Attached files
file | filename |
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EX-31.1 - EX-31.1 - Shopoff Properties Trust, Inc. | a54210exv31w1.htm |
EX-32.2 - EX-32.2 - Shopoff Properties Trust, Inc. | a54210exv32w2.htm |
EX-31.2 - EX-31.2 - Shopoff Properties Trust, Inc. | a54210exv31w2.htm |
EX-32.1 - EX-32.1 - Shopoff Properties Trust, Inc. | a54210exv32w1.htm |
EX-10.2 - EX-10.2 - Shopoff Properties Trust, Inc. | a54210exv10w2.htm |
EX-10.4 - EX-10.4 - Shopoff Properties Trust, Inc. | a54210exv10w4.htm |
EX-10.1 - EX-10.1 - Shopoff Properties Trust, Inc. | a54210exv10w1.htm |
EX-10.3 - EX-10.3 - Shopoff Properties Trust, Inc. | a54210exv10w3.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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 |
From the transition period from ________ to _______
Commission File Number: 333-139042
SHOPOFF PROPERTIES TRUST, INC.
(Exact name of registrant as specified in its charter)
Maryland | 20-5882165 | |
(State or Other Jurisdiction of | (I.R.S. Employer | |
Incorporation of Organization) | Identification No.) | |
8951 Research Drive | ||
Irvine, California | 92618 | |
(Address of Principal Executive Offices) | (Zip Code) |
(877) 874-7348
(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. Yes þ No o
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. Yes
o No o
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. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As
of November 16, 2009, there were 1,912,100 shares of Shopoff Properties Trust, Inc.
outstanding.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION |
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3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7 | ||||||||
26 | ||||||||
41 | ||||||||
41 | ||||||||
PART II OTHER INFORMATION |
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42 | ||||||||
42 | ||||||||
43 | ||||||||
43 | ||||||||
43 | ||||||||
43 | ||||||||
43 | ||||||||
44 | ||||||||
EX-10.1 | ||||||||
EX-10.2 | ||||||||
EX-10.3 | ||||||||
EX-10.4 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
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Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
The Registration Statement on Form S-11 (the Registration Statement) of Shopoff Properties
Trust, Inc. (the Company) was declared effective by the Securities and Exchange Commission (the
SEC) on August 29, 2007. The September 30, 2009 condensed consolidated financial statements of
the Company required to be filed with this Quarterly Report on Form 10-Q within 45 days of the
quarter end was prepared by management without audit and commences on the following page, together
with the related notes. In the opinion of management, the September 30, 2009 condensed consolidated
financial statements present fairly the financial position, results of operations and cash flows of
the Company. This report should be read in conjunction with the annual report of the Company for
the year ended December 31, 2008, included in the Companys Form 10-K previously filed with the SEC
on March 31, 2009.
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Table of Contents
SHOPOFF PROPERTIES TRUST, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of September 30, 2009 (Unaudited) and December 31, 2008
September 30, 2009 | ||||||||
(Unaudited) | December 31, 2008 | |||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 5,883,379 | $ | 7,486,696 | ||||
Restricted cash |
43,700 | | ||||||
Notes receivable, net |
621,173 | 558,000 | ||||||
Real estate deposits |
2,000,000 | 3,300,000 | ||||||
Real estate investments |
8,511,917 | 2,614,134 | ||||||
Prepaid expenses and other assets |
114,373 | 55,807 | ||||||
Property and equipment, net |
108,068 | 45,047 | ||||||
Total Assets |
$ | 17,282,610 | $ | 14,059,684 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Liabilities: |
||||||||
Accounts payable and accrued liabilities |
$ | 283,259 | $ | 64,596 | ||||
Due to related parties |
14,555 | 132,135 | ||||||
Note payable
secured by real estate investment |
2,000,000 | | ||||||
Total Liabilities |
2,297,814 | 196,731 | ||||||
Equity |
||||||||
Shopoff Properties Trust, Inc. stockholders equity: |
||||||||
Common stock, $0.01 par value; 200,000,000 shares
authorized; 1,907,500 and 1,857,300 shares issued and
outstanding at September 30, 2009 and December 31, 2008,
respectively |
19,075 | 18,573 | ||||||
Additional paid-in capital, net of offering costs |
15,612,835 | 15,472,346 | ||||||
Subscribed stock, $0.01 par value, 4,600 shares subscribed |
43,700 | | ||||||
Accumulated deficit |
(690,914 | ) | (1,628,066 | ) | ||||
Total Shopoff Properties Trust, Inc. stockholders equity |
14,984,696 | 13,862,853 | ||||||
Noncontrolling interest |
100 | 100 | ||||||
Total Equity |
14,984,796 | 13,862,953 | ||||||
Total Liabilities and Equity |
$ | 17,282,610 | $ | 14,059,684 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Table of Contents
SHOPOFF PROPERTIES TRUST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine months Ended September 30, 2009 and 2008
(Unaudited)
Three Months | Three Months | Nine months | Nine months | |||||||||||||
Ended | Ended | Ended | Ended | |||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenues: |
||||||||||||||||
Sale of real estate |
$ | | $ | | $ | 5,000,000 | $ | | ||||||||
Interest income, notes receivable |
42,345 | | 387,819 | | ||||||||||||
Interest income and other |
5,212 | 50,127 | 31,890 | 73,252 | ||||||||||||
Loan Fees |
30,000 | | 30,000 | | ||||||||||||
77,557 | 50,127 | 5,449,709 | 73,252 | |||||||||||||
Expenses: |
||||||||||||||||
Cost of sales of real estate |
51,920 | | 2,958,928 | | ||||||||||||
Stock based compensation |
474,556 | | 474,556 | | ||||||||||||
Professional fees |
84,038 | 47,394 | 341,897 | 111,200 | ||||||||||||
Insurance |
52,176 | 41,168 | 163,779 | 152,787 | ||||||||||||
General and administrative |
27,846 | 13,599 | 160,398 | 40,926 | ||||||||||||
Dues and Subscriptions |
37,008 | | 124,802 | | ||||||||||||
Director compensation |
40,614 | 15,958 | 117,433 | 15,958 | ||||||||||||
Acquisition fees paid to advisor |
| | 69,000 | | ||||||||||||
Due diligence costs related to
properties not acquired |
1,687 | 595,018 | 33,947 | 595,018 | ||||||||||||
769,845 | 713,137 | 4,444,740 | 915,889 | |||||||||||||
Net (loss) income before income taxes |
(692,288 | ) | (663,010 | ) | 1,004,969 | (842,637 | ) | |||||||||
Provision for income taxes |
(48,663 | ) | | 67,818 | | |||||||||||
Net (loss) income available to
common shareholders per common
share: |
$ | (643,625 | ) | $ | (663,010 | ) | $ | 937,151 | $ | (842,637 | ) | |||||
Basic |
$ | (0.34 | ) | $ | (1.05 | ) | $ | 0.50 | $ | (3.67 | ) | |||||
Diluted |
$ | (0.34 | ) | $ | (1.05 | ) | $ | 0.45 | $ | (3.67 | ) | |||||
Weighted-average number of common
shares outstanding used in per share
computations: |
||||||||||||||||
Basic |
1,876,546 | 632,095 | 1,867,947 | 229,291 | ||||||||||||
Diluted |
1,876,546 | 632,095 | 2,084,697 | 229,291 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Table of Contents
SHOPOFF PROPERTIES TRUST, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine months Ended September 30, 2009 and 2008
(Unaudited)
Nine months | Nine months | |||||||
Ended | Ended | |||||||
September 30, | September 30, | |||||||
2009 | 2008 | |||||||
Cash Flows
From Operating Activities |
||||||||
Net income (loss) |
$ | 937,151 | $ | (842,637 | ) | |||
Adjustments to reconcile net income (loss) to net cash
used in operating activities: |
||||||||
Gain on sale of real estate investment |
(2,069,914 | ) | | |||||
Depreciation expense |
17,761 | | ||||||
Stock based compensation expense |
474,556 | | ||||||
Changes in assets and liabilities: |
||||||||
Due to related parties |
(117,580 | ) | (149,841 | ) | ||||
Accounts payable and accrued liabilities |
218,663 | 45,026 | ||||||
Prepaid expenses and other assets |
(58,565 | ) | (36,480 | ) | ||||
Net cash used in operating activities |
(597,928 | ) | (983,932 | ) | ||||
Cash Flows From Investing Activities |
||||||||
Purchase of property and equipment |
(80,780 | ) | | |||||
Notes receivable, net |
(63,173 | ) | (537,000 | ) | ||||
Real estate investments |
(6,511,917 | ) | | |||||
Proceeds from sale of real estate investment, net |
4,684,047 | | ||||||
Real estate deposits |
1,300,000 | | ||||||
Net cash used in investing activities |
(671,823 | ) | (537,000 | ) | ||||
Cash Flows From Financing Activities |
||||||||
Offering costs paid to advisor |
(477,965 | ) | (2,078,357 | ) | ||||
Stock subscriptions |
43,700 | 76,807 | ||||||
Issuance of common stock to subscribers |
144,400 | 16,200,350 | ||||||
Restricted cash |
(43,701 | ) | 778,765 | |||||
Net cash (used in) provided by financing activities |
(333,566 | ) | 14,977,565 | |||||
Net change in cash |
(1,603,317 | ) | 13,456,633 | |||||
Cash, beginning of period |
7,486,696 | 200,550 | ||||||
Cash, end of period |
$ | 5,883,379 | $ | 13,657,183 | ||||
Supplemental
Information For Non-Cash Investing and Financing Activities |
||||||||
Acquisition of land with assumption of debt |
$ | 2,000,000 | $ | | ||||
Cash paid for income taxes |
$ | 91,500 | $ | | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Table of Contents
SHOPOFF PROPERTIES TRUST, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Unaudited)
1. ORGANIZATION AND NATURE OF BUSINESS
Shopoff Properties Trust, Inc. (the Trust) was incorporated on November 16, 2006 under the
laws of the State of Maryland. The Trust intends to elect to be treated as a real estate investment
trust (REIT) for federal income tax purposes for its tax year ending December 31, 2010. The Trust
was incorporated to raise capital and acquire ownership interests in undervalued, undeveloped,
non-income producing real estate assets for which the Trust will obtain entitlements and hold such
assets as long-term investments for eventual sale. In addition, the Trust may acquire partially
improved and improved residential and commercial properties and other real estate investments. It
is presently expected that the majority of the Trusts real estate related assets will be located
in California, Nevada, Arizona, Hawaii and Texas. The Trust and all of its majority-owned
subsidiaries are hereinafter collectively referred to as (the Company or We).
The recent focus of our acquisitions has been on distressed or opportunistic property
offerings. At our inception, our focus was on adding value to property through the entitlement
process, but the current real estate market has generated a supply of real estate projects that are
all partially or completely developed versus vacant, undeveloped land. This changes the focus of
our acquisitions to enhancing the value of real property through redesign and engineering
refinements and removes much of the entitlement risk that we expected to undertake. Although
acquiring distressed assets at greatly reduced prices from the peaks of 2005-2006 does not guaranty
us success, we believe that it does allow us the opportunity to acquire more assets than previously
contemplated.
We believe there will be continued distress in the real estate market in the near term and
expect this to put downward pressure on near term prices. Our view of the mid to long term is more
positive, and we expect property values to improve over the four- to ten-year time horizon. Our
plan is to be in a position to capitalize on these opportunities for capital appreciation.
The Company is conducting a best-efforts initial public offering in which it is offering
2,000,000 shares of its common stock at a price of $9.50 per share. If the 2,000,000 shares are
sold, the offering price will increase to $10.00 per share until an additional 18,100,000 shares of
common stock are sold. On August 29, 2008, the Company met the minimum offering requirement of the
sale of at least 1,700,000 shares of common stock. As of September 30, 2009, the Company had
accepted subscriptions for the sale of 1,851,400 shares of its common stock at a price of $9.50 per
share not including 21,100 shares issued to The Shopoff Group L.P. and not including 35,000 shares
of vested restricted stock issued to certain officers and directors. As of September 30, 2009, the
Company had sold but not yet accepted subscriptions for the sale of 4,600 shares of its common
stock at a price of $9.50 per share. As of September 30, 2009, the Company had 144,000 shares of
common stock at a price of $9.50 and 18,100,000 shares at a price of $10.00 remaining for sale. On
August 27, 2009, the Company announced that it had extended the expiration date of its best-efforts
initial public offering by one year, from August 29, 2009 until August 29, 2010 (or until the date
the entire offering is sold).
On December 31, 2008, we acquired our first real estate property, which was sold on March 20,
2009 (See Note 4). As such, management believes that the Company has commenced its planned
principal operations and transitioned from a development stage enterprise to an active company. The
Company adopted December 31 as its fiscal year end.
As of September 30, 2009, the Company owned five properties, sixty five finished residential
lots in the City of Lake Elsinore, California purchased for $650,000, five hundred forty three
unimproved residential lots in the City of Menifee, California purchased for $1,650,000, a final
plat of 739 single family residential lots on a total of 200 acres of unimproved land in
the Town of Buckeye, Maricopa County, Arizona purchased for $3,000,000, approximately 118 acres of
vacant and unentitled land located near the City of Lake Elsinore, in an unincorporated area of
Riverside County, California acquired via a Settlement Agreement with Springbrook Investments,
L.P., a California limited partnership (Springbrook), in which Springbrook agreed to execute and
deliver a grant deed to the underlying real estate collateral in consideration for the discharge by
the Company of all of Springbrooks obligations under a secured promissory note owned by the
Company and approximately 6.11 acres of vacant and unentitled land located near the City of Lake
Elsinore, in an unincorporated area of Riverside County, California also acquired via a Settlement
Agreement with Springbrook, in which Springbrook agreed to execute and deliver a grant deed to the
underlying real estate collateral in consideration for the discharge by the Company of all of
Springbrooks obligations under a second, separate secured promissory note owned by the Company
(See Note 4). Through June 30, 2009, the Company had originated three loans, a $600,000 secured
loan to Mesquite Venture I, LLC and
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two secured loans totaling $2,300,000 to Aware Development Company, Inc. of which one loan,
the $600,000 secured loan to Mesquite Venture I, LLC was outstanding as of September 30, 2009 (See
Note 3).
The Companys day-to-day operations are managed by Shopoff Advisors, L.P., a Delaware limited
partnership (the Advisor), as further discussed in Note 7. The Advisor manages, supervises and
performs the various administrative functions necessary to carry out our day-to-day operations. In
addition, the Advisor identifies and presents potential investment opportunities and is responsible
for our marketing, sales and client services. Pursuant to the Advisory Agreement, the Advisors
activities are subject to oversight by our board of directors.
All of the properties acquired on behalf of us are owned or managed by Shopoff Partners, L.P.,
a Maryland limited partnership of which we own a majority interest (the Operating Partnership),
or by wholly owned subsidiaries of the Operating Partnership. The Trusts wholly owned subsidiary,
Shopoff General Partner, LLC, a Maryland limited liability company (the Sole General Partner), is
the sole general partner of the Operating Partnership and owns 1% of the equity interest therein.
The Trust and the Advisor own 98% and 1% of the Operating Partnership, respectively, as limited
partners.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies presented below is designed to assist in
understanding the Companys condensed consolidated financial statements. Such financial statements
and accompanying notes are the representation of the Companys management, who is responsible for
their integrity and objectivity.
The information furnished has been prepared in accordance with accounting principles generally
accepted in the United States (GAAP) for interim financial reporting, the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and disclosures have been
condensed or omitted and therefore should be read in conjunction with the consolidated financial
statements and notes thereto contained in the annual report on Form 10-K for the year ended
December 31, 2008. In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (which consisted only of normal recurring adjustments)
which management considers necessary to present fairly the financial position of the Company as of
September 30, 2009, the results of operations for the three and nine month periods ended September
30, 2009 and 2008, and cash flows for the nine months ended September 30, 2009 and 2008. The
results of operations for the three months ended September 30, 2009 are not necessarily indicative
of the results anticipated for the entire year ending December 31, 2009. Amounts related to
disclosure of December 31, 2008 balances within these interim condensed consolidated financial
statements were derived from the audited 2008 consolidated financial statements and notes thereto.
Principles of Consolidation
Since the Companys wholly owned subsidiary, Shopoff General Partner, LLC, is the sole general
partner of the Operating Partnership and has unilateral control over its management and major
operating decisions (even if additional limited partners are admitted to the Operating
Partnership), the accounts of the Operating Partnership are consolidated in the Companys
consolidated financial statements. The accounts of Shopoff General Partner, LLC are also
consolidated in the Companys consolidated financial statements since it is wholly owned by the
Company. SPT Real Estate Finance, LLC, SPT-SWRC, LLC, SPT Lake Elsinore Holding Co., LLC and SPT
AZ Land Holdings, LLC are also 100% owned by the Operating Partnership and therefore their accounts
are consolidated in the Companys financial statements as of September 30, 2009 and December 31,
2008.
All intercompany accounts and transactions are eliminated in consolidation.
Use of Estimates
It is the Companys policy to require management to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of
contingent assets and liabilities. These estimates will be made and evaluated on an on-going basis,
using information that is currently available as well as applicable assumptions believed to be
reasonable under the circumstances. Actual results may vary from those estimates; in addition, such
estimates could be different under other conditions and/or if we use alternative assumptions.
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Reclassifications
Certain amounts in the Companys prior period consolidated financial statements have been
reclassified to conform to the current period presentation. These reclassifications have not
changed the results of operations of prior periods.
Cash and Cash Equivalents
The Company considers all highly liquid short-term investments with original maturities of
three months or less when purchased to be cash equivalents.
Concentrations of Credit Risk
The financial instrument that potentially exposes the Company to a concentration of credit
risk principally consists of cash. The Company deposits its cash with high credit financial
institutions. As of September 30, 2009, the Company maintained cash balances at certain financial
institutions in excess of the Federal Deposit Insurance Corporation (FDIC) limit of $250,000
($100,000 prior to September 30, 2008). Bank balances in excess of the FDIC limit as of September
30, 2009 and December 31, 2008 approximated $17 and $2,481,000, respectively.
As of September 30, 2009 and December 31, 2008, the Company maintained marketable securities
in a money market account at certain financial institutions in excess of the Securities Investor
Protection Corporation (SIPC) limit of $500,000. Bank balances in excess of the SIPC limit as of
September 30, 2009 and December 31, 2008 approximated $4,452,000 and $3,961,000, respectively. This
money market account, also known as a brokerage safekeeping account, is protected by additional
coverage that the financial institution has purchased through Lloyds of London, which provides
additional protection up to $149.5 million.
The Companys real estate related assets are located in Arizona, California and Nevada.
Accordingly, there is a geographic concentration of risk subject to fluctuations in the local
economies of Arizona, California and Nevada. Additionally, the Companys operations are generally
dependent upon the real estate industry, which is historically subject to fluctuations in local,
regional and national economies.
Revenue and Profit Recognition
It is the Companys policy to recognize gains on the sale of investment properties. In order
to qualify for immediate recognition of revenue on the transaction date, the Company requires that
the sale be consummated, the buyers initial and continuing investment be adequate to demonstrate a
commitment to pay, any receivable resulting from seller financing not be subject to future
subordination, and that the usual risks and rewards of ownership be transferred to the buyer. We
would expect these criteria to be met at the close of escrow. The Companys policy also requires
that the seller not have any substantial continuing involvement with the property. If we have a
commitment to the buyer in a specific dollar amount, such commitment will be accrued and the
recognized gain on the sale will be reduced accordingly.
Transactions with unrelated parties which in substance are sales but which do not meet the
criteria described in the preceding paragraph will be accounted for using the appropriate method
(such as the installment, deposit, or cost recovery method) as set forth in the Companys policy.
Any disposition of a real estate asset which in substance is not deemed to be a sale for
accounting purposes will be reported as a financing, leasing, or profit-sharing arrangement as
considered appropriate under the circumstances of the specific transaction.
For income-producing properties, we intend to recognize base rental income on a straight-line
basis over the terms of the respective lease agreements (including any rent holidays). Differences
between recognized rental income and amounts contractually due under the lease agreements will be
credited or charged (as applicable) to rent receivable. Tenant reimbursement revenue, which is
expected to be comprised of additional amounts recoverable from tenants for common area maintenance
expenses and certain other expenses, will be recognized as revenue in the period in which the
related expenses are incurred.
Interest income on the Companys real estate notes receivable is recognized on an accrual
basis over the life of the investment using the interest method. Direct loan origination fees and
origination or acquisition costs are amortized over the term of the loan as an adjustment to
interest income. The Company will place loans on nonaccrual status when concern exists as to the
ultimate collection of principal or interest. When a loan is placed on nonaccrual status, the
Company will reserve the accrual for unpaid interest and will not recognize subsequent interest
income until the cash is received, or the loan returns to accrual status.
Notes Receivable
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The Companys notes receivable are recorded at cost, net of loan loss reserves, and evaluated
for impairment at each balance sheet date. The amortized cost of a note receivable is the outstanding
unpaid principal balance, net of unamortized costs and fees directly associated with the
origination or acquisition of the loan.
The Company considers a loan to be impaired when, based upon current information and events,
it believes that it is probable that the Company will be unable to collect all amounts due under
the contractual terms of the loan agreement. A reserve is established when the present value of
payments expected to be received, observable market prices, or the estimated fair value of the
collateral (for loans that are dependent on the collateral for repayment) of an impaired loan is
lower than the carrying value of that loan.
Cost of Real Estate Assets Not Held for Sale
We anticipate that real estate assets will principally consist of wholly-owned undeveloped
real estate for which we will obtain entitlements and hold such assets as long term investments for
eventual sale. Undeveloped real estate not held for sale will be carried at cost subject to
downward adjustment as described in Impairment below. Cost will include the purchase price of the
land, related acquisition fees, as well as costs related to entitlement, property taxes and
interest. In addition, any significant other costs directly related to acquisition and development
of the land will be capitalized. The carrying amount of land will be charged to earnings when the
related revenue is recognized.
Income-producing properties will generally be carried at historical cost less accumulated
depreciation. The cost of income-producing properties will include the purchase price of the land
and buildings and related improvements. Expenditures that increase the service life of such
properties will be capitalized; the cost of maintenance and repairs will be charged to expense as
incurred. The cost of building and improvements will be depreciated on a straight-line basis over
their estimated useful lives, which are expected to principally range from approximately 15 to 39
years. When depreciable property is retired or disposed of, the related cost and accumulated
depreciation will be removed from the accounts and any gain or loss will be reflected in
operations.
The costs related to abandoned projects are expensed when management believes that such
projects are no longer viable investments.
Property Held for Sale
The Companys policy, which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets, 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 income statements for current and prior
periods report the results of operations of the component as discontinued operations.
When a property is held for sale, such property will be carried at the lower of (i) its
carrying amount or (ii) the estimated fair value less costs to sell. In addition, a depreciable
property being held for sale (such as a building) will cease to be depreciated. We will classify
operating 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 asset; | ||
| An active program to locate a buyer and other actions required to complete the plan to sell the asset has been initiated; | ||
| The sale of the asset is probable, and the transfer of the asset is expected to qualify for recognition as a completed transaction within one year; | ||
| The asset is being actively marketed for sale at a price that is reasonable in relation to its current estimated fair value; and | ||
| Given the actions required to complete the plan to sell the asset, it is unlikely that significant changes to the plan would be made or that the plan would be abandoned. |
Selling commissions and closing costs will be expensed when incurred.
We believe that the accounting related to property valuation and impairment is a critical
accounting estimate because: (1) assumptions inherent in the valuation of our property are highly
subjective and susceptible to change and (2) the impact of recognizing impairments on our property
could be material to our condensed consolidated balance sheets and statements of operations. We
will evaluate our property for impairment periodically on an asset-
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by-asset basis. This evaluation includes three critical assumptions with regard to future
sales prices, cost of sales and absorption. The three critical assumptions include the timing of
the sale, the land residual value and the discount rate applied to determine the fair value of the
income-producing properties on the balance sheet date. Our assumptions on the timing of sales are
critical because the real estate industry has historically been cyclical and sensitive to changes
in economic conditions such as interest rates and unemployment levels. Changes in these economic
conditions could materially affect the projected sales price, costs to acquire and entitle our land
and cost to acquire our income-producing properties. Our assumptions on land residual value are
critical because they will affect our estimate of what a willing buyer would pay and what a willing
seller would sell a parcel of land for (other than in a forced liquidation) in order to generate a
market rate operating margin and return. Our assumption on discount rates is critical because the
selection of a discount rate affects the estimated fair value of the income-producing properties. A
higher discount rate reduces the estimated fair value of such properties, while a lower discount
rate increases the estimated fair value of these properties. Because of changes in economic and
market conditions and assumptions and estimates required of management in valuing property held for
investment during these changing market conditions, actual results could differ materially from
managements assumptions and may require material property impairment charges to be recorded in the
future.
Long-Lived Assets
The Companys policy requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that their carrying amounts may not be recoverable. If
the cost basis of a long-lived asset held for use is greater than the projected future undiscounted
net cash flows from such asset (excluding interest), an impairment loss is recognized. Impairment
losses are calculated as the difference between the cost basis of an asset and its estimated fair
value. There were no impairment losses recorded for the three and nine months ended September 30,
2009 and December 31, 2008.
The Companys policy also requires us to separately report discontinued operations and extends
that reporting to a component of an entity that either has been disposed of (by sale, abandonment,
or in a distribution to shareholders) or is classified as held for sale. Assets to be disposed of
are reported at the lower of the carrying amount or estimated fair value less costs to sell.
Earnings Per Share
Basic net income (loss) per share (EPS) is computed by dividing income (loss) by the
weighted average number of common shares outstanding during each period. The computation of diluted
net income (loss) further assumes the dilutive effect of stock options, stock warrants and
contingently issuable shares, if any.
As of September 30, 2009,
the Company had granted 173,750 shares of restricted stock to
certain directors and officers, 35,000 of which vested as of September 30, 2009 and 138,750 of
which remain unvested as of September 30, 2009. However, such unvested shares were included in the
calculation of EPS for the nine months ended September 30, 2009 since their effect will be
dilutive.
As of September 30, 2009, the Company had 78,000 stock options that were granted to certain
directors and officers, 16,400 of which vested as of September 30, 2009 and 61,600 of which remain
unvested as of September 30, 2009. The 78,000 stock options were included in the calculation
of EPS for the nine months ended September 30, 2009 since their effect will be dilutive.
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The following is a reconciliation of the shares used in the computation of basic and diluted
EPS for the three and nine month periods ended September 30, 2009 and 2008, respectively:
Three Months Ended | Nine months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Unaudited) | ||||||||||||||||
Numerator: |
||||||||||||||||
Net (loss) income |
$ | (643,625 | ) | $ | (663,010 | ) | $ | 937,151 | $ | (842,637 | ) | |||||
Denominator: |
||||||||||||||||
Weighted average outstanding shares of common
stock |
1,876,546 | 632,095 | 1,867,947 | 229,291 | ||||||||||||
Effect of contingently issuable restricted stock |
| | 138,750 | | ||||||||||||
Effect of contingently issuable stock options |
| | 78,000 | | ||||||||||||
Weighted average number of common shares and
potential common shares outstanding |
1,876,546 | 632,095 | 2,084,697 | 229,291 | ||||||||||||
Basic (loss) income per common share |
$ | (0.34 | ) | $ | (1.05 | ) | $ | 0.50 | $ | (3.67 | ) | |||||
Diluted (loss) income per common share |
$ | (0.34 | ) | $ | (1.05 | ) | $ | 0.45 | $ | (3.67 | ) | |||||
Estimated Fair Value of Financial Instruments and Certain Other Assets/Liabilities
The Companys financial instruments include cash, accounts receivable, prepaid expenses,
security deposits, accounts payable and accrued expenses and notes payable. Management believes
that the fair value of these financial instruments approximates their carrying amounts based on
current market indicators, such as prevailing interest rates and the short-term maturities of such
financial instruments.
Management has concluded that it is not practical to estimate the fair value of amounts due to
and from related parties. The Companys policy requires, where reasonable, that information
pertinent to those financial instruments be disclosed, such as the carrying amount, interest rate,
and maturity date; such information is included in Note 7. Management believes it is not practical
to estimate the fair value of related party financial instruments because the transactions cannot
be assumed to have been consummated at arms length, there are no quoted market values available
for such instruments, and an independent valuation would not be practicable due to the lack of data
regarding similar instruments (if any) and the associated potential cost.
The Company does not have any assets or liabilities that are measured at fair value on a
recurring basis and, as of September 30, 2009 and December 31, 2008, did not have any assets or
liabilities that were measured at fair value on a nonrecurring basis.
When the Company has a loan that is identified as being impaired or being reviewed for
impairment whenever events or changes in circumstances indicate that their carrying amounts may not
be recoverable in accordance with Company policy and is collateral dependent, it is evaluated for
impairment by comparing the estimated fair value of the underlying collateral, less costs to sell,
to the carrying value of the loan.
Our Company policy establishes a three-tier fair value hierarchy, which prioritizes the inputs
used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as
quoted prices for identical financial instruments in active markets; Level 2, defined as inputs
other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3, defined as instruments that have little to no pricing observability as of the reported
date. These financial instruments do not have two-way markets and are measured using managements
best estimate of fair value, where the inputs into the determination of fair value require
significant management judgment or estimation.
The Companys policy also discusses determining fair value when the volume and level of
activity for the asset or liability has significantly decreased and identifying transactions that
are not orderly. Company policy emphasizes that even if there has been a significant decrease in
the volume and level of activity for an asset or liability and regardless of the valuation
technique(s) used, the objective of a fair value measurement remains the same. Fair value is the
price that would be received to sell an asset or be paid to transfer a liability in an orderly
transaction (that is, not a forced liquidation or distressed sale) between market participants at
the measurement date under current market conditions. Furthermore, Company policy requires
additional disclosures regarding the inputs and valuation technique(s) used in estimating the fair
value of assets and liabilities as well as any changes in such valuation technique(s).
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The following items are measured at fair value on a recurring basis subject to the Companys
disclosure requirements at September 30, 2009 and December 31, 2008:
As of September 30, 2009 | ||||||||||||||||||||
Fair Value Measurements Using: | ||||||||||||||||||||
Quoted | Significant | Significant | ||||||||||||||||||
Markets | Observable | Unobservable | ||||||||||||||||||
Carrying | Total | Prices | Inputs | Inputs | ||||||||||||||||
Value | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||
Financial Assets (Liabilities) |
||||||||||||||||||||
Cash Equivalents |
$ | 4,951,753 | $ | 4,951,753 | $ | 4,951,753 | $ | | $ | |
As of December 31, 2008 | ||||||||||||||||||||
Fair Value Measurements Using: | ||||||||||||||||||||
Quoted | Significant | Significant | ||||||||||||||||||
Markets | Observable | Unobservable | ||||||||||||||||||
Carrying | Total | Prices | Inputs | Inputs | ||||||||||||||||
Value | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||
Financial Assets (Liabilities) |
||||||||||||||||||||
Cash Equivalents |
$ | 4,460,643 | $ | 4,460,643 | $ | 4,460,643 | $ | | $ | |
Noncontrolling Interests in Consolidated Financial Statements
The Company classifies noncontrolling interests (previously referred to as minority
interest) as part of consolidated net earnings ($0 for the each of the quarters ended September
30, 2009 and 2008, respectively) and includes the accumulated amount of noncontrolling interests as
part of stockholders equity ($100 for the quarter ended September 30, 2009 and year ended December
31, 2008, respectively). The net loss amounts the Company has previously reported are now presented
as Net loss attributable to Shopoff Properties Trust, Inc. and, earnings per share continues to
reflect amounts attributable only to the Company. Similarly, in the presentation of shareholders
equity, the Company distinguishes between equity amounts attributable to the Companys stockholders
and amounts attributable to the noncontrolling interests previously classified as minority
interest outside of stockholders equity. Increases and decreases in the Companys controlling
financial interests in consolidated subsidiaries will be reported in equity similar to treasury
stock transactions. If a change in ownership of a consolidated subsidiary results in loss of
control and deconsolidation, any retained ownership interests are remeasured with the gain or loss
reported in net earnings.
Stock-Based Compensation
The Companys policy requires that all employee stock options and rights to purchase shares
under stock participation plans be accounted for under the fair value method and requires the use
of an option pricing model for estimating fair value. Accordingly, share-based compensation is
measured at the grant date, based on the fair value of the award.
Subsequent Events
The Company defines subsequent events as transactions and events that occur after the balance
sheet date but before the financial statements are issued or are available to be issued. The
Companys policy requires a disclosure of the date through which subsequent events have been
evaluated by management. The Company must conduct the evaluation as of the date the financial
statements are issued, and provide disclosure that such date was used for this evaluation.
Management has evaluated subsequent events through November 16, 2009, which is the date the
accompanying condensed consolidated financial statements were issued.
Recently Issued Accounting Pronouncements
In June 2009, the issued Financial Accounting Standards Board (FASB) issued SFAS No. 168,
The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles, a replacement of FASB Statement No. 162 (SFAS 168). Under SFAS 168, The FASB
Accounting Standards Codification (Codification or ASC) became the source of authoritative GAAP
recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases
of the SEC under authority of federal securities laws are also sources of authoritative GAAP for
SEC registrants. On July 1, 2009, the Codification superseded all then-existing non-SEC accounting
and reporting standards for nongovernmental entities. All nongrandfathered non-SEC accounting
literature not included in the Codification became nonauthoritiative at that time. SFAS 168 is
effective for interim and annual periods ended after September 15, 2009. The adoption of SFAS 168
did not have a significant impact on the Companys condensed consolidated financial statements.
In May 2009, FASB issued Statement of Financial Accounting Standards (SFAS) No. 165,
Subsequent Events (SFAS 165), which was incorporated into the FASB Codification 855-10,
Subsequent Events Overall (FASB ASC 855-10). FASB ASC 855-10, which is effective for interim
and annual periods ending after June 15, 2009,
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establishes general standards of and accounting for and disclosure of events that occur after
the balances sheet date but before financial statements are issued or are available to be issued.
The adoption of FASB ASC 855.10 did not have an impact on the Companys condensed consolidated
financial statements.
In April 2009,
the FASB issued three FASB Staff Positions (FSP) related to fair value
measurements:
| FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly (FASB ASC 820-10-65-4) | ||
| FSF No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments (FASB ASC 825-10-65-1) | ||
| FAS No. FAS 115-2 and FAS 124-2, Recognition and Preservation of Other-Than-Temporary Impairments (FASB ASC 320-10-65-1) |
The adoption of the above FSPs did not have an impact on the Companys condensed consolidated
financial statements.
3. NOTES RECEIVABLE
As of September 30, 2009 and December 31, 2008, the Company, through wholly owned subsidiaries, had
invested in real estate loans receivable as follows (dollars in thousands):
Book | Maturity | |||||||||||||||||||||||||||||||
Date | Value as of | Book | Contractual | Annual Effective | Date as of | |||||||||||||||||||||||||||
Loan Name | Acquired/ | Property | Loan | September 30, | Value as of | Interest | Interest Rate at | September 30, | ||||||||||||||||||||||||
Location of Related Property or Collateral | Originated | Type | Type | 2009 | December 31, 2008 | Rate | September 30, 2009 | 2009 | ||||||||||||||||||||||||
Mesquite Venture I |
||||||||||||||||||||||||||||||||
Mesquite, Nevada |
9/30/2008 | Vacant Land | Second deed of Trust | $ | 600,000 | $ | 558,000 | 14.00 | % | 14.00 | % | 5/15/2010 | ||||||||||||||||||||
Reserve for loan losses |
| | ||||||||||||||||||||||||||||||
$ | 600,000 | $ | 558,000 | |||||||||||||||||||||||||||||
The following summarizes the activity related to real estate loans receivable for the
nine months ended September 30, 2009:
Real estate loans receivable December 31, 2008 |
$ | 558,000 | ||
Origination of real estate loans |
2,300,000 | |||
Amortization of prepaid interest |
42,000 | |||
Real estate loans receivable converted to real estate owned (REO) |
(2,300,000 | ) | ||
Provision for loan losses |
| |||
Real estate loans receivable September 30, 2009 |
$ | 600,000 | ||
Mesquite Venture I, LLC
On September 30, 2008, the Company originated, through SPT Real Estate Finance, LLC, one real
estate loan for an amount of $600,000. All attorney and closing costs were paid by the borrower.
The loan is a second position lien behind a $3,681,000 first position lien. The term of the loan
was nine months due on June 30, 2009 and bore interest at an annual rate of 14%. The loan is
secured by a deed of trust, assignment of rents and security agreement encumbering real property
situated in the City of Mesquite with an appraised value of $11,000,000 as of July 18, 2008. On
September 30, 2008, the Company recorded this real estate loan as a note receivable with $63,000 of
prepaid interest netted against the note balance. Prepaid interest is amortized over the life of
the note. The Company recognized interest income related to this note of $42,000 for the nine months ended
September 30, 2009 and $21,000 for the year ended December 31, 2008. As of September 30, 2009 and
December 31, 2008, the note receivable balance net of the unamortized interest was $600,000 and
$558,000, respectively.
The compensation received by the Companys Advisor and its affiliates in connection with this
transaction is as follows: (i) an acquisition fee equal to 3% of the loan amount, or $18,000, and
(ii) monthly asset management fees equal to 1/12 of 2% of the total loan amount, or $1,000 per
month, plus capitalized entitlement and project related costs, for the first year, and then based
on the appraised value of the asset after one year. The total compensation received by Shopoff
Advisors as of September 30, 2009, was $30,000.
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On or about June 30, 2009, the Company, through SPT Real Estate Finance, LLC, agreed to extend
the maturity date of its secured note with Mesquite Venture I, LLC from June 30, 2009 to May 15,
2010. In consideration of this loan extension, Mesquite Venture I, LLC agreed to pay a loan
extension fee of five percent of the outstanding principal balance or $30,000 payable as follows:
$10,000 upon execution of the secured note extension, $10,000 on October 1, 2009 and $10,000 on
January 1, 2010. Mesquite Venture I, LLC also agreed to make a $10,000 payment on April 1, 2010
which will be applied against accrued and unpaid interest. Interest will accrue on the outstanding
principal balance at an annual rate of fourteen percent and all accrued and unpaid interest and
principal will be due and payable in full at the new maturity date of May 15, 2010. As of the date
of this filing, Mesquite Venture I, LLC had not made the $10,000 loan extension fee payment due
October 1, 2009. The Companys advisor is currently in discussions with Mesquite Venture I, LLC
regarding the unpaid $10,000 loan extension fee payment due October 1, 2009.
For the three and nine months ended September 30, 2009, SPT Real Estate Finance, LLC
recognized accrued interest receivable of $21,173, on the secured real estate loan.
See
Note 11 for additional information.
Aware Development Inc.
On January 9, 2009, SPT Real Estate Finance, LLC closed two separate loans to Aware
Development Company, Inc., a California corporation (Aware). One loan was in the amount of
$1,886,000 and the other loan was in the amount of $414,000. The loans were made from the proceeds
of the offering and pursuant to two secured note agreements, each dated January 9, 2009 (the Aware
Notes). The Aware Notes were secured by two separate Collateral Assignment and Pledge of Note,
Deed of Trust and Loan Documents, each dated January 9, 2009 (collectively, Pledge Agreements),
by and between Aware and SPT Real Estate Finance, LLC encumbering real property situated in the
County of Riverside, California. Interest was payable on the Aware Notes to SPT Real Estate
Finance, LLC at a rate of 28% per annum and the principal amount of the Aware Notes plus accrued
interest was due and payable six months from the date of funding, or July 9, 2009. These Aware
Notes could not be prepaid in whole or in part prior to such date, except in connection with a
payoff by Aware of the underlying senior notes in favor of Vineyard Bank N.A., a national banking
association (Vineyard), in accordance with the Pledge Agreements.
This was a related party transaction. Prior to the closing, Aware had entered into two
separate note purchase agreements with Vineyard. Pursuant to the note purchase agreements, Aware
had agreed to purchase from Vineyard two loans made by Vineyard to Springbrook Investments, L.P., a
California limited partnership (Springbrook), whose general partner is a California corporation
which is 100% owned by The Shopoff Revocable Trust dated August 12, 2004 (the Shopoff Trust).
William and Cindy Shopoff are the sole trustees of the Shopoff Trust. William Shopoff is the
president, chief executive officer and chairman of the board of directors of the Company. One of
the two loans made by Vineyard to Springbrook was in the original principal amount of $5,187,000
and the other was in the original principal amount of $1,072,000 (as heretofore modified,
collectively the Vineyard Loans).
The following were additional material terms with respect to the Vineyard Loans:
| Aware agreed that, in the absence of additional defaults other than payment defaults, Aware would forbear from exercising its rights and remedies under the Vineyard Loans, including without limitation foreclosure, from the date January 9, 2009 through July 9, 2009 (Forbearance Period), in order to allow Springbrook time to attempt to refinance the Vineyard Loans. During the Forbearance Period, interest and other required payments required of Springbrook under the Vineyard Loans would continue to accrue at the stated rate, and would be added to principal. | ||
| At any time during the Forbearance Period, Aware agreed to accept, as payment in full under the Vineyard Loans, with respect to one note, the sum of $1,896,000 plus all accrued interest then due under the Notes, of which amount Springbrook would cause to be paid $1,886,000 directly to SPT Real Estate Finance, LLC, and $10,000 to Aware and all other amounts directly to SPT Real Estate Finance, LLC and, with respect to the second note, the sum of $424,000 plus all accrued interest then due under the Aware Notes, of which amount Springbrook would cause to be paid $414,000 directly to SPT Real Estate Finance, LLC, and $10,000 to Aware and all other amounts directly to SPT Real Estate Finance, LLC. |
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| The commercial guaranties executed by William A. Shopoff, an individual, and William A. Shopoff and Cindy I. Shopoff, as Trustees of the Trust, in connection with the Vineyard Loans, were released, and Aware waived any and all right to recover under the same. |
This transaction was approved by a majority of the Companys board of directors (without the
participation of William A. Shopoff), including a majority of the Companys independent directors.
On or about July 12, 2009, SPT Real Estate Finance, LLC was informed by Aware that the
Forbearance Period had ended and that Springbrook had not made payments in full under the Vineyard
Loans which consisted, with respect to one note, of the sum of $1,886,000 plus all accrued interest
due under the Note and, with respect to the second note, the sum of $414,000 plus all accrued
interest due under the Note.
Aware also indicated that, in addition to Springbrook not making payments in full under the
Vineyard Loans, Aware would not be paying to SPT Real Estate Finance, LLC as documented in the
Pledge Agreements, the aggregate of $2,300,000 plus accrued interest due and payable to SPT Real
Estate Finance, LLC at the maturity date of July 12, 2009 and that in full settlement of its
liability to SPT Real Estate Finance, LLC, Aware would be transferring the Pledge Agreements to SPT
Real Estate Finance, LLC.
Simultaneously with Aware indicating that it would not be paying to SPT Real Estate Finance,
LLC all sums due and owing as agreed to in the Pledge Agreements, the aggregate of $2,300,000 plus
accrued interest due, Highgrove Inc., the general partner of Springbrook of which the sole
shareholder is the Shopoff Trust, indicated that it would be executing a deed-in-lieu of
foreclosure in favor of SPT Real Estate Finance, LLC.
On August 24, 2009, SPT Real Estate Finance, LLC, acquired ownership of the two Vineyard Loans
pursuant to two separate Memoranda of Assignment of Note, Deed of Trust and Loan Documents (the
Assignment Agreements) executed by Aware in favor of SPT Real Estate Finance LLC. Subsequently,
SPT Real Estate Finance LLC, as lender pursuant to the Assignment Agreements, entered into two
Settlement Agreements, each dated September 3, 2009, with Springbrook. In the Settlement
Agreements, Springbrook agreed to execute and deliver to SPT Real Estate Finance, LLC grant deeds
to the underlying real estate collateral for the Vineyard Loans in consideration for the discharge
by SPT Real Estate Finance, LLC of all Springbrooks obligations under the Vineyard Loans.
Accordingly, on September 4, 2009, SPT Real Estate Finance, LLC took title to the following
Springbrook properties which served as collateral under the Vineyard Loans:
| approximately 118 acres of vacant and unentitled land located near the City of Lake Elsinore, in an unincorporated area of Riverside County, California; and | ||
| approximately 6.11 acres of vacant and unentitled land located near the City of Lake Elsinore, in an unincorporated area of Riverside County, California. |
On September 24, 2009, SPT Real Estate Finance, LLC deeded the collateral under the Vineyard
Loans to SPT Lake Elsinore Holding Co., LLC, an affiliated entity wholly owned by the Operating
Partnership.
Prior to Aware executing the Assignment Agreements, Aware had provided SPT Real Estate
Finance, LLC with an appraisal completed for Vineyard dated
June 18, 2008 concluding that the as is
land value for the 117.24 acre property is $1,760,000. Aware also provided SPT Real Estate Finance,
LLC with an appraisal completed for Vineyard dated June 9, 2008
concluding that the as is land
value for the 6.11 acre property is $1,650,000. The total value for
the two properties based on the aforementioned
appraisals performed in June of 2008 is $3,410,000. Although the two appraisals are fifteen months
old and the Company has not obtained more recent appraisals, the Company believes that the combined
appraised value of $3,410,000 is a representative value for the two properties.
The compensation received by the Companys affiliated advisor, the Advisor, and its affiliates
in connection with this transaction was as follows: (i) an acquisition fee equal to 3% of the loan
amount, or $69,000, and (ii) monthly asset management fees equal to 1/12 of 2% of the total loan
amount, or $3,833 per month, plus capitalized entitlement and project related costs, for the first
year, and then based on the appraised value of the asset after one year. The total compensation
received by Shopoff Advisors as of September 30, 2009, was $100,208.
For the three and nine months ended September 30, 2009, SPT Real Estate Finance, LLC
recognized accrued interest receivable of $21,173 and $324,647, respectively, on the two Aware
Notes. The Aware Notes of $1,886,000
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and $414,000 and the related accrued interest receivable previously included in notes
receivable are now included as investments in real estate on the accompanying condensed
consolidated balance sheets.
4. REAL ESTATE INVESTMENTS
Winchester Ranch (Pulte Home Project)
SPT SWRC, LLC, an entity wholly owned by the Operating Partnership, was formed in October
2008 principally to acquire real estate properties in the area known as Southwest Riverside County
California. Because SPT SWRC, LLC is wholly owned by the Operating Partnership, the accounts of
SPT SWRC, LLC are consolidated in the Companys consolidated financial statements.
On December 31, 2008, SPT-SWRC, LLC, closed on the acquisition of certain parcels of land (the
Pulte Home Project) pursuant to a Purchase Agreement, dated December 23, 2008, with Pulte Home
Corporation, a Michigan corporation (Pulte Home), an entity unaffiliated with the Company and its
affiliates. The purchase price of the Pulte Home Project was $2,000,000. The Pulte Home Project is
located in an area commonly known as Winchester Ranch and consists of partially improved land with
the surface being in the first stage of the grading process and with streets and lots undefined
(rough graded). The land is zoned for residential properties with a portion set aside for
multi-family residential units.
In connection with this acquisition, the Company incurred acquisition costs of approximately
$614,000, which includes $476,774 in reconveyance costs that were capitalized in the accompanying
condensed consolidated balance sheets as part of the purchase price. The compensation received by
the Companys affiliated advisor, the Advisor, and its affiliates upon consummation of this
transaction was as follows: (i) an acquisition fee equal to 3% of the contract purchase price, or
$60,000, and (ii) monthly asset management fees equal to 1/12 of 2% of the total contract price, or
$3,333 per month, plus capitalized entitlement and project related costs, for the first year, and
then based on the appraised value of the asset after one year.
In connection with the purchase, SPT-SWRC, LLC agreed to replace existing subdivision
improvement agreements and related bonds within 180 days of the closing, or September 30, 2009, and
it executed a deed of trust in the amount of $4,692,800 securing this obligation. The deed of trust
also secures SPT- SWRC, LLCs obligation to record Tract Map No. 30266-2 within 180 days of the
closing (see Note 8). In addition, Pulte Home had the right of first refusal to repurchase the
Pulte Home Project, subject to certain terms and conditions and the Companys approval of such
repurchase.
On February 27, 2009, SPT-SWRC, LLC entered into a purchase and sale agreement to sell the
Pulte Home Project to Khalda Development, Inc. (Khalda), an entity unaffiliated with the Company
and its affiliates. The contract sales price was $5,000,000 and the transaction closed escrow on
March 20, 2009. The Company recognized a gain on sale related to this transaction of approximately
$2,070,000. In connection with this purchase, Khalda assumed SPT-SWRC, LLCs obligation to replace
the existing subdivision improvement agreements and related bonds on or before September 30, 2009.
Pulte Home waived its right of first refusal to repurchase the Pulte Home Project.
On May 1, 2009, Pulte Home caused a Notice of Default and Election to Sell Under Deed of
Trust to be filed in the Official Records of Riverside County with respect to the Pulte Home
Project. Pulte is alleging that SPT-SWRC, LLC was obligated by Section B(10) of the deed of trust
to obtain Pulte Homes written consent to the transfer of the obligations secured by the Deed of
Trust to Khalda and that no such consent was obtained, despite Pulte Homes execution of a waiver
of its right of first refusal to repurchase the Pulte Home Project. A transfer of the Pulte Home
Project in violation of the provisions of the deed of trust allows Pulte Home to accelerate the
performance of the existing, secured obligations of SPT-SWRC, LLC and to commence foreclosure
proceedings under the deed of trust.
Management believes the sale of the Pulte Home Project by SPT-SWRC, LLC to Khalda is
completed. Khalda was aware of the obligations secured by the deed of trust and assumed such
obligations when it purchased the Pulte Home Project from SPT-SWRC on March 20, 2009. Management
believes that the maximum amount of any legal exposure resulting from any action by Pulte Home with
respect to this property would be limited to the value of the property, which is no longer owned by
SPT-SWRC, LLC. Khalda, the current owner of the property, is in the process of obtaining the
governmental approvals necessary to satisfy its obligations and has declared bankruptcy in order to
forestall the foreclosure proceedings so that such governmental approvals can be obtained. A
consequence of the foreclosure is that ownership of the Winchester Hills Project could pass from
Khalda back to Pulte Home.
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The Pulte Home Project is also the subject of a dispute regarding obligations retained by both
Pulte Home, when it sold the Winchester Ranch project to SPT SWRC,
LLC, on December 31, 2008, and
by SPT SWRC, LLC when it resold the Winchester Ranch project to Khalda on March 20, 2009, to
complete certain improvements, such as grading and infrastructure (the Improvements). Both sales
were made subject to the following agreements which, by their terms, required the Improvements to
be made: (i) a Reconveyance Agreement, dated November 15, 2007, by and among Pulte Home and the
prior owners of the Winchester Ranch project Barratt American Incorporated, Meadow Vista
Holdings, LLC (Meadow Vista) and Newport Road 103, LLC (Newport) (the Reconveyance
Agreement), and (ii) a letter agreement, dated December 30, 2008, executed by SPT SWRC, LLC,
Meadow Vista, and Newport, and acknowledged by Pulte Home (the Subsequent Letter Agreement).
Meadow Vista and Newport, as joint claimants (the Claimants) against Pulte Home and SPT SWRC,
LLC, have initiated binding arbitration in an effort to require Pulte Home to reaffirm its
obligations under the Reconveyance Agreement and the Subsequent Letter Agreement to make the
Improvements in light of the subsequent transfer of ownership of the Winchester Ranch project to
Khalda, and to require that certain remedial measures be taken to restore the site to a more
marketable condition. SPT SWRC, LLC maintains that it is not a proper party to the arbitration,
because the declaratory action being sought by the Claimants is to establish rights of the
Claimants against Pulte Home, and not against SPT SWRC, LLC, and neither SPT SWRC, LLC nor Pulte
Home has taken the position that their respective transfers of the Winchester Ranch project has
released them from the obligation to make the Improvements. The arbitration process is at its
inception and, although we believe the request for declaratory relief by the Claimants has no legal
basis and that the issue is not arbitrable since no actual dispute exists, we cannot predict the
outcome of the arbitration proceedings at this time.
Wasson Canyon Project
SPT Lake Elsinore Holding Co., LLC, an entity wholly owned by the Operating Partnership,
was formed in March 2009 principally to acquire real estate properties in the Lake Elsinore area of
Riverside County California. Because SPT Lake Elsinore Holding Co., LLC is wholly owned by the
Operating Partnership, the accounts of SPT Lake Elsinore Holding Co., LLC are consolidated in
the Companys consolidated financial statements.
On April 17, 2009, SPT Lake Elsinore Holding Co., LLC closed on the purchase of real
property constituting sixty five (65) finished lots located in the City of Lake Elsinore, Riverside
County, California, commonly known as Wasson Canyon (the Wasson Canyon Project), for the purchase
price of $650,000. The purchase was made pursuant to a Purchase and Sale Agreement and Joint Escrow
Instructions (the Purchase Agreement), dated April 14, 2009, by and between the SPT Lake
Elsinore Holding Co., LLC, buyer and MS Rialto Wasson Canyon CA, LLC, a Delaware limited liability
company, as seller.
Pursuant to the Purchase Agreement, SPT Lake Elsinore Holding Co., LLC agreed to replace
existing subdivision improvement agreements and related bonds within 180 days of the closing and
executed a deed of trust in the amount of $650,000 securing this obligation. This obligation is
customary in transactions of this type.
In addition, pursuant to the Purchase Agreement, MS Rialto Wasson Canyon CA, LLC has the right
of first refusal to repurchase the Wasson Canyon Project from SPT Lake Elsinore Holding Co., LLC. Under the terms of the right of first refusal agreement entered into in connection with this
transaction, MS Rialto Wasson Canyon CA, LLC may exercise its right of first refusal by matching
the terms and conditions of a bona fide offer received by SPT Lake Elsinore Holding Co., LLC
from a third party to purchase all or a portion of the Wasson Canyon Project.
Finally, pursuant to the Purchase Agreement, SPT Lake Elsinore Holding Co., LLC assumed the
obligations of MS Rialto Wasson Canyon CA, LLC as a party to a profits participation agreement,
dated June 28, 2005 (the Profits Participation Agreement), pursuant to which SPT Lake Elsinore
Holding Co., LLC is obligated to share 50% of project revenues, less project costs and certain
other deductions, earned by it (calculated based on MS Rialto Wasson Canyon CA, LLCs original
basis) if the Wasson Canyon Project is resold in a bulk sale. The original parties to the Profits
Participation Agreement were Wasson Canyon Holdings, LLC, as obligor, and Wasson Canyon
Investments, L.P., as obligee. The obligee assigned its rights to Wasson Canyon Investments II,
L.P., an entity whose general partner is an affiliate of the Companys sponsor, The Shopoff Group.
As a result of the decline in overall property values since 2005, as a practical matter, the
profits participation would only take effect in the event of a bulk sale of the Wasson Canyon
Project in excess of $7,500,000, or approximately $115,385 per lot.
MS Rialto Wasson Canyon CA, LLC is not affiliated with the Company or any of its affiliates.
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The Companys affiliated advisor, Shopoff Advisors, L.P., received an acquisition fee equal to
3% of the contract purchase price, or $19,500, upon consummation of the transaction.
As of the nine months ended September 30, 2009, SPT Lake Elsinore Holding Co., LLC had
incurred, in addition to the purchase price of $650,000, an additional $362,543 in capitalized
project costs including the previously mentioned $19,500 acquisition fee.
Underwood Project
On May 19, 2009, SPT Lake Elsinore Holding Co., LLC, closed on the purchase of real
property constituting 543 single family residential lots, a 9.4 acre park and over 70 acres of open
space on a total of 225 acres of unimproved land commonly referred to as tract 29835 located in the
City of Menifee, Riverside County, California, commonly known as the Underwood Project. The
purchase price was $1,650,000. The purchase was made pursuant to a Purchase Agreement, dated May
13, 2009, by and between the Buyer and U.S. Bank National Association
U.S. Bank National Association is not affiliated with the Company or any of its affiliates.
The Companys affiliated advisor, Shopoff Advisors, L.P., received an acquisition fee equal to
3% of the contract purchase price, or $49,500, upon consummation of the transaction.
As of the nine months ended September 30, 2009, SPT Lake Elsinore Holding Co., LLC had
incurred, in addition to the purchase price of $1,650,000, an additional $88,675 in capitalized
project costs including the previously mentioned $49,500 acquisition fee.
Desert Moon Estates Project
On July 31, 2009, SPT AZ Land Holdings, LLC, an entity wholly owned by the Operating
Partnership, closed on the purchase of real property consisting of a final plat of 739 single
family residential lots on a total of 200 acres of unimproved land commonly known as Desert Moon
Estates located in the Town of Buckeye, Maricopa County, Arizona. The purchase price was
$3,000,000. The purchase was made pursuant to a Purchase Agreement, dated June 29, 2009, by and
between the SPT AZ Land Holdings, LLC and AZPro Developments, Inc., an Arizona corporation. On July
28, 2009, SPT AZ Land Holdings, LLC and AZPro Developments, Inc. executed a First Amendment to the
Purchase Agreement modifying the terms of the original Purchase Agreement through the addition of a
$2,000,000 Secured Promissory Note in favor of AZPro Developments, Inc. (the Promissory Note)
(see Note 5) and deed of trust wherein AZPro Developments, Inc. will act as beneficiary and a
concurrent reduction of cash required to close from $3,000,000 to $1,000,000.
AZpro Developments, Inc. is not affiliated with the Company or any of its affiliates.
The Companys affiliate advisor, Shopoff Advisors, L.P., received an acquisition fee equal to
3% of the contract purchase price, or $90,000, upon consummation of the transaction.
As of the nine months ended September 30, 2009, SPT AZ Land Holdings., LLC had incurred, in
addition to the purchase price of $3,000,000, an additional $39,911 in capitalized project costs
comprised primarily of the previously mentioned acquisition
fee, county tax and CFD credits and accrued interest on
the secured promissory note to AZPro Development, Inc.
Springbrook Properties
On September 24, 2009, SPT Lake Elsinore Holding Co., LLC, was deeded real property with an
existing basis of $2,624,647, from SPT Real Estate Finance, LLC which was previously collateral on
two separate secured real estate loans originated by SPT Real Estate Finance, LLC as discussed in
Note 3. The real property received was comprised of approximately 118 acres of vacant and
unentitled land, and approximately 6.11 acres of vacant and
unentitled land, both located near the City
of Lake Elsinore, in an unincorporated area of Riverside County, California. Prior to September 24,
2009, SPT Real Estate Finance, LLC had entered into two separate Settlement Agreements with
Springbrook which agreed to execute and deliver to SPT Real Estate Finance, LLC grant deeds to the
underlying real estate collateral for the Vineyard Loans in consideration for the discharge by SPT
Real Estate Finance, LLC of all Springbrooks obligations under the Vineyard Loans.
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The Companys affiliate advisor, Shopoff Advisors, L.P., did not receive an acquisition fee
upon consummation of the transaction.
As of the nine months ended September 30, 2009, SPT Lake Elsinore Holding Co., LLC had
incurred, in addition to the assumption of the existing basis of $2,624,647 from SPT Real Estate
Finance, LLC, an additional $96,142 in capitalized project costs.
5.
NOTE PAYABLE SECURED BY REAL ESTATE INVESTMENT
As discussed in Note 4 and in connection with the closing of Desert Moon Estates, SPT AZ Land
Holdings, LLC executed a $2,000,000 promissory note and deed of trust in favor of AZPro
Developments, Inc.
Interest on the Promissory Note will accrue on the principal outstanding from the date of the
Promissory Note at a rate of six percent (6.00%) per annum. Payments of interest only will be made
quarterly in arrears on November 1, 2009, February 1, 2010 and May 1, 2010. On the maturity date of
the Promissory Note, July 31, 2010, the entire outstanding principal balance and all unpaid
interest on the Promissory Note will be due and payable in full. The Promissory Note is secured by
a Deed of Trust with Assignment of Rents which encumbers the Desert Moon Estates Property. SPT AZ
Land Holdings, LLC may prepay in whole or in part the principal amount outstanding under the
Promissory Note, together with accrued and unpaid interest thereon computed to the date of
prepayment and any sums owing to AZPro Developments, Inc., without penalty or premium.
If SPT AZ Land Holdings, LLC fails to pay any installment of interest by the fifth day of each
calendar quarter, AZPro Developments, Inc. has the right to assess a late fee equal to 10% of the
amount that is delinquent and the interest rate on the entire principal amount outstanding will
adjust to 12% per annum from the date the delinquent payment was first due until the delinquent
payment has been made. Similar penalties apply if the principal is not paid upon the maturity date.
For the three and nine months ended September 30, 2009, SPT AZ Land Holdings, LLC recognized
accrued interest payable of $20,384, on the outstanding Promissory Note.
6. STOCKHOLDERS EQUITY
Common Stock
The Company commenced a best-efforts initial public offering of 2,000,000 shares of its common
stock at an offering price of $9.50 per share. Once 2,000,000 shares are sold, the offering price
will increase to $10.00 per share until an additional 18,100,000 shares of common stock are sold.
On November 27, 2006, The Shopoff Group L.P., the Companys sponsor, purchased 21,100 shares
of the Companys common stock for total cash consideration of $200,450.
As of September 30, 2009, the Company had sold and accepted 1,851,400 shares of its common
stock for $17,588,300 not including 21,100 shares issued to The Shopoff Group L.P. and not
including 35,000 shares of vested restricted stock previously issued to certain officers and
directors. As of September 30, 2009, the Company had sold $43,700 in stock subscriptions for 4,600
shares which had not yet been accepted by the Company. The stock was recorded as subscribed stock
in the accompanying condensed consolidated balance sheets. As of December 31, 2008, the Company had
sold and accepted 1,836,200 shares of its common stock for $17,443,900 not including 21,100 shares
issued to The Shopoff Group L.P.
Restricted Stock Grants
The Company, under its 2007 Equity Incentive Plan, approved the issuance of restricted stock
grants to its officers and non-officer directors on August 29, 2008, the date the Company reached
the minimum offering amount of $16,150,000. The restricted stock grants, which aggregated 173,750
shares and have an individual value of $9.50 per share, have a vesting schedule of five years for
officers and four years for non-officer directors. On August 29, 2009, 35,000 shares of restricted
stock grants vested. During the nine months ended September 30, 2009, 5,000 shares of restricted
stock were forfeited, 5,000 shares of restricted stock were subsequently reissued and 138,750
shares of restricted stock remained unvested and outstanding at
September 30, 2009. The forfeiture and reissuance were the result of a departure of one of our directors and her subsequent replacement as director.
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For the three and nine months ended September 30, 2009, the Company recognized compensation expense
of $360,208 comprised of $332,500 for the vesting of restricted stock grants and $27,708 in accrued
compensation expenses for unvested restricted stock grants. The vested restricted stock grants were
recorded as $350 common stock for the par value of the vested restricted stock grants and $332,150
additional paid-in capital in the accompanying condensed consolidated balance sheets.
Stock Option Grants
The
Company, under its 2007 Equity Incentive Plan, approved the granting of stock options to
certain of its officers and non-officer directors on August 29, 2009. A total of 78,000
non-qualified stock options were granted: (i) independent director Glenn Patterson, 3,500 shares,
(ii) independent director Patrick Meyer, 3,500 shares, (iii) independent director Stuart McManus,
3,000 shares, (iv) independent director Melanie Barnes, 3,000 shares (v) director Jeff Shopoff,
3,000 shares, (vi) officer Tim McSunas, 25,000 shares and (vii) officer Kevin Bridges, 37,000
shares. The options granted vest in 4 or 5 equal installments beginning on the grant date and on
each anniversary of the grant date over a period of 3 or 4 years. The options have a contractual
term of 10 years.
The fair value of stock-based awards is calculated using the
Black-Scholes option pricing model. The Black-Scholes model requires subjective assumptions,
including future stock price volatility and expected time to exercise, which greatly affect the
calculated values. There is insufficient trading history in the Companys common stock to allow
for a historically based assessment of volatility. Furthermore, the Companys shares are not
traded on an exchange. The expected volatility is therefore based on the historical volatility of
publicly traded real estate investment trusts with investment models and dividend policies deemed
comparable to those of the Company. In accordance with the guidance in the Accounting Standards
Codification (ASC) topic 718-S99 (originally issued as the SECs Staff Accounting Bulletin No.
110) the expected term of options is the average of the vesting period and the expiration date.
The risk-free rate selected to value any particular grant is based on the U.S. Treasury rate that
corresponds to the pricing term of the grant effective as of the date of the grant. The Company
does not expect to pay dividends in the foreseeable future, thus the dividend yield is assumed to
be zero. These factors could change in the future, affecting the determination of stock-based
compensation expense for grants made in future periods. The Company used the following
weighted-average assumptions in determining the fair value of its officer and director stock
options granted in the nine months ended September 30, 2009:
Expected volatility |
70 | % | ||
Expected term |
6.9 | yrs | ||
Risk-free interest rate |
3.0 | % | ||
Dividend yield |
| % |
The
weighted-average grant date fair value of officers and
non-officers directors options granted during
the nine months ended September 30, 2009 was $6.44.
For the three and nine months ended September 30, 2009, the Company recognized compensation expense
with respect to stock option grants of approximately $114,000, which was recorded to additional
paid-in capital in the accompanying condensed consolidated balance sheets. Based on the Companys
historical turnover rates and the vesting pattern of the options, management has assumed that
forfeitures are not significant in the determination of stock option expense.
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The following is a summary of the changes in stock options outstanding during the nine months ended
September 30, 2009:
Weighted | ||||||||||||
Weighted | Average | |||||||||||
Average | Remaining | |||||||||||
Number of | Exercise | Contractual | ||||||||||
Shares | Price | Life (Years) | ||||||||||
Outstanding at December 31, 2008 |
| $ | | |||||||||
Granted |
78,000 | 9.50 | ||||||||||
Outstanding at September 30, 2009 |
78,000 | $ | 9.50 | 9.9 | ||||||||
Exercisable at September 30, 2009 |
16,400 | $ | 9.50 | 9.9 | ||||||||
Based on the closing stock price of $9.50 at September 30, 2009, aggregate intrinsic value of
options outstanding at September 30, 2009 was zero.
Options outstanding that have vested and are expected to vest as of September 30, 2009 are as
follows:
Weighted | ||||||||||||
Average | ||||||||||||
Weighted | Remaining | |||||||||||
Average | Contractual | |||||||||||
Number of | Exercise | Term in | ||||||||||
Shares | Price | Years | ||||||||||
Vested
|
16,400 | $ | 9.50 | 10 | ||||||||
Expected to vest
|
61,600 | 9.50 | 10 | |||||||||
Total
|
78,000 | 9.50 | 10 | |||||||||
7. OTHER RELATED PARTY TRANSACTIONS
The Companys Advisor and affiliated entities have incurred organizational and offering costs
on the Companys behalf. Pursuant to a written agreement, such entities accepted responsibility for
such costs and expenses until the Companys Registration Statement was declared effective by the
Securities and Exchange Commission (SEC) and the minimum offering amount was raised. However, at
no time will the Companys obligation for such organizational and offering costs and expenses
exceed 12.34% of the total proceeds raised in the Offering, as more fully disclosed in the
Companys Registration Statement. We are allowed to reimburse the Advisor up to 15% of the gross
offering proceeds during the offering period, however the Advisor is required to repay us for any
organizational and offering costs and expenses reimbursed to it by us that exceed 12.34% of the
gross offering proceeds within 60 days of the close of the offering. As of September 30, 2009 we
had reimbursed the Advisor $460,138 in excess of the 12.34% limit.
As of September 30, 2009 and December 31, 2008, such costs and expenses approximated
$5,050,000 and $4,624,000 respectively. Of the approximately $5,050,000 incurred by the Advisor and
its affiliates, the Company has reimbursed them approximately $2,631,000. The $2,631,000 of
reimbursed organizational and offering costs was netted against additional paid-in capital in the
accompanying consolidated balance sheet.
On November 27, 2006, the Advisor contributed $100 for a 1% limited partnership interest in
the Operating Partnership. Such investment is reflected as a minority interest in the accompanying
consolidated financial statements.
The sole general partner of the Advisor is wholly owned by the Shopoff Trust. William and
Cindy Shopoff are the sole trustees of the Shopoff Trust. The Advisor and its affiliates will
receive substantial compensation and fees for services relating to the investment and management of
the Companys assets. Such fees, which were not negotiated on an arms-length basis, will be paid
regardless of the performance of the real estate investments acquired or the quality of the
services provided to the Company.
The Shopoff Trust is also the sole stockholder of Shopoff Securities, Inc., the Companys sole
broker-dealer engaged in the initial public offering described above. Shopoff Securities, Inc.
(which was formed in September 2006) is not receiving any selling commissions in connection with
the offering, but is entitled to receive a fixed monthly marketing
fee of $100,000 from the Companys Sponsor
and reimbursements from the Company for expenses incurred
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in connection with the sale of shares. The $100,000 fixed monthly marketing fee and
reimbursements from the Company for expenses incurred in connection with the sale of shares is not
due and payable from the Sponsor to Shopoff Securities, Inc. until the completion of the offering
and is contingent upon a determination by the Sponsor, in its sole and absolute discretion, that
the payment of the fixed monthly marketing fee will not result in total underwriting compensation
to Shopoff Securities, Inc. exceeding the amount which is permitted under the rules of the
Financial Industry Regulatory Authority. As of September 30, 2009, the offering had not yet been
completed. As the offering had not yet been completed the Sponsor had made no determination whether
a payment to Shopoff Securities Inc. would exceed the total underwriting compensation permitted
under the rules of the Financial Industry Regulatory Authority.
The relationship between the Company and the Advisor is governed by an advisory agreement (the
Agreement). Under the terms of the Agreement, the Advisor
is responsible for overseeing the
day-to-day operations of the Company and has the authority to carry out all the objectives
and purposes of the Company. The Advisor has a fiduciary responsibility to the Company and
its stockholders in carrying out its duties under the Agreement. In providing advice and services,
the Advisor shall not (i) engage in any activity which would require it to be registered as an
Investment Advisor, as that term is defined in the Investment Advisors Act of 1940, or in any
state securities law or (ii) cause the Company to make such investments as would cause the Company
to become an Investment Company, as that term is defined in the Investment Company Act of 1940.
The Companys Board of Directors has the right to revoke the Advisors authority at any time.
In accordance with the Agreement, the Company will pay the Advisor the following fees:
| Acquisition and Advisory Fees: 3% of, with respect to any real estate asset or real estate-related investment acquired by the Company directly or indirectly, the contract purchase price of the underlying property. | ||
| Debt Financing Fee: 1% of the amount available under any loan or line of credit made available to the Company upon the receipt of the proceeds from such loan or line of credit. | ||
| Asset Management Fee: a monthly payment equal to one-twelfth of 2% of (i) the aggregate asset value for operating assets and (ii) the total contract price plus capitalized entitlement and project related costs for real estate assets held for less than or equal to one year by the Company, directly or indirectly, as of the last day of the preceding month other than a real estate-related investment and (iii) the appraised value as determined from time to time for real estate assets held for greater than one year by the Company, directly or indirectly, as of the last day of the preceding month other than a real estate-related investment and (iv) the appraised value of the underlying property, for any real estate-related investment held by the Company directly or indirectly, as of the last day of the preceding month, in the case of subsection (iv) not to exceed one-twelfth of 2% of the funds advanced by the Company for the purchase of the real estate-related investment. | ||
| Disposition Fees: equal to (i) in the case of the sale of any real estate asset, other than real estate-related investments, the lesser of (a) one-half of the competitive real estate commission paid up to 3% of the contract price or, if none is paid, the amount that customarily would be paid, or (b) 3% of the contract price of each real estate asset sold, and (ii) in the case of the sale of any real estate-related investments, 3% of the sales price. Any disposition fee may be paid in addition to real estate commissions paid to non-affiliates, provided that the total real estate commissions (including such disposition fee) paid to all persons by the Company for each real estate asset, upon disposition thereof, shall not exceed an amount equal to the lesser of (i) 6% of the aggregate contract price of each real estate asset or (ii) the competitive real estate commission for each real estate asset. The Company will pay the disposition fees for a property at the time the property is sold. | ||
| Additional Fees: The Agreement includes certain other fees that will be payable to the Advisor upon the occurrence of certain potential events such as listing on a national securities exchange or termination of the Agreement. |
8. PROPOSED ACQUISITION
On September 30, 2008, the Companys Advisor entered into a purchase and sale agreement and
joint escrow instructions to purchase certain parcels of land from TSG Little Valley, L.P., a
California limited partnership (TSG Little Valley), consisting of 163 entitled, but unimproved,
residential lots, located in the City of Lake Elsinore, County of Riverside, State of California.
The contract purchase price was for $4,890,000. The Companys Advisor
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paid an initial non-refundable deposit to TSG Little Valley of $1,000,000 on October 7, 2008.
The $1,000,000 deposit was paid solely from the proceeds of the Companys initial public offering.
On September 3, 2009, the Companys Advisor executed an assignment of purchase and sale
agreement whereby the Advisor assigned all of its rights, title and interest in the purchase and
sale agreement and joint escrow instructions between Advisor and TSG Little Valley to SPT Lake
Elsinore Holding Co., LLC an affiliated entity wholly owned by the Operating Partnership.
On September 3, 2009, SPT Lake Elsinore Holding Co., LLC entered into a first amendment to
purchase and sale agreement and joint escrow instructions with TSG Little Valley. This first
amendment to purchase and sale agreement and joint escrow instructions amended the original
purchase and sale agreement and joint escrow instructions dated September 30, 2008 as previously
amended by those certain amended/supplemental escrow instructions dated October 16, 2008, October
27, 2008, November 11, 2008, November 25, 2008, December 30, 2008, January 13, 2008, January 27,
2009 and February 24, 2009. The original purchase and sale
agreement and joint escrow instructions were further amended by that
certain undated Corrective Amendment, whereby (a) SPT Lake
Elsinore Holding Co., LLC agreed to purchase additional property from TSG Little Valley consisting
of 356 entitled but unimproved, residential lots and 2 commercial lots located in the City of Lake
Elsinore, California and 400 acres of unentitled and unimproved land
located in the City of Chino Hills, California, (b) the purchase price was increased to $9,600,000 from
$4,890,000, (c) the non-refundable deposit requirement was increased to $2,000,000 from $1,000,000 and
(d) the escrow closing date was amended to on or before November 30, 2009. The Companys Advisor paid
the additional non-refundable deposit to TSG Little Valley of $1,000,000 on September 4, 2009. The
additional $1,000,000 deposit was paid solely from the proceeds of the Companys initial public
offering.
The $2,000,000 and $1,000,000 deposits are included in real estate deposits in the
accompanying condensed consolidated balance sheets as of September 30, 2009 and December 31, 2008
respectively.
The Companys Advisor, on behalf of the Company, has ordered and received two separate
appraisals on the assets it intends to purchase from TSG Little Valley. One appraisal, dated
October 15, 2008, states that the concluded market value for the 519 entitled, but unimproved,
residential lots and 2 commercial lots is $6,330,000. The second appraisal, dated April 29, 2009,
states that the concluded market value for the 400 acres of unentitled and unimproved land is
$4,900,000. The total value from the two appraisals performed in October of 2008 and April of 2009
is $11,230,000.
Stevan J. Gromet, President of Portfolio Partners, Inc., a California corporation, the general
partner of TSG Little Valley, is a shareholder of the Company with ownership of 47,800 shares as of
September 30, 2009 which represents approximately 2.51% of our total shares outstanding including
21,100 shares purchased by our sponsor and 35,000 vested restricted stock grants issued to our officers and directors. TSG Little Valley
is also a shareholder of the Company with ownership of 380,500 shares as of September 30, 2009
which represents approximately 19.95% of the Companys total shares outstanding including
21,100 shares purchased by our sponsor and 35,000 vested restricted stock grants issued to our officers and directors.
See
Note 11 for additional information.
9. COMMITMENTS AND CONTINGENCIES
Legal Matters
From time to time, the Company may be party to legal proceedings that arise in the ordinary
course of its business. Management is not aware of any legal proceedings of which the outcome is
reasonably likely to have a material adverse effect on its results of operations or financial
condition. Although the Company is not subject to any legal proceedings, its subsidiary, SPT-SWRC,
LLC is the subject of a Notice of Default filing and binding arbitration proceeding as described in
Note 4. The Company believes the Notice of Default and binding arbitration proceeding will have no
material adverse effect on its results of operations or financial condition.
Organizational and Offering Costs
The Companys Advisor and affiliated entities have incurred offering costs and certain
expenses on the Companys behalf. Pursuant to a written agreement, such entities accepted
responsibility for such costs and expenses until the Companys Registration Statement was declared
effective by the SEC and the minimum offering amount was raised. The Companys obligation for such
costs and expenses will not exceed 12.34% of the total proceeds raised in the Offering, as more
fully disclosed in the Companys Registration Statement. During 2008 and the nine months ended
September 30, 2009, the Company reimbursed its Advisor and affiliated entities approximately
$2,631,000. As of September 30, 2009, the Advisor and affiliated entities have incurred $2,419,000
in excess of the
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12.34% limitation on organizational and offering costs. The Company is not obligated to
reimburse the Advisor or other affiliated entities any amount above 12.34% of gross offering
proceeds.
Specific Performance
When SPT-SWRC, LLC purchased the Pulte Home Project on December 31, 2008, SPT-SWRC, LLC agreed
as a condition of ownership to assume responsibility of a specific performance requirement as
detailed in the Reconveyance Agreement, an assignment of which was an exhibit in the original
Purchase Agreement. The requirement obligates SPT-SWRC, LLC to complete specific development
requirements on adjacent parcels of land not owned by SPT-SWRC, LLC. Currently the primary obligor
of this specific development requirement is Khalda, through their
purchase of said property from SPT-SWRC, LLC on March 20, 2009 and subsequent assumption of the
Reconveyance Agreement. If Khalda Development Inc. fails to perform its obligations under the
assumed Reconveyance Agreement, then the obligee could look to SPT-SWRC, LLC as a remedy.
The monetary exposure under these obligations, if any, to SPT-SWRC, LLC cannot be determined
at this time.
10. REGISTRATION STATEMENT
The Company filed Post Effective Amendment No. 5 to our registration statement on Form S-11
for the Companys ongoing initial public offering with the SEC on August 17, 2009. The August 24,
2009 the SEC declared our Post Effective Amendment No. 5 to our registration statement on Form S-11
for our on-going initial public offering effective which extends our offering period through August
29, 2010.
11. SUBSEQUENT EVENTS
Note Receivable
On
or about October 12, 2009, the Company was informed that on September 28, 2009 a Notice of
Default and Election to Sell Under Deed of Trust (NOD) was recorded on behalf of East West Bank,
as beneficiary (East West Bank), with respect to a senior deed of trust securing certain
obligations of Mesquite Venture I, LLC (Borrower) to East West Bank, including without limitation
indebtedness under a promissory note in the initial principal amount of $3,681,000 (the Senior
Loan). The NOD was filed due Borrowers failure to pay the August 1, 2009 installment of principal
and interest and all subsequent installments of principal and interest under the Senior Loan. The
Borrower also has failed to pay a loan extension fee due to the Company on October 1, 2009, under
the $600,000 loan made by the Company to Borrower (Mesquite Loan). As a result of Borrowers
default on the Senior Loan, and on the Mesquite Loan, the Company is in the process of providing a
default notice to Borrower and accelerating the indebtedness under the Mesquite Loan. While the
Company may have the right to reinstate the Senior Loan under applicable documents or applicable
law, it does not presently intend to do so. The Company does intend to sue on the personal
guarantees obtained in connection with the Mesquite Loan.
Management is in the process of evaluating
this situation but believes that the Borrower, who is currently negotiating with East West Bank, will
be successful in its discussions and will ultimately cure both the NOD filed by East West Bank and the
payment default on the Companys note receivable. Management believes that the full amount of the notes
receivable is still collectible and as such, did not establish a reserve against the note receivable as
of September 30, 2009.
Proposed Acquisition
On
October 15, 2009, SPT - Lake Elsinore Holding Co., LLC entered into a
second amendment to purchase and sale agreement and joint escrow
instructions with TSG Little Valley. This second amendment to
purchase and sale agreement and joint escrow instructions amended the
original purchase and sale agreement and joint escrow instructions
dated September 30, 2008 as previously amended to provide that
$2,900,000 of the purchase price would be paid by SPT - Lake Elsinore
Holding Co., LLCs execution and delivery into escrow of (a) an
all-inclusive purchase money note secured by deed of trust in favor
of TSG Little Valley as Payee therein, in the principal amount of
$2,900,000, and (b) an all-inclusive deed of trust executed by SPT -
Lake Elsinore Holding Co., LLC in favor of TSG Little Valley as
beneficiary therein, securing the foregoing all-inclusive purchase
money note. On October 15, 2009, SPT - Lake Elsinore Holding Co., LLC
entered into a restated second amendment to purchase and sale
agreement and joint escrow instructions with TSG Little Valley. This
restated second amendment to purchase and sale agreement and joint
escrow instructions with TSG Little Valley was entered into for the
sole purpose of correcting a signature block.
On November 5, 2009,
SPT-Lake Elsinore Holding Co., LLC closed on the purchase of real property from
TSG Little Valley consisting of 519 entitled but unimproved residential lots and 2 commercial lots
located in the City of Lake Elsinore, California and 400 acres of unentitled and unimproved land
suitable for mitigation located in the City of Chino Hills, California.
Other
On November 3, 2009, pursuant to SEC Rule 17a-11, Shopoff Securities, Inc. (the
firm), the Companys broker dealer for its ongoing initial public offering, became aware of a net
capital deficiency. The firm operates under the SEC rule 15c3-3 exemption and has a minimum net
capital requirement of $5,000. The firm
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currently had $1,394 in net capital which was deficient of the minimum net capital requirement by
$3,606. The firm took the following steps to correct this matter: The firm ceased all securities
business and informed the Financial Industry Regulatory Authority, its designated examining authority, of the net capital violation. The
deficiency had not been corrected at
the time of the filing of this report.
Subsequent to September 30, 2009, additional organization and offering costs totaling
approximately $26,096 were incurred by the Advisor and its affiliates on behalf of the Company.
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
Overview
You should read the following discussion and analysis together with our condensed consolidated
financial statements and notes thereto included in this Quarterly Report on Form 10-Q. The
following information contains forward-looking statements, which are subject to risks and
uncertainties. Should one or more of these risks or uncertainties materialize, actual results may
differ materially from those expressed or implied by the forward- looking statements. Please see
Special Note Regarding Forward-Looking Statements below for a description of these risks and
uncertainties.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements included in this quarterly report on Form 10-Q are forward-looking
statements within the meaning of the federal securities laws which are intended to be covered by
the safe harbors created by those laws. Historical results and trends should not be taken as
indicative of future operations. 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; legislative/regulatory
changes, including changes to laws governing the taxation of REITs; availability of capital;
interest rates; our ability to service our debt; competition; supply and demand for undeveloped
land and other real estate in our proposed market areas; the prospect of a continuing relationship
with Shopoff Advisors; changes in accounting principles generally accepted in the United States of
America; and policies and guidelines applicable to REITs. These risks and uncertainties should be
considered in evaluating forward- looking statements and undue reliance should not be placed on
such statements. Although we believe the assumptions underlying the forward-looking statements, and
the forward-looking statements themselves, are reasonable, any of the assumptions could be
inaccurate and, therefore, there can be no assurance that these forward-looking statements will
prove to be accurate. In light of the significant uncertainties inherent in these forward-looking
statements, such information should not be regarded as a representation by us or any other person
that any of our objectives and plans, which we consider to be reasonable, will be achieved.
Company Overview
We are a Maryland corporation that intends to qualify as a real estate investment trust, or
REIT, beginning with the taxable year ended December 31, 2010. On November 30, 2006, we filed a
registration statement on Form S-11 (File No. 333-139042) with the SEC to offer a minimum of
1,700,000 shares and a maximum of 20,100,000 shares of common stock for sale to the public. The SEC
declared the registration statement effective on August 29, 2007, and we then launched our on-going
initial public offering. We sold the minimum offering of 1,700,000 shares on August 29, 2008, at
$9.50 per share. As of September 30, 2009 we had sold 1,851,400 shares of common stock for $17,588,300,
excluding shares purchased by the Sponsor. Once 2,000,000 shares are sold, the offering price will
increase to $10.00 per share until an additional 18,100,000 shares of common stock are sold.
We filed a Post-Effective Amendment No. 1 to our registration statement on April 30, 2008. The
SEC declared our Post-Effective Amendment No. 1 to our registration statement on Form S-11 for our
on-going initial public offering effective on May 13, 2008.
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We filed a Post-Effective Amendment No. 2 to our registration statement on January 21, 2009.
The SEC declared our Post-Effective Amendment No. 2 to our registration statement on Form S-11 for
our on-going initial public offering effective on February 9, 2009.
We filed a Post-Effective Amendment No. 3 to our registration statement on May 1, 2009 and
amended it as Post-Effective Amendment No. 4 on May 21, 2009.
The SEC declared that our Post-Effective Amendment No. 4 to our registration statement on Form
S-11 for our on-going initial public offering effective on May 27, 2009.
We filed a Post-Effective Amendment No. 5 to our registration statement on August 17, 2009.
The SEC declared our Post-Effective Amendment No. 5 to our registration statement on Form S-11 for
our on-going initial public offering effective on August 24, 2009.
On December 31, 2008, the Company acquired its first real estate property; as such, management
believes that the Company commenced its planned principal operations and transitioned from a
development stage enterprise to an active company.
We have used and will continue to use the proceeds of our on-going initial public offering to
acquire undeveloped real estate assets that present value-added opportunities or other
opportunistic investments for our stockholders, to obtain entitlements on such opportunities if
applicable, and to hold such assets as long-term investments for eventual sale. Entitlements is
an all inclusive term used to describe the various components of our value added business plan. We
will undertake various functions to enhance the value of our land holdings, including land planning
and design, engineering and processing of tentative tract maps and obtaining required environmental
approvals. All of these initial entitlements are discretionary actions as approved by the local
governing jurisdictions. The subsequent entitlement process involves obtaining federal, state, or
local biological and natural resource permits if applicable. Federal and state agencies may include
the U.S. Army Corps of Engineers, the U.S. Fish and Wildlife Service, state wildlife, or others as
required. By obtaining these approvals or entitlements, we can remove impediments for development
for future owners and developers of the projects. It is through this systematic process that we
believe that we can realize profits for our investors by enhancing asset values of our real estate
holdings. The majority of the property acquired will be located primarily in the States of
California, Nevada, Arizona, Hawaii and Texas. If market conditions dictate and if approved by our
board of directors, we may invest in properties located outside of these states. On a limited
basis, we may acquire interests in income producing properties and ownership interests in firms
engaged in real estate activities or whose assets consist of significant real estate holdings,
provided these investments meet our overall investment objectives. We plan to own substantially all
of our assets and conduct our operations through our Operating Partnership, or wholly owned
subsidiaries of the Operating Partnership. Our wholly owned subsidiary, Shopoff General Partner,
LLC, is the sole general partner of the Operating Partnership. We have no paid employees. The
Advisor conducts our operations and manages our portfolio of real estate investments.
The recent focus of our acquisitions has been on distressed or opportunistic property
offerings. At our inception, our focus was on adding value to property through the entitlement
process, but the current real estate market has generated a supply of real estate projects that are
all partially or completely developed versus vacant, undeveloped land. This changes the focus of
our acquisitions to enhancing the value of real property through redesign and engineering
refinements and removes much of the entitlement risk that we expected to undertake. Although
acquiring distressed assets at greatly reduced prices from the peaks of 2005-2006 does not guaranty
us success, we believe that it does allow us the opportunity to acquire more assets than previously
contemplated.
We believe there will be continued distress in the real estate market in the near term and
expect this to put downward pressure on near term prices. Our view of the mid to long term is more
positive, and we expect property values to improve over the four- to ten-year time horizon. Our
plan is to be in a position to capitalize on these opportunities for capital appreciation.
Through September 30, 2009, we had purchased four properties, one of which was subsequently
sold on March 20, 2009 and had originated three secured real estate loans, two of which were
subsequently converted to real estate owned on September 4, 2009 as a result of settlement
negotiations between the obligor and us. We had one property in escrow as of September 30, 2009. We
have placed no additional properties in escrow since September 30, 2009.
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The number of properties that we will acquire will depend upon the number of shares sold and
the resulting amount of the net proceeds available for investment in properties. Until more
arrangements are made to acquire properties and real estate-related investments, we will keep the
net proceeds of this offering in short-term, liquid investments.
A portion of the proceeds of our on-going offering will be reserved to meet working capital
needs and contingencies associated with our operations. We believe this reserve allocation will aid
our objective of preserving capital for our investors by supporting the maintenance and viability
of properties we acquire in the future. We will initially allocate to our working capital reserve
not less than 0.5% and not more than 5% of the gross proceeds of the offering (assuming we raise
the maximum offering). As long as we own any undeveloped real estate assets, we will retain as
working capital reserves an amount equal to at least 0.5% and not more than 5% of the gross
proceeds of the offering, subject to review and re-evaluation by the board of directors. If
reserves and any available income become insufficient to cover our operating expenses and
liabilities, it may be necessary to obtain additional funds by borrowing, refinancing properties
and/or liquidating our investment in one or more properties. There is no assurance that such funds
will be available or, if available, that the terms will be acceptable to us.
We intend to make an election to be taxed as a REIT under Section 856(c) of the Internal Revenue
Code for our tax year ending December 31, 2010. In order to qualify as a REIT, we must distribute
to our stockholders each calendar year at least 90% of our taxable income, excluding net capital
gains. If we qualify as a REIT for federal income tax purposes, we generally will not be subject to
federal income tax on income that we distribute to our stockholders. If we fail to qualify as a
REIT in any taxable year, we will be subject to federal income tax on our taxable income at regular
corporate rates and will not be permitted to qualify as a REIT for four years following the year in
which our qualification is denied. Such an event could materially and adversely affect our net
income (if any) and results of operations.
Results of Operations
Although we are in our
first full calendar year of operations and
have made several acquisitions without the use of capital from outside investment firms, we contemplate using
capital from these outside investment firms in the coming years to grow the Companys investment base.
As such our results of operations as of the date of this report are not indicative of those expected in future periods.
In addition, our results of operations for the
three and nine months ended September 30, 2009 are not comparable to those of the same periods in
2008.
Through September 30, 2009, we have acquired four properties and sold one property. The first
property was purchased on December 31, 2008 for an amount of $2,000,000 and we incurred closing and
related costs of approximately $614,000 including $476,774 in reconveyance costs. This property was
subsequently sold on March 20, 2009 for $5,000,000 and the Company has recognized a gain on the
sale of approximately $2,070,000. The second property was purchased on April 17, 2009 for an amount
of $650,000 and we incurred closing and related costs of approximately $45,000. The third property
was purchased on May 19, 2009, for an amount of $1,650,000 and we incurred closing and related
costs of approximately $60,000. The fourth property was purchased on July 31, 2009, for an amount
of $3,000,000 which included a seller note carry back of $2,000,000 and we incurred closing and
related costs of approximately $1,482.
Through September 30, 2009, we have originated three secured real estate loans receivable: one
in an amount of $600,000 to one borrower and two separate loans to a second borrower in the
aggregate amount of $2,300,000. The two separate loans to a second borrower in the aggregate amount
of $2,300,000 were converted to real estate owned on September 4, 2009 when we took title to the
underlying real estate serving as collateral for the two loans. The $600,000 secured real estate
loan receivable incurred zero closing costs as all title, escrow and attorney fees were paid for by
the borrower through escrow. As of September 30, 2009, from the $600,000 loan we have received
$63,000 in interest income, accrued interest receivable of $21,173, paid an acquisition fee of
$18,000, or 3% of the contract price to the Advisor, which was paid to SPT Real Estate Finance, LLC
upon the closing of escrow on September 30, 2008, and paid the Advisor asset management fees of
$12,000. As of September 30, 2009, prior to the conversion of the two separate loans aggregating
$2,300,000 to real estate owned, we had accrued $324,647 in interest income, paid an acquisition
fee of $69,000, or 3% of the contract price to the Advisor, which was paid upon the closing of
escrow on January 9, 2009, and paid the Advisor asset management fees of $26,833. As of September
30, 2009, since the conversion of the two separate loans aggregating $2,300,000 to real estate
owned, we paid the Advisor asset management fees of $4,374.
Revenue for the three months ended September 30, 2009 approximated $78,000. These revenues
consisted primarily of interest income on real estate loan receivables, interest income on cash and
cash equivalents on deposit at financial institutions and a loan fee from the extension of a loan
maturity on an existing note receivable.
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Expenses for the three months ended September 30, 2009 approximated $770,000. These expenses
consisted primarily of cost of sales on real estate sold, stock compensation on restricted stock
grants and stock options issued to directors and executive officers of the Company, due diligence
expenses incurred on potential real estate and real estate-related acquisitions which were not
acquired by us, dues and subscriptions, professional fees, insurance premiums, independent director
fees, and other general and administrative expenses. We expect expenses to increase in the future
based on a full year of real estate operations, as well as from the increased activity as we make
real estate investments and we expect these expenses to increase as a percentage of total revenue
as our cash from subscribed stock is deployed in real estate investments held for long term capital
appreciation.
For the three months ended September 30, 2009, we had a net loss before income taxes of
$643,625. This net loss was comprised of interest received from our secured real estate loan
receivables, interest received by us on stock subscriptions and a loan fee from a loan extension on
an existing note receivable, offset by the cost of sales relating to the sale of our real estate
investment, general and administrative costs, consisting primarily of stock compensation on
restricted stock grants and stock options issued to directors and executive officers of the
Company, insurance premiums, independent director fees, printing, dues and subscriptions,
professional fees, asset management fees, and due diligence expenses incurred on potential real
estate and real estate-related acquisitions which were not acquired
by us, and a credit on an income tax provision previously recognized.
The Company recognized
a provision for income taxes of $67,818 for the nine months ended
September 30, 2009 as a result of the Company recognizing profits for the first time during the
three months ended March 31, 2009 primarily from the sale of a real estate investment. The Company
was not required to recognize a provision for income taxes prior to the three months ended March
31, 2009.
Comparison of Three Months Ended September 30, 2009 to Three Months Ended September 30, 2008
Total revenues. Total revenues increased by $27,430, or 54.7% to $77,557 for the three months
ended September 30, 2009 compared to $50,127 for the three months ended September 30, 2008. The
significant components of revenue are discussed below.
Interest income, notes receivable. This caption represents revenues earned from the
origination of secured real estate loans. We earned $42,345 in interest income-notes receivable for
the three months ended September 30, 2009 compared to $0 for the three months ended September 30,
2008. The Company had not originated or invested in any secured real estate loans as of September
30, 2008.
Interest income and other. This caption represents revenues earned from the interest earned on
cash held in escrow accounts, operating accounts, savings accounts, certificates of deposits, or
other similar investments. Interest income and other decreased $44,915, or 89.6% to $5,212 for the
three months ended September 30, 2009 compared to $50,127 for the three months ended September 30,
2008. The decrease was primarily related to the reduction in the amount of cash available for
temporary investments due to the use of Company cash to make real estate and real estate-related
investments and for the payment of Company operating expenses.
Loan Fees. This caption represents origination fees earned from investments in secured real
estate loans. We earned $30,000 in loan fees for the three months ended September 30, 2009 compared
to $0 for the three months ended September 30, 2008. The Company had not originated any secured
real estate loans as of September 30, 2008.
Total expenses. Total expenses increased by $56,709, or 8.0% to $769,845 for the three months
ended September 30, 2009 compared to $713,137 for the three months ended September 30, 2008. The
significant components of expense are discussed below.
Due diligence on properties not acquired. Due diligence on properties not acquired decreased
$593,331 or 99.7% to $1,687 for the three months ended September 30, 2009 compared to $595,018 for
the three months ended September 30, 2008. The decrease was primarily related to (i) a reduction in
the number of potential real estate investments reviewed by the Company and (ii) the implementation
of condensed evaluation procedures for potential real estate investments resulting in a more
efficient and economical underwriting process.
Stock based compensation. This caption represents restricted stock grants, stock options, and
other share based compensation authorized by the Companys board of directors. We incurred $474,556
in stock based compensation for the three months ended September 30, 2009 compared to $0 for the
three months ended September 30, 2008. The Company had not issued any stock options nor incurred
any other share based compensation expense as of September 30, 2008.
Cost of goods sold. Cost of goods sold represents direct costs attributable to the investment
in the goods sold by the Company, in our case un-developed and under developed real estate assets.
We incurred $51,920 in cost of goods sold for the three months ended September 30, 2009 compared to
$0 for the three months ended September 30, 2008. The Company had not made any real estate
investments as of September 30, 2008.
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Dues and Subscriptions. Dues and subscriptions represent fees paid by the Company for
membership in and benefits from various real estate and real estate-related organizations. We
incurred $37,008 in dues and subscriptions for the three months ended September 30, 2009 compared
to $0 for the three months ended September 30, 2008. The Company had not entered into any
contractual arrangements in any real estate or real estate-related organizations as of September
30, 2008.
Insurance. Insurance increased by $11,007, or 26.7% to $52,175 for the three months ended
September 30, 2009 compared to $41,168 for the three months ended September 30, 2008. The increase
was primarily due to one extra payment of directors and officers insurance premium in 2009 as
compared to 2008. The one extra payment of directors and officers insurance premium in 2009 as
compared to 2008 was due to the Company not binding coverage until August 2008 when the Company met
its minimum offering requirement breaking escrow and beginning operations.
Professional fees. Professional fees increased by $36,644, or 77.3% to $84,038 for the three
months ended September 30, 2009 compared to $47,394 for the three months ended September 30, 2008.
The increase was primarily due to the Company engaging an independent third-party consultant to
assist the Company with its Sarbanes-Oxley documentation.
Director compensation. Director compensation increased by $24,656, or 151.5% to $40,614 for
the three months ended September 30, 2009 compared to $15,958 for the three months ended September
30, 2008. The increase was primarily due to the accrual of director compensation over three months
for the three months ended September 30, 2009 as compared to only one month for the three months
ended September 30, 2008 as directors did not begin earning compensation until the Company broke
escrow and began operations which occurred on August 29, 2008.
General and Administrative. General and administrative costs increased by $14,247, or 104.8%
to $27,846 for the three months ended September 30, 2009 as compared to $13,599 for the three
months ended September 30, 2008. The increase was primarily due to (i) a higher number of SEC
filings during the three months ended September 30, 2009 as compared to the three months ended
September 30, 2008 resulting in higher printing expenses and (ii) depreciation expense incurred on
Company purchased software that existed in the three months ended September 30, 2009 which had not
occurred during the three months ended September 30, 2008.
Provision
for income taxes.
This caption represents the amount on the condensed consolidated statement of operations that estimates the Companys
total income tax liability for the year. We incurred $(48,663) in provision for income taxes for the three months
ended September 30, 2009 compared to $0 for the three months ended September 30, 2008. The Company sold its first
real estate investment during the three months ended March 31, 2009 and recognized an income tax provision which
has been revised downwards due to a change in the overall projections of Company earnings for the calendar year
ending 2009.
Comparison of Nine Months Ended September 30, 2009 to Nine Months Ended September 30, 2008
Total revenues. Total revenues increased by $5,376,458, or 7339.7% to $5,449,710 for the nine
months ended September 30, 2009 compared to $73,252 for the nine months ended September 30, 2008.
The significant components of revenue are discussed below.
Sale of real estate. This caption represents revenues earned from the disposition of real
estate and real estate-related investments. We earned $5,000,000 for the nine months ended
September 30, 2009 compared to $0 for the nine months ended September 30, 2008 when in March 2009,
the Company sold its first real estate asset known as the Pulte Home project originally purchased
in December 2008 to Khalda. The Company did not own any real estate or real estate-related assets
as of September 30, 2008.
Interest income, notes receivable. This caption represents revenues earned from the
origination of secured real estate loans. We earned $387,819 in interest income-notes receivable
for the nine months ended September 30, 2009 compared to $0 for the nine months ended September 30,
2008. The Company had not originated or invested in any secured real estate loans as of September
30, 2008.
Interest income and other. This caption represents revenues earned from the interest earned on
cash held in escrow accounts, operating accounts, savings accounts, certificates of deposits, or
other similar investments. Interest income and other decreased $41,362, or 56.5% to $31,890 for the
nine months ended September 30, 2009 compared to $73,252 for the nine months ended September 30,
2008. The decrease was primarily related to the reduction in the amount of cash available for
temporary investments due to the use of Company cash to make real estate and real estate-related
investments and for the payment of Company operating expenses.
Loan Fees. This caption represents origination fees earned from investments in secured real
estate loans. We earned $30,000 in loan fees for the nine months ended September 30, 2009 compared
to $0 for the nine months ended September 30, 2008. The Company had not originated any secured real
estate loans as of September 30, 2008.
Total
expenses. Total expenses increased by $3,596,669, or 392.7% to
$4,512,558 (including a
provision for income taxes of $67,818), for the nine months ended September 30, 2009 compared to
$915,889 for the nine months ended September 30, 2008. The significant components of expense are
discussed below.
Due diligence on properties not acquired. Due diligence on properties not acquired decreased
$561,071 or 94.3% to $33,947 for the nine months ended September 30, 2009 compared to $595,018 for
the nine months ended September 30, 2008. The decrease was primarily related to (i) a reduction in
the number of potential real estate investments reviewed by the Company and (ii) the implementation
of condensed evaluation procedures for potential real estate investments resulting in a more
efficient and economical underwriting process.
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Stock based compensation. This caption represents restricted stock grants, stock options, and
other share based compensation authorized by the Companys board of directors. We incurred $474,556
in stock based compensation for the nine months ended September 30, 2009 compared to $0 for the
nine months ended September 30, 2008. The Company had not issued any stock options nor incurred any
other share based compensation expense as of September 30, 2008.
Cost of goods sold. Cost of goods sold represents direct costs attributable to the investment
in the goods sold by the Company, in our case un-developed and under developed real estate assets.
We incurred $2,958,928 in cost of goods sold for the nine months ended September 30, 2009 compared
to $0 for the nine months ended September 30, 2008. The Company had not made any real estate
investments as of September 30, 2008.
Acquisition
Fees. Acquisition fees represent compensation paid to our Advisor for services
provided to us during the identification, negotiation, underwriting, and purchase of our real
estate-related investments. We incurred $69,000 in acquisition fees for the nine months ended
September 30, 2009 paid to the Advisors for services rendered in originating two secured real
estate loans compared to $0 for the nine months ended September 30, 2008.
Dues and Subscriptions. Dues and subscriptions represent fees paid by the Company for
membership in and benefits from various real estate and real estate-related organizations. We
incurred $124,802 in dues and subscriptions for the nine months ended September 30, 2009 compared
to $0 for the nine months ended September 30, 2008. The Company had not entered into any
contractual arrangements in any real estate or real estate-related organizations as of September
30, 2008.
Insurance. Insurance increased by $10,992, or 7.2% to $163,779 for the nine months ended
September 30, 2009 compared to $152,787 for the nine months ended September 30, 2008. The increase
was primarily due to one extra payment of directors and officers insurance premium in 2009 as
compared to 2008. The one extra payment of directors and officers insurance premium in 2009 as
compared to 2008 was due to the Company not binding coverage until August 2008 when the Company met
its minimum offering requirement breaking escrow and beginning operations.
Professional fees. Professional fees increased by $230,697, or 207.5% to $341,897 for the nine
months ended September 30, 2009 compared to $111,200 for the nine months ended September 30, 2008.
The increase was primarily due to (i) the Company engaging an independent third-party consultant to
assist the Company with its Sarbanes-Oxley documentation and (ii) more extensive annual 10-K and
10-Q reporting periods in 2009 as compared to 2008 resulting in higher accounting and legal fees.
Director
compensation. Director compensation increased by $101,475, or
635.9% to $117,433 for
the nine months ended September 30, 2009 compared to $15,958 for the nine months ended September
30, 2008. The increase was primarily due to the accrual of director compensation over nine months
for the nine months ended September 30, 2009 as compared to only one month for the nine months
ended September 30, 2008 as directors did not begin earning compensation until the Company broke
escrow and began operations which occurred on August 29, 2008.
General and Administrative. General and administrative costs increased by $119,472, or 291.9%
to $160,398 for the nine months ended September 30, 2009 as compared to $40,926 for the nine months
ended September 30, 2008. The increase was primarily due to (i) a higher number of SEC filings
during the nine months ended September 30, 2009 as compared to
the nine months ended September
30, 2008 resulting in higher printing expenses, (ii) depreciation expense incurred on Company
purchased software that existed in the nine months ended September 30, 2009 which had not occurred
during the nine months ended September 30, 2008 and (iii) a higher level of asset management fees
paid on real estate-related investments under management by Shopoff Advisor in 2009 as compared to
2008.
Provision for income taxes. This caption represents the amount on the condensed consolidated
statement of operations that estimates the Companys total income tax liability for the year. We
incurred $67,818 in provision for income taxes for the nine months ended September 30, 2009
compared to $0 for the nine months ended September 30, 2008. The Company sold its first real estate
investment during the three months ended March 31, 2009.
Recent Market Developments
There have been historic disruptions in the financial system during the year 2008, the effects
of which are continuing. The recent failure of large U.S. financial institutions and the resulting
turmoil in the U.S. and global financial sector has had, and will likely continue to have, a
negative impact on the terms and availability of credit and the state of the economy generally
within the U.S.
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It is presently unclear what impact the recent regulatory, legislative and policy initiatives
will have on the financial markets, the U.S. banking and financial industries, and the broader U.S.
and global economies. To the extent the market does not respond favorably to the recent regulatory,
legislative and policy initiatives real estate companies, such as ours, may have difficulty
securing mortgage debt at reasonable rates or at all. In addition, while the economic downturn may
present opportunities for us to acquire assets that are undervalued, this opportunity is hampered
by the increased cost of capital and uncertainty as to when the markets will stabilize.
Organization and Offering Costs
Our organization and offering costs may be paid by the Advisor, our broker-dealer and their
affiliates on our behalf. These organization and offering costs include all expenses to be paid by
us in connection with our ongoing initial public offering, including but not limited to (i) legal,
accounting, printing, mailing, and filing fees; (ii) charges of the escrow holder; (iii)
reimbursement to the advisor for other costs in connection with preparing supplemental sales
materials; (iv) the cost of educational conferences held by us (including the travel, meal, and
lodging costs of registered representatives of broker-dealers); and (v) reimbursement to the
broker-dealer for travel, meals, lodging, and attendance fees incurred by employees of the
broker-dealer to attend retail seminars conducted by broker-dealers.
Pursuant to the advisory agreement and the broker-dealer agreement, we are obligated to
reimburse the Advisor, the broker-dealer or their affiliates, as applicable, for organization and
offering costs paid by them on our behalf, provided that the advisor is obligated to reimburse us
to the extent the organization and offering costs incurred by us in the offering exceed 12.34% of
our gross offering proceeds. The Advisor and its affiliates have incurred on our behalf
organization and offering costs of $5.050 million through September 30, 2009. Such costs are only a
liability to us to the extent the organization and offering costs do not exceed 12.34% of the gross
proceeds of the offering. From commencement of our ongoing initial public offering through
September 30, 2009, we had sold 1,851,400 shares for gross offering proceeds of $17.588 million,
excluding shares purchased by the Sponsor and recorded organization and offering costs of $2.631
million.
Liquidity and Capital Resources
We broke escrow in our on-going initial public offering on August 29, 2008 and commenced real
estate operations with the acquisition of our first material real estate investment on December 31,
2008. This first real estate investment was sold on March 20, 2009 for $5,000,000. We are offering
and selling to the public up to 2,000,000 shares of our common stock, $.01 par value per share, at
$9.50 per share and 18,100,000 shares of our common stock, $.01 par value per share, at $10.00 per
share. As of September 30, 2009, we had sold and accepted 1,851,400 shares of our common stock for
$17,588,300 excluding shares issued to the Sponsor and excluding vested restricted stock grants
issued to certain officers and directors. As of September 30, 2009 we had received but had not yet
accepted, additional subscriptions for the sale of 4,600 shares of our common stock at a price of
$9.50 per share.
Our principal demand for funds is and will be for the acquisition of undeveloped real estate
properties and other real estate-related investments, the payment of operating and general and
administrative expenses, capital expenditures and payments under debt obligations when applicable.
We did not pay any distributions to stockholders for the nine months ended September 30, 2009.
As of September 30, 2009,
our liabilities totaled $297,814 and consisted of accounts payable
and accrued liabilities, and due to related parties. We have sufficient
liquidity to meet these current obligations as disclosed.
As a result of the closing of a proposed acquisition that occurred subsequent to September 30, 2009
and discussed further in Notes 8 and 11 of the notes to condensed consolidated financial
statements, a substantial portion of our remaining liquidity as of September 30, 2009 was utilized.
Management believes that it will be able to raise additional capital for the Company through one or
more potential sources including additional common stock sales, re-capitalization via a
co-investment joint venture relationship, the sale of an asset
currently owned by the Company and or
securing appropriate longer-term debt.
Cash Flows
We had limited operations during the nine months ended September 30, 2008, because our
registration statement was not declared effective with the SEC until August 29, 2007 and the
Company did not meet the minimum offering requirement of the sale of 1,700,000 shares of common
stock until August 29, 2008. Until the Company met the minimum offering requirement, all proceeds
raised from the offering were held in an escrow account at Wells Fargo Bank N.A. We were designated
as a development stage enterprise as a result of our limited operations for the nine months ended
September 30, 2008. We transitioned from a development stage enterprise in the three months ended
December 31, 2008 and began active operations upon the acquisition of our first property on
December 31, 2008.
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The following is a comparison of the main components of our statements of cash flows for the
nine months ended September 30, 2009 to the nine months ended September 30, 2008:
Cash
From Operating Activities
We
used $597,928 in operating activities for the nine months ended September 30, 2009
compared to $983,932 that was used in operating activities for the nine months ended September 30,
2008. This $597,928 was comprised of an operating gain of $937,151 comprised primarily of revenue
from the sale of real estate of $5,000,000, interest income on secured notes receivable of
$387,819, interest income of $31,890 from subscription proceeds, a loan fee from the extension of a
loan maturity on an existing note receivable of $30,000, cost of sales of real estate of $2,958,928, stock
compensation expense from restricted stock grants and stock options issued to directors and
executive officers of $474,556, due diligence costs related to projects not acquired of $33,947,
dues and subscriptions of $124,802, professional fees of $341,897, insurance expenses of $163,779,
acquisition fees of $69,000, general and administrative expenses of $160,398, director compensation
expenses of $117,433 and a provision for income taxes of $67,818, a decrease in the amount owed to
related parties of $117,580, an increase in accounts payable and accrued liabilities of $218,663,
an increase in prepaid expenses and other assets of
$58,565, gain on sale of real estate investment of $2,069,914 and
depreciation expense of $17,761.
Cash
From Investing Activities
We
used $671,823 in investing activities for the nine months ended September 30, 2009
compared to $537,000 that was used in investing activities for the nine months ended September 30,
2008. This $671,823 was a result of originating two loans secured by real estate in the amount of
$2,300,000, accruing interest on the two loans secured by real estate of $324,647, obtaining the
underlying real estate serving as collateral for the two loans via two separate Memoranda of
Assignment of Note, Deed of Trust and Loan Documents and Settlement Agreements with the borrowers
on the loans and then incurring other property related expenses of $96,142, a reduction in prepaid
interest of $42,000 on a third loan secured by real estate, the accruing of interest of $21,173 on
a third loan secured by real estate, the sale of one real estate property for $5,000,000, related
project costs to the one real estate property sold in the amount of $315,953, the reduction of
deposits in the amount of $1,300,000, $2,300,000 which was originally placed into an escrow account
for a real estate-related investment that has been made by us and a separate $1,000,000 deposit
which has been placed into an escrow account for the purchase of a real estate investment that has
not yet been acquired by us, the purchase of three properties and related acquisition and other
property related expenses of $3,791,128 and the capitalization of expenses related to the purchase
of property and equipment of $80,781.
Cash
From Financing Activities
We used $333,566 in financing activities for the nine months ended September 30, 2009 compared
to $14,977,565 that was provided by financing activities for the nine months ended September 30,
2008. The $333,566 was primarily comprised of the reimbursement to the Sponsor of $477,965 in
organization and offering expenses, the issuance of common stock to subscribes of $144,400, the
receipt of $43,700 in stock subscriptions, and $43,701 in restricted cash comprised of subscription
proceeds and related interest, which were not accepted by us as of September 30, 2009.
Our principal demands for cash will be for property acquisitions and the payment of our
operating and administrative expenses, future debt service obligations and distributions to our
stockholders. Generally, we will fund our property acquisitions from the net proceeds of our public
offering. We intend to acquire properties with cash and mortgage or other debt, but we may acquire
properties free and clear of permanent mortgage indebtedness by paying the entire purchase price
for properties in cash. Due to the delays between the sales of our shares, our acquisition of
properties, and the subsequent disposition of properties, there will be a delay, potentially a
number of years, in the benefits to our stockholders, if any, of returns generated from our
investments.
As we have acquired limited properties, our management is not aware of any material trends or
uncertainties, favorable or unfavorable, other than the global and regional economic crisis
affecting real estate generally, which may be reasonably anticipated to have a material impact on
capital resources necessary for the entitlement of our properties.
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Our ability to finance our operations is subject to several uncertainties including those
discussed above under Recent Market Developments and under Risk Factors, and accordingly, we
cannot guarantee that we will have adequate cash from this offering in order to fund our operating
and administrative expenses, any future debt service obligations and any future payment of
distributions to our stockholders. Our ability to ultimately sell our real estate investments is
partially dependent upon the condition of real estate markets at the time we are prepared to sell
and the ability of purchasers to obtain financing at reasonable commercial rates.
Potential future sources of capital include secured and unsecured financings from banks or
other lenders, establishing additional lines of credit, proceeds from the sale of properties and
undistributed cash flow. However, we currently have not identified any additional sources of
financing and there is no assurance that such sources of financings will be available on favorable
terms or at all.
Distributions
We have not paid any distributions as of September 30, 2009. Our board of directors will
determine the amount of distributions, if any, to be distributed to our stockholders. The boards
determination will be based on a number of factors, including funds available from operations, our
capital expenditure requirements and the annual distribution requirements necessary to maintain our
REIT status under the Internal Revenue Code. Because we expect that the majority of the properties
we acquire will not generate any operating cash flow, the timing and amount of any dividends paid
will be largely dependent upon the sale of acquired properties. Accordingly, it is uncertain as to
when, if ever, dividends will be paid. Our stockholders should have the expectation that no
substantial income will be generated from our operations for at least four years from the time we
begin property acquisitions.
Investment Strategy
Our initial primary business focus was to buy, hold and sell undervalued, undeveloped
non-income producing real estate assets and to generate returns to our stockholders upon
disposition of such properties (although as described below, our recent focus has been on
distressed or opportunistic property offerings). The land acquired may have been zoned for
residential, commercial or industrial uses. Our strategy is to invest in properties with the
following attributes:
| the potential for an annual internal rate of return in excess of 30% on a compounded basis; | ||
| the potential for a sharp increase in value due to such factors as a recent or potential future zoning change or other opportunity where a property might lie in the path of progress; | ||
| characteristics of the property enable us to ascertain that we could purchase the property at a discount from current market value; | ||
| geographic location in California, Nevada, Arizona, Hawaii, or Texas; | ||
| potential for capital appreciation; | ||
| potential for economic growth in the community in which the property is located; | ||
| prospects for liquidity through sale, financing or refinancing of the property; | ||
| moderate competition from existing properties; | ||
| location in a market in which we have familiarity based upon past experience or we have an advantage based upon our experience in repositioning properties; | ||
| potential for development of the property into income property. |
The recent focus of our acquisitions has been on distressed or opportunistic property
offerings. At our inception, our focus was on adding value to property through the entitlement
process, but the current real estate market has generated a supply of real estate projects that are
all partially or completely developed versus vacant, undeveloped land. This changes the focus of
our acquisitions to enhancing the value of real property through redesign and engineering
refinements and removes much of the entitlement risk that we expected to undertake. Although
acquiring distressed assets at greatly reduced prices from the peaks of 2005-2006 does not guaranty
us success, we believe that it does allow us the opportunity to acquire more assets than previously
contemplated.
We believe there will be continued distress in the real estate market in the near term and
expect this to put downward pressure on near term prices. Our view of the mid to long term is more
positive, and we expect property
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values to improve over the four- to ten-year time horizon. Our plan is to be in a position to
capitalize on these opportunities for capital appreciation.
We may acquire other real estate assets and real estate related investments as part of our
investment strategy as follows:
Other Property Acquisitions. We may acquire partially improved and improved properties,
particularly those in which there is a potential for a change in use, such as an industrial
building changing to high density residential. In addition to fee simple interests, we may acquire
long-term leasehold interests and leasehold estates. We may acquire real estate or real
estate-related investments relating to properties in various other stages of development. We may
enter into purchase and leaseback transactions, under which we will purchase a property from an
entity and lease the property back to such entity under a net lease.
Making Loans and Investments in Mortgages. We do not intend to engage in the business of
originating, warehousing or servicing real estate mortgages as a primary business, but we may do so
as an ancillary result of our main business of investing in real estate properties. We may provide
seller financing on certain properties if, in our judgment, it is prudent to do so. However, our
main business is not investing in real estate mortgages, mortgage-backed securities or other
securities.
Investment in Securities. We may invest in equity securities of another entity, other than the
Operating Partnership or a wholly-owned subsidiary of us, only if a majority of our directors,
including a majority of the independent directors not otherwise interested in such transaction,
approve the transaction as being fair, competitive, commercially reasonable and consistent with our
investment objectives. We may also invest in community facility district bonds. We will limit this
type of investment to no more than 25% of our total assets, subject to certain tests for REIT
qualification. We may purchase our own securities when traded on a secondary market or on a
national securities exchange or national market system, if a majority of the directors determine
such purchase to be in our best interests (in addition to repurchases made pursuant to our 2007
equity incentive plan which are subject to the right of first refusal upon transfer by plan
participants). We may in the future acquire some, all or substantially all of the securities or
assets of other REITs or similar entities where that investment would be consistent with our
investment policies and the REIT qualification requirements.
Joint Ventures. We may invest in limited partnerships, general partnerships and other joint
venture arrangements with nonaffiliated third parties and with other real estate entities programs
formed by, sponsored by or affiliated with the Advisor or an affiliate of the Advisor, if a
majority of our independent directors who are not otherwise interested in the transaction approve
the transaction as being fair and reasonable to us and our stockholders and on substantially the
same terms and conditions as those received by the other joint venturers. When we believe it is
appropriate, we will borrow funds to acquire or finance properties.
Critical Accounting Policies
As defined by the SEC, our critical accounting policies will be those which are both important
to the portrayal of our financial condition and results of operations, and which require
managements most difficult, subjective, and/or complex judgments, often as a result of the need to
make significant estimates and assumptions about the future effect of matters that are inherently
uncertain. Such estimates and assumptions will be made and evaluated on an on-going basis using
information that is currently available as well as various other assumptions believed to be
reasonable under the circumstances. An accounting estimate requires assumptions about uncertain
matters that could have a material effect on the Condensed Consolidated Financial Statements if a
different amount within a range of estimates were used or if estimates changed from
period-to-period. Estimates are made under facts and circumstances at a point in time, and changes
in those facts and circumstances could produce actual results that differ from when those estimates
were made, perhaps in material adverse ways. When we begin our operating activities, we anticipate
that our critical accounting policies will include those which are described immediately below.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and the related disclosure of contingent assets and liabilities. These estimates will be
made and evaluated on an on-going basis, using information that is currently available as well as
applicable assumptions believed to be reasonable under the circumstances.
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Actual results may vary from those estimates; in addition, such estimates could be different
under other conditions and/or if we use alternative assumptions.
Principles of Consolidation
Since the Companys wholly owned subsidiary, Shopoff General Partner, LLC, is the sole general
partner of the Operating Partnership and has unilateral control over its management and major
operating decisions (even if additional limited partners are admitted to the Operating
Partnership), the accounts of the Operating Partnership are consolidated in the Companys
consolidated financial statements. The accounts of Shopoff General Partner, LLC are also
consolidated in the Companys consolidated financial statements since it is wholly owned by the
Company. SPT Real Estate Finance, LLC, SPT-SWRC, LLC, SPT-Lake Elsinore Holding Co., LLC and SPT AZ
Land Holdings, LLC are also 100% owned by the Operating Partnership and therefore their accounts
are consolidated in the Companys financial statements as of September 30, 2009 and December 31,
2008.
All intercompany accounts and transactions are eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid short-term investments with original maturities of
three months or less when purchased to be cash equivalents.
Revenue and Profit Recognition
It is the Companys policy to recognize gains on the sale of investment properties. In order
to qualify for immediate recognition of revenue on the transaction date, the Company requires that
the sale be consummated, the buyers initial and continuing investment be adequate to demonstrate a
commitment to pay, any receivable resulting from seller financing not be subject to future
subordination, and that the usual risks and rewards of ownership be transferred to the buyer. We
would expect these criteria to be met at the close of escrow. The Companys policy also requires
that the seller not have any substantial continuing involvement with the property. If we have a
commitment to the buyer in a specific dollar amount, such commitment will be accrued and the
recognized gain on the sale will be reduced accordingly.
Transactions with unrelated parties which in substance are sales but which do not meet the
criteria described in the preceding paragraph will be accounted for using the appropriate method
(such as the installment, deposit, or cost recovery method) as set forth in the Companys policy.
Any disposition of a real estate asset which in substance is not deemed to be a sale for
accounting purposes will be reported as a financing, leasing, or profit-sharing arrangement as
considered appropriate under the circumstances of the specific transaction.
For income-producing properties, we intend to recognize base rental income on a straight-line
basis over the terms of the respective lease agreements (including any rent holidays). Differences
between recognized rental income and amounts contractually due under the lease agreements will be
credited or charged (as applicable) to rent receivable. Tenant reimbursement revenue, which is
expected to be comprised of additional amounts recoverable from tenants for common area maintenance
expenses and certain other expenses, will be recognized as revenue in the period in which the
related expenses are incurred.
Interest income on the Companys real estate notes receivable is recognized on an accrual
basis over the life of the investment using the interest method. Direct loan origination fees and
origination or acquisition costs are amortized over the term of the loan as an adjustment to
interest income. The Company will place loans on nonaccrual status when concern exists as to the
ultimate collection of principal or interest. When a loan is placed on nonaccrual status, the
Company will reserve the accrual for unpaid interest and will not recognize subsequent interest
income until the cash is received, or the loan returns to accrual status.
We believe that the accounting policy related to revenue recognition is a critical accounting
policy because of the significant impact revenue recognition will have on our Condensed
Consolidated Financial Statements.
Cost of Real Estate Assets Not Held for Sale
We anticipate that real estate assets will principally consist of wholly-owned undeveloped
real estate for which we will obtain entitlements and hold such assets as long term investments for
eventual sale. Undeveloped real estate not held for sale will be carried at cost subject to
downward adjustment as described in Impairment below. Cost
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will include the purchase price of the land, related acquisition fees, as well as costs
related to entitlement, property taxes and interest. In addition, any significant other costs
directly related to acquisition and development of the land will be capitalized. The carrying
amount of land will be charged to earnings when the related revenue is recognized.
Income-producing properties will generally be carried at historical cost less accumulated
depreciation. The cost of income-producing properties will include the purchase price of the land
and buildings and related improvements. Expenditures that increase the service life of such
properties will be capitalized; the cost of maintenance and repairs will be charged to expense as
incurred. The cost of building and improvements will be depreciated on a straight-line basis over
their estimated useful lives, which are expected to principally range from approximately 15 to 39
years. When depreciable property is retired or disposed of, the related cost and accumulated
depreciation will be removed from the accounts and any gain or loss will be reflected in
operations.
The costs related to abandoned projects are expensed when management believes that such
projects are no longer viable investments.
Property Held for Sale
The Company has a policy for property held for sale. Our policy, which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets, 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 income statements for current and prior periods report the results of operations of the
component as discontinued operations.
When a property is held for sale, such property will be carried at the lower of (i) its
carrying amount or (ii) the estimated fair value less costs to sell. In addition, a depreciable
property being held for sale (such as a building) will cease to be depreciated. We will classify
operating 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 asset; | ||
| An active program to locate a buyer and other actions required to complete the plan to sell the asset has been initiated; | ||
| The sale of the asset is probable, and the transfer of the asset is expected to qualify for recognition as a completed transaction within one year; | ||
| The asset is being actively marketed for sale at a price that is reasonable in relation to its current estimated fair value; and | ||
| Given the actions required to complete the plan to sell the asset, it is unlikely that significant changes to the plan would be made or that the plan would be abandoned. |
Selling commissions and closing costs will be expensed when incurred.
We believe that the accounting related to property valuation and impairment is a critical
accounting estimate because: (1) assumptions inherent in the valuation of our property are highly
subjective and susceptible to change and (2) the impact of recognizing impairments on our property
could be material to our condensed consolidated balance sheets and statements of operations. We
will evaluate our property for impairment periodically on an asset-by-asset basis. This evaluation
includes three critical assumptions with regard to future sales prices, cost of sales and
absorption. The three critical assumptions include the timing of the sale, the land residual value
and the discount rate applied to determine the fair value of the income-producing properties on the
balance sheet date. Our assumptions on the timing of sales are critical because the real estate
industry has historically been cyclical and sensitive to changes in economic conditions such as
interest rates and unemployment levels. Changes in these economic conditions could materially
affect the projected sales price, costs to acquire and entitle our land and cost to acquire our
income-producing properties. Our assumptions on land residual value are critical because they will
affect our estimate of what a willing buyer would pay and what a willing seller would sell a parcel
of land for (other than in a forced liquidation) in order to generate a market rate operating
margin and return. Our assumption on discount rates is critical because the selection of a discount
rate affects the estimated fair value of the income-producing properties. A higher discount rate
reduces the estimated fair value of such properties, while a lower discount rate increases the
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estimated fair value of these properties. Because of changes in economic and market conditions
and assumptions and estimates required of management in valuing property held for investment during
these changing market conditions, actual results could differ materially from managements
assumptions and may require material property impairment charges to be recorded in the future.
Long-Lived Assets
The Company has a policy for property held for investment. Our policy requires that long-lived
assets be reviewed for impairment whenever events or changes in circumstances indicate that their
carrying amounts may not be recoverable. If the cost basis of a long-lived asset held for use is
greater than the projected future undiscounted net cash flows from such asset (excluding interest),
an impairment loss is recognized. Impairment losses are calculated as the difference between the
cost basis of an asset and its estimated fair value.
Our policy also requires us to separately report discontinued operations and extends that
reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in
a distribution to shareholders) or is classified as held for sale. Assets to be disposed of are
reported at the lower of the carrying amount or estimated fair value less costs to sell.
Estimated Fair Value of Financial Instruments and Certain Other Assets/Liabilities
The Companys financial instruments include cash, accounts receivable, prepaid expenses,
security deposits, accounts payable and accrued expenses. Management believes that the fair value
of these financial instruments approximates their carrying amounts based on current market
indicators, such as prevailing interest rates and the short-term maturities of such financial
instruments.
Management has concluded that it is not practical to estimate the fair value of amounts due to
and from related parties. The Companys policy requires, where reasonable, that information
pertinent to those financial instruments be disclosed, such as the carrying amount, interest rate,
and maturity date; such information is included in Note 6. Management believes it is not practical
to estimate the fair value of related party financial instruments because the transactions cannot
be assumed to have been consummated at arms length, there are no quoted market values available
for such instruments, and an independent valuation would not be practicable due to the lack of data
regarding similar instruments (if any) and the associated potential cost.
The Company does not have any assets or liabilities that are measured at fair value on a
recurring basis and, as of September 30, 2009 and December 31, 2008, did not have any assets or
liabilities that were measured at fair value on a nonrecurring basis.
When the Company has a loan that is identified as being impaired or being reviewed for
impairment whenever events or changes in circumstances indicate that their carrying amounts may not
be recoverable in accordance with Company policy and is collateral dependent, it is evaluated for
impairment by comparing the estimated fair value of the underlying collateral, less costs to sell,
to the carrying value of the loan.
Our Company policy establishes a three-tier fair value hierarchy, which prioritizes the inputs
used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as
quoted prices for identical financial instruments in active markets; Level 2, defined as inputs
other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3, defined as instruments that have little to no pricing observability as of the reported
date. These financial instruments do not have two-way markets and are measured using managements
best estimate of fair value, where the inputs into the determination of fair value require
significant management judgment or estimation.
The Companys policy also discusses determining fair value when the volume and level of
activity for the asset or liability has significantly decreased and identifying transactions that
are not orderly. Company policy emphasizes that even if there has been a significant decrease in
the volume and level of activity for an asset or liability and regardless of the valuation
technique(s) used, the objective of a fair value measurement remains the same. Fair value is the
price that would be received to sell an asset or be paid to transfer a liability in an orderly
transaction (that is, not a forced liquidation or distressed sale) between market participants at
the measurement date under current market conditions. Furthermore, Company policy requires
additional disclosures regarding the inputs and valuation technique(s) used in estimating the fair
value of assets and liabilities as well as any changes in such valuation technique(s).
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Notes Receivable
The Companys notes receivable are recorded at cost, net of loan loss reserves, and evaluated
for impairment at each balance sheet. The amortized cost of a note receivable is the outstanding
unpaid principal balance, net of unamortized costs and fees directly associated with the
origination or acquisition of the loan.
The Company considers a loan to be impaired when, based upon current information and events,
it believes that it is probable that the Company will be unable to collect all amounts due under
the contractual terms of the loan agreement. A reserve is established when the present value of
payments expected to be received, observable market prices, or the estimated fair value of the
collateral (for loans that are dependent on the collateral for repayment) of an impaired loan is
lower than the carrying value of that loan.
Organization and Offering Costs
The Companys organization and offering costs may be paid by the Companys Advisor,
broker-dealer and their affiliates on the Companys behalf. These organization and offering costs
include all expenses to be paid by us in connection with the Companys ongoing initial public
offering, including but not limited to (i) legal, accounting, printing, mailing, and filing fees;
(ii) charges of the escrow holder; (iii) reimbursement to the advisor for other costs in connection
with preparing supplemental sales materials; (iv) the cost of educational conferences held by us
(including the travel, meal, and lodging costs of registered representatives of broker-dealers);
and (v) reimbursement to the broker-dealer for travel, meals, lodging, and attendance fees incurred
by employees of the broker-dealer to attend retail seminars conducted by broker-dealers.
Pursuant to the advisory agreement and the broker-dealer agreement, the Company is obligated
to reimburse the advisor, the broker-dealer or their affiliates, as applicable, for organization
and offering costs paid by them on the Companys behalf, provided that the Advisor is obligated to
reimburse us to the extent the organization and offering costs incurred by us in the offering
exceed 12.34% of the Companys gross offering proceeds. The Companys Advisor and its affiliates
have incurred on the Companys behalf organization and offering costs of $5.050 million through
September 30, 2009. Such costs are only a liability to us to the extent the organization and
offering costs do not exceed 12.34% of the gross proceeds of the offering. From commencement of the
Companys ongoing initial public offering through September 30, 2009, the Company had sold
1,851,400 shares for gross offering proceeds of $17.588 million and recorded organization and
offering costs of $2.631 million.
Potential Investments in Partnerships and Joint Ventures.
If we invest in limited partnerships, general partnerships, or other joint ventures we will
evaluate such investments for potential variable interests pursuant to Company policy. We will
evaluate variable interest entities (VIEs) in which we hold a beneficial interest for
consolidation. VIEs, as defined by Company policy, are legal entities with insubstantial equity,
whose equity investors lack the ability to make decisions about the entitys activities, or whose
equity investors do not have the right to receive the residual returns of the entity if they occur.
An entity will be considered a VIE if one of the following applies:
| The total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties (i.e., the equity investment at risk is not greater than the expected losses of the entity). | ||
| As a group the holders of the equity investment at risk lack any one of the following three characteristics of a controlling financial interest: |
| The direct or indirect ability to make decisions about an entitys activities through voting rights or similar rights. | ||
| The obligation to absorb the expected losses of the entity if they occur. | ||
| The right to receive the expected residual returns of the entity if they occur. |
An equity investment of less than 10% of total assets generally should be considered to be
insufficient to fund the entitys operations unless there is clear evidence to the contrary, such
as evidence that it can get financing for its activities without additional subordinated financial
support.
If the Company is the interest holder that will absorb a majority of the VIEs expected losses
and/or receive a majority of the VIEs expected residual returns, we will be deemed to be the
primary beneficiary and must consolidate the VIE. Management will use its judgment when determining
if we are the primary beneficiary of, or
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have a controlling interest in, an unconsolidated entity. Factors considered in determining
whether we have significant influence or we have control include risk and reward sharing,
experience and financial condition of the other partners, voting rights, involvement in day-to-day
capital and operating decisions and continuing involvement. In the primary beneficiary decision, it
is important to realize that a holder which will absorb the majority of losses takes precedence
over any other interest holder. The determination of which enterprise (if any) is the primary
beneficiary would be made as of the date the company first becomes involved with the VIE unless
events requiring reconsideration of the status of the entitys variable interest holders have
occurred.
Investments in companies that are not consolidated will be accounted for using the equity
method when we have the ability to exert significant influence. Generally, significant influence
will exist if we have the ability to exercise significant influence over the operating and
financial policies of an investee, which may need to include the ability to significantly influence
the outcome of corporate actions requiring shareholder approval of an investee. Significant
influence is generally presumed to be achieved by owning 20 percent or more of the voting stock of
the investee. However, we will be required to evaluate all of the facts and circumstances relating
to the investment to determine whether there is predominant evidence contradicting our ability to
exercise significant influence, such as the inability by us to obtain financial information from
the investee. Under this method , an investee companys accounts are not reflected within the
Companys consolidated balance sheet and statement of operation; however, the Companys share of
the earnings or losses of the investee company will be reflected in the caption Equity in net
earning of unconsolidated subsidiaries in the Companys statement of operations. The Companys
carrying value in an equity method investee company will be reflected in the caption Investments
in unconsolidated subsidiaries in the Companys consolidated balance sheet.
Investments in companies in which we cannot exert significant influence will be accounted for
under the cost method. Under this method, the Companys share of the earnings or losses of such
investee companies will not be included in the Companys consolidated balance sheet or statement of
operations.
The accounting policy relating to the need to consolidate or to account for such investments
or acquisitions using the equity method of accounting is a critical accounting policy due to the
judgment required in determining whether we are the primary beneficiary or have control or
significant influence.
Income Taxes
The Company intends to make an election to be taxed as a REIT under Sections 856 through 860
of the Internal Revenue Code, as amended, or the Code, beginning with the taxable year ending
December 31, 2010. The Company has not yet qualified as a REIT. To qualify as a REIT, the Company
must meet certain organizational and operational requirements, including a requirement to currently
distribute at least 90% of ordinary taxable income to stockholders. As a REIT, the Company
generally will not be subject to federal income tax on taxable income that it distributes to its
stockholders. If the Company fails to qualify as a REIT in any year, it will be subject to federal
income taxes on taxable income at regular corporate rates and will not be permitted to qualify for
treatment as a REIT for federal income tax purposes for four years following the year during which
qualification is lost unless the Internal Revenue Service grants the Company relief under certain
statutory provisions. Such an event could materially adversely affect the Companys net income and
net cash available for distribution to stockholders.
The Company has federal and state net operating loss carry-forwards in the amount of $1.6M
each, substantially all of which were also available for federal and state income tax purposes, at
September 30, 2009, and are expected to begin expiring in 2027 and 2017, respectively. Effective
September 30, 2008, the State of California suspended the ability of corporations to offset taxable
income with net operating loss carryforwards for the tax years 2008 and 2009. Therefore, current
tax expense has been provided for state income tax purpose and the effect of the federal
alternative minimum tax on the ability of the Company to utilize net operating losses for federal
alternative minimum tax purposes.
In assessing the realizability of the net deferred tax assets, the Company considers whether
it is more likely than not that some or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become deductible. As of September
30, 2009, the Company had a full valuation established against its deferred tax assets. Because of
the valuation allowance, the Company had no deferred tax expense / (benefit).
Due to the change in ownership provisions of the Tax Reform Act of 1986, the Companys net
operating loss carry-forwards may be subject to an annual limitation on the utilization of these
carry-forwards against taxable income in future periods if a cumulative change in ownership of more
than 50% occurs within any three-year period.
The Company has adopted a policy for accounting for uncertainty in income taxes. The Companys
policy prescribes a recognition threshold and measurement attribute for the financial statement
recognition and
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measurement of a tax position taken or expected to be taken in a tax return. This policy also
provides guidance on de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. The adopting of the Companys policy for accounting for
uncertainty in income taxes did not result in any adjustment to the Companys beginning tax
positions. As of September 30, 2009, there was no increase or decrease to liability for income tax
associated with uncertain tax positions.
Stock-Based Compensation
Stock-based compensation will be accounted for in accordance with Company policy which
requires that the compensation costs relating to share-based payment transactions (including the
cost of all employee stock options) be recognized in the Condensed Consolidated Financial
Statements. That cost will be measured based on the estimated fair value of the equity or liability
instruments issued. Our Company policy covers a wide range of share-based compensation arrangements
including share options, restricted share plans, performance-based awards, share appreciation
rights, and employee share purchase plans.
Noncontrolling Interests in Consolidated Financial Statements
The Company classifies noncontrolling interests (previously referred to as minority
interest) as part of consolidated net earnings ($0 for the each of the quarters ended September
30, 2009 and 2008, respectively) and includes the accumulated amount of noncontrolling interests as
part of stockholders equity ($100 for the quarter ended September 30, 2009 and year ended December
31, 2008, respectively). The net loss amounts the Company has previously reported are now presented
as Net loss attributable to Shopoff Properties Trust, Inc. and, earnings per share continues to
reflect amounts attributable only to the Company. Similarly, in the presentation of shareholders
equity, the Company distinguishes between equity amounts attributable to the Companys stockholders
and amounts attributable to the noncontrolling interests previously classified as minority
interest outside of stockholders equity. Increases and decreases in the Companys controlling
financial interests in consolidated subsidiaries will be reported in equity similar to treasury
stock transactions. If a change in ownership of a consolidated subsidiary results in loss of
control and deconsolidation, any retained ownership interests are remeasured with the gain or loss
reported in net earnings.
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 may be exposed to the effects of interest rate changes primarily as a result of borrowings
used to maintain liquidity and fund expansion and refinancing of our real estate investment
portfolio and operations. Our interest rate risk management objectives will be to limit the impact
of interest rate changes on earnings, prepayment penalties and cash flows and to lower overall
borrowing costs while taking into account variable interest rate risk. To achieve our objectives,
we may borrow at fixed rates or variable rates. We currently have limited exposure to financial
market risks because we are in an early stage of our operations. We currently invest our cash and
cash equivalents in an FDIC-insured savings account which, by its nature, is subject to interest
rate fluctuations. As of September 30, 2009, a 1% increase or decrease in interest rates would have
no material effect on our interest income.
In addition to changes in interest rates, the value of our real estate and real estate related
investments is subject to fluctuations based on changes in local and regional economic conditions
and changes in the creditworthiness of lessees, and which may affect our ability to refinance our
debt if necessary.
Item 4T. | Controls and Procedures |
We carried out an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of
September 30, 2009. This evaluation was carried out under the supervision and with the
participation of our Chief Executive Officer and Chief Financial Officer. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September
30, 2009, our disclosure controls and procedures are effective.
There have been no significant changes in our internal controls over financial reporting
during the quarter ended September 30, 2009 that have materially affected or are reasonably likely
to materially affect such controls.
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Disclosure controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed in our reports filed or submitted under the
Exchange Act are recorded, processed, summarized, and reported within the time periods specified in
the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed in our reports filed
under the Exchange Act is accumulated and communicated to management, including our Chief Executive
Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Limitations on the Effectiveness of Internal Controls
Our management does not expect that our disclosure controls and procedures or our internal
control over financial reporting will necessarily prevent all fraud and material error. An internal
control system, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further, the design of a
control system must reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that breakdowns can
occur because of simple error or mistake. Additionally, controls can be circumvented by the
individual acts of some persons, by collusion of two or more people, or by management override of
the internal control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future conditions. Over time,
control may become inadequate because of changes in conditions, or the degree of compliance with
the policies or procedures may deteriorate.
PART II OTHER INFORMATION
Item 1. | Legal Proceedings |
A previously owned real estate
property known as the Pulte Home Project is the subject of a
dispute regarding obligations retained by both the seller, Pulte Home, when it sold the project to
an affiliate of the Company, SPT SWRC, LLC, on December 31, 2009, and by SPT SWRC, LLC when it
resold the project to Khalda on March 20, 2009, to complete certain improvements, such as grading
and infrastructure (the Improvements). Both sales were made subject to the following agreements
which, by their terms, required the Improvements to be made: (i) a Reconveyance Agreement, dated
November 15, 2007, by and among Pulte Home and the prior owners of the project Barratt American
Incorporated, Meadow Vista Holdings, LLC (Meadow Vista) and Newport Road 103, LLC (Newport)
(the Reconveyance Agreement), and (ii) a letter agreement, dated December 30, 2008, executed by
SPT SWRC, LLC, Meadow Vista, and Newport, and acknowledged by Pulte Home (the Subsequent Letter
Agreement). Meadow Vista and Newport, as joint claimants (the Claimants) against Pulte Home and
SPT SWRC, LLC, have initiated binding arbitration in an effort to require Pulte Home to reaffirm
its obligations under the Reconveyance Agreement and the Subsequent Letter Agreement to make the
Improvements in light of the subsequent transfer of ownership of the project to Khalda, and to
require that certain remedial measures be taken to restore the site to a more marketable condition.
SPT SWRC, LLC maintains that it is not a proper party to the arbitration, because the declaratory
action being sought by the Claimants is to establish rights of the Claimants against Pulte Home,
and not against SPT SWRC, LLC, and neither SPT SWRC, LLC nor Pulte Home has taken the position that
their respective transfers of the project has released them from the obligation to make the
Improvements. The arbitration process is at its inception and, although we believe the request for
declaratory relief by the Claimants has no legal basis and that the issue is not arbitrable since
no actual dispute exists, we cannot predict the outcome of the arbitration proceedings at this
time.
Item 1A. | Risk Factors |
There are no material changes to the risk factors as previously disclosed in our Annual Report
on Form 10-K for the year ended December 31, 2008, as modified and supplemented by the risk factors
disclosed in our Quarterly Report on Form 10-Q for the quarters ended March 31, 2009 and June 30,
2009 respectively. The materialization of any risks and uncertainties identified in our Forward
Looking Statements contained in this report together with those previously disclosed in the Form
10-K and 10-Q or those that are presently unforeseen could result in significant adverse effects on our
financial condition, results of operations and cash flows. See Item 2. Managements Discussion and
Analysis of Financial Condition and Results of Operations Forward Looking Statements in this
Quarterly Report on Form 10-Q.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
On August 29, 2007, our Registration Statement on Form S-11 (File No. 333-139042), covering a
public offering, which we refer to as the Offering, of up to 2,000,000 common shares for $9.50
per share and up to 18,100,000 common shares at $10.00 per share, was declared effective under the
Securities Act of 1933. Proceeds raised from the Offering were placed in an interest bearing escrow
account until August 29, 2008 when we received and accepted subscriptions for the minimum offering
of 1,700,000 shares, as more fully described in the Registration Statement.
As of September 30, 2009, we had sold 1,851,400 shares of common stock in the Offering
excluding shares purchased by our Sponsor and excluding vested restricted stock grants issued to
certain officers and directors, raising gross proceeds of $17,588,300. From this amount, we have
incurred approximately $5,050,000 in organization and offering costs (of which approximately
$2,631,000 has been recorded in our financial statements). As of September 30, 2009, we had net
offering proceeds from the Offering of approximately $15,490,000 which includes shares purchased by
our Sponsor and the vesting of restricted stock grants and stock options issued to certain
executive officers and directors. We used the net offering proceeds to purchase our interests in
four properties and to originate three loans, two of which we have obtained the underlying real
estate which served as collateral for the loans,, to pay $306,000 in acquisition or origination
fees and $84,081 in asset management fees and to pay other operating expenses and fees. For more
information regarding how we used the net proceeds from our initial public offering to date (along
with how we used cash from operating activities) through September 30, 2009, see our condensed
consolidated statements of cash flows included in this report.
During the period covered by this Form 10-Q, we did not sell any equity securities that were
not registered under the Securities Act of 1933, and we did not repurchase any of our securities.
Item 3. | Defaults Upon Senior Securities |
None
Item 4. | Submission of Matters to a Vote of Security Holders |
None
Item 5. | Other Information |
On November 5, 2009, an affiliate of the Company, SPT-Lake Elsinore Holding Co., LLC, a
Delaware limited liability company (Buyer) and wholly owned subsidiary of the Companys
affiliate, Shopoff Partners, L.P., closed on the purchase of real property, commonly known as
Tuscany Valley, consisting of (a) 519 entitled but unimproved residential lots and 2 commercial
lots located in the City of Lake Elsinore, California and (b) 400 acres of unentitled and
unimproved land located in the City of Chino Hills, California. The
purchase price was $9,600,000.
The purchase was made pursuant to a purchase and sale agreement and joint escrow instructions,
dated September 30, 2008 (the Tuscany Valley Purchase Agreement), by and between the Companys
Advisor and TSG Little Valley, a California limited partnership (Seller), whereby Seller agreed
to sell and the Companys Advisor agreed to buy, 163 entitled but unimproved residential lots
located in the City of Lake Elsinore, California. The contract purchase price was for $4,890,000.
The Tuscany Valley Purchase Agreement was subsequently amended by those certain
amended/supplemental escrow instructions dated October 16, 2008, October 27, 2008, November 11,
2008, November 25, 2008, December 30, 2008, January 13, 2008, January 27, 2009 and February 24,
2009. The Tuscany Valley Purchase Agreement was further amended by that certain undated Corrective
Amendment, which was drafted for the sole purpose of changing a signature block on the Tuscany
Valley Purchase Agreement.
On September 3, 2009, the Companys Advisor executed an assignment of purchase and sale
agreement whereby the Advisor assigned all of its rights, title and interest in the Tuscany Valley
Purchase Agreement to Buyer.
Also on September 3, 2009, Buyer entered into a first amendment to purchase and sale agreement
and joint escrow instructions with Seller, which amended the Tuscany Valley Purchase Agreement as
follows: (a) Buyer agreed to purchase additional property from Seller consisting of 356 entitled
but unimproved, residential lots and 2 commercial lots located in the City of Lake Elsinore,
California and 400 acres of unentitled and unimproved land located in the
City of Chino Hills, California, (b) the purchase price was increased to $9,600,000 from
$4,890,000, (c) the nonrefundable deposit requirement was increased to $2,000,000 from $1,000,000,
and (d) the escrow closing date was amended to on or before November 30, 2009.
On October 15, 2009, Buyer entered into a second amendment to purchase and sale agreement and joint escrow instructions
with Seller to provide that $2,900,000 of the purchase price would be paid by Buyers execution and delivery into escrow of (a)
an all-inclusive purchase money note secured by deed of trust (Promissory Note) in favor of Seller, as payee therein, in the
principal amount of $2,900,000, and (b) an all-inclusive deed of trust executed by Buyer in favor of Seller, as beneficiary therein,
securing the foregoing all-inclusive purchase money note. On October 15, 2009, the second amendment was restated (the Restated Second Amendment)
for the sole purpose of correcting a signature block.
The
Promissory Note bears interest at a rate of twelve percent per annum, and has a maturity
date in twelve months at which time all accrued and unpaid interest and principal is due in full.
No payments are due during the term of the Promissory Note. The
Promissory Note with its loan balance of $2,900,000 includes the unpaid
balance of that certain other promissory note having a loan date of April 3, 2006, in the original
principal amount of $2,000,000 payable by Seller to 1st Centennial (the Included Note). The Included
Note is secured by a deed of trust dated April 3, 2006 and recorded on April 10, 2006 in the
Official Records of Riverside County, California as Instrument No. 2005-0254320. The outstanding
principal balance on the Included Note as of November 3, 2009 was approximately $1,750,000. The
current payee under the Included Note is the Federal Deposit Insurance Corporation, as receiver for
1st Centennial Bank.
Should Seller fail to pay any installments when due upon the Included Note,
Buyer may make such payments directly to payee of the Included Note, and the amount shall be
credited to the next following installment or installments due under
the Promissory Note. If Buyer
fails to make any payment when required under either the Promissory
Note, Seller has the
option to immediately declare all sums due and owing under the
Promissory Note.
Stevan J. Gromet, President of Portfolio Partners, Inc., a California corporation, the general
partner of Seller, is a shareholder of the Company with ownership of 47,800 shares as of September
30, 2009, which represents approximately 2.51% of our total shares outstanding including 21,100
shares purchased by our sponsor and 35,000 vested restricted stock grants issued to our officers
and directors.
Seller is a shareholder of the Company with ownership of 380,500 shares as of September 30,
2009, which represents approximately 19.95% of the Companys total shares outstanding including
21,100 shares purchased by our sponsor and 35,000 vested restricted stock grants issued to our
officers and directors.
The Advisor received an acquisition fee equal to
3% of the contract purchase price, or $288,000, upon consummation of the transaction.
Item 6. | Exhibits |
Exhibit 10.1:
|
Assignment of Purchase and Sale Agreement between Shopoff Advisors and SPT-Lake Elsinore Holding Co., LLC dated September 3, 2009. | |
Exhibit 10.2:
|
First Amendment to Purchase and Sale Agreement and Joint Escrow Instructions between TSG Little Valley, L.P. and SPT-Lake Elsinore Holding Co., LLC and dated September 3, 2009. | |
Exhibit 10.3:
|
Second Amendment to Purchase and Sale Agreement and Joint Escrow Instructions between TSG Little Valley, L.P. and SPT-Lake Elsinore Holding Co., LLC and dated October 15, 2009. | |
Exhibit 10.4:
|
Restated Second Amendment to Purchase and Sale Agreement and Joint Escrow Instructions between TSG Little Valley, L.P. and SPT-Lake Elsinore Holding Co., LLC and dated October 15, 2009. | |
Exhibit 31.1:
|
Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Exhibit 31.2:
|
Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Exhibit 32.1:
|
Certificate of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
Exhibit 32.2:
|
Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SHOPOFF PROPERTIES TRUST, INC. (Registrant) |
||||
Date November 16, 2009 | By: | /s/ William A. Shopoff | ||
William A. Shopoff | ||||
Chief Executive Officer
(Principal Executive Officer) |
||||
Date November 16, 2009 | By: | /s/ Kevin M. Bridges | ||
Kevin M. Bridges | ||||
Chief Financial Officer,
(Principal Financial Officer) |
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EXHIBIT INDEX
Exhibit 10.1:
|
Assignment of Purchase and Sale Agreement between Shopoff Advisors and SPT-Lake Elsinore Holding Co., LLC dated September 3, 2009. | |
Exhibit 10.2:
|
First Amendment to Purchase and Sale Agreement and Joint Escrow Instructions between TSG Little Valley, L.P. and SPT-Lake Elsinore Holding Co., LLC and dated September 3, 2009. | |
Exhibit 10.3:
|
Second Amendment to Purchase and Sale Agreement and Joint Escrow Instructions between TSG Little Valley, L.P. and SPT-Lake Elsinore Holding Co., LLC and dated October 15, 2009. | |
Exhibit 10.4:
|
Restated Second Amendment to Purchase and Sale Agreement and Joint Escrow Instructions between TSG Little Valley, L.P. and SPT-Lake Elsinore Holding Co., LLC and dated October 15, 2009. | |
Exhibit 31.1:
|
Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Exhibit 31.2:
|
Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
Exhibit 32.1:
|
Certificate of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
Exhibit 32.2:
|
Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
45