Attached files
file | filename |
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EX-31.1 - EXHIBIT 31.1 - NNN 2003 VALUE FUND LLC | c92690exv31w1.htm |
EX-32.1 - EXHIBIT 32.1 - NNN 2003 VALUE FUND LLC | c92690exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - NNN 2003 VALUE FUND LLC | c92690exv31w2.htm |
EX-32.2 - EXHIBIT 32.2 - NNN 2003 VALUE FUND LLC | c92690exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
or
o | 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: 0-51295
NNN 2003 Value Fund, LLC
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
20-0122092 (I.R.S. Employer Identification No.) |
|
1551 N. Tustin Avenue, Suite 300 Santa Ana, California (Address of principal executive offices) |
92705 (Zip Code) |
(714) 667-8252
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
As of November 16, 2009, there were 9,970 units of NNN 2003 Value Fund, LLC outstanding.
NNN 2003 VALUE FUND, LLC
(A Delaware limited liability company)
TABLE OF CONTENTS
(A Delaware limited liability company)
TABLE OF CONTENTS
1
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
NNN 2003 VALUE FUND, LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2009 | December 31, 2008 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Real estate investments: |
||||||||
Operating properties, net |
$ | 19,531,000 | $ | 20,435,000 | ||||
Property held for non-sale disposition, net |
2,603,000 | 5,259,000 | ||||||
Properties held for sale, net |
19,492,000 | 29,288,000 | ||||||
Investments in unconsolidated real estate |
1,274,000 | 4,034,000 | ||||||
42,900,000 | 59,016,000 | |||||||
Cash and cash equivalents |
2,608,000 | 1,459,000 | ||||||
Accounts receivable, net |
133,000 | 369,000 | ||||||
Accounts and loans receivable due from related parties |
795,000 | 764,000 | ||||||
Restricted cash |
1,761,000 | 1,788,000 | ||||||
Identified intangible assets, net |
1,805,000 | 2,290,000 | ||||||
Other assets related to property held for non-sale disposition |
541,000 | 1,126,000 | ||||||
Other assets related to properties held for sale |
2,598,000 | 3,582,000 | ||||||
Other assets, net |
1,622,000 | 1,821,000 | ||||||
Total assets |
$ | 54,763,000 | $ | 72,215,000 | ||||
LIABILITIES AND (DEFICIT) EQUITY | ||||||||
Mortgage loans payable |
$ | 34,192,000 | $ | 34,192,000 | ||||
Mortgage loans payable secured by property held for non-sale disposition |
4,590,000 | 4,590,000 | ||||||
Mortgage loans payable secured by properties held for sale |
21,382,000 | 30,133,000 | ||||||
Accounts payable and accrued liabilities |
1,872,000 | 2,098,000 | ||||||
Accounts and loans payable due to related parties |
130,000 | 227,000 | ||||||
Acquired lease liabilities, net |
86,000 | 129,000 | ||||||
Other liabilities related to property held for non-sale disposition, net |
130,000 | 133,000 | ||||||
Other liabilities related to properties held for sale, net |
208,000 | 319,000 | ||||||
Security deposits, prepaid rent and other liabilities |
441,000 | 379,000 | ||||||
Total liabilities |
63,031,000 | 72,200,000 | ||||||
Commitments and contingencies (Note 15) |
||||||||
(Deficit) equity: |
||||||||
NNN 2003 Value Fund, LLC unit holders deficit |
(8,364,000 | ) | (279,000 | ) | ||||
Noncontrolling interest equity |
96,000 | 294,000 | ||||||
Total (deficit) equity |
(8,268,000 | ) | 15,000 | |||||
Total liabilities and (deficit) equity |
$ | 54,763,000 | $ | 72,215,000 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Table of Contents
NNN 2003 VALUE FUND, LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE LOSS
(Unaudited)
AND COMPREHENSIVE LOSS
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenue: |
||||||||||||||||
Rental revenue |
$ | 1,001,000 | $ | 697,000 | $ | 2,766,000 | $ | 3,075,000 | ||||||||
Rental revenue of operations held for non-sale disposition |
192,000 | 183,000 | 622,000 | 670,000 | ||||||||||||
Total revenues |
1,193,000 | 880,000 | 3,388,000 | 3,745,000 | ||||||||||||
Expense: |
||||||||||||||||
Rental expense |
465,000 | 386,000 | 1,293,000 | 1,343,000 | ||||||||||||
General and administrative |
162,000 | 67,000 | 548,000 | 607,000 | ||||||||||||
Depreciation and amortization |
297,000 | 595,000 | 844,000 | 1,783,000 | ||||||||||||
Operating expenses of operations held for non-sale disposition |
202,000 | 382,000 | 748,000 | 1,123,000 | ||||||||||||
Real estate related impairments |
400,000 | 2,600,000 | 400,000 | 2,600,000 | ||||||||||||
Real estate related impairments of operations held for
non-sale disposition |
300,000 | | 3,000,000 | | ||||||||||||
Total expenses |
1,826,000 | 4,030,000 | 6,833,000 | 7,456,000 | ||||||||||||
Loss before other income (expense) and discontinued operations |
(633,000 | ) | (3,150,000 | ) | (3,445,000 | ) | (3,711,000 | ) | ||||||||
Other income (expense): |
||||||||||||||||
Interest expense |
(690,000 | ) | (733,000 | ) | (2,062,000 | ) | (2,208,000 | ) | ||||||||
Interest expense of operations held for non-sale disposition |
(186,000 | ) | (132,000 | ) | (551,000 | ) | (393,000 | ) | ||||||||
Interest and dividend income |
1,000 | 49,000 | 25,000 | 232,000 | ||||||||||||
Other-than-temporary impairment of marketable equity
securities |
| (51,000 | ) | | (844,000 | ) | ||||||||||
Equity in losses of unconsolidated real estate |
(194,000 | ) | (146,000 | ) | (2,759,000 | ) | (777,000 | ) | ||||||||
Other expense |
(8,000 | ) | (1,000 | ) | (48,000 | ) | (15,000 | ) | ||||||||
Loss from continuing operations |
(1,710,000 | ) | (4,164,000 | ) | (8,840,000 | ) | (7,716,000 | ) | ||||||||
Income (loss) from discontinued operations |
815,000 | (644,000 | ) | 557,000 | (2,099,000 | ) | ||||||||||
Consolidated net loss |
(895,000 | ) | (4,808,000 | ) | (8,283,000 | ) | (9,815,000 | ) | ||||||||
Net income (loss) attributable to noncontrolling interest |
54,000 | (7,000 | ) | (198,000 | ) | (40,000 | ) | |||||||||
Net loss attributable to NNN 2003 Value Fund, LLC |
$ | (949,000 | ) | $ | (4,801,000 | ) | $ | (8,085,000 | ) | $ | (9,775,000 | ) | ||||
Comprehensive loss: |
||||||||||||||||
Consolidated net loss |
$ | (895,000 | ) | $ | (4,808,000 | ) | $ | (8,283,000 | ) | $ | (9,815,000 | ) | ||||
Recognition of previously unrealized loss on marketable
equity securities |
| | | 646,000 | ||||||||||||
Unrealized gain (loss) on marketable equity securities
arising during the period |
| (2,000 | ) | | 37,000 | |||||||||||
Comprehensive (income) loss attributable to noncontrolling
interests |
(54,000 | ) | 7,000 | 198,000 | 40,000 | |||||||||||
Comprehensive loss attributable to NNN 2003 Value Fund, LLC |
$ | (949,000 | ) | $ | (4,803,000 | ) | $ | (8,085,000 | ) | $ | (9,092,000 | ) | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Table of Contents
NNN 2003 VALUE FUND, LLC
CONDENSED CONSOLIDATED STATEMENT OF (DEFICIT) EQUITY
For the Nine Months Ended September 30, 2009
(Unaudited)
For the Nine Months Ended September 30, 2009
(Unaudited)
NNN 2003 Value | ||||||||||||||||
Number | Total Equity | Fund, LLC | Noncontrolling | |||||||||||||
of Units | (Deficit) | Deficit | Interest | |||||||||||||
BALANCE December 31, 2008 |
9,970 | $ | 15,000 | $ | (279,000 | ) | $ | 294,000 | ||||||||
Net loss |
| (8,283,000 | ) | (8,085,000 | ) | (198,000 | ) | |||||||||
BALANCE September 30, 2009 |
9,970 | $ | (8,268,000 | ) | $ | (8,364,000 | ) | $ | 96,000 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Table of Contents
NNN 2003 VALUE FUND, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Unaudited)
Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Consolidated net loss |
$ | (8,283,000 | ) | $ | (9,815,000 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Real estate related impairments on consolidated properties |
4,000,000 | 3,200,000 | ||||||
Gain on sale of real estate |
(704,000 | ) | | |||||
Other than temporary impairment of marketable equity securities |
| 844,000 | ||||||
Depreciation and amortization (including deferred financing costs,
deferred rent and above/below market leases) |
1,620,000 | 4,129,000 | ||||||
Equity in losses of unconsolidated real estate |
2,759,000 | 777,000 | ||||||
Allowance for doubtful accounts |
29,000 | (44,000 | ) | |||||
Change in operating assets and liabilities: |
||||||||
Accounts receivable |
207,000 | (69,000 | ) | |||||
Accounts receivable from related parties |
(31,000 | ) | (73,000 | ) | ||||
Other assets |
(105,000 | ) | 292,000 | |||||
Restricted cash |
(77,000 | ) | (563,000 | ) | ||||
Accounts payable and accrued liabilities |
(56,000 | ) | (738,000 | ) | ||||
Security deposits, prepaid rent and other liabilities |
(64,000 | ) | (12,000 | ) | ||||
Net cash used in operating activities |
(705,000 | ) | (2,072,000 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Proceeds from sale of real estate |
10,983,000 | | ||||||
Restricted cash |
| 728,000 | ||||||
Capital expenditures |
(479,000 | ) | (1,372,000 | ) | ||||
Distribution from (investment in) unconsolidated real estate |
1,000 | (111,000 | ) | |||||
Net cash provided by (used in) investing activities |
10,505,000 | (755,000 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Restricted cash |
104,000 | 1,385,000 | ||||||
Principal repayments on mortgage loans payable and other debt |
(8,943,000 | ) | (3,245,000 | ) | ||||
Borrowings on mortgage loans payable and other debt |
192,000 | 687,000 | ||||||
Borrowings from related parties |
| 111,000 | ||||||
Payment of deferred financing costs |
(4,000 | ) | (230,000 | ) | ||||
Distributions to noncontrolling interest |
| (2,000 | ) | |||||
Distributions to unit holders |
| (2,617,000 | ) | |||||
Net cash used in financing activities |
(8,651,000 | ) | (3,911,000 | ) | ||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
1,149,000 | (6,738,000 | ) | |||||
CASH AND CASH EQUIVALENTS beginning of period |
1,459,000 | 8,208,000 | ||||||
CASH AND CASH EQUIVALENTS end of period |
$ | 2,608,000 | $ | 1,470,000 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
||||||||
Cash paid for interest |
$ | 3,729,000 | $ | 3,989,000 | ||||
Cash paid for income taxes |
$ | 19,000 | $ | 81,000 | ||||
NONCASH INVESTING ACTIVITIES: |
||||||||
Accrual for tenant improvements and capital expenditures |
$ | 14,000 | $ | 714,000 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Table of Contents
NNN 2003 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
For the Three and Nine Months Ended September 30, 2009 and 2008
For the Three and Nine Months Ended September 30, 2009 and 2008
1. Organization and Description of Business
The use of the words we, us, or our refers to NNN 2003 Value Fund, LLC and its
subsidiaries, except where the context otherwise requires.
NNN 2003 Value Fund, LLC was formed as a Delaware limited liability company on June 19, 2003.
We were organized to acquire, own, operate and subsequently sell all or a portion of a number of
unspecified properties believed to have higher than average potential for capital appreciation, or
value-added properties. As of September 30, 2009, we held interests in seven commercial office
properties, including four consolidated properties, or our consolidated properties, and three
unconsolidated properties, or our unconsolidated properties. Our principal objectives initially
were to: (i) have the potential within approximately one to five years, subject to market
conditions, to realize income on the sale of our properties; (ii) realize income through the
acquisition, operation, development and sale of our properties or our interests in our properties;
and (iii) make periodic distributions to our unit holders from cash generated from operations and
capital transactions. We currently intend to sell all of our remaining properties and make
distributions to our unit holders from available funds. We do not anticipate acquiring any
additional real estate properties at this time.
Our ability to continue as a going concern is dependent upon our ability to generate the
necessary cash flows and/or retain the necessary financing to meet our obligations and pay our
liabilities when they come due. As of November 16, 2009, we have principal payments of $60,164,000
plus accrued interest due on outstanding mortgage loans payable related to our consolidated
properties that mature in the next twelve months. As further discussed in Note 10, Mortgage Loans
Payable and Other Debt, during the three months ended September 30, 2009, we elected to cease the
subsidization of the operations and debt service on the non-recourse promissory note for one of our
consolidated properties. In addition, we were not able pay the lender the outstanding principal
amount of $4,590,000 and the monthly interest payment due under the mortgage loan on October 1,
2009, or to make such payments within 10 days of the date such payment was due, which constituted
an event of default. We are currently in discussions with the lender to negotiate a forbearance
agreement, however, there can be no assurance that we will enter into a forbearance agreement with
our lender, or if we do enter into a forbearance agreement that we will be able to comply with the
terms of such an agreement. We have classified this property as a property held for non-sale
disposition as of September 30, 2009, as we believe it is probable that the property will be
transferred to the lender in the fourth quarter of 2009 and it no longer qualifies as a property
held for sale. If we cannot sell our real estate investments, obtain forbearance agreements, obtain
new financing, or obtain alternative financing on as favorable terms as our existing mortgage loans
payable, we may trigger defaults which could result in foreclosure of the asset discussed above and
certain other assets. As a result, the maturities of our mortgage debt combined with our deficit
cash flow from operations raises substantial doubt about our ability to continue as a going
concern.
Grubb & Ellis Realty Investors, LLC, or Grubb & Ellis Realty Investors, or our manager,
manages us pursuant to the terms of an operating agreement, or the Operating Agreement. Our manager
is managed by executive officers appointed by the board of directors of Grubb & Ellis Company, or
Grubb & Ellis. While we have only one executive officer and no employees, certain executive
officers and employees of our manager provide services to us pursuant to the Operating Agreement.
Our manager engages affiliated entities, including Triple Net Properties Realty, Inc., or Realty,
to provide certain services to us. Realty serves as our property manager pursuant to the terms of
the Operating Agreement and a property management agreement, or the Management Agreement. The
Operating Agreement terminates upon our dissolution. The unit holders may not vote to terminate our
manager prior to the termination of the Operating Agreement or our dissolution, except for cause.
The Management Agreement terminates with respect to each of our properties upon the earlier of the
sale of each respective property or December 31, 2013. Realty may be terminated without cause prior
to the termination of the Management Agreement or our dissolution, subject to certain conditions,
including the payment by us to Realty of a termination fee as provided in the Management Agreement.
2. Summary of Significant Accounting Policies
The summary of significant accounting policies presented below is designed to assist in
understanding our interim unaudited condensed consolidated financial statements. Such interim
unaudited condensed consolidated financial statements and accompanying notes thereto are the
representations of our management, who are responsible for their integrity and objectivity. These
accounting policies conform to accounting principles generally accepted in the United States of
America, or GAAP, in all material respects, and have been consistently applied in preparing the
accompanying interim unaudited condensed consolidated financial statements.
6
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NNN 2003 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Interim Unaudited Financial Data
Our accompanying interim unaudited condensed consolidated financial statements have been
prepared by us in accordance with GAAP and in conjunction with the rules and regulations of the
United States Securities and Exchange Commission, or the SEC. Certain information and footnote
disclosures required for annual financial statements have been condensed or excluded pursuant to
SEC rules and regulations. Accordingly, our accompanying interim unaudited condensed consolidated
financial statements do not include all of the information and footnotes required by GAAP for
complete financial statements. Our accompanying interim unaudited condensed consolidated financial
statements reflect all adjustments, which are, in our opinion, of a normal recurring nature and
necessary for a fair presentation of our financial position, results of operations and cash flows
for the interim periods. Interim results of operations are not necessarily indicative of the
results to be expected for the full year; such results may be less favorable. Our accompanying
interim unaudited condensed consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and the notes thereto included in our 2008 Annual
Report on Form 10-K, as filed with the SEC on March 31, 2009.
Principles of Consolidation and Basis of Presentation
The accompanying interim unaudited condensed consolidated financial statements include our
accounts and those of our wholly-owned subsidiaries, any majority-owned subsidiaries and any
variable interest entities, or VIEs, that we have concluded should be consolidated, in accordance
with the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or
Codification, Topic 810, Consolidation. All material intercompany transactions and account balances
have been eliminated in consolidation. We account for all other unconsolidated real estate
investments using the equity method of accounting. Accordingly, our share of the earnings (losses)
of these real estate investments is included in consolidated net income (loss).
Our consolidated financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the settlement of liabilities and commitments in the
normal course of business. The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or to the amounts and
classifications of liabilities that may be necessary if we are unable to continue as a going
concern.
We have evaluated subsequent events through November 16, 2009, the date of issuance of these
financial statements.
Use of Estimates
The preparation of our interim unaudited condensed consolidated financial statements in
conformity with GAAP requires our manager to make estimates and assumptions that affect the
reported amounts of the assets and liabilities as of September 30, 2009 and December 31, 2008 and
the disclosure of contingent assets and liabilities at the date of the interim unaudited condensed
consolidated financial statements and the reported amounts of revenues and expenses for the three
and nine months ended September 30, 2009 and 2008. Actual results could differ from those
estimates, perhaps in material adverse ways, and those estimates could be different under different
assumptions or conditions.
Investments in Marketable Equity Securities
We had no investments in marketable equity securities as of September 30, 2009 and December
31, 2008. During the nine months ended September 30, 2008, we recorded losses of $844,000 to
reflect the fair value of marketable equity securities owned at that time. We believed the decline
in value was other-than-temporary and recognized the losses in our statement of operations during
the nine months ended September 30, 2008. The securities were sold in 2008.
Real Estate Related Impairments
We assess the impairment of a real estate asset when events or changes in circumstances
indicate that its carrying amount may not be recoverable. Indicators we consider important which
could trigger an impairment review include the following:
| a significant negative industry or economic trend; | ||
| a significant underperformance relative to historical or projected future operating results; and | ||
| a significant change in the manner in which the asset is used. |
7
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NNN 2003 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
In the event that the carrying amount of a property exceeds the sum of the undiscounted cash
flows (excluding interest) that are expected to result from the use and eventual disposition of the
property, we would recognize an impairment loss to the extent the carrying amount exceeded the
estimated fair value of the property. The estimation of expected future net cash flows is
inherently uncertain and relies on subjective assumptions dependent upon future and current market
conditions and events that affect the ultimate value of the property. It requires us to make
assumptions related to future rental rates, tenant allowances, operating expenditures, property
taxes, capital improvements, occupancy levels, and the estimated proceeds generated from the future
sale of the property.
In accordance with FASB Codification Topic 360, Property, Plant and Equipment, as of September
30, 2009 we assessed the value of our consolidated operating properties. This valuation assessment
resulted in us recognizing charges for real estate related impairments of $700,000 and $4,000,000
against the carrying value of our consolidated real estate investments during the three and nine
months ended September 30, 2009, respectively. Additionally, our unconsolidated properties were
also assessed for impairment and impairment charges of $2,470,000 and $21,270,000 were recorded
against their carrying values during the three and nine months ended September 30, 2009,
respectively, of which our share was $349,000 and $2,996,000, respectively. Real estate related
impairments are reflected in our statements of operations as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Line Item in Statement of Operations: |
||||||||||||||||
Real estate related impairments
(investments in operating properties) |
$ | 400,000 | $ | 2,600,000 | $ | 400,000 | $ | 2,600,000 | ||||||||
Real estate related impairments of
operations held for non-sale disposition |
300,000 | | 3,000,000 | | ||||||||||||
Equity in losses of unconsolidated real
estate (investments in unconsolidated
real estate) |
349,000 | | 2,996,000 | | ||||||||||||
Income (loss) from discontinued
operations (investments in properties
held for sale) |
| 600,000 | 600,000 | 600,000 | ||||||||||||
Total real estate related impairments |
$ | 1,049,000 | $ | 3,200,000 | $ | 6,996,000 | $ | 3,200,000 | ||||||||
We are subject to the current economic conditions which have affected the availability of
credit and our ability to obtain financing or to extend loans as they come due. As of November 16,
2009, we have mortgage loans totaling $60,164,000 on our consolidated properties that mature within
the next 12 months. We plan to refinance the mortgage loans, extend the mortgage loans or sell the
properties and, in the case of one or our consolidated properties, it is probable that the property
will be transferred to the lender. If we are unable to execute on our plans, the ultimate recovery
of our investments in real estate may be further impaired.
Operating Properties
Our operating properties are stated at historical cost less accumulated depreciation net of
real estate related impairment charges. The cost of our operating properties includes the cost of
land and completed buildings and related improvements. Expenditures that increase the service life
of the property are capitalized and the cost of maintenance and repairs is charged to expense as
incurred. The cost of buildings and improvements are depreciated on a straight-line basis over the
estimated useful lives of the buildings and improvements, ranging from 6 to 39 years and the
shorter of the lease term or useful life, ranging from 1 to 6 years for tenant improvements. When
depreciable property is retired or disposed of, the related costs and accumulated depreciation are
removed from the accounts and any gain or loss is reflected in discontinued operations.
As of September 30, 2009, our operating properties consist of Four Resource Square, located in
Charlotte, North Carolina, or the Four Resource Square property, and Tiffany Square, located in
Colorado Springs, Colorado, or the Tiffany Square property. In 2008, we initiated plans to sell the
Tiffany Square property and, as such, it was classified as a property held for sale in accordance
with FASB Codification Topic 360, Property, Plant and Equipment. However, in the third quarter of
2009 it was reclassified to operating properties as it no longer qualified for held-for-sale
classification. During the period the Tiffany Square property was classified as held for sale, no
depreciation expense was recorded related to the property. Upon reclassification to operating
properties, FASB Codification Topic 360, Property Plant and Equipment, requires that a property be
recorded at the lower of its fair value or its carrying value before the property was classified as
held for sale, adjusted for any depreciation and amortization expense that would have been
recognized had the asset been continuously classified as an operating property. Upon
reclassification of the Tiffany Square
8
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NNN 2003 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
property, we determined that the fair value of the property
was lower than its adjusted carrying value and, as such, recorded an impairment charge against the
carrying value of the property, as discussed in Note 3, Real Estate Investments Operating
Properties. The operating results of the Tiffany Square property have been reclassified to Loss from
continuing operations on the accompanying condensed consolidated statements of operations for all
periods presented.
In the first quarter of 2009, our three unconsolidated properties were designated as held for
sale. However, in the third quarter of 2009, two of these unconsolidated properties, Enterprise
Technology Center, located in Scotts Valley, California, or the Enterprise Technology Center
property, and Executive Center II and III, located in Dallas, Texas, or the Executive Center II and
III property, were reclassified as operating properties as they no longer qualified for
held-for-sale classification. During the period the Enterprise Technology Center and Executive
Center II and III properties were classified as held for sale, no depreciation expense was recorded
related to the properties. Upon reclassification to operating properties, FASB Codification Topic
360, Property Plant and Equipment, requires that a property be recorded at the lower of its fair
value or its carrying value before the property was classified as held for sale, adjusted for any
depreciation and amortization expense that would have been recognized had the asset been
continuously classified as an operating property. Upon reclassification of the Enterprise
Technology Center and Executive Center II and III properties, it was determined that the fair
values of the properties were lower than their adjusted carrying values and, as such, impairment
charges were recorded against the carrying values of the properties, as discussed in Note 6, Real
Estate Investments Unconsolidated Real Estate.
Property Held for Non-Sale Disposition
During the three months ended September 30, 2009, we elected to cease the subsidization of the
operations and debt service on the non-recourse promissory note for one of our consolidated
properties, Executive Center I, located in Dallas, Texas, or the Executive Center I property, which
matured on October 1, 2009. We have classified this property as a property held for non-sale
disposition as of September 30, 2009, as we believe it is probable that the property will be
transferred to the lender in the fourth quarter of 2009 and it no longer qualifies as a property
held for sale.
Properties Held for Sale
In accordance with FASB Codification Topic 360, Property, Plant and Equipment, at such time as
a property is held for sale, such property is carried at the lower of (i) its carrying amount or
(ii) fair value less costs to sell. In addition, a property being held for sale ceases to be
depreciated. We classify properties as held for sale in the period in which all of the following
criteria are met:
| management, having the authority to approve the action, commits to a plan to sell the asset; | ||
| the asset is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets; | ||
| an active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated; | ||
| the sale of the asset is probable and the transfer of the asset is expected to qualify for recognition as a completed sale within one year; | ||
| the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and | ||
| given the actions required to complete the plan, it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. |
FASB Codification Topic 360, Property, Plant and Equipment, addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and requires that, in a period in
which a component of an entity either has been disposed of or is classified as held for sale, the
statements of operations for current and prior periods shall report the results of operations of
the component as discontinued operations. In 2008, we initiated plans to sell 901 Civic Center,
located in Santa Ana, California, or the 901 Civic Center property, the Tiffany Square property,
and The Sevens Building, located in St. Louis, Missouri, or The Sevens Building property, and
classified these three properties as held for sale as of December 31, 2008. In the first quarter of
2009, we designated four additional properties as held for sale a consolidated property, the
Executive Center I property, and our three unconsolidated properties, the Enterprise Technology
Center property, the Executive Center II and III property, and Chase Tower, located in Austin,
Texas, or the Chase Tower property.
In the third quarter of 2009, we reassessed all of the held for sale properties and
reclassified one consolidated property, the Tiffany Square property, and two unconsolidated
properties, the Enterprise Technology Center property and the Executive Center II and III
property,
to operating properties as they no longer met the held for sale classification criteria.
Additionally, one consolidated property, the Executive Center I property, was reclassified as a
property held for non-sale disposition, as discussed above.
9
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NNN 2003 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Revenues, operating costs and expenses, and other non-operating results for the discontinued
operations of the remaining consolidated property classified as held for sale, The Sevens Building
property, as well as properties sold, have been excluded from our results from continuing
operations for all periods presented herein. The financial results for these properties are
presented in our unaudited condensed consolidated statements of operations for the three and nine
months ended September 30, 2009 and 2008 in a single line item entitled Income (loss) from
discontinued operations. The related assets and liabilities for these properties are presented in
the consolidated balance sheets as of September 30, 2009 and December 31, 2008 in the line items
entitled Properties held for sale, net, Other assets related to properties held for sale,
Mortgage loan payable secured by properties held for sale, and Other liabilities related to
properties held for sale, net.
Fair Value Measurements
FASB Codification Topic 820, Fair Value Measurements, establishes a framework for measuring
fair value in generally accepted accounting principles and expands disclosures about fair value
instruments. It establishes a three-tiered fair value hierarchy that prioritizes inputs to
valuation techniques used in fair value calculations. Level 1 inputs are the highest priority and
are quoted prices in active markets for identical assets or liabilities. Level 2 inputs reflect
other than quoted prices included in Level 1 that are either observable directly or through
corroboration with observable market data. Level 3 inputs are unobservable inputs, due to little or
no market activity for the asset or liability, such as internally-developed valuation models. If
quoted market prices or inputs are not available, fair value measurements are based upon valuation
models that utilize current market or independently sourced market inputs, such as interest rates,
option volatilities, credit spreads and market capitalization rates. Items valued using such
internally-generated valuation techniques are classified according to the lowest level input that
is significant to the fair value measurement. As a result, the asset or liability could be
classified in either Level 2 or 3 even though there may be some significant inputs that are readily
observable.
On January 1, 2008, we adopted the provisions of FASB Codification Topic 820, Fair Value
Measurements, for financial assets and liabilities measured at fair value on a recurring basis and,
on January 1, 2009, we adopted the provisions of FASB Codification Topic 820, Fair Value
Measurements, for nonfinancial assets and liabilities that are not required or permitted to be
measured at fair value on a recurring basis. The adoption did not have a material impact on our
results of operations or financial position.
The following table presents the nonfinancial assets that were measured at fair value on a
nonrecurring basis in the nine months ended September 30, 2009:
Quoted Prices in | ||||||||||||||||||||
Active Markets | Significant Other | Significant | ||||||||||||||||||
for Identical | Observable | Unobservable | Total | |||||||||||||||||
Assets | Inputs | Inputs | Impairment | |||||||||||||||||
Assets | September 30, 2009 | Level 1 | Level 2 | Level 3 | Losses | |||||||||||||||
Operating properties |
$ | 19,531,000 | $ | | $ | | $ | 19,531,000 | $ | (400,000 | ) | |||||||||
Property held for non-sale disposition |
$ | 2,603,000 | $ | | $ | | $ | 2,603,000 | $ | (3,000,000 | ) | |||||||||
Properties held for sale |
$ | 19,492,000 | $ | | $ | | $ | 19,492,000 | $ | (600,000 | ) | |||||||||
Investments in unconsolidated real estate |
$ | 1,274,000 | $ | | $ | | $ | 1,274,000 | $ | (2,996,000 | ) |
We
generally use a discounted cash flow model to estimate the fair value
of our consolidated real estate investments, unless better market
comparable data is available. Management uses its best estimate in
determining the key assumptions, including the expected holding
period, future occupancy levels, capitalization rates, discount
rates, rental rates, lease-up periods and capital expenditure
requirements. The estimated fair value is further adjusted for
anticipated selling expenses. Generally, if a property is under
contract, the contract price adjusted for selling expenses is used to
estimate the fair value of the property.
There were no liabilities measured at fair value on a recurring basis as of September 30,
2009, as the interest rate swap agreement on the 901 Civic Center property loan expired on May 12,
2009.
Fair Value of Financial Instruments
FASB Codification Topic 825, Financial Instruments, requires disclosure of the fair value of
financial instruments, whether or not recognized on the face of the balance sheet, for which it is
practical to estimate that value. Fair value is defined as the quoted market prices for those
instruments that are actively traded in financial markets. In cases where quoted market prices are
not available, fair values are estimated using presently available market information and judgments
about the financial instrument, such as estimates of timing and amount of expected future cash
flows. Such estimates do not reflect any premium or discount that could result from offering for
sale at one time our entire holdings of a particular financial instrument, nor do they consider the
tax impact of the
realization of unrealized gains or losses. In many cases, the fair value
estimates cannot be substantiated by comparison to independent markets, nor can the disclosed value
be realized in immediate settlement of the instrument.
10
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NNN 2003 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Financial instruments on our consolidated balance sheets consist of cash and cash equivalents,
tenant rent and other receivables, accounts payable and accrued expenses, and mortgage loans
payable. We consider the carrying values of cash and cash equivalents, tenant rent and other receivables and accounts payable and accrued expenses to approximate
fair value for those financial instruments because of the short period of time between origination
of the instruments and their expected realization. The fair value of amounts due to and from
related parties is not determinable due to their related party nature. We estimate the fair value
of our mortgage loans payable, including mortgage loans payable secured by a property held for
non-sale disposition and properties held for sale, as of September 30, 2009 and December 31, 2008,
to be approximately $46,932,000 and $71,441,000, respectively. For non-recourse mortgage loans on
properties with estimated fair values of less than their respective loan balances, which is the
case for three of our consolidated properties, we estimate the fair value of the mortgage loans to
be equal to the estimated fair value of the properties. For the mortgage loan on the remaining
consolidated property, we believe the carrying amount approximates fair value due to the relatively
short remaining term of the loan.
Income Taxes
We are a pass-through entity for income tax purposes and taxable income is reported by our
unit holders on their individual tax returns. Accordingly, no provision has been made for income
taxes in the accompanying condensed consolidated statements of operations except for insignificant
amounts related to state franchise and income taxes.
Segments
FASB Codification Topic 280, Segment Reporting, establishes standards for reporting financial
and descriptive information about an enterprises reportable segments. We have determined that we
have one reportable segment, with activities related to investing in office buildings and value-add
commercial office properties. Our investments in real estate are geographically diversified and
management evaluates operating performance on an individual property level. However, as each of our
properties has similar economic characteristics, tenants, and products and services, our properties
have been aggregated into one reportable segment for the three and nine months ended September 30,
2009 and 2008.
Noncontrolling Interests
A noncontrolling interest relates to the interest in the consolidated entities that are not
wholly-owned by us. As a result of adopting the noncontrolling interest provisions of FASB
Codification Topic 810, Consolidation, on January 1, 2009, we have restated our December 31, 2008
consolidated balance sheet, as well as our statements of operations for the three and nine months
ended September 30, 2008, as follows:
As Previously | ||||||||||||
As of December 31, 2008 | Reported | Adjustment | As Adjusted | |||||||||
Minority interests |
$ | 294,000 | $ | (294,000 | ) | $ | | |||||
Noncontrolling interests equity |
$ | | $ | 294,000 | $ | 294,000 | ||||||
Total (deficit) equity |
$ | (279,000 | ) | $ | 294,000 | $ | 15,000 | |||||
As Previously | ||||||||||||
Three Months Ended September 30, 2008 | Reported | Adjustment | As Adjusted | |||||||||
Minority interest in losses |
$ | (7,000 | ) | $ | (7,000 | ) | $ | | ||||
Net loss / consolidated net loss |
$ | (4,801,000 | ) | $ | (7,000 | ) | $ | (4,808,000 | ) | |||
Loss attributable to noncontrolling interests |
$ | | $ | (7,000 | ) | $ | (7,000 | ) | ||||
As Previously | ||||||||||||
Nine Months Ended September 30, 2008 | Reported | Adjustment | As Adjusted | |||||||||
Minority interest in losses |
$ | (40,000 | ) | $ | (40,000 | ) | $ | | ||||
Net loss / consolidated net loss |
$ | (9,775,000 | ) | $ | (40,000 | ) | $ | (9,815,000 | ) | |||
Loss attributable to noncontrolling interests |
$ | | $ | (40,000 | ) | $ | (40,000 | ) | ||||
11
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NNN 2003 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Recently Issued Accounting Pronouncements
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R), or
SFAS No. 167 (not yet contained in FASB Codification), which amends the consolidation guidance
applicable to variable interest entities, or VIEs. The amendments to the overall consolidation
guidance affect all entities currently within the scope of FIN No. 46(R), as well as qualifying
special-purpose entities that are currently excluded from the scope of FIN No. 46(R). Specifically,
an enterprise will need to reconsider its conclusion regarding whether an entity is a VIE, whether
the enterprise is the VIEs primary beneficiary and what type of financial statement disclosures
are required. SFAS No. 167 is effective as of the beginning of the first fiscal year that begins
after November 15, 2009. Early adoption is prohibited. We will adopt SFAS No. 167 on January 1,
2010. We are currently evaluating the impact of SFAS No. 167 on our consolidated financial position
and results of operations.
3. Real Estate Investments Operating Properties
Our investments in operating properties consisted of the following as of September 30, 2009
and December 31, 2008:
September 30, 2009 | December 31, 2008 | |||||||
Buildings and tenant improvements |
$ | 19,977,000 | $ | 20,813,000 | ||||
Land |
2,203,000 | 2,049,000 | ||||||
22,180,000 | 22,862,000 | |||||||
Less: accumulated depreciation |
(2,649,000 | ) | (2,427,000 | ) | ||||
$ | 19,531,000 | $ | 20,435,000 | |||||
Depreciation expense for operating properties was $186,000 and $339,000 for the three months
ended September 30, 2009 and 2008, respectively, and $541,000 and $1,041,000 for the nine months
ended September 30, 2009 and 2008, respectively.
Real estate related impairment charges of $275,000 were recorded against land, buildings and
capital improvements on our operating properties during the three and nine months ended September
30, 2009. In addition, real estate related impairment charges of $125,000 were recorded against
identified intangible assets on our operating properties during the three and nine months ended
September 30, 2009. Real estate related impairment charges of $1,892,000 were recorded against
land, buildings and capital improvements on our operating properties during the three and nine
months ended September 30, 2008. In addition, real estate related impairment charges of $708,000
were recorded against identified intangible assets on our operating properties during the three and
nine months ended September 30, 2008.
4. Real Estate Investments Property Held for Non-Sale Disposition
Our investment in a property held for non-sale disposition consisted of the following as of
September 30, 2009 and December 31, 2008:
September 30, 2009 | December 31, 2008 | |||||||
Buildings and tenant improvements |
$ | 2,714,000 | $ | 4,358,000 | ||||
Land |
1,011,000 | 1,986,000 | ||||||
3,725,000 | 6,344,000 | |||||||
Less: accumulated depreciation |
(1,122,000 | ) | (1,085,000 | ) | ||||
$ | 2,603,000 | $ | 5,259,000 | |||||
Depreciation expense for the property held for non-sale disposition was $0 and $57,000 for the
three months ended September 30, 2009 and 2008, respectively, and $37,000 and $171,000 for the nine
months ended September 30, 2009 and 2008, respectively.
Real estate related impairment charges of $246,000 and $2,619,000 were recorded against land,
buildings and capital improvements on our property held for non-sale disposition during the three
and nine months ended September 30, 2009, respectively. In addition, real estate related impairment
charges of $54,000 and $381,000 were recorded against identified intangible assets on our property
held for non-sale disposition during the three and nine months ended September 30, 2009,
respectively. There were no real estate related impairment charges recorded against our property
held for non-sale disposition during the three and nine months ended September 30, 2008.
12
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NNN 2003 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
5. Real Estate Investments Properties Held for Sale
Our investments in properties held for sale consisted of the following as of September 30,
2009 and December 31, 2008:
September 30, 2009 | December 31, 2008 | |||||||
Buildings, tenant improvements, and other tenant related assets |
$ | 16,264,000 | $ | 25,430,000 | ||||
Land |
3,909,000 | 5,371,000 | ||||||
20,173,000 | 30,801,000 | |||||||
Less: accumulated depreciation |
(681,000 | ) | (1,513,000 | ) | ||||
$ | 19,492,000 | $ | 29,288,000 | |||||
Real estate related impairment charges of $0 and $532,000 were recorded against land,
buildings and capital improvements on our properties held for sale during the three and nine months
ended September 30, 2009, respectively. In addition, real estate related impairment charges of $0
and $68,000 were recorded against identified intangible assets on our properties held for sale
during the three and nine months ended September 30, 2009, respectively. Real estate related
impairment charges of $532,000 were recorded against land, buildings and capital improvements on
our properties held for sale during the three and nine months ended September 30, 2008. In
addition, real estate related impairment charges of $68,000 were recorded against identified
intangible assets on our properties held for sale during the three and nine months ended September
30, 2008.
901 Civic Center Disposition
On July 17, 2009, we completed the sale of the 901 Civic Center property to an unaffiliated
third party for a sales price of $11,250,000. Our net cash proceeds were $1,946,000 after payment
of the related mortgage loan, closing costs and other transaction expenses. We paid sales
commissions of $282,000, or 2.5% of the sales price, to two unaffiliated brokers. We recorded a
gain on sale of the 901 Civic Center property of $704,000 during the three and nine months ended
September 30, 2009, which is included in Income (loss) from discontinued operations on the
accompanying condensed consolidated statements of operations. We owned a 96.9% interest in the 901
Civic Center property.
6. Real Estate Investments Unconsolidated Real Estate
Our investments in unconsolidated real estate consisted of the following as of September 30,
2009 and December 31, 2008:
September 30, | December 31, | |||||||||||
Description | Location | 2009 | 2008 | |||||||||
Enterprise Technology Center |
Scotts Valley, CA | $ | 359,000 | $ | 1,312,000 | |||||||
Chase Tower |
Austin, TX | 915,000 | 861,000 | |||||||||
Executive Center II and III |
Dallas, TX | | 1,861,000 | |||||||||
$ | 1,274,000 | $ | 4,034,000 | |||||||||
Summarized condensed combined financial information about our unconsolidated real estate as of
September 30, 2009 and December 31, 2008 is as follows:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Balance Sheet Data: |
||||||||
Assets (primarily real estate) |
$ | 140,996,000 | $ | 162,436,000 | ||||
Mortgage loans and other debt payable |
$ | 117,872,000 | $ | 118,719,000 | ||||
Other liabilities |
15,664,000 | 16,102,000 | ||||||
Equity |
7,460,000 | 27,615,000 | ||||||
Total liabilities and equity |
$ | 140,996,000 | $ | 162,436,000 | ||||
Our share of equity |
$ | 1,274,000 | $ | 4,034,000 | ||||
13
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NNN 2003 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Statement of Operations Data: |
||||||||||||||||
Revenues |
$ | 5,855,000 | $ | 5,935,000 | $ | 17,982,000 | $ | 17,905,000 | ||||||||
Rental and other expenses (including real estate
related impairment charges of $2,470,000 and
$21,270,000 during the three and nine months
ended September 30, 2009, respectively) |
7,085,000 | 7,137,000 | 37,460,000 | 21,570,000 | ||||||||||||
Net loss |
$ | (1,230,000 | ) | $ | (1,202,000 | ) | $ | (19,478,000 | ) | $ | (3,665,000 | ) | ||||
Our equity in losses of unconsolidated real estate |
$ | (194,000 | ) | $ | (146,000 | ) | $ | (2,759,000 | ) | $ | (777,000 | ) | ||||
Real estate related impairment charges of $2,470,000 and $21,270,000 were recorded against
land, buildings, capital improvements and intangible assets of our unconsolidated properties during
the three and nine months ended September 30, 2009, respectively. Our share of the real estate
related impairment charges was $349,000 and $2,996,000 for the three and nine months ended
September 30, 2009, respectively, which are included in the statements of operations in Equity in
losses of unconsolidated real estate. There were no real estate related impairment charges
recorded for our unconsolidated properties during the three and nine months ended September 30,
2008.
Total mortgage loans and other debt payable of our unconsolidated properties consisted of the
following as of September 30, 2009 and December 31, 2008:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Enterprise Technology Center |
$ | 32,970,000 | $ | 33,544,000 | ||||
Chase Tower |
67,781,000 | 68,031,000 | ||||||
Executive Center II and III |
17,121,000 | 17,144,000 | ||||||
$ | 117,872,000 | $ | 118,719,000 | |||||
Chase Tower
On July 17, 2009, in connection with the mortgage loan on the Chase Tower property, we through
NNN VF Chase Tower REO, LP, along with the other senior borrowers entered into a loan modification
agreement with PSP/MRC Debt Portfolio S-1, LP, successor-in-interest to MMA Realty Capital, LLC,
the senior lender. Pursuant to the loan modification agreement, the senior loans maturity date was
extended to June 30, 2010; the Chase Tower property paid a $285,153 extension fee; the Chase Tower
property agreed to pay the senior lender an exit fee equal to 1.0% of the then outstanding
principal balance of the senior loan as of June 30, 2010; and the Chase Tower property agreed to
pay to senior lender monthly installments in the amount of 50.0% of excess cash flow, if any,
attributable to the immediately preceding month, which the senior lender shall apply to the
outstanding balance of the loan upon receipt. As of September 30, 2009, the outstanding principal
balance on the senior loan was $57,031,000.
Also on July 17, 2009, we through NNN VF Chase Tower, LLC and NNN VF Chase Tower Member, LLC,
our indirect subsidiaries, along with the other mezzanine borrowers entered into a forbearance and
loan modification agreement with Transwestern Mezzanine Realty Partners II, LLC, or the mezzanine
lender. Pursuant to the forbearance loan modification agreement, the mezzanine loans maturity date
was extended to June 30, 2010; the Chase Tower property paid $250,000 as a partial principal
prepayment; and the Chase Tower property agreed to pay to the mezzanine lender monthly installments
in the amount of 50.0% (or 100% of excess cash flow in the event the senior loan is paid in full)
of excess cash flow, if any, attributable to the immediately preceding month, which the mezzanine
lender shall apply to the outstanding balance of the loan upon
receipt. Additionally, the Chase Tower property will pay an exit fee
of 3% if the loan is repaid between January 1, 2010 and
March 31, 2010 or 5% if the loan is repaid on or after
April 1, 2010. As of September 30, 2009,
the outstanding principal balance on the mezzanine loan was $10,750,000.
We through NNN VF Chase Tower Member, LLC, NNN VF Chase Tower, LLC and NNN VF Chase Tower REO,
LP, our indirect subsidiaries, own a 14.8% interest in the Chase Tower property.
Executive Center II and III
On December 28, 2008, an extension option on the mortgage loan for the Executive Center II and
III property was exercised, extending the maturity date to December 28, 2009. The mortgage loan
originally matured on December 28, 2008 and the extension did not change any material terms of the
mortgage loan. Loan extension fees of $35,000 were paid and will be amortized to interest expense
over the term of the extension. As of September 30, 2009, the outstanding principal balance on this
loan was $14,471,000.
14
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NNN 2003 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Loan Covenants
Our unconsolidated properties that are financed by borrowings may be required by the terms of
the applicable loan documents to meet certain financial covenants such as minimum loan to value,
debt service coverage, performance covenants, as well as other requirements on a combined and
individual basis. As of September 30, 2009, two of our unconsolidated properties were in compliance
with such financial covenants, as amended, or obtained waivers for any instances of non-compliance.
However, our third unconsolidated property, the Executive Center II and III property, was not in
compliance certain financial covenants under the loan documents with the lender, which constitute
events of default. These events of default, in addition to other remedies available to the lender
under the loan documents, can result in the acceleration of all amounts due and payable under the
loan documents and/or forfeiture of the property to the lender. We are currently negotiating with
the lender of the Executive Center II and III property to obtain waivers for these instances of
non-compliance with such covenants; however, there can be no assurance that we will be able to
obtain the waivers for these instances of non-compliance.
Unconsolidated Debt Due to Related Parties
Our properties may obtain financing through one or more related parties, including our manager
and/or its affiliates. The Executive Center II and III property has outstanding unsecured notes due
to our manager as of September 30, 2009 and December 31, 2008, per the table below. These notes
bear interest at 8.00% per annum and originally became due on January 1, 2009. Per the terms of the
notes, the maturity date was automatically extended to January 1, 2010, upon extension of the
maturity dates of the mortgage loans payable on December 28, 2008.
Amount of | ||||
Note Issue Dates | Loan | |||
June 8, 2005 |
$ | 1,000,000 | ||
September 12, 2005 |
200,000 | |||
October 18, 2005 |
240,000 | |||
November 14, 2005 |
5,000 | |||
$ | 1,445,000 | |||
In addition, on November 5, 2008, the Executive Center II and III property obtained a 90-day
unsecured loan in the amount of $304,000 from NNN Realty Advisors. The unsecured note bore interest
at 8.67% per annum and all principal and all accrued interest was paid in full on January 20, 2009.
7. Marketable Equity Securities
We had no investments in marketable equity securities as of September 30, 2009 and December
31, 2008. There were no sales of marketable equity securities during the three and nine months
ended September 30, 2009 and 2008. We believed that a decline in the value of our marketable equity
security investments was other-than-temporary and recorded losses of $51,000 and $844,000 to
reflect the fair value of such securities during the three and nine months ended September 30,
2008, respectively.
8. Identified Intangible Assets
Identified intangible assets consisted of the following as of September 30, 2009 and December
31, 2008:
September 30, 2009 | December 31, 2008 | |||||||
In-place leases
and tenant
relationships, net
of accumulated
amortization of
$1,358,000 and
$1,506,000 as of
September 30, 2009
and December 31,
2008, respectively
(with a weighted
average life of 62 months and 86
months for in-place
leases and tenant
relationships,
respectively, as of
September 30, 2009
and a
weighted-average
life of 48 months
and 94 months for
in-place leases and
tenant
relationships,
respectively, as of
December 31, 2008) |
$ | 1,805,000 | $ | 2,290,000 | ||||
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NNN 2003 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Amortization expense recorded on the identified intangible assets was $88,000 and $207,000 for
the three months ended September 30, 2009 and 2008, respectively. Amortization expense recorded on
the identified intangible assets was $241,000 and $622,000 for the nine months ended September 30,
2009 and 2008, respectively.
We
also had net intangible liabilities related to below-market leases of
$86,000 and $129,000
as of September 30, 2009 and December 31, 2008, respectively. Amortization expense of $8,000 and
$8,000 was recorded as an increase to rental revenue for the three months ended September 30, 2009
and 2008, respectively. Amortization expense of $23,000 and $23,000 was recorded as an increase to
rental revenue for the nine months ended September 30, 2009 and 2008, respectively.
9. Other Assets
Other assets consisted of the following as of September 30, 2009 and December 31, 2008:
September 30, 2009 | December 31, 2008 | |||||||
Deferred rent receivable |
$ | 567,000 | $ | 295,000 | ||||
Deferred financing costs, net of
accumulated amortization of
$338,000 and $549,000 as of
September 30, 2009 and December 31,
2008, respectively |
55,000 | 166,000 | ||||||
Leasing commissions, net of
accumulated amortization of
$386,000 and $324,000 as of
September 30, 2009 and December 31,
2008, respectively |
514,000 | 824,000 | ||||||
Lease inducements, net of
accumulated amortization of
$369,000 and $94,000 as of
September 30, 2009 and December 31,
2008, respectively |
473,000 | 536,000 | ||||||
Prepaid expenses, deposits and other |
13,000 | | ||||||
$ | 1,622,000 | $ | 1,821,000 | |||||
10. Mortgage Loans Payable and Other Debt
We have fixed and variable rate mortgage loans payable secured by our consolidated properties,
including mortgage loans on a property held for non-sale disposition and properties held for sale,
of $60,164,000 and $68,915,000 as of September 30, 2009 and December 31, 2008, respectively. As of
September 30, 2009 and December 31, 2008, the effective interest rates on mortgage loans payable
ranged from 2.50% to 12.00% per annum and 2.69% to 12.00% per annum, respectively, and the
weighted-average effective interest rates were 7.28% and 6.39% per annum, respectively. The loans
mature at various dates through October 2010 and require monthly interest-only payments.
The composition of our consolidated mortgage loans payable as of September 30, 2009 and
December 31, 2008 was as follows:
Total Mortgage | Weighted Average | |||||||||||||||
Loans Payable | Interest Rate | |||||||||||||||
September 30, 2009 | December 31, 2008 | September 30, 2009 | December 31, 2008 | |||||||||||||
Variable rate |
$ | 34,574,000 | $ | 43,325,000 | 7.47 | % | 6.02 | % | ||||||||
Fixed rate |
25,590,000 | 25,590,000 | 7.04 | % | 7.04 | % | ||||||||||
Total |
$ | 60,164,000 | $ | 68,915,000 | 7.28 | % | 6.39 | % | ||||||||
Certain of our consolidated properties financed by borrowings are required by the terms of
their applicable loan documents to meet certain financial covenants such as minimum loan to value,
debt service coverage and performance covenants, as well as other requirements on a combined and
individual basis. As of September 30, 2009, we were in compliance with all such financial
covenants, as amended, on our mortgage loans, or obtained waivers for any instances of
non-compliance, except for the default on the Executive Center I property loan, as discussed below.
All outstanding principal is due on our consolidated mortgage loans payable in 2009 and 2010
as follows:
Year | Amount | |||
2009 |
$ | 4,590,000 | ||
2010 |
55,574,000 | |||
Total |
$ | 60,164,000 | ||
16
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NNN 2003 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
901 Civic Center Loan Repayment
On July 17, 2009, we completed the sale of the 901 Civic Center property to an unaffiliated
third party for a sales price of $11,250,000. Our net cash proceeds were $1,946,000 after payment
of the $8,943,000 mortgage loan, closing costs and other transaction expenses. We paid sales
commissions of $282,000, or 2.5% of the sales price, to two unaffiliated brokers. We recorded a
gain on sale of the 901 Civic Center property of $704,000 during the three and nine months ended
September 30, 2009, which is included in Income (loss) from discontinued operations on the
accompanying condensed consolidated statements of operations. We owned a 96.9% interest in the 901
Civic Center property.
Tiffany Square Loan Extension
On February 15, 2009, we exercised an extension option on our mortgage loan for the Tiffany
Square property, extending the maturity date to February 15, 2010. The principal balance of the
Tiffany Square property mortgage loan was $12,395,000 as of September 30, 2009 and requires monthly
interest-only payments through maturity.
Executive Center I Loan Default
On September 23, 2008, we exercised a third extension option on our mortgage loan for the
Executive Center I property extending the maturity date to October 1, 2009. The principal balance
outstanding on this mortgage loan as of September 30, 2009 was $4,590,000. This loan was not
repaid on October 1, 2009, and we are currently in default.
In the third quarter of 2009, we elected to cease the subsidization of the operations and debt
service on the non-recourse promissory note for the Executive Center I property. We are currently
in discussions with the lender to negotiate a forbearance agreement. While we have not reached a
final agreement with the lender, we anticipate that the preliminary terms of the forbearance
agreement would include: (i) our continued efforts to market the property for sale until December
31, 2009; (ii) if we are unable to sell the property before December 31, 2009, we will agree to
provide our lender a deed-in-lieu of sale of the property; and (iii) a deferral of all monthly
interest payments due under the note until the property is sold or until a deed-in-lieu transaction
takes place. There can be no assurance that we will enter into a forbearance agreement with the
lender on similar terms to those as outlined above or at all, or if we do enter into a forbearance
agreement that we will be able to comply with the terms of such an agreement. We have classified
this property as a property held for non-sale disposition as of September 30, 2009, as we believe
it is probable that the property will be transferred to the lender in the fourth quarter of 2009
and it no longer qualifies for held for sale classification.
If we are unable to enter into a forbearance agreement with our lender, under the terms of the
note this event of default could result in: (i) an immediate increase in our financial obligation
to the lender in connection with an applicable 3.00% interest rate increase to 15.00% (the default
interest rate) and the addition of a late charge equal to the lesser of 3.00% of the amount of any
payment not timely paid, or the maximum amount which may be charged under applicable law; (ii) the
lender foreclosing on the property; or (iii) a hindrance to our ability to negotiate future loan
transactions on favorable terms.
11. Derivative Financial Instruments
Derivatives are recognized as either assets or liabilities in our condensed consolidated
balance sheet and are measured at fair value in accordance with FASB Codification Topic 815,
Derivatives and Hedging. Since our derivative instruments are not designated as hedge instruments,
they do not qualify for hedge accounting and, accordingly, changes in fair value are included as a
component of interest expense in our condensed consolidated statements of operations and
comprehensive loss in the period of change.
We utilize derivative instruments to mitigate interest rate fluctuations on specific
transactions and cash flows. We do not utilize derivative instruments for speculative or trading
purposes.
The primary risks associated with derivative instruments are market and credit risk. Market
risk is defined as the potential for loss in value of the derivative instruments due to adverse
changes in market prices (interest rates). Utilizing derivative instruments allows us to
effectively manage the risk of increasing interest rates with respect to the potential effects
these fluctuations could have on future operations and cash flows. Credit risk is the risk that one
of the parties to a derivative contract fails to perform or meet their financial obligation. We do
not obtain collateral associated with derivative instruments, but monitor the credit standing of
our counterparties on a regular basis. Should a counterparty fail to perform, we would incur a
financial loss to the extent that the associated derivative contract was in an asset position.
17
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NNN 2003 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
The following table lists the derivative financial instrument held by us as of December 31,
2008:
Notional Amount | Index | Rate | Fair Value | Instrument | Maturity | |||||||||||||||
$9,837,000 |
LIBOR | 3.33 | % | $ | (112,000 | ) | Swap | 05/12/2009 |
We
recorded $0 and $37,000 as reductions to interest expense related to the change in the swap fair value, for the three months
ended September 30, 2009 and 2008, respectively. We paid $112,000 to reduce the swap liability and
recorded $26,000 as a reduction to interest expense related to the change in the swap fair value, for the
nine months ended September 30, 2009 and 2008, respectively. The fair value of the derivative was
$(112,000) as of December 31, 2008, and is included in accounts payable and accrued liabilities.
Our interest rate swap agreement expired on May 12, 2009, and we did not renew it.
12. Noncontrolling Interests
Noncontrolling interests relate to interests in the following consolidated limited liability
companies and property with tenant-in-common, or TIC, ownership interests that are not wholly-owned
by us as of September 30, 2009 and December 31, 2008:
Entity | Date Acquired | Noncontrolling Interests | ||||||
NNN Enterprise Way, LLC |
05/07/2004 | 26.7 | % | |||||
NNN 901 Civic Center, LLC |
04/24/2006 | 3.1 | % |
13. 2003 Value Fund, LLC Unit Holders Deficit
Pursuant to our Private Placement Memorandum, we offered for sale to the public a minimum of
1,000 and a maximum of 10,000 units at a price of $5,000 per unit. We relied on the exemptions from
registration provided by Rule 506 under Regulation D and Section 4(2) of the Securities Act.
There are three classes of membership interests, or units, each having different rights with
respect to distributions. As of September 30, 2009 and December 31, 2008, there were 4,000 Class A
units, 3,170 Class B units and 2,800 Class C units issued and outstanding. The rights and
obligations of all unit holders are governed by the Operating Agreement.
Cash from Operations, as defined in the Operating Agreement, is first distributed to all unit
holders pro rata until all Class A unit holders, Class B unit holders and Class C unit holders have
received a 10.0%, 9.0% and 8.0% cumulative (but not compounded) annual return on their contributed
and unrecovered capital, respectively. In the event that any distribution of Cash from Operations
is not sufficient to pay the return described above, all unit holders receive identical pro rata
distributions, except that Class C unit holders do not receive more than an 8.0% return on their
Class C units, and Class B unit holders do not receive more than a 9.0% return on their Class B
units. Excess Cash from Operations is then allocated pro rata to all unit holders on a per
outstanding unit basis and further distributed to the unit holders and our manager based on
predetermined ratios providing our manager with a share of 15.0%, 20.0% and 25.0% of the
distributions available to Class A units, Class B units and Class C units, respectively, of such
excess Cash from Operations.
Cash from Capital Transactions, as defined in the Operating Agreement, is first used to
satisfy our debt and liability obligations; then distributed pro rata to all unit holders in
accordance with their membership interests until all capital contributions are reduced to zero; and
lastly, in accordance with the distributions as outlined above in the Cash from Operations.
Effective November 1, 2008, we suspended cash distributions to the Class A, Class B and Class
C unit holders and, as such, no distributions were declared or paid during the nine months ended
September 30, 2009. During the nine months ended September 30, 2008, distributions of $262 per unit
were declared, resulting in aggregate distributions paid of approximately $2,617,000. To date,
Class A units, Class B units and Class C units have received identical per-unit distributions;
however, distributions may vary among the three classes of units in the future.
18
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NNN 2003 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
14. Related Party Transactions
The Management Agreement
Our manager manages us pursuant to the terms of the Operating Agreement and the Management
Agreement. While we have no employees, certain employees of our manager provide services in
connection with the Operating Agreement. In addition, Realty serves as our property manager
pursuant to the terms of the Operating Agreement and the Management Agreement.
Pursuant to the Operating Agreement and the Management Agreement, Realty is entitled to
receive the payments and fees described below. Certain fees paid to Realty during the three and
nine months ended September 30, 2009 and 2008, were passed through to our manager or its affiliate
pursuant to an agreement between our manager and Realty, or the Realty Agreement.
Property Management Fees
We pay Realty a monthly property management fee of up to 5.0% of the gross receipts revenue of
the properties. For the three months ended September 30, 2009 and 2008, we incurred property
management fees to Realty of $148,000 and $169,000, respectively, and $416,000 and $424,000 for the
nine months ended September 30, 2009 and 2008, respectively.
Real Estate Acquisition Fees
We pay Realty or its affiliate a real estate acquisition fee up to 3.0% of the gross sales
price of a property. For the three and nine months ended September 30, 2009 and 2008, we did not
incur any real estate acquisition fees.
Real Estate Disposition Fees
We pay Realty or its affiliate a real estate disposition fee up to 5.0% of the gross sales
price of a property. For the three and nine months ended September 30, 2009 and 2008, we did not
incur any real estate disposition fees.
Leasing Commissions
We pay Realty a leasing commission for its services in leasing any of our properties equal to
6.0% of the value any lease entered into during the term of the Management Agreement and 3.0% with
respect to any renewals. For the three months ended September 30, 2009 and 2008, we incurred
leasing commissions to Realty of $39,000 and $237,000, respectively, and $127,000 and $261,000 for
the nine months ended September 30, 2009 and 2008, respectively.
Accounting Fees
We pay our manager accounting fees for record keeping services provided to us. For the three
months ended September 30, 2009 and 2008, we incurred accounting fees to our manager of $14,000 and
$23,000, respectively, and $53,000 and $61,000 for the nine months ended September 30, 2009 and
2008, respectively.
Construction Management Fees
We pay Realty a construction management fee for its services in supervising any construction
or repair project in or about our properties equal to 5.0% of any amount up to $25,000, 4.0% of any
amount over $25,000 but less than $50,000 and 3.0% of any amount over $50,000, which is expended in
any calendar year for construction or repair projects. For the three and nine months ended
September 30, 2009, we incurred construction management fees to Realty of $1,000. For the three and
nine months ended September 30, 2008, we incurred construction management fees to Realty of $23,000
and $34,000, respectively.
Loan Fees
We pay Realty or its affiliate a loan fee of 1.0% of the principal amount of the loan for its
services in obtaining loans for our properties during the term of the Management Agreement. For the
three and nine months ended September 30, 2009 and 2008, we did not incur any loan fees.
19
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NNN 2003 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
Related Party Accounts Payable
Related party accounts payable consist primarily of amounts due from us related to the
Management Agreement, as discussed above, and for operating expenses incurred by us and paid by our
manager or its affiliates. As of September 30, 2009 and December 31, 2008, the amount payable by
us was $130,000 and $227,000, respectively, and is included in our condensed consolidated balance
sheets in the caption Accounts and loans payable due to related parties.
Related Party Note Receivable
On December 1, 2005, we advanced $579,000 on an unsecured basis to NNN Executive Center, LLC,
an 11.5% owner of the Executive Center II and III property. The unsecured note provides for
interest at 8.00% per annum and all principal and accrued interest was originally due in full on
December 1, 2008. The maturity date of this unsecured note has been extended to December 28, 2009.
We believe the proceeds from the anticipated sale of the Executive Center II and III property will
be sufficient to pay us in full. However, there can be no assurance that we will be able to sell
the property by December 28, 2009, or at all, or that the proceeds from the anticipated sale will
be sufficient to pay us in full, which would have a material adverse effect on our operations and
liquidity. As of September 30, 2009 and December 31, 2008, the amount due on this note receivable
was $746,000 and $722,000, respectively.
As of September 30, 2009 and December 31, 2008, the amount due to us for the note receivable
described above and for management fees from an affiliated entity was $795,000 and $764,000,
respectively, and is included in our consolidated balance sheets in the caption Accounts and loans
receivable due from related parties.
15. Commitments and Contingencies
Litigation
Neither we nor our properties are presently subject to any material litigation nor, to our
knowledge, is any material litigation threatened against us or our properties which if determined
unfavorably to us would have a material adverse effect on our cash flows, financial condition or
results of operations.
Environmental Matters
We follow the policy of monitoring our properties for the presence of hazardous or toxic
substances. While there can be no assurance that a material environmental liability does not exist,
we are not currently aware of any environmental liability with respect to the properties that would
have a material effect on our financial condition, results of operations or cash flows. Further, we
are not aware of any environmental liability or any unasserted claim or assessment with respect to
an environmental liability that we believe would require additional disclosure or the recording of
a loss contingency.
16. Concentration of Credit Risk
Financial instruments that potentially subject us to a concentration of credit risk are
primarily cash investments and accounts receivable from tenants. Cash is generally invested in
investment-grade short-term instruments and the amount of credit exposure to any one commercial
issuer is limited. We have cash in financial institutions which is insured by the Federal Deposit
Insurance Corporation, or FDIC, up to $250,000 per institution. As of September 30, 2009 and
December 31, 2008, we had cash accounts in excess of FDIC insured limits. We believe this risk is
not significant. Concentration of credit risk with respect to accounts receivable from tenants is
limited. We perform credit evaluations of prospective tenants, and security deposits are obtained
upon lease execution.
We have geographic concentration of risk subject to fluctuations in each states economy where
we operate our consolidated properties. As of September 30, 2009, we held interests in four
consolidated properties with one property each located in: (i) Missouri, which accounted for 42.2%
of our aggregate annual rent; (ii) North Carolina, which accounted for 31.4% of our aggregate
annual rent; (iii) Colorado, which accounted for 16.2% of our aggregate annual rent; and (iv)
Texas, which accounted for 10.2% of our aggregate annual rent. Rental revenue is based on
contractual base rent from leases in effect as of September 30, 2009 for all of our consolidated
properties, including those classified as operating properties, property held for non-sale
disposition and properties held for sale (reported as part of discontinued operations).
20
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NNN 2003 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
As of September 30, 2009, three tenants at three of our consolidated properties accounted for
35.6% of our aggregate annual rental revenue, including rental revenue reported as part of
discontinued operations, as follows:
Square | Lease | |||||||||
Footage | Expiration | |||||||||
Tenant | Property | (Approximate) | Date | |||||||
McKesson Information Solutions, Inc. |
Four Resource Square | 59,000 | 06/30/2012 | |||||||
PRC |
Tiffany Square | 96,000 | 05/31/2012 | |||||||
Westwood College of Technology |
Executive Center I | 44,000 | 01/31/2013 |
17. Discontinued Operations Properties Held for Sale
In accordance with FASB Codification Topic 360, Property, Plant and Equipment, the net income
(loss) from consolidated properties designated as held for sale as of September 30, 2009 is
reflected in our condensed consolidated statements of operations as discontinued operations for all
periods presented. For the three and nine months ended September 30, 2009 and 2008, discontinued
operations include the net income (loss) of two consolidated properties, one of which was sold
during the three months ended September 30, 2009:
Date Designated | ||||||||||||
Property | Date Acquired | for Sale | Date Sold | |||||||||
901 Civic Center |
04/24/2006 | 09/26/2008 | 07/17/2009 | |||||||||
The Sevens Building |
10/25/2007 | 10/10/2008 | N/A |
On July 17, 2009, we completed the sale of the 901 Civic Center property to an unaffiliated
third party for a sales price of $11,250,000. Our net cash proceeds were $1,946,000 after payment
of the related mortgage loan, closing costs and other transaction expenses. We paid sales
commissions of $282,000, or 2.5% of the sales price, to two unaffiliated brokers. We recorded a
gain on sale of the 901 Civic Center property of $704,000 during the three and nine months ended
September 30, 2009, which is included in Income (loss) from discontinued operations on the
accompanying condensed consolidated statements of operations. We owned a 96.9% interest in the 901
Civic Center property.
The following table summarizes the revenue and expense components that comprised income (loss)
from discontinued operations for the three and nine months ended September 30, 2009 and 2008:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Rental revenue |
$ | 1,075,000 | $ | 1,536,000 | $ | 4,397,000 | $ | 4,630,000 | ||||||||
Rental expense (including general, administrative, depreciation and amortization expense) |
574,000 | 1,098,000 | 2,447,000 | 4,464,000 | ||||||||||||
Real estate related impairments |
| 600,000 | 600,000 | 600,000 | ||||||||||||
Income (loss) before other expense |
501,000 | (162,000 | ) | 1,350,000 | (434,000 | ) | ||||||||||
Interest expense |
(390,000 | ) | (482,000 | ) | (1,495,000 | ) | (1,655,000 | ) | ||||||||
Other expense |
| | (2,000 | ) | (10,000 | ) | ||||||||||
Gain on disposal of discontinued operations |
704,000 | | 704,000 | | ||||||||||||
Income (loss) from discontinued operations |
815,000 | (644,000 | ) | 557,000 | (2,099,000 | ) | ||||||||||
Income (loss) from discontinued operations attributable to noncontrolling interests |
51,000 | 6,000 | 57,000 | (15,000 | ) | |||||||||||
Income (loss) from discontinued operations attributable to NNN 2003 Value Fund, LLC |
$ | 764,000 | $ | (650,000 | ) | $ | 500,000 | $ | (2,084,000 | ) | ||||||
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Item 2. | Managements Discussion and Analysis Financial Condition and Results of Operations. |
The use of the words we, us, or our refers to NNN 2003 Value Fund, LLC and its
subsidiaries, except where the context otherwise requires.
The following discussion should be read in conjunction with our financial statements and notes
appearing elsewhere in this Quarterly Report on Form 10-Q. Such financial statements and
information have been prepared to reflect our financial position as of September 30, 2009 and
December 31, 2008, together with our results of operations for the three and nine months ended
September 30, 2009 and 2008, respectively, and cash flows for the nine months ended September 30,
2009 and 2008, respectively.
Forward-Looking Statements
Historical results and trends should not be taken as indicative of future operations. Our
statements contained in this report that are not historical facts are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, or the Exchange Act. Actual results may differ
materially from those included in the forward-looking statements. We intend those forward-looking
statements to be covered by the safe-harbor provisions for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes
of complying with those safe-harbor provisions. Forward-looking statements, which are based on
certain assumptions and describe future plans, strategies and expectations of us, are generally
identifiable by use of the words believe, expect, intend, anticipate, estimate,
project, prospects, or similar expressions. Our ability to predict results or the actual effect
of future plans or strategies is inherently uncertain. Factors which could have a material adverse
effect on our operations and future prospects on a consolidated basis include, but are not limited
to: changes in economic conditions generally and the real estate market specifically; sales prices,
lease renewals and new leases; legislative/regulatory changes; availability of capital; changes in
interest rates; our ability to service our debt, competition in the real estate industry; the
supply and demand for operating properties in our current and proposed market areas; changes in
accounting principles generally accepted in the United States of America, or GAAP, policies and
guidelines applicable to us; our ongoing relationship with our manager (as defined below); and
litigation. These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Additional information
concerning us and our business, including additional factors that could materially affect our
financial results, is included herein and in our other filings with the United States Securities
and Exchange Commission, or the SEC.
Overview and Background
NNN 2003 Value Fund, LLC was formed as a Delaware limited liability company on June 19, 2003.
We were organized to acquire, own, operate and subsequently sell all or a portion of a number of
unspecified properties believed to have higher than average potential for capital appreciation, or
value-added properties. As of September 30, 2009, we held interests in seven commercial office
properties, including four consolidated properties and three unconsolidated properties. Our
principal objectives initially were to: (i) have the potential within approximately one to five
years, subject to market conditions, to realize income on the sale of our properties; (ii) realize
income through the acquisition, operation, development and sale of our properties or our interests
in our properties; and (iii) make periodic distributions to our unit holders from cash generated
from operations and capital transactions. We currently intend to sell all of our remaining
properties and make distributions to our unit holders from available funds. We do not anticipate
acquiring any additional real estate properties at this time.
Our ability to continue as a going concern is dependent upon our ability to generate the
necessary cash flows and/or retain the necessary financing to meet our obligations and pay our
liabilities when they come due. As of November 16, 2009, we have principal payments of $60,164,000
plus accrued interest due on outstanding mortgage loans payable related to our consolidated
properties that mature in the next twelve months. As discussed in Note 10, Mortgage Loans Payable
and Other Debt, to our accompanying condensed consolidated financial statements, during the three
months ended September 30, 2009, we elected to cease the subsidization of the operations and debt
service on the non-recourse promissory note for one of our consolidated properties. In addition,
we were not able pay the lender the outstanding principal amount of $4,590,000 and the monthly
interest payment due under the mortgage loan on October 1, 2009, or to make such payments within 10
days of the date such payment was due, which constituted an event of default. We are currently in
discussions with the lender to negotiate a forbearance agreement, however, there can be no
assurance that we will enter into a forbearance agreement with our lender, or if we do enter into a
forbearance agreement that we will be able to comply with the terms of such an agreement. We have
classified this property as a property held for non-sale disposition as of September 30, 2009, as
we believe it is probable that the property will be transferred to the lender in the fourth quarter
of 2009 and it no longer qualifies as a property held for sale. If we cannot sell our real estate
investments, obtain forbearance agreements, obtain new financing, or obtain alternative financing
on as favorable terms as our existing mortgage loans payable, we may trigger defaults which could
result in foreclosure of the asset discussed above and certain other assets. As a result, the
maturities of our mortgage debt combined with our deficit cash flow from operations raises
substantial doubt about our ability to continue as a going concern.
22
Table of Contents
Grubb & Ellis Realty Investors, LLC, or Grubb & Ellis Realty Investors, or our manager,
manages us pursuant to the terms of an operating agreement, or the Operating Agreement. Our manager
is managed by executive officers appointed by the board of directors of Grubb & Ellis Company, or
Grubb & Ellis. While we have only one executive officer and no employees, certain executive
officers and employees of our manager provide services to us pursuant to the Operating Agreement.
Our manager engages affiliated entities, including Triple Net Properties Realty, Inc., or Realty,
to provide certain services to us. Realty serves as our property manager pursuant to the terms of
the Operating Agreement and a property management agreement, or the Management Agreement. The
Operating Agreement terminates upon our dissolution. The unit holders may not vote to terminate our
manager prior to the termination of the Operating Agreement or our dissolution, except for cause.
The Management Agreement terminates with respect to each of our properties upon the earlier of the
sale of each respective property or December 31, 2013. Realty may be terminated without cause prior
to the termination of the Management Agreement or our dissolution, subject to certain conditions,
including the payment by us to Realty of a termination fee as provided in the Management Agreement.
Our managers principal executive offices are located at 1551 N. Tustin Avenue, Suite 300,
Santa Ana, California 92705 and its telephone number is (714) 667-8252. We make our periodic and
current reports available through our managers website at
www.gbe-realtyinvestors.com as soon as reasonably practicable after such materials are
electronically filed with the SEC. They are also available for printing when accessed through our
managers website. We do not maintain our own website or have an address or telephone number
separate from our manager. Since we pay fees to our manager for its services, we do not pay rent
for the use of their space.
Business Strategy
Our primary business strategy was to acquire, own, operate and subsequently sell all or a
portion of a number of unspecified properties believed to have higher than average potential for
capital appreciation, or value-added properties. As of September 30, 2009, we held interests in
seven commercial office properties, including four consolidated properties and three unconsolidated
properties. Our principal objectives initially were to: (i) have the potential within
approximately one to five years, subject to market conditions, to realize income on the sale of our
properties; (ii) realize income through the acquisition, operation, development and sale of our
properties or our interests in our properties; and (iii) make periodic distributions to our unit
holders from cash generated from operations and capital transactions. We currently intend to sell
all of our remaining properties and make distributions to our unit holders from available funds. We
do not anticipate acquiring any additional real estate properties at this time.
Acquisitions and Dispositions
We did not acquire any properties during the nine months ended September 30, 2009.
On July 17, 2009, we completed the sale of 901 Civic Center, located in Santa Ana, California,
or the 901 Civic Center property, to an unaffiliated third party for a sales price of $11,250,000.
Our net cash proceeds were $1,946,000 after payment of the related mortgage loan, closing costs and
other transaction expenses. We paid sales commissions of $282,000, or 2.5%, of the sales price, to
two unaffiliated brokers. We recorded a gain on sale of the 901 Civic Center property of $704,000
during the three and nine months ended September 30, 2009, which is included in Income (loss) from
discontinued operations on the accompanying condensed consolidated statements of operations. We
owned a 96.9% interest in the 901 Civic Center property.
Critical Accounting Policies
The complete listing of our Critical Accounting Policies was previously disclosed in our 2008
Annual Report on Form 10-K, as filed with the SEC on March 31, 2009, and there have been no
material changes to our critical accounting policies, as disclosed therein.
Factors Which May Influence Results of Operations
We are not aware of any material trends or uncertainties, other than national economic
conditions affecting real estate generally, the financial impact of the downturn of the credit
markets, and those listed in Part II, Item 1A of this report and those Risk Factors previously
disclosed in our 2008 Annual Report on Form 10-K, as filed with the SEC on March 31, 2009, that may
reasonably be expected to have a material impact, favorable or unfavorable, on revenues or income
from the acquisition, management and operation or disposition of our properties.
Rental Revenue
The amount of rental revenue generated by our properties depends principally on our ability to
maintain the occupancy rates of currently leased space and to lease currently available space and
space available from unscheduled lease terminations at the existing rental rates. Negative trends
in one or more of these factors could adversely affect our rental income in future periods.
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Scheduled Lease Expirations
As of September 30, 2009, our four consolidated properties were 66.5% leased to 70 tenants.
2.7% of the gross leaseable area expires during 2009. Our leasing strategy for 2009 focuses on
negotiating renewals for leases scheduled to expire during the year. If we are unable to negotiate
such renewals, we will try to identify new tenants or collaborate with existing tenants who are
seeking additional space to occupy. If the aggregate lease non-renewal factor at a property exceeds
the factor we projected when we acquired the property, we write off a portion of the tenant
relationship intangible asset to reflect our higher non-renewal experience.
Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002, as amended, and related laws, regulations and standards
relating to corporate governance and disclosure requirements applicable to public companies, have
increased the costs of compliance with corporate governance, reporting and disclosure practices
which are now required of us. These costs were unanticipated at the time of our formation and may
have a material impact on our results of operations. Furthermore, we expect that these costs will
increase in the future due to our continuing implementation of compliance programs mandated by
these requirements. Any increased costs may already affect our liquidity or capital resources
and/or future distribution of funds, if any, to our unit holders. As part of our compliance with
the Sarbanes-Oxley Act, we provided managements assessment of our internal control over our
financial reporting as of December 31, 2008 and continue to comply with such regulations.
In addition, these laws, rules and regulations create new legal bases for potential
administrative enforcement, civil and criminal proceedings against us in case of non-compliance,
thereby increasing the risks of liability and potential sanctions against us. We expect that our
efforts to comply with these laws and regulations will continue to involve significant, and
potentially increasing costs and, our failure to comply, could result in fees, fines, penalties or
administrative remedies against us.
Results of Operations
Our operating results are primarily comprised of income derived from our portfolio of
properties, as described below. Because our primary business strategy
was acquiring properties with
greater than average appreciation potential, enhancing value and realizing gains upon disposition
of these properties, our operations may reflect significant property acquisitions and dispositions
from period to period. As a result, the comparability of the financial data is limited and may vary
significantly from period to period. In addition, we have made reclassifications for all properties
designated as held for sale as of September 30, 2009 from Loss from Continuing Operations to Income
(Loss) from Discontinued Operations to conform with the current period financial statement
presentation.
Comparison of the Three and Nine Months Ended September 30, 2009 and 2008
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | Change | September 30, | Change | |||||||||||||||||||||||||||||
2009 | 2008 | $ | % | 2009 | 2008 | $ | % | |||||||||||||||||||||||||
Revenue: |
||||||||||||||||||||||||||||||||
Rental revenue |
$ | 1,001,000 | $ | 697,000 | $ | 304,000 | 43.6 | % | $ | 2,766,000 | $ | 3,075,000 | $ | (309,000 | ) | (10.0 | %) | |||||||||||||||
Rental revenue of operations
held for non-sale disposition |
192,000 | 183,000 | 9,000 | 4.9 | % | 622,000 | 670,000 | (48,000 | ) | (7.2 | %) | |||||||||||||||||||||
1,193,000 | 880,000 | 313,000 | 35.6 | % | 3,388,000 | 3,745,000 | (357,000 | ) | (9.5 | %) | ||||||||||||||||||||||
Expense: |
||||||||||||||||||||||||||||||||
Rental expense |
465,000 | 386,000 | 79,000 | 20.5 | % | 1,293,000 | 1,343,000 | (50,000 | ) | (3.7 | %) | |||||||||||||||||||||
General and administrative |
162,000 | 67,000 | 95,000 | 141.8 | % | 548,000 | 607,000 | (59,000 | ) | (9.7 | %) | |||||||||||||||||||||
Depreciation and amortization |
297,000 | 595,000 | (298,000 | ) | (50.1 | %) | 844,000 | 1,783,000 | (939,000 | ) | (52.7 | %) | ||||||||||||||||||||
Operating expenses of
operations held for non-sale
disposition |
202,000 | 382,000 | (180,000 | ) | (47.1 | %) | 748,000 | 1,123,000 | (375,000 | ) | (33.4 | %) | ||||||||||||||||||||
Real estate related impairments |
400,000 | 2,600,000 | (2,200,000 | ) | (84.6 | %) | 400,000 | 2,600,000 | (2,200,000 | ) | (84.6 | %) | ||||||||||||||||||||
Real estate related
impairments of operations held
for non-sale disposition |
300,000 | | 300,000 | | % | 3,000,000 | | 3,000,000 | | % | ||||||||||||||||||||||
1,826,000 | 4,030,000 | (2,204,000 | ) | (54.7 | %) | 6,833,000 | 7,456,000 | (623,000 | ) | (8.4 | %) | |||||||||||||||||||||
Loss before other income
(expense) and discontinued
operations |
(633,000 | ) | (3,150,000 | ) | 2,517,000 | (79.9 | %) | (3,445,000 | ) | (3,711,000 | ) | 266,000 | (7.2 | %) | ||||||||||||||||||
Other income (expense): |
||||||||||||||||||||||||||||||||
Interest expense |
(690,000 | ) | (733,000 | ) | 43,000 | (5.9 | %) | (2,062,000 | ) | (2,208,000 | ) | 146,000 | (6.6 | %) | ||||||||||||||||||
Interest expense of operations
held for non-sale disposition |
(186,000 | ) | (132,000 | ) | (54,000 | ) | 40.9 | % | (551,000 | ) | (393,000 | ) | (158,000 | ) | 40.2 | % | ||||||||||||||||
Interest and dividend income |
1,000 | 49,000 | (48,000 | ) | (98.0 | %) | 25,000 | 232,000 | (207,000 | ) | (89.2 | %) | ||||||||||||||||||||
Other-than-temporary
impairment of marketable
equity securities |
| (51,000 | ) | 51,000 | (100.0 | %) | | (844,000 | ) | 844,000 | (100.0 | %) | ||||||||||||||||||||
Equity in losses of
unconsolidated real estate |
(194,000 | ) | (146,000 | ) | (48,000 | ) | 32.9 | % | (2,759,000 | ) | (777,000 | ) | (1,982,000 | ) | 255.1 | % | ||||||||||||||||
Other expense |
(8,000 | ) | (1,000 | ) | (7,000 | ) | 700.0 | % | (48,000 | ) | (15,000 | ) | (33,000 | ) | 220.0 | % | ||||||||||||||||
Loss from continuing operations |
(1,710,000 | ) | (4,164,000 | ) | 2,454,000 | (58.9 | %) | (8,840,000 | ) | (7,716,000 | ) | (1,124,000 | ) | 14.6 | % | |||||||||||||||||
Income (loss) from
discontinued operations |
815,000 | (644,000 | ) | 1,459,000 | 226.6 | % | 557,000 | (2,099,000 | ) | 2,656,000 | 126.5 | % | ||||||||||||||||||||
Consolidated net loss |
$ | (895,000 | ) | $ | (4,808,000 | ) | $ | 3,913,000 | (81.4 | %) | $ | (8,283,000 | ) | $ | (9,815,000 | ) | $ | 1,532,000 | (15.6 | %) | ||||||||||||
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Four Resource Square, located in Charlotte, North Carolina, or the Four Resource Square
property, and Tiffany Square, located in Colorado Springs, Colorado, or the Tiffany Square
property, are our only consolidated operating properties as of September 30, 2009.
Rental Revenue
Rental revenue increased $304,000, or 43.6%, to $1,001,000, during the three months ended
September 30, 2009, compared to rental revenue of $697,000 for the three months ended September 30,
2008. The increase was primarily attributable to higher straight-line rents, increased rental
income and higher CAM recoveries totaling $702,000 for the Four Resource Square property, which was
partially offset by lower lease inducement revenue at the Tiffany Square property of $437,000.
Rental revenue decreased $309,000, or 10.0%, to $2,766,000, during the nine months ended
September 30, 2009, compared to rental revenue of $3,075,000 for the nine months ended September
30, 2008. The decrease was primarily attributable to lower lease inducement revenue at the Tiffany
Square property of $503,000, which was partially offset by higher straight-line rents at the Four
Resource Square property of $251,000.
Rental Revenue of Operations Held for Non-Sale Disposition
Rental revenue of operations held for non-sale disposition increased $9,000, or 4.9%, to
$192,000, during the three months ended September 30, 2009, compared to $183,000 for the three
months ended September 30, 2008.
Rental revenue of operations held for non-sale disposition decreased $48,000, or 7.2%, to
$622,000, during the nine months ended September 30, 2009, compared to $670,000 for the nine months
ended September 30, 2008. The decrease was primarily attributable to lower CAM recoveries at
Executive Center I, located in Dallas, Texas, or the Executive Center I property. The lower CAM
recovery income is a result of lower estimated costs for 2009.
Rental Expense
Rental expense increased $79,000, or 20.5%, to $465,000, during the three months ended
September 30, 2009, compared to rental expense of $386,000 for the three months ended September 30,
2008. The increase was primarily attributable to higher general building maintenance and repair
costs at the Four Resource Square and Tiffany Square properties.
Rental expense decreased $50,000, or 3.7%, to $1,293,000, during the nine months ended
September 30, 2009, compared to rental expense of $1,343,000 for the nine months ended September
30, 2008. The decrease was primarily attributable to lower HVAC maintenance and security costs at
the Tiffany Square property.
General and Administrative Expense
General and administrative expense consists primarily of third-party professional accounting
fees, legal fees and printing fees related to our SEC filing requirements. General and
administrative expense increased $95,000, or 141.8%, to $162,000, during the three months ended
September 30, 2009, compared to general and administrative expense of $67,000 for the three months
ended September 30, 2008. The increase was due primarily to higher legal and professional fees at
the Four Resource Square and Tiffany Square properties, as well as higher audit and accounting
fees.
General and administrative expense decreased $59,000, or 9.7%, to $548,000, during the nine
months ended September 30, 2009, compared to general and administrative expense of $607,000 for the
nine months ended September 30, 2008. The decrease was due primarily to lower franchise tax
expenses.
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Depreciation and Amortization Expense
Depreciation and amortization expense decreased $298,000, or 50.1%, to $297,000, during the
three months ended September 30, 2009, compared to depreciation and amortization expense of
$595,000 for the three months ended September 30, 2008. The decrease was primarily the result of a
decrease in depreciation expense for the Tiffany Square property, as it was classified as held for
sale for the majority of the three months ended September 30, 2009. The Tiffany Square property was
not depreciated during the period it was classified as held for sale, and when it was reclassified
to operating properties the impairment charge recorded exceeded any catch-up depreciation expense
that would have otherwise been required. Depreciation expense for the Four Resource Square
property also decreased due to the $5,900,000 impairment charge recorded in 2008 and the resulting
lower depreciable basis.
Depreciation and amortization expense decreased $939,000, or 52.7%, to $844,000, during the
nine months ended September 30, 2009, compared to depreciation and amortization expense of
$1,783,000 for the nine months ended September 30, 2008. The decrease was primarily the result of a
decrease in depreciation expense for the Tiffany Square property, as it was classified as held for
sale for the majority of the nine months ended September 30, 2009. The Tiffany Square property was
not depreciated during the period it was classified as held for sale, and when it was reclassified
to operating properties the impairment charge recorded exceeded any catch-up depreciation expense
that would have otherwise been required. Depreciation expense for the Four Resource Square
property also decreased due to the $5,900,000 impairment charge recorded in 2008 and the resulting
lower depreciable basis.
Operating Expenses of Operations Held for Non-Sale Disposition
Operating expenses of operations held for non-sale disposition decreased $180,000, or 47.1%,
to $202,000, during the three months ended September 30, 2009, compared to $382,000 for the three
months ended September 30, 2008. The decrease was primarily attributable to decreased maintenance,
security, property tax and administrative costs for the Executive Center I property, as well as
lower depreciation expense as a result of the property being classified as held for sale for the
majority of the three months ended September 30, 2009. The Executive Center I property was not
depreciated during the period it was classified as held for sale, and when it was reclassified to
property held for non-sale disposition the impairment charge recorded exceeded any catch-up
depreciation expense that would have otherwise been required.
Operating expenses of operations held for non-sale disposition decreased $375,000, or 33.4%,
to $748,000, during the nine months ended September 30, 2009, compared to $1,123,000 for the nine
months ended September 30, 2008. The decrease was primarily attributable to decreased maintenance,
security, property tax and administrative costs for the Executive Center I property, as well as
lower depreciation expense as a result of the property being classified as held for sale for the
majority of the nine months ended September 30, 2009. The Executive Center I property was not
depreciated during the period it was classified as held for sale, and when it was reclassified to
property held for non-sale disposition the impairment charge recorded exceeded any catch-up
depreciation expense that would have otherwise been required.
Real Estate Related Impairments
During the three months ended September 30, 2009, we reviewed our consolidated operating
properties for impairment in accordance with FASB Codification Topic 360, Property, Plant and
Equipment, as indicators of impairment were present and one such property had been reclassified
from property held for sale to operating properties. As a result of these impairment reviews, we
recorded real estate related impairments of $300,000 related to the Tiffany Square property and
$100,000 related to the Four Resource Square property, for total real estate related impairments of
$400,000 for the three and nine months ended September 30, 2009.
During the three months ended September 30, 2008, we reviewed our consolidated operating
properties for impairment in accordance with FASB Codification Topic 360, Property, Plant and
Equipment, as indicators of impairment were present and one such property had been reclassified
from property held for sale to operating properties. As a result of these impairment reviews, we
recorded a real estate related impairment of $2,600,000 related to the Tiffany Square property for
the three and nine months ended September 30, 2008.
Real Estate Related Impairments of Operations Held for Non-Sale Disposition
During the three months ended September 30, 2009, we reviewed our property held for non-sale
disposition for impairment in accordance with FASB Codification Topic 360, Property, Plant and
Equipment, as indicators of impairment were present and the property had been reclassified from
property held for sale to property held for non-sale disposition. As a result of this impairment review, we recorded a real estate related impairment of $300,000 related to the Executive
Center I property during the three months ended September 30, 2009.
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Total real estate related impairments for our property held for non-sale disposition during
the nine months ended September 30, 2009 was $3,000,000.
Interest Expense
Interest expense decreased $43,000, or 5.9%, to $690,000 for the three months ended September
30, 2009, compared to interest expense of $733,000 for the three months ended September 30, 2008,
primarily due to lower loan fee amortization for the Tiffany Square property.
Interest expense decreased $146,000, or 6.6%, to $2,062,000 for the nine months ended
September 30, 2009, compared to interest expense of $2,208,000 for the nine months ended September
30, 2008, primarily due to lower loan fee amortization for the Tiffany Square property.
Interest Expense of Operations Held for Non-Sale Disposition
Interest expense of operations held for non-sale disposition increased $54,000, or 40.9%, to
$186,000 for the three months ended September 30, 2009, compared to $132,000 for the three months
ended September 30, 2008, primarily due to higher loan fee amortization related to additional loan
fees paid when the loan on the Executive Center I property was extended in October 2008, as well as
an increase in the interest rate at that same time.
Interest expense of operations held for non-sale disposition increased $158,000, or 40.2%, to
$551,000 for the nine months ended September 30, 2009, compared to $393,000 for the nine months
ended September 30, 2008, primarily due to higher loan fee amortization related to additional loan
fees paid when the loan on the Executive Center I property was extended in October 2008, as well as
an increase in the interest rate at that time.
Interest and Dividend Income
Interest and dividend income decreased $48,000, or 98.0%, to $1,000 during the three months
ended September 30, 2009, compared to interest and dividend income of $49,000 for the three months
ended September 30, 2008, primarily due to a decrease in interest income earned on our money market
accounts as a result of lower average invested cash balances for the three months ended September
30, 2009, compared to the same period in 2008.
Interest and dividend income decreased $207,000, or 89.2%, to $25,000 during the nine months
ended September 30, 2009, compared to interest and dividend income of $232,000 for the nine months
ended September 30, 2008, primarily due to a decrease in interest income earned on our money market
accounts as a result of lower average invested cash balances in for the nine months ended September
30, 2009, compared to the same period in 2008.
Other-than-temporary Impairment of Marketable Equity Securities
We did not hold any investments in marketable equity securities during the three or nine
months ended September 30, 2009. We recorded other-than-temporary impairments of marketable equity
securities of $51,000 and $844,000 during the three and nine months ended September 30, 2008,
respectively, to reflect the fair value of our marketable equity security investments since we
believed that the declines in value were other-than-temporary as of September 30, 2008.
Equity in Losses of Unconsolidated Real Estate
Equity in losses of unconsolidated real estate increased $48,000, or 32.9%, to a loss of
$194,000, during the three months ended September 30, 2009, compared to a loss of $146,000 for the
three months ended September 30, 2008. The increased loss was primarily attributable to real estate
related impairment charges of $2,470,000 recorded during the three months ended September 30, 2009
at our unconsolidated properties, of which our share was $349,000. This impairment was partly
offset by our share of the increased income at the unconsolidated properties for the three months
ended September 30, 2009, compared to the same period in 2008. All three of the unconsolidated
properties were classified as held for sale for the majority of the three months ended September
30, 2009 and no depreciation or amortization expense was recorded during that period, resulting in
the increase in income.
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Equity in losses of unconsolidated real estate increased $1,982,000, or 255.1%, to a loss of
$2,759,000, during the nine months ended September 30, 2009, compared to loss of $777,000 for the
nine months ended September 30, 2008. The increased loss was primarily attributable to real estate
related impairment charges of $21,270,000 recorded during the nine months ended September 30, 2009
at our unconsolidated properties, of which our share was $2,996,000. This impairment was partly
offset by our share of the increased income at the unconsolidated properties for the nine months
ended September 30, 2009, compared to the same period in 2009. All three of the unconsolidated
properties were classified as held for sale for the majority of the nine months ended September 30,
2009 and no depreciation or amortization expense was recorded during that period, resulting in the
increase in income.
Other Expense
Other expense increased $7,000, or 700.0%, to other expense of $8,000, during the three months
ended September 30, 2009, from other expense of $1,000 during the three months ended September 30,
2008.
Other expense increased $33,000, or 220.0%, to other expense of $48,000, during the nine
months ended September 30, 2009, from other expense of $15,000 during the nine months ended
September 30, 2008. The increase is attributable to the write off of unrealized income on sold
properties.
Income (Loss) from Discontinued Operations
The results of discontinued operations increased $1,459,000 to income of $815,000 during the
three months ended September 30, 2009, compared to a loss from discontinued operations of $644,000
for the three months ended September 30, 2008. The improved results were primarily attributable to
the gain recognized on the sale of the 901 Civic Center property during the three months ended
September 30, 2009 of $704,000, as well as the impact of the real estate related impairment charge
of $600,000 for The Sevens Building property that was recorded during the three months ended
September 30, 2008.
The results of discontinued operations increased $2,656,000 to income of $557,000 during the
nine months ended September 30, 2009, compared to a loss from discontinued operations of $2,099,000
for the nine months ended September 30, 2008. The improved results were primarily attributable to
the gain recognized on the sale of the 901 Civic Center property during the nine months ended
September 30, 2009 of $704,000, as well as increased income from The Sevens Building property of
$1,272,000 and the 901 Civic Center property of $680,000 during the nine months ended September 30,
2009, compared to the same period in 2008. The increase in income at both properties is primarily
due to lower depreciation and amortization expense, as both properties have been designated as held
for sale.
Consolidated Net Loss
As a result of the above, consolidated net loss was $895,000 for the three months ended
September 30, 2009, compared to $4,808,000 for the three months ended September 30, 2008.
As a result of the above, consolidated net loss was $8,283,000 for the nine months ended
September 30, 2009, compared to $9,815,000 for the nine months ended September 30, 2008.
Liquidity and Capital Resources
As previously disclosed in our 2008 Annual Report on Form 10-K, as filed with the SEC on March
31, 2009, and as discussed in the Quarterly report on Form 10-Q filed with the SEC on August 14,
2009, our ability to continue as a going concern is dependent upon our ability to generate the
necessary cash flows and/or retain the necessary financing to meet our obligations and pay our
liabilities when they come due.
As of November 16, 2009, we have principal payments of $60,164,000 plus accrued interest due
on outstanding mortgage loans payable related to our consolidated properties that mature in the
next twelve months, including a $4,590,000 mortgage loan related to the Executive Center I property
which matured on October 1, 2009 and for which we are in default. We are currently in discussions
with the lender to negotiate a forbearance agreement. While we have not reached a final agreement
with the lender, we anticipate that the preliminary terms of the forbearance agreement would
include: (i) our continued efforts to market the property for sale until December 31, 2009; (ii) if
we are unable to sell the property before December 31, 2009, we will agree to provide our lender a
deed-in-lieu of sale of the property; and (iii) a deferral of all monthly interest payments due
under the note until the property is sold or until a
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deed-in-lieu transaction takes place. There can be no assurance that we will enter into a
forbearance agreement with the lender on similar terms to those as outlined above or at all, or if
we do enter into a forbearance agreement that we will be able to comply with the terms of such an
agreement. We have classified this property as a property held for non-sale disposition as of
September 30, 2009, as we believe it is probable that the property will be transferred to the
lender in the fourth quarter of 2009 and it no longer qualifies for held for sale classification.
If we are unable to enter into a forbearance agreement with our lender, under the terms of the note
this event of default could result in: (i) an immediate increase in our financial obligation to the
lender in connection with an applicable 3.0% interest rate increase to 15.0% (the default interest
rate) and the addition of a late charge equal to the lesser of 3.0% of the amount of any payment
not timely paid, or the maximum amount which may be charged under applicable law; (ii) the lender
foreclosing on the property; or (iii) a hindrance to our ability to negotiate future loan
transactions on favorable terms.
If we cannot sell our real estate investments, extend the loan maturity dates, or obtain new
financing on as favorable terms as our existing mortgage loans payable, we may trigger additional
defaults which could result in foreclosure of certain assets. As previously discussed, the
maturities of our mortgage debt combined with our deficit cash flow from operations raises
substantial doubt about our ability to continue as a going concern.
Current Sources of Capital and Liquidity
We seek to create and maintain a capital structure that allows for financial flexibility and
diversification of capital resources. We expect to meet our short-term liquidity needs, which may
include principal repayments of debt obligations and capital expenditures, primarily through the
sale of our real estate investments.
Effective November 1, 2008, we suspended cash distributions to the Class A, Class B and Class
C unit holders. The suspension of distributions allows us to conserve approximately $290,000 per
month. It is anticipated that these funds will be applied towards future tenanting costs to lease
spaces not covered by lender reserves and to supplement the lender reserve funding and other
operating costs as necessary.
Planned Sales and Valuations of Real Estate Investments
As of September 30, 2009, one consolidated property, The Sevens Building property, and one
unconsolidated property, Chase Tower, located in Austin, Texas, or the Chase Tower property, are
being actively marketed for sale and meet all of the other criteria to be classified as held for
sale. Two of our consolidated properties, the Four Resource Square property and the Tiffany Square
property, and two unconsolidated properties, Enterprise Technology Center, located in Scotts
Valley, California, or the Enterprise Technology Center property, and Executive Center II and III,
located in Dallas Texas, or the Executive Center II and III property, are classified as operating
properties because they do not meet the held for sale classification criteria. Additionally, one of
our consolidated properties, the Executive Center I property, is classified as held for non-sale
disposition.
Pursuant to FASB Codification Topic 360, Property, Plant and Equipment, during 2008 we
assessed the value of all of our consolidated and unconsolidated properties. This valuation
assessment resulted in us recognizing real estate related impairment
charges of $21,200,000 during
2008 against the carrying value of our consolidated properties and our investments in
unconsolidated real estate. During the nine months ended September 30, 2009, pursuant to FASB
Codification Topic 360, Property, Plant and Equipment, we recorded real estate related impairment
charges on certain of our consolidated properties and our investments in unconsolidated real estate
of $25,270,000.
Cash Flows
Net
cash used in operating activities was $705,000 for the nine months ended September 30,
2009, compared to cash used in operating activities of $2,072,000 for the nine months ended
September 30, 2008. This decrease in cash used in operating activities was due primarily to changes
in operating assets and liabilities and improved cash operating results after non-cash reconciling
items.
Cash
provided by investing activities was $10,505,000 for the nine months ended September 30,
2009, compared to cash used in investing activities of $755,000 for the nine months ended September
30, 2008. The improvement in cash flows from investing activities between the two periods was
primarily due to the sale of the 901 Civic Center property during the nine months ended September
30, 2009, which generated proceeds of $10,983,000.
Cash used in financing activities was $8,651,000 for the nine months ended September 30,
2009, compared to cash used in financing activities of $3,911,000 for the nine months ended
September 30, 2008. The increase in cash used in financing activities was
primarily due to the repayment of the loan on the 901 Civic Center property in connection
with the sale of the property, which was partially offset by suspension of distributions to the
unit holders effective November 1, 2008.
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Factors which may Influence Future Sources of Capital and Liquidity
Debt Financing
One of our principal liquidity needs is the payment of principal and interest on our
outstanding indebtedness, which includes mortgage loans payable and other debt. Our variable rate,
interest-only mortgage loans bear interest at rates ranging from 2.50% to 8.00% per annum as of
September 30, 2009, and our fixed rate, interest-only mortgage loans bear interest at rates ranging
from 5.95% to 12.00% per annum as of September 30, 2009. Our mortgage loans payable mature at
various dates through October 2010.
The composition of our aggregate mortgage loans payable as of September 30, 2009 and December
31, 2008 was as follows:
Mortgage | Weighted Average | |||||||||||||||
Loans Payable | Interest Rate | |||||||||||||||
September 30, 2009 | December 31, 2008 | September 30, 2009 | December 31, 2008 | |||||||||||||
Variable rate |
$ | 34,574,000 | $ | 43,325,000 | 7.47 | % | 6.02 | % | ||||||||
Fixed rate |
25,590,000 | 25,590,000 | 7.04 | % | 7.04 | % | ||||||||||
Total |
$ | 60,164,000 | $ | 68,915,000 | 7.28 | % | 6.39 | % | ||||||||
Additional information regarding our mortgage loans payable as of September 30, 2009 was as
follows:
Weighted- | ||||||||||||||||
Average | Variable | |||||||||||||||
Principal | Interest | or Fixed | ||||||||||||||
Property | Outstanding | Maturity Date | Rate | Interest Rate | ||||||||||||
Consolidated Properties: |
||||||||||||||||
Executive Center I |
$ | 4,590,000 | 10/01/2009 | 12.00 | % | Fixed | ||||||||||
Tiffany Square |
12,395,000 | 02/15/2010 | 8.00 | % | Variable | |||||||||||
Four Resource Square |
21,797,000 | 03/07/2010 | 7.25 | % | Variable | |||||||||||
The Sevens Building (1) |
21,382,000 | 10/31/2010 | 5.89 | % | Fixed & Variable | |||||||||||
Total consolidated mortgage loans payable |
$ | 60,164,000 | ||||||||||||||
Unconsolidated Properties: |
||||||||||||||||
Executive Center II and III (2) |
$ | 14,471,000 | 12/28/2009 | 3.12 | % | Variable | ||||||||||
Enterprise Technology Center |
32,970,000 | 05/11/2011 | 6.44 | % | Fixed | |||||||||||
Chase Tower |
67,781,000 | 06/30/2010 | 3.76 | % | Variable | |||||||||||
Total unconsolidated mortgage loans payable |
$ | 115,222,000 | ||||||||||||||
(1) | Mortgage loans payable include $21,000,000 with a fixed interest rate of 5.95% and $382,000 with a variable interest rate of 2.50% as of September 30, 2009. | |
(2) | Excludes other unsecured notes payable of $2,650,000 as of September 30, 2009, which is comprised of $1,205,000 due to TIC ownership, with a maturity date of December 28, 2009, and $1,445,000 due to a related party, with a maturity date of January 1, 2010. These notes bear interest at 8.00% per annum. |
Certain of our consolidated properties financed by borrowings are required by the terms of
their applicable loan documents to meet certain financial covenants such as minimum loan to value,
debt service coverage and performance covenants, as well as other requirements on a combined and
individual basis. As discussed in Note 10, Mortgage Loans Payable and Other Debt, to our
accompanying condensed consolidated financial statements, as of September 30, 2009, we were in
compliance with such covenants, as amended, on all our mortgage loans on our consolidated
properties, or obtained waivers for any instances of non-compliance, except for the default on the
Executive Center I property loan, as discussed in Note 10, Mortgage Loans Payable and Other Debt,
to our accompanying condensed consolidated financial statements.
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Our unconsolidated properties that are financed by borrowings may be required by the terms of
the applicable loan documents to meet certain financial covenants such as minimum loan to value,
debt service coverage, performance covenants, as well as other requirements on a combined and
individual basis. As of September 30, 2009, two of our unconsolidated properties were in compliance
with such financial covenants, as amended, or obtained waivers for any instances of non-compliance.
However, our third unconsolidated property, the Executive Center II and III property, was not in
compliance with certain financial covenants, as discussed in Note 6, Real Estate Investments
Unconsolidated Real Estate, to our accompanying condensed consolidated financial statements.
The following table provides information with respect to the scheduled principal and interest
payments of our aggregate consolidated mortgage loans payable, as well as certain other
obligations, as of September 30, 2009. The table does not reflect any available loan extension
options.
Payments Due by Period | ||||||||||||||||||||
Less than | More than | |||||||||||||||||||
1 Year | 1-3 Years | 4-5 Years | 5 Years | |||||||||||||||||
(2009) | (2010-2011) | (2012-2013) | (After 2013) | Total | ||||||||||||||||
Principal payments variable rate debt |
$ | | $ | 34,574,000 | $ | | $ | | $ | 34,574,000 | ||||||||||
Principal payments fixed rate debt |
4,590,000 | 21,000,000 | | | 25,590,000 | |||||||||||||||
Interest payments variable rate debt (based on
rate in effect as of September 30, 2009) |
645,000 | 425,000 | | | 1,070,000 | |||||||||||||||
Interest payments fixed rate debt |
314,000 | 1,041,000 | | | 1,355,000 | |||||||||||||||
Tenant improvement and lease commission obligations |
14,000 | | | | 14,000 | |||||||||||||||
$ | 5,563,000 | $ | 57,040,000 | $ | | $ | | $ | 62,603,000 | |||||||||||
As of September 30, 2009, approximately 42.5% of our consolidated debt bears interest at fixed
rates. The remaining 57.5% of our consolidated debt is exposed to fluctuations on the 30-day LIBOR
rate.
Other Liquidity Needs
We have restricted cash balances of $1,761,000 as of September 30, 2009 that are held as
credit enhancements and as reserves for property taxes, capital expenditures and capital
improvements in connection with our loan portfolio. When we repay loans, the restricted balances
that are held at that time will become available to us as unrestricted funds. In addition, $217,000
of the restricted cash balance represents an escrow account that was funded from the proceeds of
the sale of our Southwood property to pay a rent guaranty to the buyer, for a period of five years.
The buyer has received and may continue to receive payments from this escrow account over the five
year period, which ends on December 31, 2010, At the end of the five year period, we will receive
any remaining balance in the escrow account.
We estimate that our expenditures for tenant improvements and leasing commissions will require
approximately $150,000 for the remainder of 2009. As of September 30, 2009, we had $16,000 of
restricted cash in loan impounds and reserve accounts for such capital expenditures and any
remaining expenditures will be paid with cash on hand, net cash from operations or gains from the
sale of assets. We cannot provide assurance, however, that we will not exceed these estimated
expenditure and distribution levels or be able to obtain additional sources of financing on
commercially favorable terms, or at all.
Capital Resources
General
Our primary sources of capital are proceeds from the sale of properties, our ability to obtain
debt financing from third parties and related parties including, without limitation, our manager
and its affiliates and our real estate operations. We derive substantially all of our revenues from
tenants under leases at our properties. Our operating cash flow, therefore, depends materially on
the rents that we are able to charge our tenants and the ability of these tenants to make their
rental payments to us. The terms of any debt financing received from our manager or its affiliates
are not negotiated on an arms length basis and under the terms of the Operating Agreement, we may
be required to pay interest on our borrowings at a rate of up to 12.00% per annum. We may use the
net proceeds from such loans for any purpose, including, without limitation, operating
requirements, capital and tenant improvements, rate lock deposits and distributions.
Our primary uses of cash are to fund the payment of principal and interest on outstanding
indebtedness, to fund capital investment in our existing portfolio of operating assets and to fund
distributions to our unit holders. We may also regularly require capital to invest in our existing
portfolio of operating assets in connection with routine capital improvements, deferred maintenance
on our properties recently acquired and leasing activities, including funding tenant improvements,
allowances, leasing commissions, development of land and capital improvements. The amounts of the
leasing-related expenditures can vary significantly depending on negotiations with tenants and the
willingness of tenants to pay higher base rents over the life of the leases.
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There are currently no limits or restrictions on the use of proceeds from our manager and its
affiliates that would prohibit us from making the proceeds available for distribution. We may also
pay distributions from cash from capital transactions, including, without limitation, the sale of
one or more of our properties. Distributions payable to our unit holders may include a return of
capital as well as a return in excess of capital. Distributions exceeding taxable income will
constitute a return of capital for federal income tax purposes to the extent of a unit holders
basis. Distributions in excess of a unit holders tax basis will generally constitute capital gain.
Our distribution rate was at 7.0% per annum (excluding special distributions), prior to the
suspension of distributions effective November 1, 2008, and was the same among all unit holders
since inception through November 1, 2008.
Off-Balance Sheet Arrangements
As of September 30, 2009, we had no off-balance sheet transactions, nor do we currently have
any such arrangements or obligations.
Inflation
We will be exposed to inflation risk as income from long-term leases is expected to be the
primary source of our cash flows from operations. We expect that there will be provisions in the
majority of our tenant leases that will offer some protection from the impact of inflation. These
provisions include rent steps, reimbursement billings for operating expense pass-through charges,
real estate tax and insurance reimbursements on a per square foot allowance basis. However, due to
the long-term nature of the leases, among other factors, the leases may not re-set frequently
enough to cover inflation.
Recently Issued Accounting Pronouncements
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R), or
SFAS No. 167 (not yet contained in FASB Codification), which amends the consolidation guidance
applicable to variable interest entities, or VIEs. The amendments to the overall consolidation
guidance affect all entities currently within the scope of FIN No. 46(R), as well as qualifying
special-purpose entities that are currently excluded from the scope of FIN No. 46(R). Specifically,
an enterprise will need to reconsider its conclusion regarding whether an entity is a VIE, whether
the enterprise is the VIEs primary beneficiary and what type of financial statement disclosures
are required. SFAS No. 167 is effective as of the beginning of the first fiscal year that begins
after November 15, 2009. Early adoption is prohibited. We will adopt SFAS No. 167 on January 1,
2010. We are currently evaluating the impact of SFAS No. 167 on our consolidated financial position
and results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk includes risks that arise from changes in interest rates, foreign currency
exchange rates, commodity prices, equity prices and other market changes that affect market
sensitive instruments. In pursuing our business plan, we expect that the primary market risk to
which we will be exposed is interest rate risk.
We are exposed to interest rate changes primarily as a result of our long-term debt used to
maintain liquidity and to fund operations and capital expenditures. Our interest rate risk
objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower
our overall borrowing costs. To achieve these objectives, we borrow primarily at fixed rates or
variable rates with the lowest margins available and, in some cases, we may enter into derivative
financial instruments such as interest rate swaps, caps and treasury locks in order to seek to
mitigate our interest rate risk on a related financial instrument. We do not enter into derivative
or interest rate transactions for speculative purposes.
In addition to changes in interest rates, the value of our properties is subject to
fluctuations based on changes in local and regional economic conditions and changes in the
creditworthiness of tenants, which may affect our ability to refinance our debt if necessary.
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The table below presents, as of September 30, 2009, the consolidated principal amounts and
weighted average interest rates by year of expected maturity to evaluate the expected cash flows
and sensitivity to interest rate changes.
Expected Maturity Date | ||||||||||||||||||||||||||||||||
2009 | 2010 | 2011 | 2012 | 2013 | Thereafter | Total | Fair Value | |||||||||||||||||||||||||
Variable rate mortgage loans payable |
$ | | $ | 34,574,000 | $ | | $ | | $ | | $ | | $ | 34,574,000 | $ | 22,832,000 | ||||||||||||||||
Weighted average interest rate on
maturing variable rate debt (based
on rates in effect as of September
30, 2009) |
| % | 7.47 | % | | % | | % | | % | | % | 7.47 | % | ||||||||||||||||||
Fixed rate mortgage loans payable |
$ | 4,590,000 | $ | 21,000,000 | $ | | $ | | $ | | $ | | $ | 25,590,000 | $ | 24,100,000 | ||||||||||||||||
Weighted average interest rate on
maturing fixed rate debt |
12.00 | % | 5.95 | % | | % | | % | | % | | % | 7.04 | % |
As of September 30, 2009, we estimate the fair value of our mortgage loans payable,
including mortgage loans payable secured by a property held for non-sale disposition and properties
held for sale, to be approximately $46,932,000. For non-recourse mortgage loans on properties with
estimated fair values of less than their respective loan balances, which is the case for three of
our consolidated properties, we estimate the fair value of the mortgage loans to be equal to the
estimated fair value of the properties. For the mortgage loan on the remaining consolidated
property, we believe the carrying amount approximates fair value due to the relatively short
remaining term of the loan.
As of September 30, 2009, we had fixed and variable rate mortgage loans with effective
interest rates ranging from 2.50% to 12.00% per annum and a weighted average effective interest
rate of 7.28% per annum. As of September 30, 2009, our mortgage loans payable consisted of
$25,590,000, or 42.5%, of the total debt, at a weighted average fixed interest rate of 7.04% per
annum and $34,574,000, or 57.5%, of the total debt, at a weighted average variable interest rate of
7.47% per annum. Our mortgage loans mature at various dates through October 2010.
An increase in the variable interest rate on certain mortgage loans payable constitutes a
market risk. As of September 30, 2009, for example, a 0.50% increase in LIBOR would have increased
our overall annual interest expense by $173,000, or approximately 6.70%.
Item 4. Controls and Procedures.
Not applicable.
Item 4T. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures. We maintain disclosure controls and
procedures that are designed to ensure that information required to be disclosed in our reports
under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed,
summarized and reported within the time periods specified in the United States Securities and
Exchange Commission, or the SEC, rules and forms and that such information is accumulated and
communicated to us, including our chief executive officer and our managers chief financial
officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, we recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, as ours are designed to do, and we necessarily were required to apply
our judgment in evaluating whether the benefits of the controls and procedures that we adopt
outweigh their costs.
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of
September 30, 2009 was conducted under the supervision and with the participation of our manager,
including our chief executive officer and our managers chief financial officer, of the
effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act). Based on this evaluation, our chief executive officer and our
managers chief financial officer concluded that our disclosure controls and procedures, as of
September 30, 2009, were effective for the purposes stated above.
(b) Changes in internal control over financial reporting. There were no changes in our
internal control over financial reporting that occurred during the quarter ended September 30, 2009
that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
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PART II OTHER INFORMATION
The use of the words, we, us, or our refers to NNN 2003 Value Fund, LLC and its
subsidiaries, except where the context otherwise requires.
Item 1. Legal Proceedings.
Neither we nor our properties are presently subject to any material litigation nor, to our
knowledge, is any material litigation threatened against us or our properties which if determined
unfavorably to us would have a material adverse effect on our cash flows, financial condition or
results of operations.
Item 1A. Risk Factors.
There are no material changes from the risk factors previously disclosed in our 2008 Annual
Report on Form 10-K, as filed with the United States Securities and Exchange Commission, or the
SEC, on March 31, 2009, except as noted below and except that on July 17, 2009 we completed the
sale of the 901 Civic Center property to an unaffiliated third party for a sales price of
$11,250,000. Therefore, the risk factors previously disclosed in our 2008 Annual Report on Form
10-K, as filed with the SEC on March 31, 2009, regarding the 901 Civic Center property are no
longer applicable.
Some or all of the foregoing factors may affect the returns we receive from our investments,
our results of operations, our ability to pay distributions to our unit holders or our ability to
dispose of our investments.
The uncertainty regarding our ability to generate the necessary cash flow to meet our
financial obligations, and the effect of other unknown adverse factors could threaten our existence
as a going concern.
Continuing as a going concern is dependent upon, among other things, generating sufficient
cash flows to meet our obligations and pay our liabilities as they come due. As of November 16,
2009, we have principal payments of $60,164,000 plus accrued interest due on outstanding mortgage
loans payable related to our consolidated properties that mature in the next twelve months. During
the three months ended September 30, 2009, we elected to cease the subsidization of the operations
and debt service on the non-recourse promissory note for one of our consolidated properties. In
addition, we were not able pay the lender the outstanding principal amount of $4,590,000 and the
monthly interest payment due under the promissory note on October 1, 2009, or to make such payments
within 10 days of the date such payment was due which constituted an event of default. We are
currently in discussions with the lender to negotiate a forbearance agreement, however, there can
be no assurance that we will enter into a forbearance agreement with our lender, or if we do enter
into a forbearance agreement that we will be able to comply with the terms of such an agreement. If
we cannot sell our real estate investments, obtain forbearance agreements, obtain new financing, or
obtain alternative financing on as favorable terms as our existing
mortgage loans payable, we have and may
trigger defaults which could result in foreclosure of the asset discussed above and certain other
assets. As a result, the maturities of our mortgage debt combined with our deficit cash flow from
operations raises substantial doubt about our ability to continue as a going concern.
The unaudited condensed consolidated financial statements of NNN 2003 Value Fund, LLC,
contained elsewhere in this Quarterly Report on Form 10-Q, have been prepared assuming that NNN
2003 Value Fund, LLC will be able to continue as a going concern. However, the report of our
independent registered public accounting firm on our audited consolidated financial statements as
of and for the year ended December 31, 2008, included in our Annual Report on Form 10-K filed with
SEC on March 31, 2009, includes an explanatory paragraph describing the existence of substantial
doubt about the ability of the Company to continue as a going concern. This report, as well as our
uncertain ability to pay our debt service obligations, may adversely impact our ability to secure
funding, attract or retain tenants, and maintain and promote our properties, which could materially
adversely affect our results of operations and cash flow. The unaudited condensed consolidated
financial statements do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
We will rely on the disposition of a number of our properties to generate cash and fund our
operations.
We have limited financial resources. As of September 30, 2009, cash on hand totaled
$2,608,000, as compared to $1,459,000 as of December 31, 2008. In order to fund our operations, our
projected capital requirements will require us to sell a number of our properties. As of September
30, 2009, we own a combination of seven consolidated and unconsolidated properties and are
currently marketing three of those properties for sale. One of our consolidated properties is
classified as a property held for non-sale disposition as of September 30, 2009, as we believe it
is probable that the property will be transferred to the lender in the fourth quarter of 2009 and
it no longer qualifies for held for sale classification. If we are unable to sell our properties
and generate cash from the sale of those properties it could have a material adverse impact on our
financial performance and our ability to pay any future distributions to our unit holders.
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Our mortgage loan payable on our Executive Center I property matured on October 1, 2009, and
we were unable to pay the outstanding principal balance and interest due under the loan which
triggered an event of default. If we are unable to enter into a forbearance agreement with the
lender, the lender may exercise their remedies under the loan agreements, including foreclosure on
the property which would have a material adverse effect on our operations and liquidity.
In the third quarter of 2009, we elected to cease the subsidization of the operations and debt
service on the non-recourse promissory note for Executive Center I. In addition, we were not able to
pay the lender the outstanding principal amount of $4,590,000 and the monthly interest payment due
under the mortgage loan on October 1, 2009, or to make such payments within 10 days of the date
such payment was due. Therefore, an event of default has occurred under the mortgage loan. We are
currently in discussions with the lender to negotiate a forbearance agreement. While we have not
reached a final agreement with the lender, we anticipate that the preliminary terms of the
forbearance agreement would include: (i) our continued efforts to market the property for sale
until December 31, 2009; (ii) if we are unable to sell the property before December 31, 2009, we
will agree to provide our lender a deed-in-lieu of sale of the property; and (iii) a deferral of
all monthly interest payments due under the note until the property is sold or until a deed-in-lieu
transaction takes place. There can be no assurance that we will enter into a forbearance agreement
with the lender on similar terms to those as outlined above or at all, or if we do enter into a
forbearance agreement that we will be able to comply with the terms of such an agreement.
If we are unable to enter into a forbearance agreement with our lender, under the terms of the
note this event of default could result in: (i) an immediate increase in our financial obligation
to the lender in connection with an applicable 3.0% interest rate increase to 15.0% (the default
interest rate) and the addition of a late charge equal to the lesser of 3.0% of the amount of any
payment not timely paid, or the maximum amount which may be charged under applicable law; (ii) the
lender foreclosing on the property; or (iii) a hindrance to our ability to negotiate future loan
transactions on favorable terms.
If we are unable to pay the outstanding balances and all accrued interest on our mortgage
loans that mature within the next 12 months, the respective lenders may declare us in default of
the loans and exercise their remedies under the loan agreements, including foreclosure on the
properties, which could have a material adverse effect on our operating activities and cash flow.
As of November 16, 2009, the mortgage loans on our consolidated properties, which have a
combined outstanding balance of approximately $60,164,000, all mature within the next 12 months and
two of which mature in the next six months. We also have two unconsolidated loans related to our
unconsolidated properties that mature within the next nine months, where our combined share of the
outstanding balances is approximately $15,972,000. We anticipate selling these properties before
their respective loan maturity dates and anticipate using the proceeds from these sales to pay off
their respective mortgage loans. However, there can be no assurance that we will be able to sell
any of these properties or refinance their mortgage loans by their respective loan maturity dates.
If we are unable to sell the properties, extend the loan maturity dates, or obtain new financing to
pay the respective lenders on as favorable terms as our existing loans on the properties, we may
trigger an event of default under each loan, which may result in the foreclosure on the properties,
and could have a material adverse effect on our operating activities and cash flow.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
In the third quarter of 2009, we elected to cease the subsidization of the operations and debt
service on the non-recourse promissory note for the Executive Center I property. In addition, we
were not able to pay the lender the outstanding principal amount of $4,590,000 and the monthly
interest payment due under the mortgage loan on October 1, 2009, or to make such payments within 10
days of the date such payment was due. Therefore, an event of default has occurred under the
mortgage loan. We are currently in discussions with the lender to negotiate a forbearance
agreement. While we have not reached a final agreement with the lender, we anticipate that the
preliminary terms of the forbearance agreement would include: (i) our continued efforts to market
the property for sale until December 31, 2009; (ii) if we are unable to sell the property before
December 31, 2009, we will agree to provide our lender a deed-in-lieu of sale of the property; and
(iii) a deferral of all monthly interest payments due under the note until the property is sold or
until a deed-in-lieu transaction takes place. There can be no assurance that we will enter into a
forbearance agreement with the lender on similar terms to those as outlined above or at all, or if
we do enter into a forbearance agreement that we will be able to comply with the terms of such an
agreement. We have classified this property as a property held for non-sale disposition as of
September 30, 2009, as we believe it is probable that the property will be transferred to the
lender in the fourth quarter of 2009 and it no longer qualifies for held for sale classification.
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If we are unable to enter into a forbearance agreement with our lender, under the terms of the
note this event of default could result in: (i) an immediate increase in our financial obligation
to the lender in connection with an applicable 3.0% interest rate increase to 15.0% (the default
interest rate) and the addition of a late charge equal to the lesser of 3.0% of the amount of any
payment not timely paid, or the maximum amount which may be charged under applicable law; (ii) the
lender foreclosing on the property; or (iii) a hindrance to our ability to negotiate future loan
transactions on favorable terms.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
The exhibits listed on the Exhibit Index (following the signatures section of this report) are
included, or incorporated by reference, in this quarterly report.
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SIGNATURES
Pursuant to the requirements 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.
NNN 2003 Value Fund, LLC (Registrant) |
||||
November 16, 2009 | /s/ Kent W. Peters | |||
Date | Kent W. Peters | |||
Chief Executive Officer (principal executive officer) |
||||
November 16, 2009 | /s/ Michael J. Rispoli | |||
Date | Michael J. Rispoli | |||
Chief Financial Officer Grubb & Ellis Realty Investors, LLC, the Manager of NNN 2003 Value Fund, LLC (principal financial officer) |
||||
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EXHIBIT INDEX
Pursuant to Item 601(a)(2) of Regulation S-K, this Exhibit index immediately precedes the
exhibits.
The following exhibits are included, or incorporated by reference, in this Quarterly Report on
Form 10-Q for the period ended September 30, 2009 (and are numbered in accordance with Item 601 of
Regulation S-K).
Exhibit | ||
Number | Description | |
3.1
|
Articles of Organization of NNN 2003 Value Fund, LLC, dated March 19, 2003, (included in Exhibit 3.1 to our form 10 filed on May 2, 2005 and incorporated herein by reference). | |
10.1
|
Operating Agreement of NNN 2003 Value Fund, LLC, by and between Triple Net Properties, LLC, as the Manager, and Anthony W. Thompson, as the Initial Member (included as Exhibit 10.1 to our Form 10 filed on May 2, 2005 and incorporated herein by reference). | |
10.2
|
Management Agreement between NNN 2003 Value Fund, LLC and Triple Net Properties Realty, Inc. (included as Exhibit 10.2 to our Form 10 filed on May 2, 2005 and incorporated herein by reference). | |
10.3
|
First Amendment to Operating Agreement of NNN 2003 Value Fund, LLC, by and between Triple Net Properties, LLC, as the Manager, dated January 20, 2005, (included as Exhibit 10.3 to our Form 10-K filed on April 2, 2007 and incorporated herein by reference). | |
10.4
|
First Amendment to Management Agreement between NNN 2003 Value Fund, LLC and Triple Net Properties Realty, Inc., dated May 1, 2005, (included as Exhibit 10.4 to our Form 10-K filed on April 2, 2007 and incorporated herein by reference). | |
10.5
|
Second Amendment to Operating Agreement of NNN 2003 Value Fund, LLC, by and between Triple Net Properties, LLC, as the Manager, dated February 2, 2007, (included as Exhibit 10.7 to our Form 10-K filed on April 2, 2007 and incorporated herein by reference). | |
10.6
|
Temporary Extension Agreement by and among NNN VF Chase Tower, LLC et al. (Senior Borrowers) and PSP/MRC DEBT PORTFOLIO S-1, L.P., successor-in-interest to MMA Realty Capital, LLC the (Senior Lender) and also NNN VF Chase Tower, LLC et al. (Mezzanine Borrowers) and Transwestern Mezzanine Realty Partners II, LLC, (Mezzanine Lender) dated June 30, 2009, (included as Exhibit 10.1 to our Current Report on Form 8-K filed on July 6, 2009 and incorporated herein by reference). | |
10.7
|
Letter Amendment to the Temporary Extension Agreement by and among NNN Chase Tower REO, LP, NNN OF 8 Chase Tower REO, LP, ERG Chase Tower, LP and NNN VF Chase Tower RE, LP and PSP/MRC Debt Portfolio S-1, LP, by and among NNN Chase Tower, LLC, NNN Chase Tower Member, LLC, NNN OF 8 Chase Tower, LLC, NNN Of 8 Chase Tower Member, LLC, NNN-ERG Chase Tower GP I, LLC, ERG Chase Tower Limited I, LP, NNN VF Chase Tower, LLC NNN VF Chase Tower Member, LLC, Grubb & Ellis Realty Investors, LLC, NNN Opportunity Fund VIII, LLC, NNN 2003 Value Fund, LLC and Transwestern Mezzanine Realty Partners II, LLC, dated July 10, 2009 (included as Exhibit 10.1 to our Current Report on Form 8-K filed July 14, 2009 and incorporated herein by reference) | |
10.8
|
Seventh Amendment to Agreement for Purchase and Sale by and among NNN VF 901 Civic, LLC, NNN 901 Civic, LLC and Robert Ko, effective July 15, 2009 (included as Exhibit 10.1 to our Current Report on Form 8-K filed July 21, 2009 and incorporated herein by reference) | |
10.9
|
Loan Modification Agreement by and among NNN Chase Tower REO, LP, NNN OF 8 Chase Tower REO, LP, ERG Chase Tower, LP and NNN VF Chase Tower RE, LP and PSP/MRC Debt Portfolio S-1, LP, dated July 17, 2009 (included as Exhibit 10.1 to our Current Report on Form 8-K filed July 23, 2009 and incorporated herein by reference) | |
10.10
|
Forbearance and Modification Agreement by and among NNN Chase Tower, LLC, NNN Chase Tower Member, LLC, NNN OF 8 Chase Tower, LLC, NNN Of 8 Chase Tower Member, LLC, NNN-ERG Chase Tower GP I, LLC, ERG Chase Tower Limited I, LP, NNN VF Chase Tower, LLC NNN VF Chase Tower Member, LLC, Grubb & Ellis Realty Investors, LLC, NNN Opportunity Fund VIII, LLC, Andrew Pastor, Jeffrey S. Newberg, Kirk A. Rudy, Christopher T. Ellis, David L. Roche, and Arnold B. Miller, NNN 2003 Value Fund, LLC and Transwestern Mezzanine Realty Partners II, LLC, dated July 17, 2009 (included as Exhibit 10.2 to our Current Report on Form 8-K filed July 23, 2009 and incorporated herein by reference) |
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Table of Contents
Exhibit | ||
Number | Description | |
31.1*
|
Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2*
|
Certification of Principal Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1**
|
Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2**
|
Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed herewith. | |
** | Furnished herewith. |
39