjunction with acquisitions, recapitalizations or other corporate
transactions. We may act as one of several sources of financing for these
transactions by purchasing real property from the seller and net leasing it to
the company or its successor in interest (the lessee).
In some circumstances, we grant tenants a right to purchase the property leased
by the tenant. The option purchase price is generally the greater of the
contract purchase price and the fair market value of the property at the time
the option is exercised.
INVESTMENTS IN LOANS
An investment may be structured as a mortgage loan in situations in which a
standard net lease transaction would have an adverse impact on the seller of a
property or otherwise may not be advantageous for them or us. We may also invest
in mortgage loans or mortgage securities originated by non-affiliates. WPC will
attempt to structure our participation in any such loan in a manner that is
intended to provide us with an economic return similar to that which we could
expect to receive had the investment been structured as a net lease transaction.
Any transaction structured as a loan must otherwise meet our investment
criteria.
Some of the loans may allow us to participate in the economic benefits of any
increase in the value of the property securing repayment of the loan as though
we were an equity owner of a portion of the property. Loans may include first
mortgage loans, leasehold mortgage loans and conventional mortgage loans without
equity enhancements. We will not make or invest in loans that are subordinate to
any mortgage held by WPC, the directors or their affiliates. Any loans will be
collateralized by various types of real property as well as personal or mixed
property connected with the real property. The loans generally will be
collateralized by property with a demonstrable income-producing potential. In
determining whether to make loans, WPC will analyze relevant property and
financial factors in a manner similar to its evaluation of net lease real
estate.
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CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
JOINT VENTURES
We may enter into joint ventures or general partnerships and other
participations with real estate developers, owners and others for the purpose of
obtaining equity interests in a property or properties in accordance with our
investment policies. These investments permit us to own interests in large
properties without unduly restricting the diversity of our portfolio. We will
not enter into a joint venture to make an investment that we would not be
permitted to make on our own. In connection with such a joint investment, both
we, and our affiliates would be required to approve any material decisions
concerning the investment, including refinancing and capital improvements.
OTHER INVESTMENTS
We may invest up to 10% of our net equity in unimproved or non-income- producing
real property and in "equity interests." Investment in equity interests in the
aggregate will not exceed five percent of our net equity. Such "equity
interests" are defined generally to mean stock, warrants or other rights to
purchase the stock of, or other interests in, a tenant of a property, an entity
to which we lend money or a parent or controlling person of a borrower or
tenant. We may invest in unimproved or non-income-producing property, which WPC
believes will appreciate in value, or which will increase the value of adjoining
or neighboring properties we own. There can be no assurance that these
expectations will be realized.
There can be no assurance as to when our capital may be fully invested in
properties. Pending investment, cash obtained from the Offering of our
securities will be invested in permitted temporary investments, which include
short-term U.S. Government securities, bank certificates of deposit, other
short-term liquid investments and auction-rate securities. Auction-rate
securities are purchases of long-term income instruments which provide for
frequent resets of stated interest rates. A market exists to provide for
redemption of auction-rate securities at the interest reset date, generally at
par value; however, there is a risk that a redemption price will be below par
value. To maintain our REIT status, we also may invest in securities that
qualify as "real estate assets" and produce qualifying income under the REIT
provisions of the Internal Revenue Code. Any investments in other REITs in which
WPC or any director is an affiliate must be approved as being fair and
reasonable by a majority of the directors (including a majority of the
independent directors) who are not otherwise interested in the transaction.
Our reserves, if any, will be invested in permitted temporary investments. WPC
will evaluate the relative risks and rate of return, our cash needs and other
appropriate considerations when making short-term investments on our behalf. The
rate of return of permitted temporary investments may be less than would be
obtainable from real estate investments.
Financing Strategies
Our strategy is to borrow, generally, on a limited recourse basis. The use of
non-recourse financing allows us to limit our exposure on any property to the
amount of equity invested in the property. We generally borrow in the same
currency that is used to pay rent on the property. This will enable us to hedge
a portion of our currency risk on international investments. Non-recourse
financing generally restricts the lender's claim on the assets of the borrower.
The lender generally may only take back the property securing the debt. This
protects our other assets. We generally borrow approximately 60% of the purchase
price of our properties; however, there is no limitation on the amount we may
borrow against any single improved property. Aggregate borrowings as of the time
that the net proceeds of our current offering have been fully invested and at
the time of each subsequent borrowing may not exceed 75% of the value of all
properties, unless the excess is approved by a majority of the independent
directors and disclosed to shareholders in our next quarterly report, along with
the reason for the excess. For purposes of determining the maximum allowable
amounts of indebtedness, "value" means the lesser of:
- the total appraised value of the properties as reflected in the most
recently obtained appraisal for each property, or
- the total value of our assets as reflected in the most recently
completed valuation.
By operating on a leveraged basis, we will have more funds available and,
therefore, will make more investments than would otherwise be possible, than if
we did not use debt financing. This is expected to result in a more diversified
portfolio. Lenders may have recourse to our other assets in limited
circumstances not related to the repayment of the indebtedness. Lenders may also
seek to include in the terms of mortgage loans provisions making the termination
or replacement of WPC an event of default or an event requiring the immediate
repayment of the full
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CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
outstanding balance of the loan. We will not agree to the inclusion of these
provisions and will attempt to negotiate loan terms allowing us to replace or
terminate WPC if the action is ordered by the board. The replacement or
termination may, however, require the prior consent of the mortgage lenders.
All of our mortgages are limited recourse and bear interest at fixed rates and
provide for monthly or quarterly installments which include scheduled payments
of principal. Accordingly, our near term cash flow should not be adversely
affected by increases in interest rates, which are near historical lows.
However, financing on future acquisitions will likely bear higher rates of
interest. A lender on limited recourse mortgage debt has recourse only to the
property collateralizing such debt and not to any of our other assets, while
unsecured financing would give a lender recourse to all of our assets. The use
of limited recourse debt, therefore, will help us to limit our exposure of all
of our assets to any one debt obligation. Management believes that the strategy
of combining equity and limited recourse mortgage debt will allow us to meet our
short-term and long-term liquidity needs and will help to diversify our
portfolio and, therefore, reduce concentration of risk in any particular lessee.
WPC may refinance properties during the term of a loan when a decline in
interest rates makes it profitable to prepay an existing mortgage, when an
existing mortgage matures or if an attractive investment becomes available and
the proceeds from the refinancing can be used to purchase such investment. The
benefits of the refinancing may include an increased cash flow resulting from
reduced debt service requirements, an increase in distributions from proceeds of
the refinancing, if any, and/or an increase in property ownership if some
refinancing proceeds are reinvested in real estate.
Asset Management
We believe that effective management of our net lease assets is essential to
maintain and enhance property values. Important aspects of asset management
include restructuring transactions to meet the evolving needs of current
tenants, re-leasing properties, refinancing debt, selling properties and
knowledge of the bankruptcy process. WPC monitors, on an ongoing basis,
compliance by tenants with their lease obligations and other factors that could
affect the financial performance of any of our properties. Monitoring involves
receiving assurances that each tenant has paid real estate taxes, assessments
and other expenses relating to the properties it occupies and confirming that
appropriate insurance coverage is being maintained by the tenant. WPC reviews
financial statements of our tenants and undertakes regular physical inspections
of the condition and maintenance of our properties. Additionally, WPC
periodically analyzes each tenant's financial condition, the industry in which
each tenant operates and each tenant's relative strength in its industry.
Holding Period
We intend to hold each property we acquire for an extended period. The
determination of whether a particular property should be sold or otherwise
disposed of will be made after consideration of relevant factors with a view to
achieving maximum capital appreciation and after-tax return for our
shareholders. If our common stock is not listed for trading on a national
securities exchange or included for quotation on NASDAQ, our intention is to
generally begin selling properties and other assets within eight to twelve years
after the proceeds of our public offerings are substantially invested, subject
to market conditions. The board of directors will consider whether to list the
shares, liquidate or devise an alternative liquidity strategy.
Competition
We face competition for the acquisition of office and industrial properties in
general, and such properties net leased to major corporations in particular,
from insurance companies, credit companies, pension funds, private individuals,
investment companies and other REITs. We also face competition from institutions
that provide or arrange for other types of commercial financing through private
or public offerings of equity or debt or traditional bank financings. We believe
our management's experience in real estate, credit underwriting and transaction
structuring should allow us to compete effectively for office and industrial
properties.
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CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
Environmental Matters
Under various federal, state and local environmental laws, regulations and
ordinances, current or former owners of real estate, as well as other parties,
may be required to investigate and clean up hazardous or toxic chemicals,
substances or waste or petroleum product or waste, releases on, under, in or
from a property. These parties may be held liable to governmental entities or to
third parties for specified damages and for investigation and cleanup costs
incurred by these parties in connection with the release or threatened release
of hazardous materials. These laws typically impose responsibility and liability
without regard to whether the owner knew of or was responsible for the presence
of hazardous materials, and the liability under these laws has been interpreted
to be joint and several under some circumstances. Our leases often provide that
the tenant is responsible for all environmental liability and for compliance
with environmental regulations relating to the tenant's operations.
We will typically undertake an investigation of potential environmental risks
when evaluating an acquisition. Phase I environmental assessments will be
performed by third party environmental consulting and engineering firms for all
properties acquired by us. Where we believe them to be warranted, Phase II
environmental assessments will be performed. Phase I assessments do not involve
subsurface testing, whereas Phase II assessments involve some degree of soil
and/or groundwater testing. We may acquire a property which is known to have had
a release of hazardous materials in the past, subject to a determination of the
level of risk and potential cost of remediation. We normally require property
sellers to indemnify us fully against any environmental problem existing as of
the date of purchase. Additionally, we often structures our leases to require
the tenant to assume most or all responsibility for compliance with the
environmental provisions of the lease or environmental remediation relating to
the tenant's operations and to provide that non-compliance with environmental
laws is a lease default. In some cases, we may also require a cash reserve, a
letter of credit or a guarantee from the tenant, the tenant's parent company or
a third party to assure lease compliance and funding of remediation. The value
of any of these protections depends on the amount of the collateral and/or
financial strength of the entity providing the protection. Such a contractual
arrangement does not eliminate our statutory liability or preclude claims
against us by governmental authorities or persons who are not a party to the
arrangement. Contractual arrangements in our leases may provide a basis for us
to recover from the tenant damages or costs for which we have been found liable.
Factors Affecting Future Operating Results
Our future results may be affected by certain risks and uncertainties including
the following:
WE MAY NOT BE ABLE TO RAISE SUFFICIENT FUNDS TO DIVERSIFY OUR REAL ESTATE
PORTFOLIO.
As of March 8, 2005, we have ceased fundraising and have withdrawn our initial
registration statement (see Significant Developments in 2004 above and
Subsequent Events in Item 7). Our potential profitability and ability to
diversify our investments, both geographically and by type of properties
purchased, will be limited by the amount of funds at our disposal. The
investment of a smaller sum of money will likely result in the acquisition of
fewer properties and, accordingly, less diversification of our real estate
portfolio than the investment of a larger sum in a greater number of properties.
The amount we have to invest will depend on whether we recommence offering our
shares and the success of any such offering, as well as the amount of money we
are able to borrow. Lack of diversification will increase the potential adverse
effect on us, of a single under-performing investment.
OUR CAPITAL RAISING ABILITY IS OVERLY RELIANT ON ONE SELECTED-DEALER.
We are overly reliant on American Express Financial Advisors, Inc. to market our
shares to investors. Any adverse change in that arrangement could severely
limit our ability to increase assets under management and may prevent us from
having funds available for new transactions.
WE ARE SUBJECT TO THE RISKS OF REAL ESTATE OWNERSHIP WHICH COULD REDUCE THE
VALUE OF OUR PROPERTIES AND LOANS.
Our performance and asset value are subject to risks incident to the ownership
and operation of net leased industrial and commercial property, including:
- changes in the general economic climate;
- changes in local conditions such as an oversupply of space or
reduction in demand for real estate;
- changes in interest rates and the availability of financing; and
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CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
- changes in laws and governmental regulations, including those
governing real estate usage, zoning and taxes.
WE MAY HAVE DIFFICULTY RE-LEASING OR SELLING OR OUR PROPERTIES.
Real estate investments generally lack liquidity compared to other financial
assets and this lack of liquidity will limit our ability to quickly change our
portfolio in response to changes in economic or other conditions. The net leases
we may enter into or acquire may be for properties that are specially suited to
the particular needs of our tenant. With these properties, if the current lease
is terminated or not renewed, we may be required to renovate the property or to
make rent concessions in order to lease the property to another tenant. In
addition, in the event we are forced to sell the property, we may have
difficulty selling it to a party other than the tenant due to the special
purpose for which the property may have been designed. These and other
limitations, such as a property's location and/or local economic conditions, may
affect our ability to re-lease or sell properties without adversely affecting
returns to our shareholders.
THE INABILITY OF A TENANT IN A SINGLE TENANT PROPERTY TO PAY RENT WILL REDUCE
OUR REVENUES.
Most of our properties are each occupied by a single tenant and, therefore, the
success of our investments is materially dependent on the financial stability of
such tenants. Lease payment defaults by tenants could cause us to reduce the
amount of distributions to shareholders. A default of a tenant on its lease
payments to us would cause us to lose the revenue from the property and cause us
to have to find an alternative source of revenue to meet any mortgage payment
and prevent a foreclosure if the property is subject to a mortgage. In the event
of a default, we may experience delays in enforcing our rights as landlord and
may incur substantial costs in protecting our investment and reletting our
property. If a lease is terminated, there is no assurance that we will be able
to lease the property for the rent previously received or sell the property
without incurring a loss.
IF OUR TENANTS ARE HIGHLY LEVERAGED, THEY MAY HAVE A HIGHER POSSIBILITY OF
FILING FOR BANKRUPTCY OR INSOLVENCY.
Of tenants that experience downturns in their operating results due to adverse
changes to their business or economic conditions, those that are highly
leveraged may have a higher possibility of filing for bankruptcy or insolvency.
In bankruptcy or insolvency, a tenant may have the option of vacating a property
instead of paying rent. Until such a property is released from bankruptcy, our
revenues would be reduced and could cause us to reduce distributions to
shareholders.
THE BANKRUPTCY OR INSOLVENCY OF TENANTS MAY CAUSE A REDUCTION IN REVENUE.
Bankruptcy or insolvency of a tenant could cause:
- the loss of lease payments;
- an increase in the costs incurred to carry the property;
- a reduction in the value of shares; and
- a decrease in distributions to shareholders.
Under bankruptcy law, a tenant who is the subject of bankruptcy proceedings has
the option of continuing or terminating any unexpired lease. If the tenant
terminates the lease, any claim we have for breach of the lease (excluding
collateral securing the claim) will be treated as a general unsecured claim.
The maximum claim will be capped at the amount owed for unpaid rent prior to the
bankruptcy unrelated to the termination, plus the greater of one year's lease
payments or 15% of the remaining lease payments payable under the lease (but no
more than three years' lease payments). In addition, due to the long-term nature
of our leases and terms providing for the repurchase of a property by the
tenant, a bankruptcy court could recharacterize a net-lease transaction as a
secured lending transaction. If that were to occur, we would not be treated as
the owner of the property, but might have additional rights as a secured
creditor. Those rights would not include a right to compel the tenant to timely
perform its obligations under the lease but would instead entitle us to
"adequate protection," a bankruptcy concept that applies to protect against
further decrease in the value of the property if the value of the property is
less than the balance owed to us.
As a general rule, insolvency laws outside of the United States are not as
favorable to reorganization or to the protection of a debtor's rights as tenants
under a lease as are the laws in the United States. Our rights to terminate a
lease for default are more likely to be enforceable in countries other than the
United States, while a debtor/tenant or
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CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
its insolvency representative is less likely to have rights to force
continuation of lease without our consent. Nonetheless, most such laws would
permit a tenant or an appointed insolvency representative to terminate a lease
if it so chose.
However, because the bankruptcy laws of the United States are considered to be
more favorable to debtors and to their reorganization, entities which are not
ordinarily perceived as United States entities may seek to take advantage of the
United States bankruptcy laws if they are eligible. An entity would be eligible
to be a debtor under the United States bankruptcy laws if it had a domicile
(state of incorporation or registration), place of business or assets in the
United States. If a tenant became a debtor under the United States bankruptcy
laws, then it would have the option of continuing or terminating any unexpired
lease. Prior to taking the requisite procedural steps to continue or terminate
an unexpired lease, the tenant (or its trustee if one has been appointed) must
timely perform all obligations of the tenant under the lease.
The programs managed by WPC or its affiliates have had tenants file for
bankruptcy protection and are involved in litigation (including two
international tenants). Four of the prior fourteen CPA(R) programs reduced the
rate of distributions to their investors as a result of adverse developments
involving tenants.
OUR TENANTS GENERALLY WILL NOT HAVE ACCESS TO TRADITIONAL SOURCES OF CREDIT,
WHICH MAY CREATE A HIGHER RISK OF LEASE DEFAULTS AND THEREFORE LOWER REVENUES.
Generally, no credit rating agencies evaluate or rank the debt or the credit
risk of many of our tenants, as we seek tenants that we believe will have stable
or improving credit profiles that have not been recognized by the traditional
credit market. Our long-term leases with certain of these tenants may therefore
pose a higher risk of default than would long term leases with tenants whose
credit potential has already been recognized by the market.
THERE IS NOT, AND MAY NEVER BE, A PUBLIC MARKET FOR OUR SHARES, SO IT WILL BE
DIFFICULT FOR SHAREHOLDERS TO SELL SHARES QUICKLY.
There is no current public market for the shares and, therefore, it will be
difficult for shareholders to sell their shares promptly. In addition, the price
received for any shares sold prior to a liquidity event is likely to be less
than the proportionate value of the real estate we own. Investor suitability
standards imposed by certain states may also make it more difficult to sell your
shares to someone in those states. The shares should be purchased as a long-term
investment only.
LIABILITY FOR UNINSURED LOSSES COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
Losses from disaster-type occurrences (such as wars, terrorist activities or
earthquakes) may be either uninsurable or not insurable on economically viable
terms. Should an uninsured loss occur, we could lose our capital investment
and/or anticipated profits and cash flow from one or more properties, which in
turn could cause the value of the shares and distributions to shareholders to be
reduced.
POTENTIAL LIABILITY FOR ENVIRONMENTAL MATTERS COULD ADVERSELY AFFECT OUR
FINANCIAL CONDITION.
We may own industrial and commercial properties that will cause us to be subject
to the risk of liabilities under federal, state and local environmental laws.
Some of these laws could impose the following on us:
- Responsibility and liability for the cost of removal or remediation
of hazardous substances released on our property, generally without
regard to our knowledge or responsibility of the presence of the
contaminants.
- Liability for the costs of removal or remediation of hazardous
substances at disposal facilities for persons who arrange for the
disposal or treatment of these substances.
- Potential liability for common law claims by third parties based on
damages and costs of environmental contaminants.
Our costs of investigation, remediation or removal of hazardous substances may
be substantial. In addition, the presence of hazardous substances on one of our
properties, or the failure to properly remediate a contaminated property, could
adversely affect our ability to sell or lease the property or to borrow using
the property as collateral.
OUR USE OF DEBT TO FINANCE ACQUISITIONS COULD ADVERSELY AFFECT OUR CASH FLOW.
Most of our property acquisitions are made by borrowing a portion of the
purchase price of our properties and securing the loan with a mortgage on the
property. If we are unable to make our debt payments as required, a lender
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CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
could foreclose on the property or properties securing its debt. This could
cause us to lose part or all of our investment which in turn could cause the
value of the shares and distributions to shareholders to be reduced. We
generally borrow on a non-recourse basis to limit our exposure on any property
to the amount of equity invested in the property. We generally borrow
approximately 60% of the purchase price of our properties. There is no
limitation on the amount borrowed on a single property and the aggregate
borrowings may not exceed 75% of the value of all properties without board
approval.
BALLOON PAYMENT OBLIGATIONS MAY ADVERSELY AFFECT OUR FINANCIAL CONDITION.
Some of our financing may require us to make a lump-sum or "balloon" payment at
maturity. Our ability to make any balloon payment is uncertain and may depend
upon our ability to refinance the mortgage or our ability to sell the property.
At the time the balloon payment is due, we may or may not be able to refinance
the balloon payment on terms as favorable as the original loan or sell the
property at a price sufficient to make the balloon payment. A refinancing or
sale could affect the rate of return to shareholders and the projected time of
disposition of our assets. There are no scheduled balloon payments, including
our pro rata share of mortgage obligations of equity investees, due over the
next five years.
THE IRS MAY TREAT SALE-LEASEBACK TRANSACTIONS AS LOANS, WHICH COULD JEOPARDIZE
OUR REIT STATUS.
The Internal Revenue Service may take the position that specific sale-leaseback
transactions we will treat as true leases are not true leases for federal income
tax purposes but are, instead, financing arrangements or loans. If a
sale-leaseback transaction were so recharacterized, we might fail to satisfy the
Asset Tests or the Income Tests and consequently lose our REIT status effective
with the year of recharacterization. Alternatively, the amount of our REIT
taxable income could be recalculated which could cause us to fail the
Distribution Test.
FAILURE TO QUALIFY AS A REIT WOULD ADVERSELY AFFECT OUR OPERATIONS AND ABILITY
TO MAKE DISTRIBUTIONS.
If we fail to qualify as a REIT in any taxable year, we would be subject to
United States federal income tax on our taxable income at corporate rates. In
addition, we would generally be disqualified from treatment as a REIT for the
four taxable years following the year we lost our REIT status. Failing to
obtain, or losing our REIT status would reduce our net earnings available for
investment or distribution to shareholders because of the additional United
States tax liability, and we would no longer be required to make distributions.
We might be required to borrow funds or liquidate some investments in order to
pay the applicable tax.
Qualification as a REIT is subject to the satisfaction of tax requirements and
various factual matters and circumstances which are not entirely within our
control. New legislation, regulations, administrative interpretations or court
decisions could change the tax laws with respect to qualification as a REIT or
the federal income tax consequences of being a REIT.
TAX BASIS FOREIGN CURRENCY GAINS MAY AFFECT OUR REIT STATUS.
In order to retain REIT status, which allows us to deduct dividends on our
Federal tax returns, there are limitations on certain sources of income,
including foreign currency gains, which if exceeded, would not allow us to
retain REIT status and disallow us to deduct dividend payments, subject to a
Federal taxation.
WE WILL NOT BE ABLE TO BENEFIT FROM CREDITS FOR FOREIGN TAXES.
We attempt to structure our international investments to minimize foreign taxes.
If we pay foreign taxes, we are not able to pass-through the benefits to our
shareholders nor will we benefit as a REIT unless we incur Federal tax
liabilities.
THE LIMIT ON THE NUMBER OF OUR SHARES A PERSON MAY OWN MAY DISCOURAGE A
TAKEOVER.
Our articles of incorporation restrict beneficial ownership of more than 9.8% of
the outstanding shares by one person or affiliated group in order to meet REIT
qualification rules. These restrictions may discourage a change of control and
may deter individuals or entities from making tender offers for our shares,
which offers might be financially attractive to shareholders or which may cause
a change in our management.
WE WERE INCORPORATED IN JUNE 2003 AND HAVE A LIMITED OPERATING HISTORY.
We were incorporated in June 2003 and have a limited property acquisition
history. We cannot guarantee that we will continue to find suitable property
investments, or that our tenants will fulfill their lease obligations. Our
failure to timely invest the proceeds of this offering, or to invest in quality
properties could diminish returns to investors.
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CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
OUR BOARD OF DIRECTORS MAY CHANGE OUR INVESTMENT POLICIES WITHOUT SHAREHOLDER
APPROVAL, WHICH COULD ALTER THE NATURE OF AN INVESTMENT IN OUR SHARES.
Our bylaws require that our independent directors review our investment policies
at least annually to determine that they the policies we are following are in
the best interest of the shareholders. These policies may change over time. The
methods of implementing our investment policies may also vary, as new investment
techniques are developed. Our investment policies, the methods for their
implementation, and our other objectives, policies and procedures may be altered
by a majority of the directors (including a majority of the independent
directors), without the approval of our shareholders. As a result, the nature of
an investment in our shares could change without shareholder consent.
WE MAY NEED TO USE LEVERAGE TO MAKE DISTRIBUTIONS.
We may incur indebtedness if necessary to satisfy the requirement that we
distribute at least 90% of our real estate investment trust taxable income or
otherwise, as is necessary or advisable to assure that we maintain our
qualification as a REIT for federal income tax purposes. In such an event, it is
possible that we could make distributions in excess of our earnings and profits
and, accordingly, that such distributions could constitute a return of capital
for federal income tax purposes. It is also possible that we will make
distributions in excess of our income as calculated in accordance with generally
accepted accounting principles.
A CHANGE IN ACCOUNTING STANDARDS REGARDING OPERATING LEASES MAY MAKE THE LEASING
OF FACILITIES LESS ATTRACTIVE TO OUR POTENTIAL TENANTS, WHICH COULD REDUCE
OVERALL DEMAND FOR OUR LEASING SERVICES.
Under Statement of Financial Accounting Standard No. 13, Accounting for Leases,
if the present value of a company's minimum lease payments equal 90% or more of
a property's fair value, the lease is classified as a capital lease, and the
lease obligation is included as a liability on the company's balance sheet.
However, if the present value of the minimum lease payments is less than 90% of
the property's value, the lease is considered an operating lease, and the
obligation does not appear on the company's balance sheet, but rather in the
footnotes thereto. Thus, entering an operating lease can appear to enhance a
tenant's balance sheet. The Securities and Exchange Commission is currently
conducting a study of off-balance-sheet financing, including leasing, and the
Financial Accounting Standards Board has recently indicated that it is
considering addressing the issue. If the accounting standards regarding the
financial statement classification of operating leases are revised, then
companies may be less willing to enter into leases because the apparent benefits
to their balance sheets could be reduced or eliminated. This in turn could cause
a delay in investing our offering proceeds, and make it more difficult for us to
enter leases on terms we find favorable.
OUR SUCCESS IS DEPENDENT ON THE PERFORMANCE OF WPC.
Our ability to achieve our investment objectives and to pay distributions is
dependent upon the performance of WPC in the acquisition of investments, the
selection of tenants, the determination of any financing arrangements, and upon
the management of the assets. Shareholders must rely entirely on the management
ability of WPC and the oversight of the board of directors.
WPC MAY BE SUBJECT TO CONFLICTS OF INTEREST.
WPC manages our business and selects our real estate investments. WPC has some
conflicts of interest in its management of us, which arise primarily from the
involvement of WPC and its affiliates in other activities that may conflict with
us and the payment of fees by us to WPC and its affiliates. The activities in
which a conflict could arise between us and WPC are:
- competition with certain affiliates for property acquisitions, which
may cause WPC and its affiliates to direct properties suitable for
us to other related entities;
- the receipt of compensation by WPC and its affiliates for property
purchases, leases, sales and financing for us, which may cause WPC
and its affiliates to engage in transactions that generate higher
fees, rather than transactions that are more appropriate or
beneficial for our business;
- agreements between us and WPC or any of its affiliates, including
agreements regarding compensation of WPC and its affiliates, will
not be negotiated on an arm's length basis as would occur if the
agreements were with unaffiliated third parties;
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CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
- purchases and loans from affiliates, subject to our investment
procedures, objectives and policies, which will increase fees and
interest payable to affiliates, thereby decreasing our net income
and possibly causing us to incur higher leverage levels; and
- disposition, incentive and termination fees, which are based on the
sale price of properties, may cause a conflict between the advisor's
desire to sell a property and our plans to hold or sell the
property.
Inherent in these transactions is the conflict of interest that arises due to
the potential impact of the transaction on the amount of fees received by WPC
and/or its affiliates and the distributions to shareholders.
MARYLAND LAW COULD RESTRICT CHANGE IN CONTROL.
Provisions of Maryland law applicable to us prohibit business combinations with:
- any person who beneficially owns 10% or more of the voting power of
outstanding shares;
- an affiliate who, at any time within the two-year period prior to
the date in question, was the beneficial owner of 10% or more of the
voting power of our outstanding shares, referred to as an interested
shareholder; or
- an affiliate of an interested shareholder.
These prohibitions last for five years after the most recent date on which the
interested shareholder became an interested shareholder. Thereafter, any
business combination must be recommended by our board of directors and approved
by the affirmative vote of at least 80% of the votes entitled to be cast by
holders of our outstanding shares and two-thirds of the votes entitled to be
cast by holders of our shares other than shares held by the interested
shareholder. These requirements could have the effect of inhibiting a change in
control even if a change in control were in our shareholders' interest. These
provisions of Maryland law do not apply, however, to business combinations that
are approved or exempted by our board of directors prior to the time that
someone becomes an interested shareholder.
OUR PARTICIPATION IN JOINT VENTURES CREATES ADDITIONAL RISK.
We may participate in joint ventures and purchase properties jointly with other
entities, some of which may be unaffiliated with us. There are additional risks
involved in these types of transactions. These risks include the potential of
our joint venture partner becoming bankrupt and the possibility of diverging or
inconsistent economic or business interests of us and our partner. These
diverging interests could result in, among other things, exposing us to
liabilities of the joint venture in excess of our proportionate share of these
liabilities. The partition rights of each owner in a jointly owned property
could reduce the value of each portion of the divided property. In addition, the
fiduciary obligation that WPC or our board may owe to our partner in an
affiliated transaction may make it more difficult for us to enforce our rights.
INVESTMENTS IN PROPERTIES OUTSIDE OF THE UNITED STATES SUBJECT US TO FOREIGN
CURRENCY RISKS WHICH MAY IMPACT DISTRIBUTIONS.
We will be subject to foreign currency risk due to potential fluctuations in
exchange rates between foreign currencies and the U.S. dollar. Although we are
not prohibited from doing so, we do not currently intend to engage in direct
hedging activities to mitigate the risks of exchange rate fluctuations. We
attempt to mitigate the risk of currency fluctuation by financing our properties
in the local currency denominations, although there can be no assurance that
this will be effective. As a result, changes in the relation of any such foreign
currency to U.S. dollars will affect our revenues, operating margins and
distributions and may also affect the book value of our assets and the amount of
shareholders' equity. Also, if in the future we were to engage in foreign
currency exchange rate hedging activities, any income recognized with respect to
these hedges (as well as any foreign currency gain recognized with respect to
changes in exchange rates) will generally not qualify as eligible income for
purposes of either the 75% gross income test or the 95% gross income test that
we must satisfy annually in order to qualify and maintain our status as a REIT.
Changes in foreign currency exchange rates used to value the REIT's foreign
assets would be considered changes in the value of the REIT's assets, and
therefore, may adversely affect our status as a REIT. Further, keeping bank
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CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
accounts in foreign currency which are not considered cash or cash equivalents
may adversely affect our status as a REIT.
INTERNATIONAL INVESTMENT RISKS, INCLUDING CURRENCY FLUCTUATION, ADVERSE
POLITICAL OR ECONOMIC DEVELOPMENTS, LACK OF UNIFORM ACCOUNTING STANDARDS
(INCLUDING AVAILABILITY OF INFORMATION IN ACCORDANCE WITH U.S. GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES), UNCERTAINTY OF FOREIGN LAWS AND THE DIFFICULTY
OF ENFORCING CERTAIN OBLIGATIONS IN OTHER COUNTRIES WILL AFFECT OUR OPERATIONS
AND OUR ABILITY TO MAKE DISTRIBUTIONS.
Foreign real estate investments involve certain risks not generally associated
with investments in the United States. These risks include unexpected changes in
regulatory requirements, political and economic instability in certain
geographic locations, potential imposition of adverse or confiscatory taxes,
possible currency transfer restrictions, expropriation, the difficulty in
enforcing obligations in other countries and the burden of complying with a wide
variety of foreign laws. Each of these risks might adversely impact our
performance and or impair our ability to make expected distributions to
shareholders. In addition, there is less publicly available information about
foreign companies and a lack of a uniform financial accounting standards and
practices (including the availability of information in accordance with
accounting principles generally accepted in the United States) which could
impair our ability to analyze transactions and receive timely and accurate
financial information from tenants necessary to meet our reporting obligations
to financial institutions or governmental or regulatory agencies. Certain of
these risks may be greater in emerging markets and less developed countries.
THIS IS THE FIRST REIT MANAGED BY WPC THAT HAS A SIGNIFICANT FOCUS ON
INTERNATIONAL INVESTMENTS.
We and our manager have no experience managing a REIT whose focus is on making a
significant percentage of its investments outside of the United States. Our lack
of international investing experience could cause a delay in investing funds,
increased investment expenses or lower quality investments than anticipated, and
therefore could adversely affect our revenues and distributions to shareholders.
A DELAY IN INVESTING FUNDS MAY ADVERSELY AFFECT OR CAUSE A DELAY IN OUR ABILITY
TO DELIVER EXPECTED RETURNS TO INVESTORS AND MAY ADVERSELY AFFECT OUR
PERFORMANCE.
We have not yet identified all of the properties to be purchased with the
proceeds of our current "best efforts" Offering. There could be a substantial
delay in time before all offering proceeds are invested by us. This delay could
be magnified if we recommence a new offering of shares, as is currently
anticipated. This could cause a substantial delay in the time it takes for an
investment to realize its full potential return, and could adversely affect a
shareholder's return.
SHAREHOLDERS' EQUITY INTERESTS MAY BE DILUTED.
If shares of our stock are sold in a future offering, the equity interest of
shareholders may be diluted. Because investors will pay the same price per share
during any future offering, the value of shares acquired by current shareholders
will be diluted upon the purchase of shares by shareholders purchasing
subsequently if investments already acquired have appreciated in value.
Conversely, if investments acquired by us have depreciated in value, the value
of the shares purchased in any later offering will be diluted immediately upon
the purchase of the shares. Also, our advisor has the right to receive certain
fees in the form of shares of our common stock, in lieu of cash. In the event a
significant number of shares are sold to our advisor at discount prices, the
value of shares purchased by others in any later offerings may be diluted.
WE MAY INCUR COSTS TO FINISH BUILD-TO-SUIT PROPERTIES.
We may sometimes acquire undeveloped or partially developed land parcels for the
purpose of owning to-be-built facilities for a prospective tenant. Often,
completion risk, cost overruns and on-time delivery are the obligations of the
prospective tenant. To the extent that the tenant or the third-party developer
experiences financial difficulty or other complications during the construction
process, we may be required to incur project costs to complete all or part of
the project within a specified time frame. The incurrence of these costs or the
non-occupancy by the tenant may reduce the project's and our portfolio's
returns.
WE MAY FACE COMPETITION FOR ACQUISITION OF PROPERTIES.
We face competition for the acquisition of office and industrial properties in
general, and such properties not leased to major corporations in particular,
from insurance companies, credit companies, pension funds, private individuals,
investment companies and other REITs. We also face competition from institutions
that provide or arrange for other types of commercial financing through private
or public offerings of equity or debt or traditional bank financings.
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CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
THE NET ASSET VALUE WILL BE BASED ON INFORMATION THAT OUR ADVISOR PROVIDES TO A
THIRD PARTY.
Our asset management and performance fees are based on an annual third party
valuation of our real estate. Any valuation includes the use of estimates and
our valuations may be influenced by the information provided by the advisor.
Because net asset value is an estimate and can change as interest rate and real
estate markets fluctuate, there is no assurance that a shareholder will realize
net asset value in connection with any liquidity event.
(d) FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
See Note 13 of the Consolidated Financial Statements for financial data
pertaining to our segment and geographic operations.
(e) AVAILABLE INFORMATION
All filings we make with the SEC, including our Annual Report on Form 10-K, our
Quarterly Reports on Form 10-Q, and our Current Reports on Form 8-K, and any
amendments, are available for free on our website as soon as reasonably
practicable after they are filed or furnished to the SEC. Our website address is
http://www.cpa16global.com. Our SEC filings are available to be read or copied
at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C.
20549. Information regarding the operation of the Public Reference Room can be
obtained by calling the SEC at 1-800-SEC-0330. Our filings can also be obtained
for free on the SEC's Internet site at http://www.sec.gov. The reference to our
website address does not constitute incorporation by reference of the
information contained on our website in this Report or other filings with the
SEC, and the information contained on our website is not part of this document.
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CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
Item 2. Properties.
Set forth below is certain information relating to CPA(R):16 - Global's property
owned as of December 31, 2004.
RENT PER SHARE OF
LEASE OBLIGOR/ SQUARE SQUARE CURRENT
LOCATION OWNERSHIP INTEREST FOOTAGE FOOT ANNUAL RENTS (1)
- ---------------------------------------------- ----------------------------- --------- -------- ----------------
U-HAUL MOVING PARTNERS AND MERCURY
PARTNERS, LP (2)
Mercury Partners, LP - 30.77% Interest in a limited
78 Locations in 24 States partnership owning land and
buildings (6) 3,779,262 4.91 5,708,178
U-Haul Moving Partners -
78 Locations in 24 States 2,035,000 4.91 3,073,923
--------- ---------
Total: 5,814,262 8,782,101
THALES, S.A. (2)
Aubagne, Conflan St. Honorine, Ymare, 35% interest in a limited
Laval, France liability company owning land
and buildings (6) 1,209,129 4.48 1,895,914 (4)
Guyancourt, France 410,483 13.74 1,973,655 (4)
--------- ---------
Total: 1,619,612 3,869,569
HUNTSMAN, LLC (3) 100%
The Woodlands, TX 282,000 12.43 3,545,000
FOSS MANUFACTURING COMPANY, INC. (2) 100%
Hampton, NH (2) 528,010 6.05 3,194,565
TIETOENATOR PLC (2)
Espoo, Finland 40% interest in a limited
liability company owning land
and buildings (6) 466,483 16.52 3,082,520 (4)
PLY GEM INDUSTRIES, INC. (2) 100%
Kearney, MO; Fair Bluff, NC; York, NE;
Walbridge, OH; Middlesex Twnsp, PA; Rocky
Mount, VA; Martinsburg, WV Middlesex
Twnsp, PA 1,554,396 1.92 2,980,575
POLESTAR PETTY LIMITED (2) 100%
Leeds, United Kingdom 199,618 11.38 2,272,417 (4)
PLANTASJEN ASA(2) 100%
Vantaa, Finland 91,145 16.17 1,474,105 (4)
Tornby, Linkoping, Sweden 58,770 11.98 704,124 (4)
--------- ---------
Total: 149,915 2,178,229
XPEDITE SYSTEMS, INC. (2) 100%
Tinton Falls, NJ 90,008 15.50 1,395,000
CASTLE ROCK INDUSTRIES, INC. (2) 100%
Chandler, AZ; Englewood, CO 357,229 3.72 1,327,620
ACTUANT CORPORATION (2) 50% interest in a limited
partnership owning land and
buildings (6)
Kahl am Main, Germany 305,692 5.83 891,116 (4)
CWD WINDOWS AND DOORS, INC. (2) 100%
Calgary, Alberta, Canada 302,884 2.29 692,329 (4)
LEASE OBLIGOR/ INCREASE LEASE MAXIMUM
LOCATION FACTOR TERM TERM
- ---------------------------------------------- ----------- ---------- ----------
U-HAUL MOVING PARTNERS AND MERCURY
PARTNERS, LP (2)
Mercury Partners, LP -
78 Locations in 24 States
CPI April 2024 April 2034
U-Haul Moving Partners -
78 Locations in 24 States CPI April 2014 April 2034
Total:
THALES, S.A. (2)
Aubagne, Conflan St. Honorine, Ymare,
Laval, France
INSEE (5) Dec. 2011 Dec. 2020
Guyancourt, France INSEE (5) Dec. 2010 Dec. 2019
Total:
HUNTSMAN, LLC (3)
The Woodlands, TX Aug. 2005 Aug. 2042
FOSS MANUFACTURING COMPANY, INC. (2)
Hampton, NH (2) CPI Aug. 2024 Aug. 2044
TIETOENATOR PLC 2
Espoo, Finland
Finnish
CPI Dec. 2016 Dec. 2031
PLY GEM INDUSTRIES, INC. (2)
Kearney, MO; Fair Bluff, NC; York, NE;
Walbridge, OH; Middlesex Twnsp, PA; Rocky
Mount, VA; Martinsburg, WV Middlesex
Twnsp, PA CPI Aug. 2024 Aug. 2044
POLESTAR PETTY LIMITED (2)
Leeds, United Kingdom Stated May 2029 May 2029
PLANTASJEN ASA(2)
Vantaa, Finland Finnish CPI Aug, 2024 Aug. 2044
Tornby, Linkoping, Sweden Swedish CPI Aug. 2029 Aug. 2049
Total:
XPEDITE SYSTEMS, INC. (2)
Tinton Falls, NJ Stated June 2016 June 2026
CASTLE ROCK INDUSTRIES, INC. (2)
Chandler, AZ; Englewood, CO CPI June 2024 June 2044
ACTUANT CORPORATION (2)
Kahl am Main, Germany German CPI Jan. 2021 Jan. 2031
CWD WINDOWS AND DOORS, INC. (2)
Calgary, Alberta, Canada CPI Aug. 2024 Sept. 2044
1. Share of Current Annual Rents is the product of the Square Footage, the
Rent per Square Foot, and the Ownership Interest percentage. Rents are
collected in local currency and dollar amount is based on conversion rate
at December 31, 2004.
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CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
2. This property is encumbered by a mortgage note payable.
3. Build-to-suit commitment. Initial annual rent is based on our share of
estimated construction costs of $36,925 and will commence when
construction is completed.
4. Based on exchange rates at December 31, 2004.
5. INSEE construction index, an index published quarterly by the French
Government.
6. Remaining interest in this property is owned by an affiliate(s).
Item 3. Legal Proceedings.
In March 2004, following a broker-dealer examination of Carey Financial, the
wholly-owned broker-dealer subsidiary of WPC, by the staff of the SEC, Carey
Financial received a letter from the staff of the SEC alleging certain
infractions by Carey Financial of the Securities Act of 1933, the Securities
Exchange Act of 1934, the rules and regulations thereunder and those of the
National Association of Securities Dealers, Inc. ("NASD").
The staff alleged that in connection with a public offering of shares of CPA(R):
15, Carey Financial and its retail distributors sold certain securities without
an effective registration statement and failed to make certain disclosures. In
the event the SEC pursues these allegations, or if affected CPA(R): 15 investors
bring a similar private action, CPA(R): 15 might be required to offer the
affected investors the opportunity to receive a return of their investment. It
cannot be determined at this time if, as a consequence of investor funds being
returned by CPA(R): 15, Carey Financial would be required to return to CPA(R):
15 the commissions paid by CPA(R): 15 on purchases actually rescinded. Further,
as part of any action against WPC, the SEC could seek disgorgement of any such
commissions or different or additional penalties or relief, including without
limitation, injunctive relief and/or civil monetary penalties, irrespective of
the outcome of any rescission offer. The potential effect such a rescission
offer or SEC action may ultimately have on the operations of WPC, Carey
Financial or the REITs managed by WPC, cannot be predicted at this time.
In June 2004, the Division of Enforcement of the SEC ("Enforcement Staff")
commenced an investigation into compliance with the registration requirements of
the Securities Act of 1933 in connection with the public offerings of shares of
CPA(R): 15 during 2002 and 2003. In December 2004, the scope of the Enforcement
Staff's inquiries broadened to include broker-dealer compensation arrangements
in connection with CPA(R): 15 and other REITs managed by WPC, as well as the
disclosure of such arrangements. At that time WPC and Carey Financial received a
subpoena from the Enforcement Staff seeking documents relating to payments by
WPC, Carey Financial, and REITs managed by WPC to (or requests for payment
received from) any broker-dealer, excluding selling commissions and selected
dealer fees. WPC and Carey Financial subsequently received additional subpoenas
and requests for information from the Enforcement Staff seeking, among other
things, information relating to any revenue sharing agreements or payments
(defined to include any payment to a broker-dealer, excluding selling
commissions and selected dealer fees) made by WPC, Carey Financial or any REIT
managed by WPC in connection with the distribution of REITs managed by WPC or
the retention or maintenance of REIT assets. Other information sought by the SEC
includes information concerning the accounting treatment and disclosure of any
such payments, communications with third parties (including other REIT issuers)
concerning revenue sharing, and documents concerning the calculation of
underwriting compensation in connection with the REIT offerings under applicable
NASD rules.
In response to the Enforcement Staff's subpoenas and requests, WPC and Carey
Financial have produced documents relating to payments made to certain
broker-dealers both during and after the offering process, for certain of the
REITs managed by WPC (including Corporate Property Associates 10 Incorporated,
CIP(R), CPA(R): 12, CPA(R): 14, and CPA(R): 15), in addition to selling
commissions and selected dealer fees. The expenses associated with these
payments, which were made during the period from early 2000 through the end of
2003, were borne by the REITs. WPC is continuing to gather information relating
to these types of payments made to broker-dealers and supply it to the SEC.
WPC, Carey Financial and the REITs, are cooperating fully with this
investigation and are in the process of providing information to the Enforcement
Staff in response to the subpoenas and requests. Although no regulatory action
has been initiated against WPC or Carey Financial in connection with the matters
being investigated, it is possible that the SEC may pursue an action against
either WPC or Carey Financial in the future. The potential
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CORPORATE PROPERTY ASSOCIATES 16-GLOBAL INCORPORATED
timing of any such action and the nature of the relief or remedies the SEC may
seek cannot be predicted at this time. If such an action is brought, it could
have a material adverse effect on WPC and the REITs managed by WPC.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the fourth quarter of the year ended December 31,
2004 to a vote of security holders, through the solicitation of proxies or
otherwise.
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CORPORATE PROPERTY ASSOCIATES 16-GLOBAL INCORPORATED
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
Information with respect to our common equity is hereby incorporated by
reference to page 33 of our Annual Report contained in Appendix A.
ITEM 6. SELECTED FINANCIAL DATA.
Selected Financial Data are hereby incorporated by reference to page 2 of our
Annual Report contained in Appendix A.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Management's Discussion and Analysis are hereby incorporated by reference to
pages 3 to 12 of our Annual Report contained in Appendix A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
(In thousands)
Market risk is the exposure to loss resulting from changes in interest rates,
credit spreads, foreign currency exchange rates and equity prices. In pursuing
our business plan, the primary market risks to which we are exposed are interest
rate and foreign currency exchange rate risks.
INTEREST RATE RISK
The value of our real estate is subject to fluctuations based on changes in
interest rates, local and regional economic conditions and changes in the
creditworthiness of lessees, and which may affect our ability to refinance our
debt when balloon payments are scheduled.
All of our $97,691 of long-term debt bears interest at fixed rates, and
therefore the fair value of these instruments is affected by changes in the
market interest rates. The following table presents principal cash flows based
upon expected maturity dates of the debt obligations and the related
weighted-average interest rates by expected maturity dates for the fixed rate
debt. The interest rates on fixed rate debt as of December 31, 2004 ranged from
4.81% to 6.6%
2005 2006 2007 2008 2009 Thereafter Total Fair Value
--------- --------- --------- ---------- -------- ------------ -------- ----------
Fixed rate debt $ 1,839 $ 2,110 $ 2,276 $ 2,452 $ 2,673 $ 86,341 $ 97,691 $ 96,377
Weighted average interest rate 5.94% 6.03% 5.85% 5.96% 5.98% 5.98%
A change in interest rates of 1% would not have an effect on annual interest
expense as we have no variable rate debt. A change in interest rates of 1% would
impact the fair value of our fixed rate debt at December 31, 2004 by
approximately $7,070.
At December 31, 2004, we own $69,900 of auction-rate securities which are
long-term securities that provide a resetting of their interest rate at
intervals (typically ranging between weekly and semi-annually) and provide a
market mechanism which allows a holder to sell at the interest reset date.
Because of the interest reset, auction-rate securities are priced and traded as
short-term investments. There is no assurance that an auction-rate security will
be sold at par nor can sellers force issuers to redeem if sell orders exceed buy
orders at an interest rate reset date.
Although we have not experienced any credit losses on investments in loan
participations, in the event of a significant rising interest rate environment
and/or economic downturn, loan defaults could increase and result in us
recognizing credit losses, which could adversely affect our liquidity and
operating results. Further, such defaults could have an adverse effect on the
spreads between interest earning assets and interest bearing liabilities.
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CORPORATE PROPERTY ASSOCIATES 16-GLOBAL INCORPORATED
FOREIGN CURRENCY EXCHANGE RATE RISK
We have foreign operations in the United Kingdom, France, Finland, Germany,
Sweden and Canada and as such are subject to risk from the effects of exchange
rate movements of foreign currencies, which may affect future costs and cash
flows. The majority of our foreign operations for the preceeding year were
conducted in the Euro. For all currencies we are a net receiver of the foreign
currency (we receive more cash then we pay out) and therefore we benefit from a
weaker U.S. dollar and are adversely affected by a stronger U.S. dollar relative
to the foreign currency. Net realized and unrealized foreign currency
translation gains of $18 are included in the accompanying consolidated financial
statements for the year ended December 31, 2004.
To date, we have not entered into any foreign currency forward exchange
contracts to hedge the effects of adverse fluctuations in foreign currency
exchange rates.
Scheduled future minimum rents, exclusive of renewals, under non-cancelable
leases resulting from our foreign operations are as follows:
2005 2006 2007 2008 2009 Thereafter Total
------ ------ ------ ------ ------ ---------- --------
Rental income (1) $ 227 $ 227 $ 227 $ 227 $ 227 $ 3,325 $ 4,460
Interest income from direct
financing leases (1) 4,841 4,899 4,959 5,019 5,082 105,374 130,174
Scheduled principal payments for the mortgage notes payable during each of the
next five years following December 31, 2004, and thereafter, from our foreign
operations are as follows:
2005 2006 2007 2008 2009 Thereafter Total
------ ------ ------ ------ ------ ---------- --------
Fixed rate debt (1) $ 493 $ 679 $ 753 $ 840 $ 949 $ 40,035 $ 43,749
(1) Based on the applicable December 31, 2004 exchange rate.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following consolidated financial statements and supplementary data are
hereby incorporated by reference to pages 13 to 32 of our Annual Report
contained in Appendix A:
(i) Report of Independent Registered Public Accounting Firm.
(ii) Consolidated Balance Sheets at December 31, 2004 and 2003.
(iii) Consolidated Statements of Operations at December 31, 2004 and for the
period from inception (June 5, 2003) to December 31, 2003.
(iv) Consolidated Statements of Shareholder's Equity at December 31, 2004 and
for the period from inception (June 5, 2003) to December 31, 2003.
(v) Consolidated Statements of Cash Flows at December 31, 2004 and for the
period from inception (June 5, 2003) to December 31, 2003.
(vi) Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
ITEM 9A. CONTROLS AND PROCEDURES.
Our co-chief executive officers and chief financial officer have conducted a
review of our disclosure controls and procedures as of December 31, 2004.
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CORPORATE PROPERTY ASSOCIATES 16-GLOBAL INCORPORATED
Our disclosure controls and procedures include our controls and other procedures
designed to ensure that information required to be disclosed in this and other
reports filed under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") is accumulated and communicated to our management, including our
Co-Chief Executive Officers and Chief Financial Officer, to allow timely
decisions regarding required disclosure and to ensure that such information is
recorded, processed, summarized and reported, within the required time periods.
Based upon this review, our Co-Chief Executive Officers and Chief Financial
Officer have concluded that our disclosure controls (as defined in Rule
13a-14(c) under the Exchange Act) are sufficiently effective to ensure that the
information required to be disclosed by us in the reports we file under the
Exchange Act is recorded, processed, summarized and reported within the required
time periods.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act). Internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America.
Our internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of our
assets; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America, and
that our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of our assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
We assessed the effectiveness of our internal control over financial reporting
as of December 31, 2004. In making this assessment, we used criteria set forth
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on our assessment, we
concluded that, as of December 31, 2004, our internal control over financial
reporting is effective based on those criteria.
Our assessment of the effectiveness of internal control over financial reporting
as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm who also audited our consolidated
financial statements included in Item 8, as stated in their report in Item 8.
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CORPORATE PROPERTY ASSOCIATES 16-GLOBAL INCORPORATED
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
This information will be contained in our definitive Proxy Statement with
respect to our Annual Meeting of Shareholders, to be filed with the Securities
and Exchange Commission within 120 days following the end of our fiscal year,
and is hereby incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION.
This information will be contained in our definitive Proxy Statement with
respect to our Annual Meeting of Shareholders, to be filed with the Securities
and Exchange Commission within 120 days following the end of our fiscal year,
and is hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
This information will be contained in our definitive Proxy Statement with
respect to our Annual Meeting of Shareholders, to be filed with the Securities
and Exchange Commission within 120 days following the end of our fiscal year,
and is hereby incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
This information will be contained in our definitive Proxy Statement with
respect to our Annual Meeting of Shareholders, to be filed with the Securities
and Exchange Commission within 120 days following the end of our fiscal year,
and is hereby incorporated by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
This information will be contained in our definitive Proxy Statement with
respect to our Annual Meeting of Shareholders, to be filed with the Securities
and Exchange Commission within 120 days following the end of our fiscal year,
and is hereby incorporated by reference.
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CORPORATE PROPERTY ASSOCIATES 16-GLOBAL INCORPORATED
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a) 1. Consolidated Financial Statements:
The following consolidated financial statements are filed as a part of this
Report:
Report of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets at December 31, 2004 and 2003.
Consolidated Statements of Operations for the year ended December 31, 2004 and
for the period from inception (June 5, 2003) to December 31, 2003.
Consolidated Statements of Shareholders' Equity for the year ended December 31,
2004 and for the period from inception (June 5, 2003) to December 31, 2003.
Consolidated Statements of Cash Flows for the year ended December 31, 2004 and
for the period from inception (June 5, 2003) to December 31, 2003.
Notes to Consolidated Financial Statements.
The Consolidated Financial Statements are hereby incorporated by reference to
pages 13 to 32 of our Annual Report contained in Appendix A.
(a) 2. Financial Statements of Material Equity Investees:
UH Storage (DE) Limited Partnership
Report of Independent Registered Public Accounting Firm.
Balance Sheet at December 31, 2004.
Statement of Income for the year ended December 31, 2004.
Statement of Partners' Capital for the year ended December 31, 2004.
Statement of Cash Flows for the year ended December 31, 2004.
Notes to Financial Statements.
Schedule III - Real Estate and Accumulated Depreciation as of December 31,
2004 of UH Storage (DE) Limited Partnership.
The financial statements of the material equity investee are contained herewith
in Item 15 on pages 1 to 9.
The separate financial statements of material equity investees have been audited
as of December 31, 2004 and for the year then ended in accordance with Rule 3-09
of Regulation S-X.
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CORPORATE PROPERTY ASSOCIATES 16-GLOBAL INCORPORATED
(a) 3. Financial Statement Schedules:
The following schedules are filed as a part of this Report:
Report of Independent Registered Public Accounting Firm.
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 2004.
Schedule III is contained on pages 14 to 16 of this Form 10-K.
Schedule IV - Mortgage Loans on Real Estate.
Schedule IV is contained on page 17 of this Form 10-K.
Financial Statement Schedules other than those listed above are omitted because
the required information is given in the Consolidated Financial Statements,
including the Notes thereto, or because the conditions requiring their filing do
not exist.
-26-
Report of Independent Registered
Public Accounting Firm
To the Members of
UH STORAGE (DE) LIMITED PARTNERSHIP:
In our opinion, the financial statements listed in the index appearing under
Item 15(a)(2) present fairly, in all material respects, the financial position
of UH STORAGE (DE) LIMITED PARTNERSHIP at December 31, 2004 and the results of
its operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedules listed in the index
appearing under Item 15(a)(2) present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audit. We conducted our audit of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
March 15, 2005
-1-
UH STORAGE (DE) LIMITED PARTNERSHIP
BALANCE SHEET
December 31, 2004
2004
------------
ASSETS:
Land $ 69,080,000
Buildings, net of accumulated depreciation of $3,348,303 185,733,665
Intangible assets, net of accumulated amortization of $1,877,609 52,711,146
Cash and cash equivalents 375,697
Escrow and restricted funds 40,831,750
Other assets 2,150,000
------------
Total assets 350,882,258
============
LIABILITIES and PARTNERS' CAPITAL:
Liabilities:
Mortgage notes payable 181,380,837
Accrued interest payable 1,007,263
Accounts payable and accrued expenses 230,241
Deposits held by lender 22,849,417
Tenant security deposits 7,150,000
Prepaid rent 7,135,279
------------
Total liabilities 219,753,037
------------
Partners' Capital
General partner 656,131
Limited partners 130,473,090
------------
131,129,221
------------
Total liabilities and partners' capital $350,882,258
============
The accompanying notes are an integral part of these financial statements.
-2-
UH STORAGE (DE) LIMITED PARTNERSHIP
STATEMENT OF INCOME
For the year ended December 31, 2004
2004
-----------
Revenue:
Rental income $19,196,833
-----------
19,196,833
-----------
Expenses:
Depreciation and amortization of intangibles 5,225,911
General and administrative 254,454
Property expense 5,298
-----------
5,485,663
-----------
Income before other interest income and
interest expense 13,711,170
-----------
Other interest income 4,540
Interest expense on mortgages (8,066,350)
-----------
Net income $ 5,649,360
===========
The accompanying notes are an integral part of these financial statements.
UH STORAGE (DE) LIMITED PARTNERSHIP
STATEMENT OF PARTNERS' CAPITAL
For the year ended December 31, 2004
General Partner Limited Partners Total
--------------- ---------------- ------------
Balance, January 1, 2004 $ 487 $ - $ 487
Contributions 661,827 131,703,571 132,365,398
Distributions (34,430) (6,851,594) (6,886,024)
Net income 28,247 5,621,113 5,649,360
--------------- ---------------- ------------
Balance, December 31, 2004 $ 656,131 $ 130,473,090 $131,129,221
=============== ================ ============
The accompanying notes are an integral part of these financial statements.
-3-
UH STORAGE (DE) LIMITED PARTNERSHIP
STATEMENT OF CASH FLOWS
For the year ended December 31, 2004
2004
-------------
Cash flows from operating activities:
Net income $ 5,649,360
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 5,225,912
Increase in escrow and restricted funds (10,831,750)
Increase in prepaid rent and security deposits 7,135,279
Increase in accrued interest payable 1,007,263
Net change in other operating assets and liabilities (2,104,935)
-------------
Net cash provided by operating activities 6,081,129
-------------
Cash flows from investing activities:
Purchase of real estate assets (312,750,723)
-------------
Net cash used in investing activities (312,750,723)
-------------
Cash flows from financing activities:
Distributions paid (6,886,024)
Capital contributions 132,365,398
Proceeds from mortgage 183,000,000
Payment of mortgage principal (1,619,163)
-------------
Net cash provided by financing activities 306,860,211
-------------
Net increase in cash and cash equivalents 190,617
Cash and cash equivalents, beginning of year 185,080
-------------
Cash and cash equivalents, end of year $ 375,697
=============
The accompanying notes are an integral part of these financial statements.
-4-
UH STORAGE (DE) LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
1. Organization and Business:
UH Storage (DE) Limited Partnership (the "Partnership") was formed in Delaware
on May 13, 2003 as a limited partnership company. The Partnership had no
significant operations until April 2004.
The Partnership's business consists of the leasing of 78 self-storage and truck
rental facilities to U-Haul Moving Partners, Inc.("Moving Partners") and Mercury
Partners LP ("Mercury")(collectively "UHaul") pursuant to master net leases with
each lessee. The Mercury lease has an initial term of 20 years with two ten-year
renewal options and provides for annual rent of $18,551,115. The Moving
Partner's lease has an initial term of ten years with two ten-year renewal
options and provides for annual rent of $9,990,000. In the event that Moving
Partners does not renew its lease, Mercury will assume the lease obligations of
Moving Partners, including any renewal terms. The leases provide for rent
increases every five years based on a formula indexed to the Consumer Price
Index.
2. Summary of Significant Accounting Policies:
Use of Estimates:
Amounts presented for the period from inception (May 13, 2003) to December 31,
2003 are unaudited. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Real Estate Leased to Others:
Real estate is leased to others on a net lease basis, whereby the tenants are
generally responsible for all operating expenses relating to the property,
including property taxes, insurance, maintenance, repairs, renewals and
improvements. Expenditures for maintenance and repairs including routine
betterments are charged to operations as incurred. Significant renovations,
which increase the useful life of the properties, are capitalized.
The leases are accounted for under the operating method, that is real estate is
recorded at cost less accumulated depreciation, rental revenue is recognized on
a straight-line basis over the term of the leases and expenses (including
depreciation) are charged to operations as incurred.
In connection with the Partnership's acquisition of properties, purchase costs
were allocated to the tangible and intangible assets and liabilities acquired
based on their estimated fair values. The value of the tangible assets,
consisting of land, buildings and tenant improvements, are determined as if
vacant. Intangible assets including the above-market value of leases, the value
of in-place leases and the value of tenant relationships are recorded at their
relative fair values. No value was attributed to above-market value of leases.
The total amount of other intangible assets was allocated to in-place lease
values and tenant relationship intangible values based on management's
evaluation of the specific characteristics of each tenant's lease and the
Partnership's overall relationship with each tenant. Characteristics considered
in allocating these values included the tenant, the tenant's credit quality and
the expectation of lease renewals among other factors. Third party appraisals or
management's estimates were used to determine these values.
Factors considered in the analysis included the estimated carrying costs of the
property during a hypothetical expected lease-up period, current market
conditions and costs to execute similar leases. The Partnership also considered
information obtained about a property in connection with its pre-acquisition due
diligence. Estimated carrying costs include real estate taxes, insurance, other
property operating costs and estimates of lost rentals at market rates during
the hypothetical expected lease-up periods, based on management's assessment of
specific market conditions. Estimated costs to execute leases including
commissions and legal costs to the extent that such costs were not already
incurred with a new lease that has been negotiated in connection with the
purchase of the property are also considered.
5
UH STORAGE (DE) LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Continued)
The value of in-place leases are amortized to expense over the remaining initial
term of each lease. The value of tenant relationship intangibles will be
amortized to expense over the initial and renewal terms of the leases but no
amortization period for intangible assets will exceed the remaining depreciable
life of the building.
Depreciation is computed using the straight-line method over the estimated
useful life of the properties - 40 years.
When events or changes in circumstances indicate that the carrying amount of a
long-lived asset may not be recoverable, the Partnership assesses the
recoverability of its long-lived assets, including residual interests of real
estate assets and investments, based on projections of undiscounted cash flows,
without interest charges, over the life of such assets. In the event that such
cash flows are insufficient, the assets are adjusted to their estimated fair
value.
Cash Equivalents:
The Partnership considers all short-term highly liquid investments that are both
readily convertible to cash and have a maturity of three months or less at the
time of purchase to be cash equivalents. Items classified as cash equivalents
may include commercial paper and money market funds. Substantially all of the
Partnership's cash and cash equivalents at December 31, 2004 and 2003 were held
in the custody of one financial institution and which balance, at times,
exceeded federally insurable limits. The Partnership mitigates this risk by
depositing funds with a major financial institution.
Restricted Funds and Deposits Held:
The Partnership maintains certain cash balances which represent funds received
from lessees which will be released upon the lessees meeting certain financial
ratios in accordance with the lease agreements or at the end of the lease term,
provided that all lease provisions have been met. Such cash balances are
recorded as escrow and restricted funds with the related obligation recorded as
deposits held by lender in the acPartnershiping balance sheet. In addition,
certain balances are restricted as they are held by the lender in accordance
with the mortgage agreements. Such balances consist primarily of required
deposits for which a portion will be released to the Partnership periodically in
the ordinary course of business.
Impairments:
When events or changes in circumstances indicate that the carrying amount may
not be recoverable, the Partnership assesses the recoverability of its
long-lived assets and certain intangible assets based on projections of
undiscounted cash flows, without interest charges, over the life of such assets.
In the event that such cash flows are insufficient, the assets are adjusted to
their estimated fair value. The Partnership performs a review of its estimate of
residual value of its direct financing leases at least annually to determine
whether there has been an other than temporary decline in the Partnership's
current estimate of residual value of the underlying real estate assets (i.e.,
the estimate of what the Partnership could realize upon sale of the property at
the end of the lease term). If the review indicates a decline in residual value
that is other than temporary, a loss is recognized and the accounting for the
direct financing lease will be revised to reflect the decrease in the expected
yield using the changed estimate, that is, a portion of the future cash flow
from the lessee will be recognized as a return of principal rather than as
revenue.
Investments in unconsolidated joint ventures are accounted for under the equity
method and are recorded initially at cost, as equity investments and are
subsequently adjusted for our proportionate share of earnings and cash
contributions and distributions. On a periodic basis, we assess whether there
are any indicators that the value of equity investments may be impaired and
whether or not that impairment is other than temporary. To the extent an other
than temporary impairment has occurred, the charge is measured as the excess of
the carrying amount of the investment over the fair value of the investment.
When the Partnership identifies assets as held for sale, it discontinues
depreciating the assets and estimates the sales price, net of selling costs, of
such assets. If in the Partnership's opinion, the net sales price of the assets
which have been identified for sale is less than the net book value of the
assets, an impairment charge is recognized and a valuation allowance is
established. To the extent that a purchase and sale agreement has been entered
into, the allowance is based on the negotiated sales price. To the extent that
the Partnership has adopted a plan to sell an asset but has not entered into a
sales agreement, it will make judgments of the net sales price based on current
market information. Accordingly, the initial assessment may be greater or less
than the purchase price subsequently committed to and may result in a further
adjustment to the fair value of the property. If circumstances arise that
6
UH STORAGE (DE) LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Continued)
previously were considered unlikely and, as a result, the Partnership decides
not to sell a property previously classified as held for sale, the property is
reclassified as held and used. A property that is reclassified is measured and
recorded individually at the lower of (a) its carrying amount before the
property was classified as held for sale, adjusted for any depreciation expense
that would have been recognized had the property been continuously classified as
held and used, (b) the fair value at the date of the subsequent decision not to
sell, or (c) the current carrying value.
Income Taxes:
As a partnership, we are not liable for federal taxes as each partner
recognizes its proportionate share of income in its tax return. Accordingly, no
provision for federal income taxes is recognized.
3. Real Estate Leased to Others Accounted for Under the Operating Method:
Scheduled future minimum rents, exclusive of renewals and expenses paid by
tenants, under non-cancelable operating leases are approximately as follows:
Year Ending December 31,
- ------------------------
2005 $ 28,541,115
2006 28,541,115
2007 28,541,115
2008 28,541,115
2009 28,541,115
Thereafter through 2024 428,116,740
No contingent rents were recognized for the year ended December 31, 2004.
4. Intangible Assets:
In connection with its acquisition of properties, the Partnership has recorded
lease intangibles of $54,588,755, which are being amortized over periods ranging
from 20 years to 40 years.
Intangible assets are summarized as follows:
DECEMBER 31, 2004
-----------------
Lease intangibles
In-place lease $ 51,440,894
Tenant relationship 3,147,861
Less: accumulated amortization (1,877,609)
------------
$ 52,711,146
============
Amortization of intangibles was $1,877,609 for the year ended December 31, 2004.
Scheduled annual amortization of intangibles for each of the next five years is
$2,650,742.
5. Mortgage Notes Payable:
The Partnership's mortgage notes payable are collateralized by deeds of trust
and lease assignments on 77 properties, and bear interest at an annual rate of
6.449%. A balloon payment of $144,298,864 is scheduled in May 2014.
Scheduled principal payments during each of the next five years following
December 31, 2004 and thereafter are as follows:
Year Ending December 31,
- ------------------------
2005 $ 2,986,966
2006 3,188,231
2007 3,403,058
2008 3,600,137
7
UH STORAGE (DE) LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Continued)
2009 3,874,941
Thereafter through 2014 164,327,504
------------
$181,380,837
============
Interest paid was $7,059,087 in 2004.
6. Disclosure About Fair Value of Financial Investments:
The fair value of the Partnership's mortgage notes payable and other assets and
liabilities approximates their carrying value at December 31, 2004. A change in
interest rates at December 31, 2004 of 1% would impact the fair value of our
fixed rate mortgage debt at December 31, 2004 by approximately $7,482,000.
8
UH STORAGE (DE) LIMITED PARTNERSHIP
SCHEDULE III -
REAL ESTATE AND
ACCUMULATED DEPRECIATION
Gross Amount at which Carried
Initial Cost to Partnership at Close of Period
--------------------------------------- ---------------------------------------
Costs Capitalized
Subsequent to
Description Encumbrances Land Buildings Acquisition (a) Land Buildings Total
- --------------------- ------------ ----------- ------------ ------------------ ----------- ------------ ------------
Real Estate Accounted
for Under the
Operating Method:
$181,380,837 $69,080,000 $189,081,968 $ - $69,080,000 $189,081,968 $258,161,968
------------ ----------- ------------ ------ ----------- ------------ ------------
$181,380,837 $69,080,000 $189,081,968 $ - $69,080,000 $189,081,968 $258,161,968
============ =========== ============ ------ =========== ============ ============
Life on which
Depreciation in
Latest Statement
Accumulated Date of Income
Description Depreciation(c) Acquired is Computed
- --------------------- --------------- --------- -----------------
Real Estate Accounted
for Under the
Operating Method:
$3,348,303 4/29/2004 40 years
----------
$3,348,303
==========
(a) At December 31, 2004, the aggregate cost of real estate owned by UH
Storage (DE) Limited partnership for Federal income tax purposes is
$312,750,723.
(b)
Reconciliation of Real Estate
Accounted for Under the Operating Method
December 31, 2004
----------------------------------------
Balance at beginning of year $ -
Additions 189,081,968
------------
Balance at close of year $189,081,968
============
Reconciliation of Accumulated Depreciation
December 31, 2004
------------------------------------------
Balance at beginning of year $ -
Depreciation expense 3,348,303
------------
Balance at close of year $ 3,348,303
============
9
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
(a) 3. Exhibits:
The following exhibits are filed as part of this Report.
Documents other than those designated as being filed herewith
are incorporated herein by reference.
Exhibit No. Description Method of Filing
- ----------- ------------------------------------------------- -------------------------------------------
3.1 Articles of Incorporation of Registrant Exhibit 3.1 to Registration Statement Form
S-11 (No. 333-106838) dated July 3, 2003
3.2 Bylaws of Registrant Exhibit 3.2 to Registration Statement Form
S-11 (No. 333-106838) dated July 3, 2003
4.1 2003 Distribution Reinvestment and Stock Purchase Exhibit 4.1 to Registration Statement Form
Plan of Registrant S-11 (No. 333-106838) dated July 3, 2003
10.1 Selected Dealer Agreement Exhibit 10.1 to Registration Statement
Form S-11 (No. 333-106838) dated July 3,
2003
10.2 Escrow Agreement Exhibit 10.2 Registration Statement Form
S-11 (No. 333-106838) dated July 3, 2003
10.3 Selected Investment Advisor Agreement Exhibit 10.3 to Registration Statement
Form S-11 (No. 333-106838) dated July 3,
2003
10.4 Sales Agency Agreement Exhibit 10.4 to Registration Statement
Form S-11 (No. 333-106838) dated July 3,
2003
10.5 Advisory Agreement Exhibit 10.5 to Registration Statement
Form S-11 (No. 333-106838) dated July 3,
2003
10.6 Wholesaling Agreement Exhibit 10.6 to Registration Statement
Form S-11 (No. 333-106838) dated July 3,
2003
21.1 Subsidiaries Filed herewith
31.1 Rule 15d-14(a) Certification of Co-Chief Executive Filed Herewith
Officers
31.2 Rule 15d-14(a) Certification of Chief Financial Filed Herewith
Officer
32.1 Section 1350 Certification of Co-Chief Executive Filed Herewith
Officers
32.2 Section 1350 Certification of Chief Financial Officer Filed Herewith
10
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
a Maryland corporation
3/15/05 BY: /s/ John J. Park
- --------- ------------------------------------
Date John J. Park
Managing Director and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
3/15/05 BY: /s/ William Polk Carey
- --------- ------------------------------------
Date William Polk Carey
Chairman of the Board Co-Chief Executive Officer and Director
(Co-Principal Executive Officer)
3/15/05 BY: /s/ Gordon F. DuGan
- --------- ------------------------------------
Date Gordon F. DuGan
Vice Chairman of the Board, Co-Chief Executive Officer,
Director,Senior Managing Director and Chief Acquisitions
Officer (Co-Principal Executive Officer)
3/15/05 BY: /s/ Thomas E. Zacharias
- --------- ------------------------------------
Date Thomas E. Zacharias
President
3/15/05 BY: /s/ Elizabeth P. Munson
- --------- ------------------------------------
Date Elizabeth P. Munson
Director
3/15/05 BY: /s/ Warren G. Wintrub
- --------- ------------------------------------
Date Warren G. Wintrub
Director
3/15/05 BY: /s/ John J. Park
- --------- ------------------------------------
Date John J. Park
Managing Director and Chief Financial Officer
3/15/05 BY: /s/ Claude Fernandez
- --------- ------------------------------------
Date Claude Fernandez
Managing Director and Chief Accounting Officer
11
Report of Independent Registered Public Accounting Firm on
Financial Statement Schedules
To the Board of Directors and Shareholders of
Corporate Property Associates 16 - Global Incorporated:
Our audits of the consolidated financial statements, of management's assessment
of the effectiveness of internal control over financial reporting and of the
effectiveness of internal control over financial reporting referred to in our
report dated March 15, 2005 appearing in the 2004 Annual Report to Shareholders
of Corporate Property Associates 16 - Global Incorporated (which report,
consolidated financial statements and assessment are incorporated by reference
in this Annual Report on Form 10-K) also included an audit of the financial
statement schedules listed in Item 15(a)(3) of this Form 10-K. In our opinion,
these financial statement schedules present fairly, in all material respects,
the information set forth therein when read in conjunction with the related
consolidated financial statements.
PricewaterhouseCoopers LLP
New York, New York
March 15, 2005
\
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2004
Initial Cost to Company
-----------------------
Increase
in Net
Description Encumbrances Land Buildings Investment (a)
- --------------------------------- ------------ ----------- ----------- --------------
Operating Method:
Manufacturing facilities leased
to Castle Rock Industries, Inc. $ 9,278,751 $ 3,380,000 $ 8,884,549
Manufacturing facilities leased
to Foss Manufacturing Company,
Inc. 16,836,319 9,800,000 19,960,449
Office building leased to
Xpedite Systems, Inc. 10,214,809 1,700,000 12,933,861
Manufacturing facility leased to
CWD Windows and Doors, Inc. 3,528,775 2,246,511 192,080
------------ ----------- ----------- --------------
$ 39,858,654 $17,126,511 $41,778,859 $ 192,080
============ =========== =========== ==============
Gross Amount at which
Carried at Close of Period
--------------------------
Life on which
Depreciation in
Latest
Statement of
Accumulated Date Income
Description Land Buildings Total Depreciation (d) Acquired is Computed
- --------------------------------- ----------- ----------- ------------ ---------------- --------- ---------------
Operating Method:
Manufacturing facilities leased
to Castle Rock Industries, Inc. $ 3,380,000 $ 8,884,549 $ 12,264,549 $ 120,312 6/1/ 2004 40 yrs.
Manufacturing facilities leased
to Foss Manufacturing Company,
Inc. 9,800,000 19,960,449 29,760,449 228,713 7/1/2004 40 yrs.
Office building leased to
Xpedite Systems, Inc. 1,700,000 12,933,861 14,633,861 94,309 9/16/2004 40 yrs.
Manufacturing facility leased to
CWD Windows and Doors, Inc. 2,438,591 2,438,591 8/27/2004 40 yrs.
----------- ----------- ------------ ----------------
$17,318,591 $41,778,859 $59,097,450 $ 443,334
=========== =========== ============ ================
14
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
SCHEDULE III - REAL ESTATE and ACCUMULATED DEPRECIATION
as of December 31, 2004
Initial Cost to Company
------------------------
Gross Amount at which
Increase Carried
Description (Decrease) in Net at Close of Period
Encumbrances Land Buildings Investment(a) Total Date Acquired
- -------------------------------- ------------ ----------- ----------- ----------------- --------------------- -------------
Direct Financing Method:
Manufacturing facility leased
to Polestar Petty Ltd.. $ 20,138,268 $ 6,908,055 $21,012,446 $ 2,199,417 $30,119,918 5/5/12004
Manufacturing facility leased
to CWD Windows and Doors, Inc. 3,467,782 272,193 3,739,975 8/27/2004
Manufacturing facilities leased
to Ply Gem Industries, Inc. 17,612,429 2,980,000 29,190,524 (60,229) 32,110,295 8/27/2004
Retail stores leased to
Plantasjen ASA 20,082,220 4,279,286 26,627,554 225,062 31,131,902 12/27/2004
------------ ----------- ----------- ---------------- -----------
$ 57,832,917 $14,167,341 $80,298,306 $ 2,636,443 $97,102,090
============ =========== =========== ================ ===========
15
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
NOTES to SCHEDULE III - REAL ESTATE
and ACCUMULATED DEPRECIATION
(a) The increase (decrease) in net investment is due to the amortization of
unearned income producing a constant periodic rate of return on the net
investment which is more (less) than lease payments received and foreign
currency translation adjustments.
(b) At December, 2004, the aggregate cost of real estate owned by
CPA(R):16-Global and its subsidiaries for Federal income tax purposes is
$168,163,559
(c)
Reconciliation of Real Estate Accounted for
Under the Operating Method
December 31, 2004
-------------------------------------------
Balance at beginning of year $ -
Additions 58,905,370
Disposition -
Foreign currency translation adjustment 192,080
-----------
Balance at December 31, 2004 $59,097,450
===========
Reconciliation of Accumulated Depreciation
December 31, 2004
-------------------------------------------
Balance at beginning of year $ -
Depreciation expense 443,334
--------
Balance at December 31, 2004 $443,334
========
16
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
as of December 31, 2004
Principal Amount of
Final Periodic Periodic Carrying Loans Subject to
Interest Maturity Maturity Payment Prior Face Amount of Amount of Delinquent Principal
Description Rate Date(1) Date Terms Liens Mortgages Mortgages or Interest
- -------------------------------- -------- -------- -------- -------- ----- -------------- ----------- --------------------
Subordinated Mortgage -
collaterialized by properties
occupied by BlueLinx Holdings, Libor + Interest
Inc. or its affiliates 4.5% 11/9/07 Monthly Only N/A $20,000,000 $20,291,429 $ -
(1) Upon maturity, we are due a balloon payment of $20,000,000.
NOTES to SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE
Reconciliation of Mortgage Loans on Real Estate
December 31, 2004
------------------------------------------------
Balance at beginning of year $ -
Additions 20,300,000
Collections of principal -
Amortization of premium (8,571)
-----------
Balance at December 31, 2004 $20,291,429
===========
17
APPENDIX A TO FORM-K
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
2004 ANNUAL REPORT
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act). Internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America.
Our internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of our
assets; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America, and
that our receipts and expenditures are being made only in accordance with
authorizations of our management and directors; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of our assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
We assessed the effectiveness of our internal control over financial reporting
as of December 31, 2004. In making this assessment, we used criteria set forth
in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on our assessment, we
concluded that, as of December 31, 2004, our internal control over financial
reporting is effective based on those criteria.
Our assessment of the effectiveness of internal control over financial reporting
as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm who also audited our consolidated
financial statements included in Item 8, as stated in their report in Item 8.
-1-
SELECTED FINANCIAL DATA
(In thousands except per share amounts)
2004 2003 (1)
-------- ----------
OPERATING DATA:
Revenues $ 5,776 $ -
Net income (loss) 5,124 (42)
Basic earnings (loss) per share 0.21 (2.08)
Cash dividends paid 5,918 -
Cash dividends declared per share .46 -
Payment of mortgage principal (2) 344 -
BALANCE SHEET DATA:
Total assets $ 585,512 $ 1,230
Long-term obligations (3) 103,387 -
(1) For the period from inception (June 5, 2003) through December 31, 2003.
(2) Represents scheduled mortgage principal amortization paid.
(3) Represents limited recourse mortgage notes payable and deferred
acquisition fee installments that are due after more than one year.
-2-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(In thousands except share and per share amounts)
The following discussion and analysis of financial condition and results of
operations of Corporate Property Associates 16 - Global Incorporated should be
read in conjunction with the consolidated financial statements and notes thereto
for the year ended December 31, 2004. As used in this Annual Report on Form
10-K, the terms "the Company," "we," "us" and "our" include Corporate Property
Associates 16 - Global Incorporated, its consolidated subsidiaries and
predecessors, unless otherwise indicated. Forward-looking statements, which are
based on certain assumptions, describe our future plans, strategies and
expectations. Forward-looking statements discuss matters that are not historical
facts. Because they discuss future events or conditions, forward-looking
statements may include words such as "anticipate," "believe," "estimate,"
"intend," "could," "should," "would," "may," "seeks," "plans" or similar
expressions. Do not unduly rely on forward-looking statements. They give our
expectations about the future and are not guarantees, and speak only as of the
date they are made. Such statements involve known and unknown risks,
uncertainties and other factors that may cause our actual results, performance
or achievement to be materially different from the results of operations or plan
expressed or implied by such forward looking statements. While we cannot predict
all of the risks and uncertainties, they include, but are not limited to, those
described in Item 1 of this Annual Report on Form 10-K. Accordingly, such
information should not be regarded as representations that the results or
conditions described in such statements or that our objectives and plans of will
be achieved.
EXECUTIVE OVERVIEW
Nature of Business
We were formed in June 2003 and in December 2003, we commenced a "best efforts"
public offering (the "Offering") to raise up to $1,100,000. As of December 31,
2004, we have raised approximately $511,333 from our Offering and $2,734 from
our Distribution Reinvestment and Share Purchase Plan. We are using the proceeds
from the Offering of common stock along with limited recourse mortgage financing
to purchase properties and, in most cases, enter into long-term net leases with
corporate tenants.
We seek to structure our net leases to place certain economic burdens of
ownership on corporate tenants by requiring them to pay the costs of maintenance
and repair, insurance and real estate taxes. The lease obligations are
unconditional. When possible, we also negotiate guarantees of the obligations
from the parent company of the lessee. The leases are generally structured to
include periodic rent increases that are stated or based on increases in the
Consumer Price Index ("CPI") or, for retail properties, may provide for
additional rents based on sales in excess of a specified base amount. We may
also acquire interests in real estate through joint ventures. These joint
ventures are generally with affiliates.
For 2003, we elected C-Corp status and filed federal, state and local income tax
returns. For 2004, we intend to file our Federal tax return as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, and
accordingly will not be subject to Federal income taxes on amounts distributed
to shareholders, provided we distribute at least 90% of our REIT taxable income
to shareholders and meet certain other conditions. We intend to retain our REIT
status. Our primary objectives are to pay:
- - fund dividends to shareholders; and
- - protect our shareholders from the effects of inflation through rent
escalation provisions, property appreciation, tenant credit improvement
and regular paydown of limited recourse mortgage debt.
We cannot guarantee that our objectives will be ultimately realized.
We are advised by W. P. Carey & Co. LLC ("WPC"), an affiliate, pursuant to an
advisory agreement. Our advisory agreement is renewable annually by independent
directors who are elected by our shareholders. In connection with each renewal,
WPC is required to provide the independent directors with a comparison of the
fee structure with several similar companies. The advisory agreement also
provides that a third party portfolio valuation be performed after a stated
period and annually thereafter. The portfolio valuation will be used to
-3-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
determine the asset base for calculation of asset management and performance
fees. Until the initial valuation is performed, the fee is based on the cost of
the properties.
How We Earn Revenue
The primary source of our revenue is earned from leasing real estate. We acquire
and own commercial properties that are then leased to companies domestically and
internationally, primarily on a net lease basis. Revenue is subject to
fluctuation because of lease expirations, lease terminations, the timing of new
lease transactions and acquisitions and sales of property.
How Management Evaluates Results of Operations
Management evaluates our results with a primary focus on the ability to generate
cash flow necessary to meet our objectives of funding dividends to our
shareholders and overall property appreciation. As a result, management's
assessment of operating results gives less emphasis to the effect of unrealized
gains and losses, which may cause fluctuations in net income for comparable
periods but have no impact on cash flow and to other noncash charges such as
depreciation and impairment charges. In evaluating cash flow from operations,
management includes equity distributions that are included in investing
activities to the extent that the distributions in excess of equity income are
the result of noncash charges such as depreciation and amortization. Management
does not consider unrealized gains and losses from foreign currency or
derivative instruments, if any, when evaluating its ability to fund dividends.
Management's evaluation of our potential for generating cash flow is based on
long-term assessments of cash flow from its real estate investments.
Our operations consist of the direct and indirect investment in and the leasing
of industrial and commercial real estate. Management's evaluation of the sources
of lease revenues for the twelve-month period ended December 31, 2004 are as
follows:
2004
--------
Per Statement of Income:
Rental income from operating leases $ 2,901
Interest income from direct financing leases 2,769
Adjustment:
Share of lease revenue from equity investments 9,255
--------
$ 14,925
========
In 2004, we earned our share of net lease revenues (i.e., rental income and
interest income from direct financing leases) from our direct and indirect
ownership of real estate from the following lease obligations:
2004 %
------- ---
U-Haul Moving Partners, Inc. and Mercury Partners, LP (a) $ 5,907 39%
Polestar Petty Ltd.(b) 1,661 11
Foss Manufacturing Company, Inc. 1,598 11
Thales S.A. (a)(b) 1,588 11
TietoEnator Plc (a)(b) 1,353 9
PlyGem Industries, Inc. (b) 1,154 8
Castle Rock Industries, Inc. 760 5
Xpedite Systems, Inc. 467 3
Actuant Corporation (a)(b) 407 3
Plantasjen ASA (b) 30 -
------- ---
$14,925 100%
======= ===
(a) Represents our proportionate share of lease revenues from equity
investments.
(b) Revenue amounts are subject to fluctuations in foreign currency exchange
rates.
-4-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
Current Developments and Trends
Competition for investments continues to remain strong. If general economic
conditions continue to improve, inflation and interest rates, at least for the
short term, are expected to continue to rise as well. Rising interest rates are
expected to have the following impact on our business:
- - Rising interest rates would likely cause a decline in the values of
properties in our investment portfolio;
- - Rising interest rates would likely cause an increase in the CPI, which
over time will result in increased revenue and partially offset the impact
of declining property values;
- - The impact of rising interest rates would be mitigated through our use of
fixed interest rates on our current debt; however, fixed rate debt
obtained in connection with subsequent investments would be affected;
- - Rising interest rates would likely enable us to achieve higher rates of
return on new investments, which would be partially offset by increased
debt costs associated with increased interest rates; and
- - Rising interest rates could make other income generating products more
attractive to investors on a relative basis and affect our ability to
raise capital.
We will continue to pursue our objectives through long-term transactions and
diversifying our portfolio. We expect to continue investing in the international
commercial real estate market, as we believe the international market provides
for favorable opportunities relative to risk/return as compared to opportunities
in the United States. In addition, financing terms are generally more favorable
for international transactions. Financing terms for international transactions
generally provide for lower interest rates and greater flexibility to finance
the underlying property. These benefits are partially offset by shorter loan
maturities. Investing in additional international properties increases our
exposure to fluctuations in foreign currency exchange rates.
Management believes that as the portfolio matures there is a potential for an
increase in the value of the existing portfolio and that any increase may not be
reflected in our financial statements.
In December 2004, we ceased active fundraising from our Offering in order to
bring into balance the rates of fundraising and investment as we believed that
it was prudent to cease taking in additional funds until we have been able to
complete additional sufficient amount of new real estate acquisitions, to
substantially reduce our uninvested cash balance. The registration statement
for our initial Offering was withdrawn in March 2005. (see Subsequent Events
below)
In September 2004, we filed a registration statement with the United States
Securities and Exchange Commission for a second offering of shares of common
stock that has not yet been declared effective. Once a decision is made to
recommence sales of shares, the second offering, which will also be on a "best
efforts" basis, will be for a maximum of 80,000,000 shares at a price of $10 per
share and will register up to 40,00,000 shares for the Distribution Reinvestment
and Share Purchase Plan.
A description of transactions completed in 2004 and subsequent are described
hereafter in results of operations and subsequent events, respectively.
RESULTS OF OPERATIONS
We had no substantive operations in 2003 when we were formed and commenced real
estate operations in 2004. During 2004, we acquired real estate interests in
properties with twelve lessees, including a property under construction, and
anticipate that we will use the proceeds of our Offering, along with limited
recourse property-level mortgage financing, to acquire additional interests in
order to form a diversified portfolio. For the comparable years ended December
31, 2004 and 2003, we had net income of $5,124 and a net loss of $42,
respectively. The results of operations for the year ended December 31, 2004 are
not expected to be representative of future results because we anticipate that
our asset base will increase substantially. As our asset base increases,
revenues and general and administrative, property and depreciation expenses will
increase. Interest expense will increase as we obtain mortgage financing for our
properties. In addition to our domestic
-5-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
properties, as of March 9, 2005 we have acquired interests in properties in
France, Finland, Canada, Sweden and Thailand. The value of our foreign
investments and related cash available to us from them will be affected by
fluctuations in foreign currency exchange rates. Our real estate portfolio as of
December 31, 2004 (including our investment in a mortgage note and the pro rata
share of equity investments), and based on foreign currency exchange rates as of
December 31, 2004, is expected to generate annual cash flow in 2005 of $14,753,
as follows:
Annual % of Estimated
Contractual Annual Estimated Annual Annual
Lease Obligor Rent Debt Service Cash Flow Cash Flow
- ---------------------------------------------- ----------- ----------------- ---------------- --------------
U-Haul Moving Partners, Inc. and Mercury LP(1) $ 8,782 $ 4,541 $ 4,241 32%
Ply-Gem Industries, Inc. 3,555 1,811 1,744 13
Thales S.A.(1)(2) 3,868 2,320 1,548 11
Foss Manufacturing Company, Inc. 3,195 1,533 1,662 12
TietoEnator Plc.(1)(2) 3,082 1,909 1,173 9
Polestar Petty Ltd.(2) 2,272 1,463 809 6
Plantasjen ASA (2) 2,178 1,396 782 6
Xpedite Systems, Inc. 1,395 820 575 4
Castle Rock Industries, Inc. 1,328 770 558 4
Actuant Corporation.(1)(2) 891 530 361 3
------- ------- ------- ---
$30,546 $17,093 $13,453 100%
======= ======= ======= ===
(1) Pro rata share of equity investment.
(2) Based on applicable foreign currency exchange rate on December 31, 2004.
We also hold an investment in a $20,000 mortgage loan participation, which is
scheduled to provide interest of no less than an annual rate of 6.5%. Based on
the 6.50% interest rate, annual cash flow is $1,300. The loan represents a
subordinated participation in the loan.
FINANCIAL CONDITION
Uses of Cash During the Year
Prior to December 31, 2003, we had no substantive operating history and our cash
balances consisted of funds received from our Advisor to purchase the initial
20,000 shares. Since December 31, 2003, we have raised funds from our Offering
and commenced real estate operations. Cash and cash equivalents totaled $217,310
as of December 31, 2004. Management believes we have sufficient cash balances,
along with marketable securities of $69,900 which we intend to convert to cash,
to invest in a diversified real estate portfolio and meet working capital needs.
Our use of cash during the period is described below.
Operating Activities
For the year ended December 31, 2004, cash flows from operating activities were
$7,584 and combined with distributions from equity investments totaled $8,569,
and which was sufficient to pay dividends to shareholders of $5,918 and meet
scheduled mortgage principal installment payments of $344. Annual operating cash
flow is expected to continue to increase as a result of the investments
completed in 2004 as well as subsequent to December 31, 2004 and our intention
to continue to invest in real estate interests.
Investing Activities
For the year ended December 31, 2004, we used $242,981 to invest in real estate
interests, including a mortgage loan participation and ownership interests in
equity investments. As of December 31, 2004, we placed $22,829 in escrow
accounts, of which $11,021 was used in January 2005 to invest in a 40% interest
in a property in Helsinki, Finland, owned with an affiliate, $9,960 represents
deposits which we intend to use to invest in properties in France and Belgium,
with substantially all of the remainder to be used to fund an expansion at a
-6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
leased property. During 2004, we purchased $9,732 in short-term investments
(i.e., money-market type investments with maturities of more than 90 days but
less than one year and which we expect to redeem for cash) and as of December
31, 2004, hold $69,900 of auction-rate securities which management believes
provide a more favorable yield than short-term investments.
Financing Activities
For the year ended December 31, 2004, we raised $465,143 net of costs, from our
Offering, obtained $95,937 in mortgage financing to finance investments, paid
$1,294 in financing costs and related deposits and paid dividends to
shareholders of $5,918. If additional shares are sold, and the proceeds
invested, dividends to shareholders is expected to increase. A quarterly
dividend of $5,353 was paid in January 2005.
We intend to obtain limited recourse financing ranging from approximately 50% to
60% of the purchase cost for our domestic properties and 70% to 80% for our
international properties. We do not currently plan on seeking additional sources
of financing such as an unsecured line of credit; however, our financing
strategies could change in the future.
Cash Resources
As of December 31, 2004, we had $217,310 in cash and cash equivalents as well as
$9,753 in short-term instruments and $69,900 in marketable securities that we
intend to convert to cash, which will primarily be used to fund future real
estate investments, as well as maintain sufficient working capital balances and
meet other commitments. We intend to fund quarterly dividends from cash
generated from our real estate portfolio. We also currently expect to continue
raising funds through an additional offering of our Common Stock, which may
commence as early as the second quarter 2005. Substantially all of the capital
raised is being raised by one selected-dealer and any adverse change in our
relationship with this selected-dealer could limit our ability to sell
additional shares of common stock.
Cash Requirements
During the next twelve months, cash requirements will include scheduled mortgage
principal payment installments (we have no mortgage balloon payments scheduled
until 2011), paying dividends to shareholders, as well as other normal recurring
operating expenses. We intend to use our cash to purchase new properties to
further diversify our portfolio and maintain cash balances sufficient to meet
working capital needs. We also plan to use our cash to fund commitments related
to build-to-suit projects and a future expansion agreement (see Off-Balance
Sheet and Aggregate Contractual Agreements table below). Based on the projected
increase in operating cash flows from recent property acquisitions, cash flow
from operations and distributions from operations of equity investments in
excess of equity income is expected to be sufficient to meet operating cash flow
objectives. Accordingly, we expect to have sufficient cash flow to continue
funding dividends to our shareholders. Dividends are determined based in part
upon management's long-term projections of cash flow. If we recommence selling
shares and invest the proceeds from such sales, dividends are expected to
increase.
We currently conduct business in the several countries and expect to recognize
foreign currency transaction gains and losses from our foreign operations. We
are subject to foreign currency exchange rate risk from the effects of changes
in exchange rates. To date, we have not entered into any foreign currency
forward exchange contracts to hedge the effects of adverse fluctuations in
foreign currency exchange rates. We have obtained limited recourse mortgage
financing at fixed rates of interest in the local currency. To the extent that
currency fluctuations increase or decrease rental revenues as translated to
dollars, the change in debt service, as translated to dollars, will partially
offset the effect of fluctuations in revenue, and, to some extent mitigate the
risk from changes in foreign currency rates.
-7-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
OFF-BALANCE SHEET AND AGGREGATE CONTRACTUAL AGREEMENTS
The table below summarizes our contractual obligations as of December 31, 2004
and the effect that such obligations are expected to have on our liquidity and
cash flow in future periods.
Less than
Total 1 Year 1-3 Years 3-5 Years More than 5 years
-------- --------- --------- --------- -----------------
Limited recourse mortgage notes payable (1) $160,713 $ 7,461 $15,704 $ 15,887 $121,661
Deferred acquisition fees (1) 8,836 - 5,948 2,888 -
Deposit held for future expansion (3) 1,984 1,984 - - -
Build-to-suit commitment (4) 30,183 30,183 - - -
Operating leases (2) 168 10 26 29 103
-------- ------- ------- -------- --------
$201,884 $39,638 $21,678 $ 18,804 $121,764
======== ======= ======= ======== ========
(1) Amounts are inclusive of principal and interest.
(2) Operating lease obligations consist primarily of our share of minimum
rents payable under an office cost-sharing agreement with certain
affiliates for the purpose of leasing office space used for the
administration of real estate entities.
(3) In connection with the acquisition of the Polestar Petty property in 2004,
we entered into an agreement to fund a future expansion at the property.
(4) On September 30, 2004, we purchased a property in Woodlands, Texas and
entered into a build-to-suit commitment to finance the construction of
three research and development facilities. Our share of estimated total
construction costs are projected to be approximately $38,025, of which
$7,842 was funded as of December 31, 2004.
As of December 31, 2004, we have no material capital lease obligations, either
individually or in the aggregate.
In connection with the purchase of our properties, we require the sellers to
perform environmental reviews. We believe, based on the results of such
reviews, that our properties were in substantial compliance with Federal and
state environmental statutes at the time the properties were acquired. Tenants
are generally subject to environmental statutes and regulations regarding the
discharge of hazardous materials and any related remediation obligations. In
addition, our leases generally require tenants to indemnify us from all
liabilities and losses related to the leased properties with provisions of such
indemnification specifically addressing environmental matters. The leases
generally include provisions which allow for periodic environmental assessments,
paid for by the tenant, and allow us to extend leases until such time as a
tenant has satisfied its environmental obligations. Certain of the leases allow
us to require financial assurances from tenants such as performance bonds or
letters of credit if the costs of remediating environmental conditions are, in
our estimation, in excess of specified amounts.
SUBSEQUENT EVENTS
Acquisitions:
Since December 31, 2004, we have made investments in properties leased to HMS
Healthcare, Inc., Pohjola Non-Life Insurance Company; Clean Earth Kentucky, LLC;
Precise Technology Group, Inc.; IDS Group Limited; Finisar Corporation;
MetalsAmerica, Inc; and PolyPipe, Inc. These transactions are expected to
generate annual cash flow (contractual rent less property-level mortgage debt
service) of $12,462, as follows:
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
Annual
Contractual Annual Estimated Annual
Lease Obligor Rent Debt Service Cash Flow
- ------------------------------------------- ----------- ----------------- ----------------
Pohjola Non-Life Insurance Company (1), (2) $ 3,274 $ 1,474 $ 1,800
HMS Healthcare, Inc 1,228 -- 1,228
Finisar Corporation 2,951 1,717 1,234
PolyPipe, Inc. 787 -- 787
Precise Technology Group, Inc. 1,448 836 612
IDS Group Limited (2) 1,476 893 583
Clean Earth Kentucky, LLC 711 393 318
MetalsAmerica, Inc. 651 339 312
Telcordia Technologies, Inc. 8,913 4,375(3) 4,538
------- ------- -------
$21,439 $10,027 $11,412
======= ======= =======
(1) Pro rata share of equity investment.
(2) Based on applicable foreign currency exchange rate on December 31, 2004.
(3) Annual debt service increases to $5,578 in year three.
In January 2005, we purchased a $12,740 mortgage note. Annual cash flow from the
mortgage note, including installments of principal, in the mortgage loan is
expected to approximate $1,050.
For a further description of the acquisition activity since December 31, 2004,
see Note 16 of the accompanying financial statements.
Proposed Acquisition:
On February 28, 2005, we and CPA(R):15, through 25% and 75% interests,
respectively, in a limited liability company, entered into a purchase and sales
agreement with Hellweg Die Profi-Baumarkte GMBH to purchase up to 16 properties
in Germany for up to $166,345 (based on the exchange rate of the Euro as of the
date of the agreement), subject to certain due diligence procedures and
negotiations with the proposed lessees. There is no assurance that this purchase
will be completed, and, if completed, that the actual terms will not differ from
the proposed terms. To the extent that all 16 properties are purchased, initial
annual rent will be $13,597 (based on the exchange rate of the Euro as of the
date of the agreement). In the event that the purchase is completed, we and
CPA(R):15 intend to seek limited recourse mortgage financing of approximately
$115,223.
Fund Raising Activity:
On March 8, 2005, we filed an amendment to the registration statement for our
Offering, to deregister all shares of our Common Stock that remain unissued as
of March 8, 2005, pursuant to our Offering. Also registered under the
registration statement were shares of our Common Stock to be sold pursuant to
our Distribution Reinvestment and Share Purchase Plan (the "Plan Shares"). The
unsold Plan Shares were not deregistered by such amendment, and we will continue
to issue and sell Plan Shares under our Distribution Reinvestment and Share
Purchase Plan pursuant to the registration statement.
CRITICAL ACCOUNTING ESTIMATES
A summary of our significant accounting policies is described in Note 1 to the
Consolidated Financial Statements. Many of these accounting policies require
certain judgment and the use of certain estimates and assumptions when applying
these policies in the preparation of our consolidated financial statements. On a
quarterly basis, we evaluate these estimates and judgments based on historical
experience as well as other
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
factors that we believe to be reasonable under the circumstances. These
estimates are subject to change in the future if underlying assumptions or
factors change. Certain accounting policies, while significant, may not require
the use of estimates. Those accounting policies that require significant
estimation and/or judgment are listed below.
Classification of Real Estate Assets
We classify our directly owned leased assets for financial reporting purposes as
either real estate leased under the operating method or net investment in direct
financing leases at the inception of a lease. This classification is based on
several criteria, including, but not limited to, estimates of the remaining
economic life of the leased assets and the calculation of the present value of
future minimum rents. In determining the classification of a lease, we use
estimates of remaining economic life provided by third party appraisals of the
leased assets. The calculation of the present value of future minimum rents
includes determining a lease's implicit interest rate, which requires an
estimate of the residual value of leased assets as of the end of the
non-cancelable lease term. Different estimates of residual value result in
different implicit interest rates and could possibly affect the financial
reporting classification of leased assets. The contractual terms of our leases
are not necessarily different for operating and direct financing leases; however
the classification is based on accounting pronouncements which are intended to
indicate whether the risks and rewards of ownership are retained by the lessor
or substantially transferred to the lessee. Management believes that it retains
certain risks of ownership regardless of accounting classification. Assets
classified as net investment in direct financing leases are not depreciated and,
therefore, the classification of assets may have a significant impact on net
income even though it has no effect on cash flows.
Identification of Tangible and Intangible Assets in Connection with Real
Estate Acquisitions
In connection with the acquisition of properties, purchase costs are allocated
to tangible and intangible assets and liabilities acquired based on their
estimated fair values. The value of tangible assets, consisting of land,
buildings and tenant improvements, is determined as if vacant. Intangible assets
including the above-market value of leases, the value of in-place leases and the
value of tenant relationships are recorded at their relative fair values.
Below-market value of leases are also recorded at their relative fair values and
are included in other liabilities in the accompanying financial statements.
The value attributed to tangible assets is determined in part using a discount
cash flow model which is intended to approximate what a third party would pay to
purchase the property as vacant and rent at current "market" rates. In applying
the model, we assume that the disinterested party would sell the property at the
end of a market lease term. Assumptions used in the model are property-specific
as it is available; however, when certain necessary information is not
available, we will use available regional and property-type information.
Assumptions and estimates include a discount rate or internal rate of return,
marketing period necessary to put a lease in place, carrying costs during the
marketing period, leasing commissions and tenant improvements allowances, market
rents and growth factors of such rents, market lease term and a cap rate to be
applied to an estimate of market rent at the end of the market lease term.
Above-market and below-market lease intangibles are based on the difference
between the market rent and the contractual rents and are discounted to a
present value using an interest rate reflecting our current assessment of the
risk associated with the lease acquired. We acquire properties subject to net
leases and consider the credit of the lessee in negotiating the initial rent.
The total amount of other intangible assets is allocated to in-place lease
values and tenant relationship intangible values based on our evaluation of the
specific characteristics of each tenant's lease and our overall relationship
with each tenant. Characteristics we consider in allocating these values include
the nature and extent of the existing relationship with the tenant, prospects
for developing new business with the tenant, the tenant's credit quality and the
expectation of lease renewals, among other factors. Third party appraisals or
our estimates are used to determine these values. Intangible assets for
above-market and below-market leases, in-place lease intangibles and tenant
relationships are amortized over their estimated useful lives. In the event that
a tenant
-10-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
terminates its lease, the unamortized portion of each intangible, including
market rate adjustments, in-place lease values and tenant relationship values,
are charged to expense.
Factors considered include the estimated carrying costs of the property during a
hypothetical expected lease-up period, current market conditions and costs to
execute similar leases. Estimated carrying costs include real estate taxes,
insurance, other property operating costs and estimates of lost rentals at
market rates during the hypothetical expected lease-up periods, based on
assessments of specific market conditions. Estimated costs to execute leases
include commissions and legal costs to the extent that such costs are not
already incurred with a new lease that has been negotiated in connection with
the purchase of the property.
Impairments
Impairment charges may be recognized on long-lived assets, including but not
limited to real estate, direct financing leases, assets held for sale and equity
investments. Estimates and judgments are used when evaluating whether these
assets are impaired. When events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable, we perform projections of
undiscounted cash flows, and if such cash flows are insufficient, the assets are
adjusted (i.e., written down) to their estimated fair value. An analysis of
whether a real estate asset has been impaired requires us to make our best
estimate of market rents, residual values and holding periods. In our
evaluations, we generally obtain market information from outside sources;
however, such information requires us to determine whether the information
received is appropriate to the circumstances. As our investment objective is to
hold properties on a long-term basis, holding periods used in the analyses
generally range from five to ten years. Depending on the assumptions made and
estimates used, the future cash flow projected in the evaluation of long-lived
assets can vary within a range of outcomes. We will consider the likelihood of
possible outcomes in determining the best possible estimate of future cash
flows. Because in most cases, each of our properties is leased to one tenant, we
are more likely to incur significant writedowns when circumstances change
because of the possibility that a property will be vacated in its entirety and,
therefore, it is different from the risks related to leasing and managing
multi-tenant properties. Events or changes in circumstances can result in
further noncash writedowns and impact the gain or loss ultimately realized upon
sale of the assets.
We perform a review of our estimate of residual value of our direct financing
leases at least annually to determine whether there has been an other than
temporary decline in the current estimate of residual value of the underlying
real estate assets (i.e., the estimate of what we could realize upon sale of the
property at the end of the lease term). If the review indicates a decline in
residual value, that is other than temporary, a loss is recognized and the
accounting for the direct financing lease will be revised to reflect the
decrease in the expected yield using the changed estimate, that is, a portion of
the future cash flow from the lessee will be recognized as a return of principal
rather than as revenue. While an evaluation of potential impairment of real
estate accounted for under the operating method is determined by a change in
circumstances, the evaluation of a direct financing lease can be affected by
changes in long-term market conditions even though the obligations of the lessee
are being met. Changes in circumstances include, but are not limited to, vacancy
of a property not subject to a lease and termination of a lease. We may also
assess properties for impairment because a lessee is experiencing financial
difficulty and because management expects that there is a reasonable probability
that the lease will be terminated in a bankruptcy organization or a property
remains vacant for a period that exceeds the period anticipated in a prior
impairment evaluation.
Investments in unconsolidated joint ventures are accounted for under the equity
method and are recorded initially at cost, as equity investments and
subsequently adjusted for our proportionate share of earnings and cash
contributions and distributions. On a periodic basis, we assess whether there
are any indicators that the value of equity investments may be impaired and
whether or not that impairment is other than temporary. To the extent impairment
has occurred, the charge shall be measured as the excess of the carrying amount
of the investment over the fair value of the investment.
When we identify assets as held for sale, we discontinue depreciating the assets
and estimate the sales price, net of selling costs, of such assets. If in our
opinion, the net sales price of the assets, which have been identified for
-11-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
(In thousands except share and per share amounts)
sale, is less than the net book value of the assets, an impairment charge is
recognized and a valuation allowance is established. To the extent that a
purchase and sale agreement has been entered into, the allowance is based on the
negotiated sales price. To the extent that we have adopted a plan to sell an
asset but have not entered into a sales agreement, we will make judgments of the
net sales price based on current market information. Accordingly, the initial
assessment may be greater or less than the purchase price subsequently committed
to and may result in a further adjustment to the fair value of the property. If
circumstances arise that previously were considered unlikely and, as a result,
we decide not to sell a property previously classified as held for sale, the
property is reclassified as held and used. A property that is reclassified is
measured and recorded individually at the lower of (a) its carrying amount
before the property was classified as held for sale, adjusted for any
depreciation expense that would have been recognized had the property been
continuously classified as held and used, (b) the fair value at the date of the
subsequent decision not to sell, or (c) the current carrying value.
Provision for Uncollected Amounts from Lessees
On an ongoing basis, we assess our ability to collect rent and other
tenant-based receivables and determine an appropriate allowance for uncollected
amounts. Because our real estate operations have a limited number of lessees, we
believe that it is necessary to evaluate the collectibility of these receivables
based on the facts and circumstances of each situation rather than solely use
statistical methods. We will generally recognize a provision for uncollected
rents and other tenant receivables that typically range between 0.25% and 1% of
lease revenues (rental income and interest income from direct financings leases)
and will measure our allowance against actual rent arrearages and adjust the
percentage applied. For amounts in arrears, we make subjective judgments based
on our knowledge of a lessee's circumstances and may reserve for the entire
receivable amount from a lessee because there has been significant or continuing
deterioration in the lessee's ability to meet its lease obligations. Based on
actual experience during 2004, we did not record a provision for uncollected
amounts as substantially all amounts due as of December 31, 2004, have been
collected.
Interest to be Capitalized in Connection with Real Estate Under Construction
Operating real estate is stated at cost less accumulated depreciation. Costs
directly related to build-to-suit projects, primarily interest, if applicable,
are capitalized. Interest capitalized in 2004 was approximately $151. We
consider a build-to-suit project as substantially completed upon the completion
of improvements, but no later than a date that is negotiated and stated in the
lease. If portions of a project are substantially completed and occupied and
other portions have not yet reached that stage, the substantially completed
portions are accounted for separately. We allocate costs incurred between the
portions under construction and the portions substantially completed and only
capitalize those costs associated with the portion under construction. We do not
have a credit facility and determine an interest rate to be applied for
capitalizing interest based on an average rate on our outstanding limited
recourse mortgage debt.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liability and Equity" ("FAS 150"). FAS
150 establishes standards to classify as liabilities certain financial
instruments that are mandatorily redeemable or include an obligation to
repurchase and expands financial statement disclosure requirements. Such
financial instruments will be measured at fair value with changes in fair value
included in the determination of net income. FAS 150 was effective for financial
instruments entered into or modified after May 31, 2003, and otherwise effective
at the beginning of the first interim period beginning after June 15, 2003.
In November 2003, the FASB issued FASB Staff Position 150-3 ("FSP 150-3"), which
defers the classification and measurement provisions of FAS 150 indefinitely as
they apply to mandatorily redeemable non-controlling interests associated with
finite-lived entities. We adopted FAS 150 in July 2003 and it did not have a
significant impact on our consolidated financial statements.
-12-
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Corporate Property Associates 16-Global Incorporated:
We have completed an integrated audit of Corporate Property Associates
16-Global Incorporated's 2004 consolidated financial statements and of its
internal control over financial reporting as of December 31, 2004 and an audit
of its 2003 consolidated financial statements for the period from inception
(June 5, 2003) to December 31, 2003 in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Our opinions, based
on our audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, shareholders' equity and cash flows present
fairly, in all material respects, the financial position of Corporate Property
Associates 16-Global Incorporated and its subsidiaries at December 31, 2004
and for the period from inception (June 5, 2003) to December 31, 2003, and the
results of their operations and their cash flows as of December 31, 2004 and
for the period from inception (June 5, 2003) to December 31, 2004 in conformity
with accounting principles generally accepted in the United States of America.
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 of these statements in accordance with
the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that the
Company maintained effective internal control over financial reporting as of
December 31, 2004 based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), is fairly stated, in all
-13-
material respects, based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2004, based on criteria established in
Internal Control - Integrated Framework issued by the COSO. The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express opinions on
management's assessment and on the effectiveness of the Company's internal
control over financial reporting based on our audit. We conducted our audit of
internal control over financial reporting in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. An audit of internal control over financial reporting
includes obtaining an understanding of internal control over financial
reporting, evaluating management's assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such
other procedures as we consider necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company's assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
New York, New York
March 15, 2005
-14-
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share amounts)
December 31,
2004 2003
-------- --------
ASSETS:
Real estate leased to others:
Accounted for under the operating method:
Land $ 17,318 $
Buildings 41,779 --
-------- --------
59,097 --
Less, accumulated depreciation 443 --
-------- --------
58,654 --
Net investment in direct financing leases 97,102 --
Real estate under construction 9,994 --
Mortgage note receivable 20,291 --
Cash and cash equivalents 217,310 170
Short-term investments 9,753 --
Equity investments 65,964 1
Marketable securities 69,900 -
Funds in escrow 22,922 --
Intangible assets, net of accumulated amortization of $123 at December 31, 2004 5,614 --
Due from affiliates -- 30
Deferred offering costs 3,080 1,029
Other assets, net 4,928 --
-------- --------
Total assets $585,512 $ 1,230
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Liabilities:
Limited recourse mortgage notes payable $97,691 $ --
Accrued interest 298 --
Prepaid and deferred rental income and security deposits 3,737 --
Other deposits 2,458 --
Due to affiliates 4,399 1,045
Dividends payable 5,353 --
Deferred acquisition fees payable to affiliate 7,535 --
Accounts payable and accrued expenses 833 27
-------- --------
Total liabilities 122,304 1,072
-------- --------
Commitments and contingencies
Shareholders' equity:
Common stock, $.001 par value; authorized 110,000,000 shares; 51,426,720 and 20,000
shares issued and outstanding at December 31, 2004 and 2003 51 --
Additional paid-in capital 465,292 200
Dividend in excess of accumulated earnings (6,188) (42)
Accumulated other comprehensive income 4,053 --
-------- --------
Total shareholders' equity 463,208 158
-------- --------
Total liabilities and shareholders' equity $585,512 $ 1,230
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
-15-
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except share and per share amounts)
For the period from
inception
Year Ended (June 5, 2003)
December 31, through December 31,
2004 2003
----------- --------------------
Revenues:
Rental income $ 2,901 $ -
Interest income from direct financing leases 2,769 -
Interest income on mortgage receivable 30 -
Other operating income 76 -
---------- ---------
5,776 -
---------- ---------
Operating expenses:
Depreciation and amortization $ 556 $ -
General and administrative 1,034 42
Property expenses 1,704 -
---------- ---------
3,294 42
---------- ---------
Income (loss) before other interest income, equity investments,
interest expense and gains, net 2,482 (42)
Other interest income 2,288 -
Income from equity investments 2,340 -
Gain on foreign currency transactions, net 18 -
Interest expense (2,004) -
---------- ---------
Net income (loss) $ 5,124 $ (42)
========== =========
Basic earnings (loss) per share $ 0.21 $ (2.08)
========== =========
Weighted average shares outstanding - basic 24,564,256 20,000
========== =========
The accompanying notes are an integral part of the consolidated
financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the period from inception (June 5, 2003) through December 31, 2003
and for the year ended December 31, 2004
(In thousands except share and per share amounts)
Dividends in Accumulated
Additional Excess of Other
Common paid-in Comprehensive Accumulated Comprehensive
stock capital (loss) income Earnings Income Total
------ ---------- ------------- ------------ ------------- -----
20,000 shares issued $.001 par,
at $10 per share $ 200 $ 200
Net loss $ (42) $ (42) (42)
=============
Balance at ---------- ---------- ---------
December 31, 2003 200 (42) 158
51,406,720 shares issued $.001 par,
at $10 per share, net of offering
costs $ 51 465,092 465,143
Dividends declared (11,270) (11,270)
Comprehensive Income:
Net income 5,124 5,124 5,124
Other comprehensive income:
Foreign currency translation
adjustment 4,053 $ 4,053 4,053
-------------
$ 9,135
=============
------ ---------- ------------ ---------- ---------
December 31, 2004 $ 51 $ 465,292 $ (6,188) $ 4,053 $ 463,208
The accompanying notes are an integral part of the
consolidated financial statements.
-16-
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands except share and per share amounts)
For the period from
inception
Year Ended (June 5, 2003)
December 31, through December 31,
2004 2003
------------ --------------------
Cash flows from operating activities:
Net income (loss) $ 5,124 $ (42)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:
Depreciation and amortization of intangible assets and deferred financing costs 464 --
Unrealized gain on foreign currency transactions (192) --
Straight-line rent adjustments (103) --
Increase in accrued interest 298 --
Decrease (increase) in due from affiliates 30 (30)
Increase in due to affiliates (a) 1,305 15
Increase in accounts payable and accrued expenses (245) 27
Increase in other assets (507) --
Increase in prepaid rent and security deposits 2,155 --
Increase in funds in escrow (745) --
----------- -----------
Net cash provided by (used in) operating activities 7,584 (30)
----------- -----------
Cash flows from investing activities:
Distributions received from equity investments in excess of equity income 985 --
Purchase of short-term investments (9,732) --
Purchase of mortgage receivable (20,300) --
VAT taxes paid and recoverable from purchase of real estate, net (86) --
Funds held in escrow for acquisition of real estate and equity investments (22,829) --
Purchases of securities (82,175) --
Sales of securities 12,275 --
Acquisition of real estate and equity investments and other capitalized costs (c ) (222,681) --
----------- -----------
Net cash used in investing activities (344,543) --
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of stock, net of costs of raising capital 465,143 200
Proceeds from mortgages (b) 95,937 --
Payment of financing costs and mortgage financing deposits (1,294) --
Payments of mortgage principal (344) --
Dividends paid (5,918) --
----------- -----------
Net cash provided by financing activities 553,524 200
----------- -----------
Effect of exchange rate changes on cash 575 --
----------- -----------
Net increase in cash and cash equivalents 217,140 170
Cash and cash equivalents, beginning of period 170 --
----------- -----------
Cash and cash equivalents, end of period $ 217,310 $ 170
=========== ===========
(a) Increase in due to affiliates excludes amounts related to the raising of
capital (financing activities) pursuant to the Company's public offering.
At December 31, 2004 and 2003, the amount due to the Company's advisor for
such costs was $3,080 and $1,043, respectively.
(b) Net of $570 retained by mortgage lenders.
(c) Included in the cost basis of real estate investments acquired in 2004 are
deferred acquisition fees payable of $7,535
Supplemental Cash Flows Information:
2004 2003
------ ------
Interest paid, net of amounts capitalized $1,836 $ -
====== ======
Interest capitalized $ 151 $ -
====== ======
A dividend of $.116012 per share for the quarter ended December 31, 2004 was
declared in December 2004 and paid in January 2005.
The accompanying notes are an integral part of the
consolidated financial statements.
-17-
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS,
(In thousands except share and per share amounts)
1. Organization:
Corporate Property Associates 16 - Global Incorporated (the "Company"), a
Maryland corporation, was formed on June 5, 2003 under the General Corporation
Law of Maryland for the purpose of engaging in the business of investing in and
owning property net leased to creditworthy corporations and other creditworthy
entities. Subject to certain restrictions and limitations, the business of the
Company is managed by W. P. Carey & Co. LLC (the "Advisor") On June 12, 2003,
the Advisor purchased 20,000 shares of common stock for $200,000 as the initial
shareholder of the Company.
A maximum of 110,000,000 shares of common stock are being offered to the public
(the "Offering") on a "best efforts" basis by Carey Financial Corporation
("Carey Financial"), a wholly-owned subsidiary of the Advisor, and selected
other dealers at a price of $10 per share. For the year ended December 31, 2004,
the Company issued 51,133,332 shares ($511,333) pursuant to its Offering (see
Note 16).
In September 2004, the Company filed a registration statement with the United
States Securities and Exchange Commission ("SEC") for a second offering of
shares of common stock that has not yet been declared effective. The second
offering will be for a maximum of 80,000,000 shares at a price of $10 per share
and will register up to 40,00,000 shares for the Distribution Reinvestment and
Share Purchase Plan.
2. Summary of Significant Accounting Policies:
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. At December 31, 2004, the Company is not the
primary beneficiary of any variable interest entity ("VIE"). All material
inter-entity transactions have been eliminated.
For acquisitions of an interest in an entity, the Company evaluates the entity
to determine if the entity is deemed a VIE, and if the Company is deemed to be
the primary beneficiary, in accordance with the Financial Accounting Standards
Board ("FASB") Interpretation No. 46(R), "Consolidation of Variable Interest
Entities" ("FIN 46(R)"). Entities that meet one or more of the criteria listed
below are considered VIEs.
- The Company's equity investment is not sufficient to allow the
entity to finance its activities without additional third party
financing;
- The Company does not have the direct or indirect ability to make
decisions about the entity's business;
- The Company is not obligated to absorb the expected losses of the
entity;
- The Company does not have the right to receive the expected residual
returns of the entity; and
- The Company's voting rights are not proportionate to its economic
interests, and substantially all of the entity's activities either
involve or are conducted on behalf of an investor that has
disproportionately few voting rights.
The Company consolidates the entities that are VIEs and the Company is deemed to
be the primary beneficiary of the VIE. For entities where the Company is not
deemed to be the primary beneficiary or the entity is not deemed a VIE and the
Company's ownership is 50% or less and has the ability to exercise significant
influence as well as jointly-controlled tenancy-in-common interests are
accounted for under the equity method, i.e. at cost, increased or decreased by
the Company's share of earnings or losses, less distributions. The Company will
reconsider its determination of whether an entity is a VIE and who the primary
beneficiary is if certain events occur that are likely to cause a change in the
original determinations.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the
-18-
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands except share and per share amounts)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
PURCHASE PRICE ALLOCATION
In connection with the Company's acquisition of properties, purchase costs are
allocated to the tangible and intangible assets and liabilities acquired based
on their estimated fair values. The value of the tangible assets, consisting of
land, buildings and tenant improvements, are determined as if vacant. Intangible
assets including the above-market value of leases, the value of in-place leases
and the value of tenant relationships are recorded at their relative fair
values. Below-market value of leases are also recorded at their relative fair
values and are included in deferred rental income in the accompanying financial
statements.
Above-market and below-market in-place lease values for owned properties are
recorded based on the present value (using an interest rate reflecting the risks
associated with the leases acquired) of the difference between (i) the
contractual amounts to be paid pursuant to the leases negotiated and in place at
the time of acquisition of the properties and (ii) management's estimate of fair
market lease rates for the property or equivalent property, measured over a
period equal to the remaining non-cancelable term of the lease. The capitalized
above-market lease value is amortized as a reduction of rental income over the
remaining non-cancelable term of each lease. The capitalized below-market lease
value is amortized as an increase to rental income over the initial term and any
fixed rate renewal periods in the respective leases.
The total amount of other intangibles are allocated to in-place lease values and
tenant relationship intangible values based on management's evaluation of the
specific characteristics of each tenant's lease and the Company's overall
relationship with each tenant. Characteristics that are considered in allocating
these values include the nature and extent of the existing relationship with the
tenant, prospects for developing new business with the tenant, the tenant's
credit quality and the expectation of lease renewals among other factors. Third
party appraisals or management's estimates are used to determine these values.
Intangibles for above-market and below-market leases, in-place lease intangibles
and tenant relationships are amortized over their estimated useful lives. In the
event that a lease is terminated, the unamortized portion of each intangible,
including market rate adjustments, in-place lease values and tenant relationship
values, is charged to expense.
Factors considered in the analysis include the estimated carrying costs of the
property during a hypothetical expected lease-up period, current market
conditions and costs to execute similar leases. Management also considers
information obtained about a property in connection with its pre-acquisition due
diligence. Estimated carrying costs include real estate taxes, insurance, other
property operating costs and estimates of lost rentals at market rates during
the hypothetical expected lease-up periods, based on management's assessment of
specific market conditions. Estimated costs to execute leases including
commissions and legal costs to the extent that such costs are not already
incurred with a new lease that has been negotiated in connection with the
purchase of the property will also be considered.
The value of in-place leases are amortized to expense over the remaining initial
term of each lease. The value of tenant relationship intangibles are amortized
to expense over the initial and expected renewal terms of the leases but no
amortization period for intangible assets will exceed the remaining depreciable
life of the building.
OPERATING REAL ESTATE
Land and buildings and personal property are carried at cost less accumulated
depreciation. Renewals and improvements are capitalized, while replacements,
maintenance and repairs that do not improve or extend the lives of the
respective assets are expensed as incurred.
REAL ESTATE UNDER CONSTRUCTION AND REDEVELOPMENT
For properties under construction, operating expenses including interest charges
and other property expenses, including real estate taxes, are capitalized rather
than expensed and rentals received are recorded as a reduction of capitalized
project (i.e., construction) costs. Interest is capitalized by applying the
interest rate applicable to
-19-
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands except share and per share amounts)
outstanding borrowings to the average amount of accumulated expenditures for
properties under construction during the period.
MORTGAGE NOTES RECEIVABLE
For investments in mortgage notes and loan participations, the loans are
initially reflected at acquisition cost which consists of the outstanding
balance net of the acquisition discount or premium. The Company amortizes any
discount or premium as an adjustment to increase or decrease, respectively, the
yield realized on these loans using the effective interest method. As such,
differences between carrying value and principal balances outstanding do not
represent embedded losses or gains as we generally plan to hold such loans to
maturity.
CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all short-term, highly liquid investments that are both
readily convertible to cash and have a maturity of generally three months or
less at the time of purchase to be cash equivalents. Items classified as cash
equivalents include commercial paper and money-market funds. The Company's cash
and cash equivalents at December 31, 2004 were held in the custody of five
financial institutions, and which balance at times exceeds federally insurable
limits. The Company mitigates this risk by depositing funds with major financial
institutions. Instruments that have a maturity of three months or more at the
time of purchase are classified as short-term investments in the accompanying
consolidated financial statements.
MARKETABLE SECURITIES
Marketable securities which consist of auction-rate securities are classified
as available for sale securities and reported at fair value with any unrealized
gains and losses on these securities reported as a component of other
comprehensive income (loss) until realized.
OTHER ASSETS
Included in other assets are deferred charges and deferred rental income.
Deferred charges are costs incurred in connection with mortgage financings and
refinancings and are amortized over the terms of the mortgages and included in
interest expense in the accompanying consolidated financial statements. Deferred
rental income is the aggregate difference for operating leases between scheduled
rents, which vary during the lease term, and rent recognized on a straight-line
basis.
DEFERRED ACQUISITION FEES
Fees are payable for services provided by the Advisor, to the Company relating
to the identification, evaluation, negotiation, financing and purchase of
properties. A portion of such fees are deferred and are payable in annual
installments with each installment equal to .25% of the purchase price of the
properties over no less than three years following the first anniversary of the
date a property was purchased. Payment of such fees is subject achieving to the
preferred return (see Note 3).
REAL ESTATE LEASED TO OTHERS
Real Estate is leased to others on a net lease basis, whereby the tenant is
generally responsible for all operating expenses relating to the property,
including property taxes, insurance, maintenance, repairs, renewals and
improvements. Expenditures for maintenance and repairs including routine
betterments will be charged to operations as incurred. Significant renovations,
which increase the useful life of the properties, will be capitalized.
The Company intends to diversify its real estate investments among various
corporate tenants engaged in different industries, by property type and
geographically. Four of the Company's lessees each currently represent more than
10% of total leasing revenues. Substantially all of the Company's leases provide
for either scheduled rent increases, periodic rent increases based on formulas
indexed to increases in the Consumer Price Index ("CPI").
The leases are accounted for under either the direct financing or operating
methods. Such methods are described below (see Notes 4 and 5):
-20-
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands except share and per share amounts)
Direct financing method - Leases accounted for under the direct financing method
are recorded at their net investment (see Note 5). Unearned income is deferred
and amortized to income over the lease terms so as to produce a constant
periodic rate of return on the Company's net investment in the lease.
Operating method - Real estate is recorded at cost less accumulated
depreciation, rental revenue is recognized on a straight-line basis over the
term of the leases and expenses (including depreciation) are charged to
operations as incurred (see Note 4).
On an ongoing basis, the Company assesses its ability to collect rent and other
tenant-based receivables and determines an appropriate allowance for uncollected
amounts. Because the real estate operations has a limited number of lessees, the
Company believes that it is necessary to evaluate the collectibility of these
receivables based on the facts and circumstances of each situation rather than
solely use statistical methods. The Company will generally recognize a provision
for uncollected rents and other tenant receivables that typically ranges between
0.25% and 1% of lease revenues (rental income and interest income from direct
financing leases) and will measure its allowance against actual rent arrearages
and adjust the percentage applied. For amounts in arrears, the Company makes
subjective judgments based on its knowledge of a lessee's circumstances and may
reserve for the entire receivable amount from a lessee because there has been
significant or continuing deterioration in the lessee's ability to meet its
lease obligations.
DEPRECIATION
Depreciation is computed using the straight-line method over the estimated
useful lives of the properties - generally 40 years. Depreciation of tenant
improvements is computed using the straight-line method over the remaining term
of the lease.
IMPAIRMENTS
When events or changes in circumstances indicate that the carrying amount may
not be recoverable, the Company assesses the recoverability of its long-lived
assets and certain intangible assets based on projections of undiscounted cash
flows, without interest charges, over the life of such assets. In the event that
such cash flows are insufficient, the assets are adjusted to their estimated
fair value. The Company performs a review of its estimate of residual value of
its direct financing leases at least annually to determine whether there has
been an other than temporary decline in the Company's current estimate of
residual value of the underlying real estate assets (i.e., the estimate of what
the Company could realize upon sale of the property at the end of the lease
term). If the review indicates a decline in residual value that is other than
temporary, a loss is recognized and the accounting for the direct financing
lease will be revised to reflect the decrease in the expected yield using the
changed estimate, that is, a portion of the future cash flow from the lessee
will be recognized as a return of principal rather than as revenue.
Investments in unconsolidated joint ventures are accounted for under the equity
method and are recorded initially at cost, as equity investments and are
subsequently adjusted for our proportionate share of earnings and cash
contributions and distributions. On a periodic basis, we assess whether there
are any indicators that the value of equity investments may be impaired and
whether or not that impairment is other than temporary. To the extent an other
than temporary impairment has occurred, the charge is measured as the excess of
the carrying amount of the investment over the fair value of the investment.
When the Company identifies assets as held for sale, it discontinues
depreciating the assets and estimates the sales price, net of selling costs, of
such assets. If in the Company's opinion, the net sales price of the assets
which have been identified for sale is less than the net book value of the
assets, an impairment charge is recognized and a valuation allowance is
established. To the extent that a purchase and sale agreement has been entered
into, the allowance is based on the negotiated sales price. To the extent that
the Company has adopted a plan to sell an asset but has not entered into a sales
agreement, it will make judgments of the net sales price based on current market
information. Accordingly, the initial assessment may be greater or less than the
purchase price subsequently committed to and may result in a further adjustment
to the fair value of the property. If circumstances arise that previously were
considered unlikely and, as a result, the Company decides not to sell a property
previously
-21-
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands except share and per share amounts)
classified as held for sale, the property is reclassified as held and used. A
property that is reclassified is measured and recorded individually at the lower
of (a) its carrying amount before the property was classified as held for sale,
adjusted for any depreciation expense that would have been recognized had the
property been continuously classified as held and used, (b) the fair value at
the date of the subsequent decision not to sell, or (c) the current carrying
value.
FOREIGN CURRENCY TRANSLATION
The Company consolidates its real estate investments in Finland, Sweden,
Germany, France, Canada and the United Kingdom. The functional currencies for
these investments are the Euro, the Swedish Kroner, the Canadian Dollar and the
British Pound. The translation from these local currencies to the U.S. dollar is
performed for assets and liabilities using current exchange rates in effect at
the balance sheet date and for revenue and expense accounts using a weighted
average exchange rate during the period. The gains and losses resulting from
such translation are reported as a component of other comprehensive income as
part of shareholders' equity. As of December 31, 2004, the cumulative foreign
currency translation adjustment gain was $4,053.
Foreign currency transactions may produce receivables or payables that are fixed
in terms of the amount of foreign currency that will be received or paid. A
change in the exchange rates between the functional currency and the currency in
which a transaction is denominated increases or decreases the expected amount of
functional currency cash flows upon settlement of that transaction. That
increase or decrease in the expected functional currency cash flows is a foreign
currency transaction gain or loss that generally will be included in determining
net income for the period in which the exchange rate changes. Likewise, a
transaction gain or loss (measured from the transaction date or the most recent
intervening balance sheet date, whichever is later), realized upon settlement of
a foreign currency transaction generally will be included in net income for the
period in which the transaction is settled. Foreign currency transactions that
are (i) designated as, and are effective as, economic hedges of a net investment
and (ii) intercompany foreign currency transactions that are of a long-term
nature (that is, settlement is not planned or anticipated in the foreseeable
future), when the entities to the transactions are consolidated or accounted for
by the equity method in the Company's financial statements will not be included
in determining net income but will be accounted for in the same manner as
foreign currency translation adjustments and reported as a component of other
comprehensive income as part of shareholder's equity. The contributions to the
equity investments were funded in part through subordinated debt.
Foreign currency intercompany transactions that are scheduled for settlement,
consisting primarily of accrued interest and the translation to the reporting
currency of intercompany subordinated debt with scheduled principal repayments,
are included in the determination of net income, and the Company recognized
unrealized gains of $192 from such transactions for the year ended December 31,
2004. For the year ended December 31, 2004, the Company recognized realized
losses of $175, on foreign currency transactions in connection with the transfer
of cash from foreign operations of subsidiaries to the parent company. No
realized or unrealized gains were recognized in 2003.
ACCUMULATED OTHER COMPREHENSIVE INCOME
As of December 31, 2004 and 2003, accumulated other comprehensive income
reflected in the shareholders' equity is comprised of the following:
December 31,
-------------------
2004 2003
------ ------
Foreign currency translation adjustment $4,053 $ -
------ ------
Accumulated other comprehensive income $4,053 $ -
====== ======
FEDERAL INCOME TAXES
The Company intends to file its federal income tax return as a REIT under
Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the
"Code"). In order to maintain its qualification as a REIT, the Company is
required to, among other things, distribute at least 90% of its REIT taxable
income to its shareholders and meet certain tests regarding the nature of its
income and assets. As a REIT, the Company is not subject to federal income tax
with respect to that portion of its income which meets certain criteria and is
distributed annually to the shareholders. Accordingly, no provision for federal
income taxes is included in the accompanying consolidated financial statements.
The Company
-22-
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands except share and per share amounts)
has and intends to continue to operate so that it meets the requirements for
taxation as a REIT. Many of these requirements, however, are highly technical
and complex. If the Company were to fail to meet these requirements, the Company
would be subject to federal income tax. The Company is subject to certain state,
local and foreign taxes. Provision for such taxes has been included in general
and administrative expenses in the Company's Consolidated Statements of
Operations.
COSTS OF RAISING CAPITAL
Costs incurred in connection with the raising of capital through the sale of
common stock are charged to shareholder's equity upon the issuance of shares.
EARNINGS PER SHARE
The Company has a simple equity capital structure with only common stock
outstanding. As a result, the Company has presented basic per-share amounts only
for all periods presented in the accompanying consolidated financial statements.
ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liability and Equity" ("FAS 150"). FAS
150 establishes standards to classify as liabilities certain financial
instruments that are mandatorily redeemable or include an obligation to
repurchase and expands financial statement disclosure requirements. Such
financial instruments will be measured at fair value with changes in fair value
included in the determination of net income. FAS 150 was effective for financial
instruments entered into or modified after May 31, 2003, and otherwise effective
at the beginning of the first interim period beginning after June 15, 2003.
In November 2003, the FASB issued FASB Staff Position 150-3 ("FSP 150-3"), which
defers the classification and measurement provisions of FAS 150 indefinitely as
they apply to mandatorily redeemable non-controlling interests associated with
finite-lived entities. As of December 31, 2004, the Company does not have any
minority interests that have finite lives and were considered mandatorily
redeemable non-controlling interests prior to the issuance of FSP 150-3. The
Company adopted FAS 150 in July 2003 and it did not have a significant impact on
our consolidated financial statements.
3. Agreements and Transactions with Related Parties:
Pursuant to the advisory agreement, the Advisor will perform certain services
for the Company including the identification, evaluation, negotiation, purchase
and disposition of property, the day-to-day management of the Company and the
performance of certain administrative duties. The advisory agreement between the
Company and the Advisor provides that the Advisor will receive asset management
and performance fees, each of which are -1/2 of 1% of average invested assets,
as defined in the advisory agreement. The performance fee is subordinated to the
preferred return, a non-compounded cumulative distribution return of 6%. As of
December 31, 2004, the preferred return has not been achieved. The asset
management and performance fees will be payable in cash or restricted stock at
the option of the Advisor. In connection with the day-to-day operations, the
Advisor will also be reimbursed for the actual cost of personnel needed to
provide administrative services to the operation of the Company. The Company
incurred asset management fees of $819 with performance fees in like amount, and
personnel reimbursements of $50 in 2004. Asset management and personnel
reimbursement costs are included in property expense and general and
administrative expense, respectively in the accompanying financial statements.
The Company is a participant in an agreement with certain affiliates for the
purpose of leasing office space used for the administration of real estate
entities and sharing the associated costs. Pursuant to the terms of the
agreement, the Company's share of rental occupancy and leasehold costs is based
on gross revenue, and expenses incurred in 2004 were $3. The Company's current
share of future minimum lease payments on the office lease, which has a current
term through 2016, is $168.
In connection with structuring and negotiating acquisitions and related mortgage
financing on behalf of the Company, the advisory agreement provides for
acquisition fees of not more than 4.5%, based on the aggregate cost
-23-
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands except share and per share amounts)
of properties acquired of which 2% will be deferred and payable in equal annual
installment over three years with payment, subject to achieving the preferred
return. Unpaid installments bear interest at an annual rate of 5%. The
acquisition fees will be payable in cash or restricted stock at the option of
the Advisor.
Fees are payable to the Advisor for services provided to the Company relating to
the identification, evaluation, negotiation, financing and purchase of
properties and refinancing of mortgages. A portion of such fees are deferred and
payable in equal installments over no less than three years following the first
anniversary of the date a property was purchased. Such deferred fees are only
payable if the preferred return has been met. As of December 31, 2004, the
preferred return has not been met. The unpaid portion of the deferred fees bears
interest at an annual rate of 5% from the date of acquisition of a property
until paid. For transactions and refinancings that were completed in 2004,
current fees were $9,410 and deferred fees were $7,535.
In connection with the disposition of properties, the Company will incur a
subordinated disposition fee which will be the lesser of (i) 50% of the
competitive real estate commission and (ii) 3% of the sales price of the
property. The subordinated disposition fee is not payable unless or until
shareholders have received a return of 100% of their initial investment plus a
6% non-compounded cumulative annual distribution return.
The Advisor is obligated to reimburse the Company for the amount by which
operating expenses of the Company exceeds the 2%/25% Guidelines (the greater of
2% of average invested assets or 25% of net income) as defined in the advisory
agreement for any twelve-month period. If in any year the operating expenses of
the Company exceed the 2%/25% guidelines, the Advisor will have an obligation to
reimburse the Company for such excess, subject to certain conditions. Only if
the independent directors find that such excess expenses were justified based on
any unusual and nonrecurring factors which they deem sufficient, the Advisor may
be paid in future years for the full amount or any portion of such excess
expenses, but only to the extent that such reimbursement would not cause the
Company's operating expenses to exceed this limit in any such year. Charges
related to asset impairment, bankruptcy of lessees, lease payment defaults,
extinguishment of debt or uninsured losses are generally not considered unusual
and nonrecurring. A determination that a charge is unusual and nonrecurring,
such as the costs of significant litigation that are not associated with day-to
day operations, or uninsured losses that are beyond the size or scope of the
usual course of business based on the event history and experience of the
Advisor and independent directors, is made at the sole discretion of the
independent directors. The Company will record any reimbursement of operating
expenses as a liability until any contingencies are resolved and will record the
reimbursement as a reduction of asset management and performance fees at such
time that a reimbursement is fixed, determinable and irrevocable. The operating
expenses of the Company have not exceeded the amount that would require the
Advisor to reimburse the Company.
The Company owns interests in entities which range from 35% to 50%, with the
remaining interests held by affiliates. The Company has a significant influence
in these investments, which are, therefore, accounted for under the equity
method of accounting (see Note 6).
As previously reported by the Advisor, the Advisor and Carey Financial, the
wholly-owned broker-dealer subsidiary of the Advisor, are currently subject to
an SEC investigation into payments made to third party broker dealers in
connection with the distribution of REITs managed by the Advisor and other
matters. Although no regulatory action has been initiated against the Advisor
or Carey Financial in connection with the matters being investigated, it is
possible that the SEC may pursue an action in the future. The potential timing
of any such action and the nature of the relief or remedies the SEC may seek
cannot be predicted at this time. If such an action is brought, it could
materially affect the Advisor and the REITs managed by the Advisor.
4. Real Estate Leased to Others Accounted for Under the Operating Method:
Scheduled future minimum rents, exclusive of renewals and expenses paid by
tenants, under non-cancelable operating leases amount are approximately as
follows:
Year Ending December 31,
- ------------------------
2005 $ 6,144
2006 6,197
2007 6,234
2008 6,234
2009 6,234
Thereafter through 2024 79,589
-24-
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands except share and per share amounts)
There were no contingent rents earned in 2004.
5. Net Investment in Direct Financing Leases:
Net investment in direct financing leases is summarized as follows:
December 31, 2004
-----------------
Minimum lease payments receivable $188,762
Unguaranteed residual value 72,248
--------
261,010
Less: unearned income (163,908)
--------
$ 97,102
========
Scheduled future minimum rents, exclusive of renewals and expenses paid by
tenants, under non-cancelable direct financing leases are approximately as
follows:
Year Ending December 31,
- ------------------------
2005 $ 7,822
2006 7,880
2007 7,939
2008 8,000
2009 8,062
Thereafter through 2029 149,059
There were no contingent rents earned in 2004.
6. Equity Investments:
On April 29, 2004, the Company, along with two affiliates, Corporate Property
Associates 14 Incorporated and Corporate Property Associates 15 Incorporated,
through a limited partnership, UH Storage (DE) Limited Partnership ("UH
Storage"), in which the Company owns a 30.77% limited partnership interest,
purchased 78 retail self-storage and truck rental facilities and entered into
master lease agreements with two lessees that operate the facilities under the
U-Haul brand name. The self-storage facilities are leased to Mercury Partners,
LP and the truck rental facilities are leased to U-Haul Moving Partners, Inc.
Summarized financial information of UH Storage is as follows:
December 31,
2004
-------------
Assets (primarily real estate) $ 350,882
Liabilities (primarily mortgage notes payable) (219,753)
------------
Partners' and members' equity $ 131,129
============
Company's share of equity investees' net assets $ 40,596
============
Year Ended December 31,
2004
-------------------------
Revenues (primarily rental income) $ 19,197
Expenses (primarily depreciation) (5,486)
Other interest income 4
Interest expense (8,066)
------------
Net income $ 5,649
============
Company's share of net income from equity investment $ 1,723
============
-25-
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands except share and per share amounts)
The Company also owns interests in single-tenant net leased properties leased to
corporations through noncontrolling interests in partnerships and limited
liability companies in which its ownership interests are 50% or less and the
Company exercises significant influence. The underlying investments are owned
with affiliates that have similar investment objectives as the Company. The
ownership interests range from 35% to 50%. The lessees are Actuant Corporation,
TietoEnator Plc. and Thales S.A. (see Note 7).
Summarized financial information of the above mentioned equity investees are as
follows:
For the
Period From
Inception
(June 5, 2003)
Year Ended Through
December 31, December 31,
---------------------------------
2004 2003
---------------------------------
Assets (primarily real estate) $ 249,920 $ 17,575
Liabilities (primarily mortgage notes payable) (185,665) (635)
--------- ---------
Partners' and members' equity $ 64,255 $ 16,940
========= =========
Company's share of equity investees' net assets $ 25,368 $ 1
========= =========
For the
Period From
Inception
(June 5, 2003)
Year Ended Through
December 31, December 31,
--------------------------------
2004 2003
--------------------------------
Revenues (primarily rental income and interest income
from direct financing leases) $ 9,874 $ 93
Expenses (primarily depreciation) (3,720) -
Other interest income 65 -
Interest expense (4,059) -
--------- ----------
Net income $2,160 $ 93
========= ==========
Company's share of net income from equity investments $ 617 $ -
========= ==========
7. Acquisitions of Real Estate Interests:
A summary of the properties (real estate accounted for under the operating
method and net investment in direct financing leases), equity investments, real
estate under construction and mortgage note receivable acquired in 2004 is as
follows:
Properties Acquired:
Initial Annual
Contractual Mortgage Annual Debt Date(s)
Lease Obligor: Cost Location Rent Financing Service Acquired
- -------------------------------- --------- --------------------- -------------- ----------- ----------- ---------
Polestar Petty Ltd.(1) $ 27,921 Leeds, United Kingdom $ 2,116 $ 18,840 $ 1,354 5/5/2004
Castle Rock Industries, Inc. 13,765 Chandler, AZ and 1,328 9,300 770 6/1/2004
Englewood, CO
Foss Manufacturing Company, Inc. 32,171 Hampton, NH 3,195 17,000 1,533 7/1/2004
Ply-Gem Industries, Inc.(1) 37,885 Kearney, MO; 3,510 21,186 1,812 8/27/2004
Martinsburg, WV;
Valencia, PA; Toledo,
OH; York, NE;
FairBluff, NC; Rockey
Mountain, VA;
Alberta, Canada
Xpedite Systems, Inc. 15,522 Tinton Falls, NJ 1,395 10,250 820 9/16/2004
On December 27, 2004, the Company completed the purchase of land and buildings
located in Vantaa (Helsinki), Finland for $20,832 (based on the exchange rate of
the Euro on the date of acquisition) and Linkoping, Sweden for $10,075 (based on
the exchange rate of the Swedish Kroner on the date of acquisition) and entered
into net lease agreements with Plantasjen ASA ("Plantasjen").
The Vantaa lease has an initial term of 20 years with two 10-year renewal
options and provides for initial annual rent of $1,462 (based on the exchange
rate on the date of acquisition). The Linkoping lease has an initial term of 25
years with two 10-year renewal options and provides for initial annual rent of
$699 (based on the exchange rate on
-26-
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands except share and per share amounts)
the date of acquisition). Both leases provide for annual rent increases based on
increases in the cost of living index of each respective country.
The Company obtained limited recourse mortgage loans of $13,575 and $6,355
(based on the exchange rates as of the date of acquisition) in connection with
the acquisition of the Helsinki and Linkoping properties, respectively. The
Helsinki and Linkoping mortgage loans provide for payments of principal and
interest at annual interests rates of 4.81% and 5.25%, respectively, with
quarterly payments of principal and interest. The loans have a 10-year term with
principal amortizing 2% annually over the mortgage terms.
Equity Investments Acquired:
Initial Annual
Contractual Mortgage Annual Debt Date(s)
Lease Obligor: Cost Location Rent Financing Service Acquired
- -------------------------------- --------- --------------------- -------------- ----------- ----------- ---------
Mercury Partners, LP and U-Haul $ 96,620 78 properties $ 8,782 $ 56,309 $ 4,541 4/29/2004
Moving Partners, Inc.(3) 24 states
Actuant Corporation(1)(2)(5) 8,266 Kahl am Main, Germany 798 5,680 475 6/7/2004
TietoEnator Plc.(1)(6) 39,222 Espoo, Finland 2,794 28,296 1,731 7/8/2004
Thales S.A.(1)(4) 36,232 Guyancourt, Conflans, 3,421 26,830 2,021 7/26/2004
Laval, Ymare and and
Aubagne, France 8/3/2004
Real Estate Under Construction:
Initial Annual
Contractual Mortgage Annual Debt Date(s)
Lease Obligor: Cost Location Rent Financing Service Acquired
- -------------------------------- --------- --------------------- -------------- ----------- ----------- ---------
Huntsman LLC(6) $ 38,025 Woodland, TX $ 3,545 $ - $ - 9/30/2004
(1) Based on the applicable foreign currency exchange rate on the dates of
acquisition.
(2) The Company exercised an option, which increased its 0.01% interest in a
limited partnership as a limited partner to 50% on June 7, 2004. Amounts
shown represent the Company's proportionate 50% share.
(3) Amounts represent the Company's proportionate 30.77% share.
(4) Amounts shown represent the Company's proportionate 35% share.
(5) Amounts shown represent the Company's proportionate 40% share.
(6) Build-to-suit commitment. The initial annual rent is based on estimated
construction costs of $36,925 and will commence when construction is
completed.
Mortgage Note Receivable Acquired:
In December 2004, the Company acquired a $20,000 participation in a $165,000
mortgage loan collateralized by the distribution facilities of BlueLinx Holdings
Inc. ("BlueLinx"). The participation represents the subordinate position in a
$165,000 five-year floating rate first mortgage loan against BlueLinx's real
estate portfolio. The Company's participation in the note bears annual interest
at the sum of the greater of the one-month London Interbank Offering Rate or 2%,
and 4.5%. The loan is interest only and is initially scheduled to mature on
November 9, 2007, which maturity may be extended for two 1-year periods. A
balloon payment of $20,000 is due to the Company at maturity.
8. Intangibles:
In connection with its acquisition of properties, the Company has recorded net
intangibles of $4,799, which are being amortized over periods ranging from 12
years to 40 years. Amortization of below-market and above-market rent
intangibles is recorded as an adjustment to rental income.
-27-
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands except share and per share amounts)
Intangibles are summarized as follows:
DECEMBER 31, 2004
-----------------
Lease intangibles
In-place lease $ 3,822
Tenant relationship 1,568
Above-market rent 347
Less: accumulated amortization (123)
--------------
$ 5,614
--------------
Below-market rent $ (938)
Less: accumulated amortization 22
--------------
$ (916)
==============
Net amortization of intangibles was $101 for the year ended December 31, 2004.
Scheduled annual amortization of intangibles for each of the next five years is
$223.
9. Mortgage Notes Payable:
Mortgage notes payable, all of which are limited recourse to the Company, are
collateralized by an assignment of various leases and by real property with a
carrying value of $155,756 As of December 31, 2004, mortgage notes payable had
fixed interest rates ranging from 4.81% to 6.60% and maturity dates ranging from
2014 to 2024.
Scheduled principal payments during each of the five years following December
31, 2004 are as follows:
Year Ending December 31, Fixed Rate Debt
- ------------------------ ---------------
2005 $ 1,839
2006 2,110
2007 2,276
2008 2,452
2009 2,673
Thereafter through 2024 86,341
--------------
Total $97,691
==============
10. Disclosures About Fair Value of Financial Instruments:
The Company's mortgage notes payable had a carrying value of $97,961 and a fair
value of $96,377 at December 31, 2004. The fair value of the Company's mortgage
note receivable of $20,291 at December 31, 2004 approximated its carrying value.
The fair value of the Company's marketable securities of $69,900 and other
assets and liabilities at December 31, 2004 approximated their carrying value.
The fair value of debt instruments was evaluated using a discounted cash flow
model with rates that take into account the credit of the tenants and interest
rate risk.
11. Dividends:
Dividends paid to shareholders consist of ordinary income, capital gains, return
of capital or a combination thereof for income tax purposes. For the year ended
December 31, 2004, dividends per share reported for tax purposes were as
follows:
2004
Ordinary income $.34
Return of capital .12
----
$.46
-28-
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands except share and per share amounts)
12. Commitments and Contingencies:
The Company is liable for certain expenses of the Offering, which include
filing, legal, accounting, printing and escrow fees, which are to be deducted
from the gross proceeds of the Offering. The Company is reimbursing Carey
Financial or one of its affiliates for expenses (including fees and expenses of
its counsel) and for the costs of any sales and information meetings of Carey
Financial's employees or those of one of its affiliates relating to the
Offering. Total underwriting compensation with respect to the Offering may not
exceed 10% of gross proceeds of the Offering. The Advisor has agreed to be
responsible for the payment of (i) organization and offering expenses (excluding
selling commissions to Carey Financial with respect to shares sold by selected
dealers) which exceed 4% of the gross proceeds of the Offering and (ii)
organization and offering expenses (including selling commissions, fees and fees
paid and expenses reimbursed to selected dealers) which exceed 15% of the gross
proceeds of the Offering. The total costs paid by the Advisor were $11,654
through December 31, 2004, of which the Company has reimbursed $8,997.
Unreimbursed costs are included in due to affiliates in the accompanying
consolidated financial statements.
Total costs paid by the Advisor as of December 31, 2004, in connection with the
Company's filing of a registration statement for a second offering (see Note 1)
with the SEC were $424, which has not been reimbursed.
13. Segment Information:
The Company currently operates in one business segment with domestic and
foreign investments. The Company acquired its first foreign real estate
investments in December 2003.
For 2004, geographic information for the real estate operations segment is
as follows:
Domestic Foreign (1) Total
-------- ----------- --------
Revenues $ 3,893 $ 1,883 $ 5,776
Operating expenses (3,289) (5) (3,294)
Income from equity investments 1,723 617 2,340
Interest expense (1,112) (892) (2,004)
Other, net (2) 2,268 38 2,306
-------- ---------- --------
Net income $ 3,483 $ 1,641 $ 5,124
======== ========== ========
Total assets $514,013 $ 71,499 $585,512
Total long-lived assets 169,898 67,430 237,328
(1) Consists of operations in the European Union and Canada.
(2) Consists of other interest income and gains on foreign currency
transactions.
14. Selected Quarterly Financial Data (unaudited):
Three Months Ended
---------------------------------------------------------------------------
March 31, 2004 June 30, 2004 September 30, 2004 December 31, 2004
-------------- ------------- ------------------ ------------------
Revenues $ - $ 447 $ 2,160 $ 3,169
Operating expenses 127 419 1,121 1,627
Net (loss) income (33) 515 1,748 2,894
(Loss) earnings per share - basic (0.01) 0.03 0.05 0.14
Dividends declared per share 0.112476 0.112931 0.115460 0.116012
-29-
CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands except share and per share amounts)
Three Months Ended
December 31, 2003 (1)
---------------------
Revenues $ -
Expenses 42
Net loss (42)
Net loss per share - Basic $ (2.08)
Dividends declared per share N/A
(1) The Company was formed in June 2003 and commenced operations in December
2003.
15. Pro Forma Financial Information (Unaudited):
The following consolidated pro forma financial information has been presented as
if the Company's acquisitions made during 2004 had occurred on January 1, 2004
for the year ended December 31, 2004 and June 5, 2003 (inception) for the period
ended December 31, 2003. The pro forma financial information is not necessarily
indicative of what the actual results would have been, nor does it purport to
represent the results of operations for future periods.
For the Period From
Year Ended Inception (June 5, 2003)
December 31, Through December 31,
2004 2003
--------------- ------------------------
Pro forma total revenues $15,091 $8,424
Pro forma net income 8,590 4,602
Pro forma earnings per share:
Basic 0.17 0.09
For pro forma purposes, the Company's interest income, other than interest
earned on a mortgage note, has been eliminated based on an assumption that
substantially all cash proceeds from the Company's Offering, have been or will
be invested in real estate. The Company will likely earn interest on cash
generated from operations; however, it is not practicable to make such
assumptions as to how much interest income would have been earned on such funds
during the pro-forma periods presented.
The pro forma weighted average shares outstanding for the period from inception
(June 5, 2003) to December 31, 2003 and for the year ended December 31, 2004 was
determined as if all shares issued since the inception of the Company were
issued on June 5, 2003.
16. Subsequent Events:
Acquisitions:
On January 3, 2005, the Company purchased a property in Southfield, Michigan for
$18,732 and entered into a net lease agreement with HMS Healthcare, Inc. ("HMS")
for 81.65% of the leaseable space of the property and assumed two leases with
existing tenants for the remaining 18.35% of the leaseable space. The lease with
HMS has an initial term of 20 years with two 10-year renewal options. The HMS
lease provides for initial annual rent of $1,228 with stated rent increases of
6.903% every third year. The assumed leases provide for initial annual rent of
$318 and $63, respectively, and expire in December 2005 and December 2010,
respectively.
On January 3, 2005, the Company and CPA(R):15, through 40% and 60% interests,
respectively, in a limited liability company, purchased a property in Helsinki,
Finland for $113,287 (based on the exchange rate of the Euro on the date of
acquisition) and entered into a net lease with Pohjola Non-Life Insurance
Company. The lease has an initial term of 10 years 5 months with a 5-year
renewal option and provides for initial annual rent of $8,128 with annual rent
increases based on increases in the Finnish CPI. In connection with the
purchase, the limited liability company obtained a limited recourse mortgage
loan of $84,663 at a fixed annual interest rate of 4.59% through February 2007
and 4.57%, thereafter. The loan matures in Jan 2015 at which time a balloon
payment is scheduled.
On January 14, 2005, the Company purchased a property in Cynthiana, Kentucky for
$7,366 and entered into a net lease agreement with Clean Earth Kentucky, LLC.
The lease has an initial term of 20 years with two 10-year renewal options and
provides for initial annual rent of $711 with annual rent increases based on
increases in the CPI. In connection with the purchase, the Company obtained a
limited recourse mortgage loan of $4,550 with a fixed annual interest rate of
6.08%. The loan matures in February 2025 at which time a balloon payment is
scheduled.
On January 18, 2005, the Company purchased a property located in Buffalo Grove,
Illinois for $16,469 and entered into a net lease agreement with Precise
Technology Group, Inc. The lease has an initial term of 20 years with two
10-year renewal options and provides for initial annual rent of $1,448 with
increases every two years based on increases in the CPI.
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CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands except share and per share amounts)
On January 28, 2005, the Company purchased properties in Lamlukka and Bangpa-In,
Thailand for $23,689 (based on the exchange rate of the Thai Baht on the date of
acquisition). and entered into net lease agreements with LFD Manufacturing
Limited and IDS Logistics (Thailand) Limited. The leases are guaranteed by the
parent, IDS Group Limited. The Company is committed to funding expansions, at
the option of the lessee of $6,057. The transaction is structured so that the
Company owns 49% of the subsidiary that purchased the properties but receives
substantially all of the economic benefits and risks of ownership of the
property. The lease has an initial term of 15 years with a 5-year renewal option
and provides for initial annual rent of $1,495 with rent increases every three
years based on increases in the cost of living index of the respective country.
In connection with the acquisition, the Company obtained a limited recourse
mortgage loan of $11,440. Interest on the mortgage loan is at an annual fixed
interest rate of 7.15%. The loan matures in July 2018 at which time a balloon
payment is scheduled. In the event the expansion takes place, the Company has
the ability to increase its borrowing under the loan facility by $3,900 to
partially fund the expansion, at substantially the same terms as the original
borrowing.
On January 31, 2005, the Company purchased a mortgage note receivable of
$12,740, collateralized by distribution and storage facilities of Reyes Holdings
L.L.C.
On February 4, 2005, the Company purchased properties in Sunnyvale, California
and Allen, Texas for $29,292 and entered into a net lease agreement with Finisar
Corporation for an initial term of 15 years with two 10 year renewal options and
which provides for initial annual rent of $2,951 with stated annual rent
increases of 2.25%. In connection with this purchase, the Company obtained a
limited recourse mortgage loan of $17,000 at a fixed annual interest rate of
5.96%. The loan matures in March 2020 at which time a balloon payment is
scheduled.
On February 9, 2005, the Company purchased a property in Shelby, North Carolina
for $7,437 and entered into a net lease agreement with MetalsAmerica, Inc. The
lease has an initial term of 20 years with two ten year renewal options and
provides for initial annual rent of $651. In connection with this purchase, the
Company obtained a limited recourse mortgage loan of $4,000 with a fixed annual
interest rate of 5.84%. The loan matures in March 2025.
On February 25, 2005, the Company purchased properties in Fernley, Nevada;
Gainesville, Texas; Sandersville, Georgia and Erwin, Tennessee for $8,714 and
entered into a net lease with PolyPipe, Inc. The lease has an initial term of 20
years, with two ten-year renewal options and provides for initial annual rent of
$787.
On March 1, 2005, the Company purchased property in Piscataway, New Jersey for
$119,970 and entered into a net lease with Telcordia Technologies, Inc. The
lease has an initial term of 18.5 years and provides for initial annual rent of
$8,913. Limited recourse mortgage financing of $79,686 was obtained in
connection with this purchase.
Proposed Acquisitions:
On February 28, 2005, the Company and CPA(R):15, through 25% and 75% interests,
respectively, in a limited liability company, entered into a purchase and sales
agreement with Hellweg Die Profi-Baumarkte GMBH to purchase up to 16 properties
in Germany for up to $166,345 (based on the exchange rate of the Euro as of the
date of the agreement), subject to certain due diligence procedures and
negotiations with the proposed lessees. There is no assurance that this purchase
will be completed, and, if completed, that the actual terms will not differ from
the proposed terms. To the extent that all 16 properties are purchased, initial
annual rent will be $13,597 (based on the exchange rate of the Euro as of the
date of the agreement). In the event that the purchase is completed, the Company
and CPA(R):15 intend to seek limited recourse mortgage financing of
approximately $115,223.
Fundraising Activity:
On March 8, 2005, the Company filed an amendment to the registration statement
for its Offering, to deregister all shares of its common stock that remain
unissued as of March 8, 2005, pursuant to its Offering. Also registered under
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CORPORATE PROPERTY ASSOCIATES 16 - GLOBAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
(In thousands except share and per share amounts)
the registration statement were shares of the Company's common stock to be sold
pursuant to its Distribution Reinvestment and Share Purchase Plan (the "Plan
Shares"). The unsold Plan Shares were not deregistered by such amendment, and
the Company will continue to issue and sell Plan Shares under its Distribution
Reinvestment and Share Purchase Plan pursuant to the registration statement.
-32-
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
There is no established public trading market for the Shares of the Company. As
of December 31, 2004, there were 17,613 holders of record of the Shares of the
Company.
DIVIDENDS
The Company intends to file its 2004 federal income tax return as a real estate
investment trust ("REIT"). A REIT is required to distribute annually 90% of its
Distributable REIT Taxable Income to maintain its status as a REIT. Quarterly
dividends declared by the Company since its inception are as follows:
Cash Dividends Declared Per Share-2004
- --------------------------------------
First quarter $0.112476
Second quarter 0.112931
Third quarter 0.115460
Fourth quarter 0.116012
---------
$0.456879
=========
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Pursuant to Rule 701 of Regulation S-K, the use of proceeds from CPA(R):16 -
Global's offering of common stock which commenced in December 2003 (File
#333-106838) is as follows as of December 31, 2004:
Shares registered: 110,000,000
Aggregate price of offering amount registered: $ 1,100,000,000
Shares sold: 51,133,332
Aggregated offering price of amount sold: $ 511,333,320
Direct or indirect payments to directors,
officers, general partners of the issuer
or their associates, to persons owning
ten percent or more of any class of
equity securities of the issuer and to
affiliates of the issuer: $ 48,875,022
Direct or indirect payments to others:
Net offering proceeds to the issuer after
deducting expenses: $ 462,458,298
Purchases of real estate, mortgage note
receivable and equity investments: $ 242,981,142
Temporary investments in cash and cash
equivalents, short-term investments
and marketable securities: $ 219,477,156
REPORT ON FORM 10-K
The Advisor will supply to any shareholder, upon written request and without
charge, a copy of the Annual Report on Form 10-K for the year ended December 31,
2004 as filed with the SEC. The 10-K may also be obtained through the SEC's
EDGAR database at www.sec.gov.
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