Attached files
file | filename |
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EX-31.1 - EXHIBIT 31.1 - NNN 2002 VALUE FUND LLC | c97242exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - NNN 2002 VALUE FUND LLC | c97242exv31w2.htm |
EX-21.1 - EXHIBIT 21.1 - NNN 2002 VALUE FUND LLC | c97242exv21w1.htm |
EX-32.2 - EXHIBIT 32.2 - NNN 2002 VALUE FUND LLC | c97242exv32w2.htm |
EX-32.1 - EXHIBIT 32.1 - NNN 2002 VALUE FUND LLC | c97242exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
Or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 0-51098
NNN 2002 Value Fund, LLC
(Exact name of registrant as specified in its charter)
Virginia | 75-3060438 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
1551 N. Tustin Avenue, Suite 300, Santa Ana, California | 92705 | |
(Address of principal executive offices) | (Zip Code) |
Registrants
telephone number, including area code: (714) 667-8252
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
None | None |
Securities registered pursuant to Section 12(g) of the Act:
Class A LLC Membership Interests
Class B LLC Membership Interests
Class C LLC Membership Interests
(Title of class)
Class B LLC Membership Interests
Class C LLC Membership Interests
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes o No þ
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
Yes o No þ
Yes o No þ
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 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
Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to
the best of registrants knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 þ | Smaller Reporting Company o | |||
(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 Act). Yes o No þ
As of June 30, 2009, the aggregate market value of the outstanding units held by non-affiliates of
the registrant was approximately $29,799,000 (based on the price for which each unit was sold). No
established market exists for the registrants units.
As of March 5, 2010, there were 5,960 units of NNN 2002 Value Fund, LLC outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
None
NNN 2002 Value Fund, LLC
TABLE OF CONTENTS
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Exhibit 32.1 | ||||||||
Exhibit 32.2 |
Table of Contents
PART I
Item 1. | Business. |
The use of the words we, us or our refers to NNN 2002 Value Fund, LLC, except where the
context otherwise requires.
Our Company
NNN 2002 Value Fund, LLC was formed as a Virginia limited liability company on May 15, 2002.
We were organized for the purpose of acquiring all or a portion of up to three unspecified
properties from unaffiliated sellers in accordance with our private placement memorandum dated
May 15, 2002, as amended, or our Private Placement Memorandum. We expected to own and operate
interests in the properties acquired for approximately three to five years from acquisition. As
described below, on September 7, 2005, our unit holders approved a plan of liquidation and eventual
dissolution of our company. Accordingly, we are engaged in an ongoing liquidation of our remaining
asset. As of December 31, 2009, we owned a 12.3% interest in one unconsolidated property, Congress
Center, located in Chicago, Illinois, or the Congress Center property. References herein to our
property, our one remaining unconsolidated property or our remaining asset are to our 12.3%
interest in the Congress Center property.
Grubb & Ellis Realty Investors, LLC (formerly known as Triple Net Properties, LLC), or Grubb &
Ellis Realty Investors, or our Manager, manages us pursuant to the terms of an operating agreement,
or the Operating Agreement. Our Manager is primarily responsible for managing our day-to-day
operations and assets. While we have no employees, certain employees and executive officers of our
Manager provide services to us pursuant to the Operating Agreement. Our Manager is managed by
executive officers of our Manager. Our Manager engages affiliated entities, including Triple Net
Properties Realty, Inc., or Realty, to provide various services for our one remaining
unconsolidated property. Realty serves as our property manager pursuant to the terms of the
Operating Agreement and a property management agreement, or the Management Agreement. The Operating
Agreement terminates upon our dissolution. The unit holders may not vote to terminate our Manager
prior to the termination of the Operating Agreement or our dissolution except for cause. The
Management Agreement terminates with respect to our one remaining unconsolidated property upon the
earlier of the sale of such property or ten years from the date of
acquisition, which would be January 9, 2013. Realty may be
terminated with respect to our one remaining unconsolidated property without cause prior to the
termination of the Management Agreement or our dissolution, subject to certain conditions,
including the payment by us to Realty of a termination fee as provided in the Management Agreement.
Our Managers principal executive offices are located at 1551 N. Tustin Avenue, Suite 300,
Santa Ana, California 92705 and its telephone number is (714) 667-8252. We make our periodic and
current reports available on our Managers website at www.gbe-realtyinvestors.com as soon as
reasonably practicable after such materials are electronically filed with the United States
Securities and Exchange Commission, or the SEC. They are also available for printing through our
Managers website. We do not maintain our own website or have an address or telephone number
separate from our Manager. Since we pay fees to our Manager for its services, we do not pay rent
for the use of their space.
Plan of Liquidation
At a special meeting of our unit holders on September 7, 2005, our unit holders approved our
plan of liquidation. Our plan of liquidation contemplates the orderly sale of all of our assets,
the payment of our liabilities and the winding up of operations and the dissolution of our company.
We engaged an independent third party to perform financial advisory services in connection with our
plan of liquidation, including rendering opinions as to whether our net real estate liquidation
value range estimate and our estimated per unit distribution range were reasonable. We continually
evaluate the Congress Center property and adjust our net real estate liquidation value accordingly.
It is our policy that when we execute a purchase and sale agreement for the sale of the Congress
Center property or become aware of market conditions or other circumstances that indicate that the
current value of our property materially differs from our expected net sales price, we will adjust
our liquidation value accordingly. Following the approval of our plan of liquidation by our unit
holders, we adopted the liquidation basis of accounting as of August 31, 2005 and for all periods
subsequent to August 31, 2005.
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Our plan of liquidation gives our Manager the power to sell any and all of our assets without
further approval by our unit holders and provides that liquidating distributions be made to our
unit holders as determined by our Manager. Due to unfavorable conditions in the current real estate
market, we have decided to extend our estimated sale date of the Congress Center property to
December 31, 2010. Although we can provide no assurances, we currently expect to sell our one
remaining unconsolidated property by December 31, 2010 and anticipate completing our plan of
liquidation by March 31, 2011.
For a more detailed discussion of our plan of liquidation, including the risk factors and
certain other uncertainties associated therewith, please read our definitive proxy statement filed
with the SEC on August 4, 2005.
Liquidation Update for 2009
We are focused on improving rental income and cash flow by aggressively marketing rentable
space and extending and renewing existing leases for the Congress Center property. In January
2010, we completed the extension of a 91,000 square foot lease with Akzo Nobel, Inc., through 2019.
We currently expect to market and sell our one remaining asset by December 31, 2010.
Current Investment Objectives And Policies
General
In accordance with our plan of liquidation, our primary objective is to obtain the highest
possible sales value for the Congress Center property, while maintaining current income from that
investment. Pursuant thereto we have sought to:
| preserve our unit holders capital investment; and |
| generate cash through the sale of the Congress Center property. |
Due to the adoption of our plan of liquidation, we will not acquire any new properties, and we
are focused on liquidating our 12.3% interest in the Congress Center property. However, we cannot
assure our unit holders that we will attain any of these objectives or that unit holder capital
will not decrease.
Disposition Strategies
In accordance with our plan of liquidation, we currently consider various factors when
evaluating the potential disposition of our interest in the Congress Center property. These factors
include, without limitation, the following:
| the ability to sell our interest in the Congress Center property at the highest possible price in order to maximize the return to the unit holders; and |
| the ability of prospective buyers to finance their acquisition of the Congress Center property. |
Operating Strategies
In accordance with our plan of liquidation, our primary operating strategy is to enhance the
performance and value of the Congress Center property through management strategies designed to
address the needs of current and prospective tenants. Our management strategies include:
| managing costs and seeking to minimize operating expenses through centralized management, leasing, marketing, financing, accounting, renovation and data processing activities; |
| improving rental income and cash flow by aggressively marketing rentable space and raising rents when feasible and extending and renewing existing leases; and | ||
| emphasizing regular maintenance and periodic renovation to meet the needs of tenants and to maximize long-term returns. |
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Financing Policies
To date, we have financed our investments through a combination of equity as well as secured
debt. We may utilize certain derivative financial instruments at times to limit interest rate risk.
The derivatives we enter into, and the only derivative transactions approved by our Manager, are
those which are used for hedging purposes rather than investment purposes. If an anticipated
hedging transaction does not occur, any positive or negative value of the derivative will be
recognized immediately in operating (loss) income.
We had no derivative financial instruments as of December 31, 2009 and 2008.
Tax Status
We are a pass-through entity for income tax purposes and taxable income is reported by our
unit holders on their individual tax returns. Accordingly, no provision has been made for income
taxes in the accompanying consolidated financial statements except for insignificant amounts
related to state franchise and income taxes.
Distribution Policy
Following payment of the April 2005 monthly distribution, the then board of managers of our
Manager decided to discontinue the payment of monthly distributions. In accordance with our plan of
liquidation, our Manager can make liquidating distributions from net proceeds received from the
sale of assets at its discretion. Liquidating distribution amounts will depend on our anticipated
cash needs to satisfy liquidation and other expenses, financial condition and capital requirements
and other factors our Manager deems relevant.
Competition
We compete with a considerable number of other real estate companies to lease office space,
some of which may have greater marketing and financial resources than we do. Principal factors of
competition in our business are the quality of properties (including the design and condition of
improvements), leasing terms (including rent and other charges and allowances for tenant
improvements), attractiveness and convenience of location, the quality and breadth of tenant
services provided, and the reputation as an owner and operator of quality office properties in the
relevant market. Our ability to compete also depends upon, among other factors, trends of the
national and local economies, financial condition and operating results of current and prospective
tenants, availability and cost of capital, including capital raised by incurring debt, construction
and renovation costs, taxes, governmental regulations, legislation and population trends.
In selling the Congress Center property, we are in competition with other sellers of similar
properties to locate suitable purchasers, which may result in us receiving lower net proceeds than
our estimated liquidation proceeds.
As of March 5, 2010, we have a 12.3% unconsolidated ownership interest in the Congress Center
property. Other entities managed by our Manager also own interests in this property, as well as
other Chicago, Illinois properties. Our property may face competition in this region from such
other properties owned, operated or managed by our Manager or our Managers affiliates. Our Manager
or its affiliates have interests that may vary from ours in this geographic market.
Government Regulations
Many laws and governmental regulations are applicable to our property and changes in these
laws and regulations, or their interpretation by agencies and the courts, occur frequently.
Costs of Compliance with the Americans with Disabilities Act. Under the Americans with
Disabilities Act of 1990, or ADA, all public accommodations must meet federal requirements for
access and use by disabled persons.
Although we believe that we are in substantial compliance with present requirements of the
ADA, the Congress Center property has not been audited, nor have investigations of the Congress
Center property been conducted to determine compliance. We may incur additional costs in connection
with the ADA. Additional federal, state and local laws also may require modifications to the
Congress Center property or restrict our ability to renovate the Congress Center property. We
cannot predict the cost of compliance with the ADA or other legislation. If we incur substantial
costs to comply with the ADA or any other legislation, our financial condition, results of
operations, cash flow and ability to satisfy our debt service obligations and pay distributions
could be adversely affected.
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Costs of Government Environmental Regulation and Private Litigation. Environmental laws and
regulations hold us liable for the costs of removal or remediation of certain hazardous or toxic
substances which may be on the Congress Center property. These laws could impose liability without
regard to whether we are responsible for the presence or release of the hazardous materials.
Government investigations and remediation actions may have substantial costs and the presence of
hazardous substances on the Congress Center property could result in personal injury or similar
claims by private plaintiffs. Various laws also impose liability on persons who arrange for the
disposal or treatment of hazardous or toxic substances for the cost of removal or remediation of
hazardous substances at the disposal or treatment facility. These laws often impose liability
whether or not the person arranging for the disposal ever owned or operated the disposal facility.
As the owner and operator of the Congress Center property, we may be deemed to have arranged for
the disposal or treatment of hazardous or toxic substances.
Use of Hazardous Substances by Some of Our Tenants. Some of our tenants may handle hazardous
substances and wastes on the Congress Center property as part of their routine operations.
Environmental laws and regulations subject these tenants, and potentially us, to liability
resulting from such activities. We require our tenants, in their leases, to comply with these
environmental laws and regulations and to indemnify us for any related liabilities. We are unaware
of any material noncompliance, liability or claim relating to hazardous or toxic substances or
petroleum products in connection with the Congress Center property.
Other Federal, State and Local Regulations. The Congress Center property is subject to various
federal, state and local regulatory requirements, such as state and local fire and life safety
requirements. If we fail to comply with these various requirements, we may incur governmental fines
or private damage awards. While we believe that the Congress Center property is currently in
material compliance with all of these regulatory requirements, we do not know whether existing
requirements will change or whether future requirements will require us to make significant
unanticipated expenditures that will adversely affect our ability to make distributions to our unit
holders. We believe, based in part on engineering reports which we generally obtain at the time we
acquired our interest in the Congress Center property, that the Congress Center property complies
in all material respects with current regulations. However, if we were required to make significant
expenditures under applicable regulations, our financial condition, results of operations, cash
flow and ability to satisfy our debt service obligations and to pay distributions could be
adversely affected.
Significant Tenants
As of December 31, 2009, we had no consolidated properties, however, five tenants at the
Congress Center property accounted for 10.0% or more of the aggregate annual rental income at that
property for the year ended December 31, 2009, as follows:
Percentage of | Lease | |||||||||||||||
2009 Annual | 2009 Annual | Square Footage | Expiration | |||||||||||||
Tenant | Base Rent* | Base Rent | (Approximate) | Date** | ||||||||||||
Department of Homeland Security |
$ | 3,538,000 | 28.6 | % | 76,000 | April 2012 | ||||||||||
North American Co. Life and Health Insurance |
$ | 2,472,000 | 20.0 | % | 101,000 | Feb. 2012 | ||||||||||
Akzo Nobel, Inc. |
$ | 2,131,000 | 17.2 | % | 91,000 | Dec. 2013 | ||||||||||
United States Treasury Department |
$ | 1,677,000 | 13.6 | % | 37,000 | Feb. 2013 | ||||||||||
National Railroad Passenger Corporation |
$ | 1,249,000 | 10.1 | % | 50,000 | Dec. 2011 |
* | Annualized rental income is based on contractual base rent from leases in effect as of December 31, 2009. | |
** | In January 2010, we completed a lease extension on the Akzo Nobel, Inc. lease to December 2019. |
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Geographic
Concentration
For
the year ended December 31, 2009, we owned a 12.3% interest in
the Congress Center property located in Chicago, Illinois, our one
remaining unconsolidated property. Accordingly, there is a geographic
concentration of risk subject to fluctuations in Illinois economy.
Employees
We have no employees or executive officers. Substantially all work performed for us is
performed by employees and executive officers of our Manager and its affiliates.
Financial Information About Industry Segments
We internally evaluate the Congress Center property and our interest therein as one industry
segment and, accordingly, we do not report segment information.
Item 1A. | Risk Factors. |
Risks Associated with Our Liquidation
If we are unable to find a buyer for our one remaining unconsolidated property at our expected
sales price, our liquidating distributions to our unit holders may be delayed or reduced.
As of March 5, 2010, the Congress Center property is not subject to a binding sales agreement
providing for the sale of our entire interest in the property. In calculating the estimated range
of liquidating distributions to our unit holders, we assumed that we would be able to find a buyer
for the Congress Center property at an amount based on our best estimate of market value for the
property. However, we may have overestimated the sales price that we will ultimately be able to
obtain for this asset. For example, in order to find a buyer in a timely manner, we may be required
to lower our asking price below the low end of our current estimate of the propertys fair value.
If we are not able to find a buyer for this asset in a timely manner or if we have overestimated
the sales price we will receive, our liquidating distributions to our unit holders would be delayed
and/or reduced. Furthermore, the projected amount of liquidating distributions to our unit holders
are based upon the appraisal of our property, but real estate market values are constantly changing
and fluctuate with changes in interest rates, supply and demand dynamics, occupancy percentages,
lease rates, the availability of suitable buyers, the perceived quality and dependability of income
flows from tenancies and a number of other factors, both local and national. The net liquidation
proceeds from the Congress Center property may also be affected by the terms of prepayment or
assumption costs associated with debt encumbering the property. In addition, co-ownership matters,
transactional fees and expenses, environmental contamination at our property or unknown
liabilities, if any, may adversely impact the net liquidation proceeds from the asset.
Our co-ownership arrangements with affiliated entities may not reflect solely our unit holders
best interest and may subject our investment in Congress Center to increased risks.
We acquired our interest in the Congress Center property through a co-ownership arrangement
with affiliates of our Manager. Each co-owner is required to approve all sales, refinancings,
leases and lease amendments. This acquisition was financed, in part, by loans under which we may
have been or are jointly and severally liable for the entire loan amount along with the other
co-owner(s). The terms of this co-ownership arrangement may be more favorable to the co-owner(s)
than to our unit holders. In addition, investing in properties through co-ownership arrangements
subjects those investments to risks not present in a wholly-owned property, including, among
others, the following:
| the risk that the co-owner(s) in the investment might become bankrupt; |
| the risk that the co-owner(s) may at any time have economic or business interests or goals which are inconsistent with our business interests or goals; |
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| the risk that the co-owner(s) may not be able to make required payments on loans under which we are jointly and severally liable; |
| the risk that all the co-owners may not approve refinancings, leases and lease amendments requiring unanimous consent of co-owners that would have adverse consequences for our unit holders; or |
| the risk that the co-owner(s) may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives, such as disapproving the sale of the property. |
Actions by co-owner(s) requiring unanimous consent of co-owners might have the result of
blocking actions that are in our best interest subjecting the applicable property to liabilities in
excess of those otherwise contemplated and may have the effect of reducing our cash available for
distribution to our unit holders. It also may be difficult for us to sell our interest in any
co-ownership arrangement at the time we deem best for our unit holders.
The downturn in the credit markets may increase the cost of borrowing, and may make it difficult
for prospective buyers of the Congress Center property to obtain financing, which would have a
material adverse effect on our liquidation.
Ongoing events in the financial markets have had an adverse impact on the credit markets and,
as a result, the availability of credit has become more expensive and difficult to obtain. Most
lenders are imposing more stringent restrictions on the terms of credit and there may be a general
reduction in the amount of credit available in the markets in which we conduct business. The
negative impact on the tightening of the credit markets may have a material adverse effect on
prospective buyers of the Congress Center property resulting from, but not limited to, an inability
to assume the current loan on the Congress Center property which
matures October 1, 2014 and /or otherwise finance the
acquisition of the Congress Center property on favorable terms, if at all, increased financing
costs, and stricter loan-to-value ratios requiring significantly higher cash down payments upon
purchase or financing with increasingly restrictive covenants.
The negative impact of the adverse changes in the credit markets on the real estate sector
generally or on prospective buyers inability to obtain financing on favorable terms, if at all,
may have a material adverse effect on our liquidation.
Our ability to dispose of our interest in the Congress Center property and our ability to pay
distributions to our unit holders are subject to general economic and regulatory factors we cannot
control or predict.
Our liquidation is subject to the risks of a national economic slowdown or disruption, other
changes in national, regional or local economic conditions or changes in tax, real estate,
environmental or zoning laws. The following factors may affect income from the Congress Center
property, which would have a materially adverse effect on our ability to dispose of our interest in
the Congress Center property, and subsequently our ability to pay distributions to our unit
holders:
| poor economic times may result in defaults by tenants at the Congress Center property. We may also be required to provide rent concessions or reduced rental rates to maintain or increase occupancy levels; |
| job transfers and layoffs may cause vacancies to increase and a lack of future population and job growth may make it difficult to maintain or increase occupancy levels; |
| increases in supply of competing properties or decreases in demand for the Congress Center property may impact our ability to maintain or increase occupancy levels; |
| changes in interest rates and availability of debt financing could render the sale of the Congress Center property difficult or unattractive; |
| periods of high interest rates may reduce cash flow from leveraged property; |
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| increased insurance premiums, real estate taxes or energy or other expenses may reduce funds available for distribution or, to the extent such increases are passed through to tenants, may lead to tenant defaults. Also, any such increased expenses may make it difficult to increase rents to tenants on turnover, which may limit our ability to increase our returns; and |
| inability to increase or maintain the current occupancy rate and/or further deterioration of property values may prevent prospective buyers from obtaining financing for the acquisition of the Congress Center property due to stricter loan-to-value ratios, which would increase the amount of cash needed to purchase the property. |
We may delay and/or reduce our liquidating distributions to our unit holders.
As of March 5, 2010, we estimate that our net proceeds from liquidation will be approximately
$20,784,000 (of which $18,900,000 has been paid to our unit holders as of March 5, 2010) and we
expect to distribute per unit approximately $3,643.77 for Class A, $3,473.70 for Class B, and
$3,341.71 for Class C in liquidating distributions (of which $3,171.22 per unit for each class has
been paid as of March 5, 2010), which we anticipate paying by March 31, 2011. However, our
expectations about the amount of liquidating distributions that we will make and when we will make
them are based on many estimates and assumptions, one or more of which may prove to be incorrect.
As a result, the actual amount of liquidating distributions we pay to our unit holders may be more
or less than we currently estimate. In addition, the liquidating distributions to our unit holders
may be paid later than we predict.
Our plan of liquidation allows for the sale of our interest in the Congress Center property to
affiliates.
Our plan of liquidation provides that we may sell our interest in the Congress Center property
to an affiliate, but only if we obtain an independent third party fairness opinion as to the
fairness of the proposed transaction to us, from a financial point of view, or we receive an
appraisal of the underlying unconsolidated property as a condition to our Managers approval and
the proposed sales price is within the range of values provided by the appraisal. In no event will
our Manager approve a transaction if: (i) the independent third party conducting the fairness
opinion concludes after a review of the information then available, including any pending offers,
letters of intent, contracts for sale, appraisals or other data, that the consideration to be
received by us is not fair to us from a financial point of view; (ii) the independent third party
conducting the fairness opinion concludes that the consideration to be received is less than the
appraised value of the property; or (iii) we have received a higher offer for the property from a
credible party whom we reasonably believe is ready, able and willing to close the transaction on
the contract terms.
If any of the parties to a future sale agreement default thereunder, or if a sale does not
otherwise close, our liquidating distributions to our unit holders may be delayed or reduced.
The consummation of any future potential sales transaction is subject to the satisfaction of
applicable closing conditions. If the transaction contemplated by the future sale agreement does
not close because of a buyer default, failure of a closing condition or for any other reason, we
will need to locate a new buyer for the Congress Center property, which we may be unable to do promptly or at a price
or on terms that are as favorable as the failed transaction. We will also incur additional costs
involved in locating a new buyer and negotiating a new sale agreement
for the Congress Center property.
These additional costs are not included in our projections. In the event that we incur these
additional costs, our liquidating distributions to our unit holders would be delayed and/or
reduced.
Decreases in property values may reduce the amount that we receive upon the sale of our interest
in the Congress Center property.
The underlying value of the Congress Center property may be reduced by a number of factors
that are beyond our control, including, without limitation, the following:
| adverse changes in economic conditions; |
| the financial performance of our tenants, and the ability of our tenants to satisfy their obligations under their leases; |
| terminations and renewals of leases by our tenants; |
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| competition; and | ||
| changes in real estate tax rates and other operating expenses. |
Any reduction in the value of the Congress Center property would make it more difficult for us
to sell the asset for the amount that we have estimated. Reductions in the amount that we receive
when we sell our interest in the Congress Center property could decrease or delay the payment of
liquidating distributions to unit holders.
If we are unable to maintain the occupancy rates of currently leased space and lease currently
available space, if tenants default under their leases or other obligations to us during the
liquidation process or if our cash flow during the liquidation is otherwise less than we expect,
our liquidating distributions to our unit holders may be delayed and/or reduced.
In calculating our estimated liquidating distributions to our unit holders, we assumed that we
would maintain the occupancy rates of currently-leased space, that we would be able to rent certain
currently available space at market rents and that we would not experience any significant tenant
defaults during the liquidation process that were not subsequently cured. Negative trends in one or
more of these factors during the liquidation process may adversely affect the resale value of the
Congress Center property, which would hinder our ability to sell the property and reduce our
liquidating distributions to our unit holders. To the extent that we receive less rental income
than we expect during the liquidation process, our liquidating distributions to our unit holders
will be reduced. We may also decide in the event of a tenant default to restructure the lease,
which could require us to substantially reduce the rent payable to us under the lease, or make
other modifications that are unfavorable to us, which could decrease or delay the payment of
liquidating distributions to our unit holders.
If our liquidation costs or unpaid liabilities are greater than we expect, our liquidating
distributions to our unit holders may be delayed and/or reduced.
Before making the final liquidating distribution to our unit holders, we will need to pay or
arrange for the payment of all of our transaction costs in the liquidation, and all other costs and
all valid claims of our creditors. Our Manager may also decide to acquire one or more insurance
policies covering unknown or contingent claims against us, for which we would pay a premium which
has not yet been determined. Our Manager may also decide to establish a reserve fund to pay these
contingent claims. The total amount of transaction costs in the liquidation is not yet final, and,
therefore we have used estimates of these costs in calculating the amounts of our projected
liquidating distributions to our unit holders. To the extent that we have underestimated these
costs in calculating our projections, our actual net liquidation value may be lower than our
estimated range. In addition, if the claims of our creditors are greater than we have anticipated
or we decide to acquire one or more insurance policies covering unknown or contingent claims
against us, our liquidating distributions to our unit holders may be delayed and/or reduced.
Further, if a reserve fund is established, payment of liquidating distributions to our unit holders
may be delayed and/or reduced.
If we are not able to sell the Congress Center property in a timely manner, we may experience
severe liquidity problems, may not be able to meet our obligations to our creditors and ultimately
may become subject to bankruptcy proceedings.
In the event we are not able to sell the Congress Center property within a reasonable period
of time and for a reasonable amount, or if our expenses exceed our estimates, we may experience
severe liquidity problems and not be able to meet our financial obligations to our creditors in a
timely manner. If we cannot meet our obligations to our creditors in a timely manner, we may
ultimately become subject to bankruptcy proceedings.
We may be unable to secure funds for future capital improvements, which could adversely impact our
ability to attract or retain tenants, and subsequently pay liquidating distributions to our unit
holders.
In order to attract and retain tenants, the Congress Center property may be required to expend
funds for capital improvements. In addition, the Congress Center property may require substantial
funds for renovations in order to be sold, upgraded or repositioned in the market. If the Congress
Center property has insufficient capital reserves, it will have to obtain financing from other
sources. The Congress Center property has established capital reserves in an amount it, in its
discretion, believes is necessary. The lender also may require escrow of capital reserves in excess
of any established reserves.
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If these reserves or any reserves otherwise established are
designated for other uses or are insufficient to meet the Congress Center propertys cash needs,
the Congress Center property may have to obtain financing from either affiliated or unaffiliated
sources to fund cash requirements. We cannot assure our unit holders that sufficient financing will
be available to the Congress Center property or, if available, will be available to it on
economically feasible terms or on terms that would be considered acceptable. Moreover, certain
reserves required by the lender may be designated for specific uses and may not be available for
capital purposes such as future capital improvements. Additional borrowing for capital improvements
at the Congress Center property will increase interest expense, which could have a negative impact
on our proportionate share of the proceeds from the sale of the Congress Center property, and
therefore, our ability to pay liquidating distributions to our unit holders may be adversely
affected.
The Congress Center property is subject to property taxes that may increase in the future, which
could adversely affect our ability to sell our interest in the Congress Center property and to
subsequently pay liquidating distributions to our unit holders.
The Congress Center property is subject to property taxes that may increase as tax rates
change and as the Congress Center property is reassessed by taxing authorities. If property taxes
increase, our ability to sell our interest in the Congress Center property and subsequently pay
liquidating distributions to our unit holders could be adversely affected.
Our obligation to register our securities with the SEC subjects us to the Exchange Act,
Sarbanes-Oxley Act compliance and related reporting requirements and we may become subject to
liability for any failure to comply.
As a result of our obligation to register our securities with the SEC under the Securities
Exchange Act of 1934, as amended, or the Exchange Act, we are subject to the rules of the Exchange
Act and related reporting requirements. This compliance with the reporting requirements of the
Exchange Act requires timely filing of Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K
and Current Reports on Form 8-K, among other actions. Further, recently enacted and proposed laws,
regulations and standards relating to corporate governance and disclosure requirements applicable
to public companies, including the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley
Act. These laws, rules and regulations create new legal bases for administrative enforcement, civil
and criminal proceedings against us in case of non-compliance, thereby increasing our risk of
liability and potential sanctions. Costs incurred in defending against any such actions or
proceedings, and any liability or sanctions incurred in connection with such actions or proceedings
could decrease or delay the payment of liquidating distributions to our unit holders.
We were formed prior to the enactment of these new corporate governance standards and did not
intend to become subject to those provisions. As a result, we did not have all of the necessary
procedures and policies in place at the time of their enactment. Any failure to comply with the
Sarbanes-Oxley Act could result in fees, fines, penalties or administrative remedies, which could
reduce and/or delay the amount of distributions to our unit holders under our plan of liquidation.
If we are unable to retain our Manager and sufficient officers and employees of our Manager to
complete our plan of liquidation in a reasonably expeditious manner, our liquidating distributions
to our unit holders might be delayed or reduced.
We are managed by the executive officers and key employees of our Manager. Our ability to
locate qualified buyers for the Congress Center property and to negotiate and complete any such
sale, depends to a large extent upon the experience and abilities of our Managers officers and
employees, their familiarity with our assets, any counter-parties to any sale agreements and the
market for our one remaining unconsolidated property, and their ability to efficiently manage the
professionals in the process. We face the risk that these individuals might resign. Our inability
to retain these individuals could adversely affect our ability to complete our plan of liquidation
in a reasonably expeditious manner and our prospects of selling our one remaining unconsolidated
property at the expected price.
Our ability to complete our plan of liquidation in a timely manner also depends on our
Managers ability to retain its key employees. Our Managers officers and employees may seek other
employment rather than remain with our Manager throughout the process of liquidation. If our
Manager: (i) is unable to retain appropriate qualified
officers and employees to complete our plan of liquidation in a reasonably expeditious manner;
(ii) suffers or is distracted by adverse financial or operational problems in connection with its
operations unrelated to us; and/or (iii) is unable to allocate sufficient resources to oversee and
perform our operations for any reason, then our liquidating distributions to our unit holders might
be delayed and/or reduced.
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Our unit holders may not receive any profits resulting from the sale of our interest in the
Congress Center property, or receive such profits in a timely manner, because we may provide
financing to the purchaser of such property.
In accordance with our plan of liquidation, our unit holders may experience a delay before
receiving their share of the net proceeds of such liquidation. In liquidation, we may sell our
interest in the Congress Center property either subject to or upon the assumption of any then
outstanding mortgage debt or, alternatively, may provide financing to purchasers. We may take a
purchase money obligation secured by a mortgage on the asset at the time of sale as partial payment
thereof. We do not have any limitations or restrictions on our right to take such purchase money
obligations. To the extent we receive promissory notes or other property in lieu of cash from the
sale, such proceeds, other than any interest payable on those proceeds, will not be included in net
sale proceeds until and to the extent the promissory notes or other property are actually paid,
sold, refinanced or otherwise disposed of. In many cases, we may receive initial down payments in
an amount less than the selling price and subsequent payments may be spread over a number of years.
In such event, our unit holders may experience a delay in the distribution of the net proceeds of a
sale until such time as the installment payments are paid and not in default.
Our entity value may be adversely affected by adoption of our plan of liquidation.
In accordance with our plan of liquidation, we are committed to winding-up our operations.
This may adversely affect the value that a potential acquirer might place on us or put pressure on
us to sell our interest in the Congress Center property at or below the end of the estimated range,
which would reduce the amount of distributions to our unit holders.
There can be no assurance that our plan of liquidation will result in greater returns to our unit
holders on their investment within a reasonable period of time, than our unit holders would
receive through other alternatives reasonably available to us.
Our
unit holders will no longer participate in any future earnings or
growth of our one remaining asset or
benefit from any increases in the value of our asset once such asset
is sold. While our Manager
believes that liquidation will be more likely to provide our unit holders with a greater return on
their investment within a reasonable period of time than our unit holders would receive through
other alternatives reasonably available to us, such belief relies on certain assumptions and
judgments concerning future events which may be unreliable or incorrect.
Our Manager may amend our plan of liquidation without unit holder approval.
Our Manager may amend our plan of liquidation without further unit holder approval, to the
extent permitted by Virginia law. Thus, to the extent that Virginia law permits us to so do, we may
decide to conduct the liquidation differently than was described in the proxy statement. Further,
our Manager may terminate our plan of liquidation without further action by our unit holders,
except as may be prohibited by Virginia law.
Our Manager has the authority to sell the Congress Center property under terms less favorable than
those assumed for the purpose of estimating our net liquidation value range.
Our Manager has the authority to sell the Congress Center property on such terms and to such
parties as our Manager determines in its sole discretion. Notably, our unit holders will have no
subsequent opportunity to vote on such matters and will, therefore, have no right to approve or
disapprove the terms of such sale. Accordingly, our unit holders must rely solely on our judgment
with respect to the sale process and our judgment may not always be the best judgment when
evaluating in hindsight.
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Our plan of liquidation may lead to unit holder litigation which could result in substantial costs
and distract our Manager.
Historically, extraordinary corporate actions by a company, such as our proposed plan of
liquidation, sometimes lead to securities class action lawsuits being filed against that company.
We may become involved in this type of litigation as a result of our plan of liquidation. As of
March 5, 2010, no such lawsuits relative to our plan of liquidation have been filed. However, if
such a lawsuit is filed against us, the litigation is likely to be expensive and, even if we
ultimately prevail, the process will divert our Managers attention from implementing our plan of
liquidation and otherwise operating our business. If we do not prevail in any such lawsuit which
may be filed against us in the future, we may be liable for damages. In such event, we cannot
predict the amount any such damages; however, they may be significant and may reduce our cash
available for liquidating distributions to our unit holders.
Our Managers executives and our Manager have conflicts of interest that differ from our unit
holders as a result of the liquidation.
Our Manager, its affiliates and employees have interests in the liquidation that are different
from their interests as a unit holder. Our Manager is aware of these actual and potential conflicts
of interest. Some of the conflicts of interest presented by the liquidation are summarized below.
Our Manager or its affiliates receive compensation under the Operating Agreement and the
Management Agreement, including fees for disposing of our one remaining unconsolidated property.
Our Manager has engaged affiliates of our Manager, to provide a number of services in connection
with our property, including disposing of our one remaining unconsolidated property. In accordance
with our plan of liquidation, our Manager, Realty, or another affiliate of our Manager, will be
paid to liquidate our assets pursuant to the Operating Agreement and the Management Agreement. Such
fee will be a selling commission equal to up to 5.0% of the gross sales price of our one remaining
unconsolidated property if the terms of the sale are approved by us. Based on our estimated sales
price as of December 31, 2009, we estimate that pursuant to the Operating Agreement, we will pay
fees to our Manager or Realty of approximately $181,000 for disposing of the Congress Center
property. Our Manager or Realty also has agreements with certain affiliated co-owners of our
property, under which our Manager or Realty will also receive fees for the disposition of the
affiliated co-owners interests in the underlying property. Based on our estimated sales price as
of December 31, 2009, we estimate that the total fees that will be received by our Manager or
Realty from the affiliated co-owners will be approximately $1,295,000. Moreover, if we sell our
interest in the Congress Center property to an affiliate of ours or an affiliate of our Manager,
our Manager or Realty may receive additional fees from the purchaser of the underlying property.
Our Manager is also entitled to receive liquidating distributions pursuant to the Operating
Agreement. As of December 31, 2009, we estimate that our Manager will receive approximately
$382,000 in liquidating distributions.
Our plan of liquidation has caused our accounting basis to change, which could require us to
write-down our assets.
In accordance with our plan of liquidation, we have changed our basis of accounting from the
going-concern basis to that of the liquidation basis of accounting. In order for our financial
statements to be in accordance with accounting principles generally accepted in the United States
of America under the liquidation basis of accounting, all of our assets have been stated at their
estimated fair value and all of our liabilities (including those related to severance agreements)
are recorded at the estimated amounts at which the liabilities are expected to be settled. We may
make liquidating distributions to our unit holders that exceed the carrying amount of our net
assets. However, we cannot assure our unit holders what the ultimate amounts of such liquidating
distributions will be. Under the liquidation basis of accounting, the fair value of the assets and
liabilities is estimated at each reporting period, and therefore, there is a risk that our assets
may substantially decrease, due to revised estimates of the fair value or, that certain of our
liabilities be increased or certain other liabilities be recorded to reflect the anticipated
effects of an orderly liquidation. Write downs in our assets could reduce the price that a third
party would be willing to pay to acquire our unit holders units or our assets.
We may be unable to sell our interest in a limited liability company at our expected value.
Our investment in the Congress Center property is held as a member of a limited liability
company, or LLC, that holds an undivided tenant-in-common, or TIC, interest in the property. Under
the liquidation basis of accounting, we account for this interest at its estimated fair value. As
of December 31, 2009, our proportionate share of the estimated fair value of this property was
$572,000. Because of the nature of joint ownership, we will need to agree
with our co-owners on the terms of the property sale before the sale can be affected. There
can be no assurance that we will agree with our co-owners on satisfactory sales terms for this
property. If the parties are unable to agree, the matter could ultimately be presented to a court
of law, and a judicial partition could be sought. A failure to reach agreement with these parties
regarding the sales terms of this property may delay and/or reduce our liquidating distributions to
our unit holders. Additionally, in order to realize a return on our investment, we presently intend
to sell our interest in this LLC. We may be unable to receive our expected value for this property
because we hold a minority interest in the LLC and thus cannot sell our property interest held in
the limited liability company or the Congress Center property in its entirety.
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Unit holders could be liable to the extent of liquidating distributions received if contingent
reserves are insufficient to satisfy our liabilities.
If we fail to create an adequate contingency reserve for payment of our expenses and
liabilities, or if we transfer our assets to a liquidating trust and the contingency reserve and
the assets held by the liquidating trust are less than the amount ultimately found payable in
respect of expenses and liabilities, each of our unit holder could be held liable for the payment
to creditors of such unit holders pro rata portion of the excess, limited to the amounts
previously received by the unit holder in distributions from us or the liquidating trust.
If a court holds at any time that we have failed to make adequate provision for our expenses
and liabilities or if the amount ultimately required to be paid in respect of such liabilities
exceeds the amount available from the contingency reserve and the assets of the liquidating trust,
our creditors could seek an injunction to prevent us from making distributions to our unit holders
under our plan of liquidation on the grounds that the amounts to be distributed are needed to
provide for the payment of our expenses and liabilities. Any such action could delay or
substantially diminish the cash distributions to be made to unit holders and/or holders of
beneficial interests of the liquidation trust under our plan of liquidation.
We may have underestimated the amount of prepayment fees or defeasance charges on our mortgages.
In calculating the estimated fair value of the Congress Center property and, therefore, our
estimated per unit distribution amount, we have assumed that any purchaser of the Congress Center
property will assume the mortgage on the underlying property, which contains penalties in the event
of the prepayment of that mortgage. The sale of our remaining asset pursuant to our plan of
liquidation will trigger substantial penalties unless the purchaser assumes (and/or is allowed to
assume) the corresponding mortgage. We may be unsuccessful in negotiating the assumption of any
underlying mortgage in connection with the sale of our remaining asset, which could negatively
affect the amount of cash available for distribution to our unit holders under our plan of
liquidation.
Other Risks of Our Business
Distributions paid by us have included, and will continue to include, a return of capital.
Distributions paid to our unit holders have included, and will continue to include, a return
of capital as well as a return in excess of capital. Distributions exceeding taxable income will
constitute a return of capital for federal income tax purposes to the extent of a unit holders
adjusted tax basis. Distributions in excess of adjusted tax basis will generally constitute capital
gain.
We depend upon our tenants to pay rent, and their inability to pay rent may substantially reduce
our revenues and cash available for distribution to our unit holders.
Our investment in the Congress Center property is subject to varying degrees of risk that
generally arise from the ownership of real estate. The value of our property interest and the
ability to make distributions to our unit holders depend upon the ability of the tenants at our
property to generate enough income in excess of applicable operating expenses to make their lease
payments to us. Changes beyond our control may adversely affect the tenants ability to make their
lease payments to us and, in such event, would substantially reduce both our income from operations
and our ability to make distributions to our unit holders. These changes include, among others, the
following:
| downturns in national, regional or local economic conditions where our property is located, which generally will negatively impact the demand for office space and rental rates; |
| changes in local market conditions such as an oversupply of office properties, including space available by sublease, or a reduction in demand for the lease of office properties, making it more difficult for us to lease space at attractive rental rates or at all; |
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| competition from other available office properties owned by others, which could cause us to lose current or prospective tenants or cause us to reduce rental rates to competitive levels; |
| our ability to pay for adequate maintenance, insurance, utility, security and other operating costs, including real estate taxes and debt service payments, that are not necessarily reduced when circumstances such as market factors and competition cause a reduction in income from a property; and |
| changes in federal, state or local regulations and controls affecting rents, prices of goods, interest rates, fuel and energy consumption. |
Due to these changes, among others, tenants and lease guarantors, if any, may be unable to
make their lease payments. A default by a tenant or the failure of a tenants guarantor to fulfill
its obligations to us, or an early termination of a lease as a result of a tenant default or
otherwise could, depending upon the size of the leased premises and our Managers ability to
successfully find a substitute tenant, have an adverse effect on our revenues and cash available
for distribution to our unit holders.
Our use of borrowings on the Congress Center property could result in its foreclosure and
unexpected debt service expenses upon refinancing, both of which could have an adverse impact on
our operations and cash flow. Additionally, restrictive covenants in our loan documents may
restrict our operating activities.
We rely on borrowings to partially fund capital expenditures and other items. As of
December 31, 2009, there was $93,486,000 of debt outstanding related to the Congress Center
property, our proportionate share of which was $11,480,000. Accordingly, we are subject to the
risks normally associated with debt financing, including, without limitation, the risk that our
cash flow may not be sufficient to cover required debt service payments. There is also a risk that,
if necessary, existing indebtedness will not be able to be refinanced or that the terms of such
refinancing will not be as favorable as the terms of the existing indebtedness.
In addition, if we cannot meet our required mortgage payment obligations, the Congress Center
property could be foreclosed upon by, or otherwise transferred to, our lender, with a consequent
loss of income and asset value to us. For tax purposes, a foreclosure on our property would be
treated as a sale of the property for a purchase price equal to the outstanding balance of the debt
secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our
tax basis in the property, we would recognize taxable income on foreclosure, but we may not receive
any cash proceeds.
The mortgage on the Congress Center property contains customary restrictive covenants,
including provisions that limit the borrowing subsidiarys ability, without the prior consent of
the lender, to incur additional indebtedness, further mortgage or transfer the applicable property,
discontinue insurance coverage, change the conduct of its business or make loans or advances to,
enter into any transaction of merger or consolidation with any third party. In addition, any future
lines of credit or loans may contain financial covenants, further restrictive covenants and other
obligations.
If we materially breach such covenants or obligations under the Congress Center loan
agreement, the lender may have the right to seize our income from the property or legally declare a
default on the loan obligation, require us to repay the debt immediately and foreclose on the
property, among other remedies. If we were to breach such covenants or obligations, we may then
have to sell the Congress Center property either at a loss or at a time that prevents us from
achieving a higher price. Any failure to pay our indebtedness when due or failure to cure events of
default could result in higher interest rates during the period of the loan default and could
ultimately result in the loss of the property through foreclosure. Additionally, if the lender were
to seize our income from the property, we
would no longer have any discretion over the use of the income, which may adversely impact our
ability to make liquidating distributions to our unit holders.
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Due to the risks involved in the ownership of real estate, there is no guarantee of any return on
our unit holders investments and our unit holders may lose some or all of their investments.
By owning units, our unit holders will be subjected to the risks associated with owning real
estate. Ownership of real estate is subject to significant risks. The performance of our unit
holders investment in us is subject to risks related to the ownership and operation of real
estate, including, without limitation, the following:
| changes in the general economic climate; |
| changes in local conditions such as an oversupply of space or reduction in demand for real estate; |
| changes in interest rates and the availability of financing; and |
| changes in laws and governmental regulations, including those governing real estate usage, zoning and taxes. |
If our property interest decreases in value, the value of our unit holders investment will
likewise decrease and our unit holders could lose some or all of their investment.
If the Congress Center property is unable to generate sufficient funds to pay its expenses,
liabilities or distributions, we may need to borrow funds to pay such expenses, liabilities or
distributions, which may cause our liquidating distributions to our unit holders to be reduced
and/or delayed.
If the Congress Center property is unable to generate sufficient funds to pay its expenses,
liabilities or distributions, the Congress Center property may need to borrow funds from affiliates
or third parties to pay such expenses, liabilities or distributions and incur an interest expense.
The payment of interest expenses may reduce the amount available for distributions to us which may
then reduce or delay the timing of our liquidating distributions to our unit holders since the
Congress Center property is our one remaining unconsolidated property and source of revenue.
The failure of any bank in which we deposit our funds could reduce the amount of cash we have
available to pay liquidating distributions.
The Federal Deposit Insurance Corporation, or FDIC, currently insures amounts up to $250,000
per depositor per insured bank. We currently have cash and cash equivalents deposited in certain
financial institutions in excess of federally insured levels. If any of the banking institutions in
which we have deposited funds ultimately fails, we may lose the amount of our deposits over any
federally insured amount. The loss of our deposits could reduce the amount of cash we have
available to repay debt obligations, fund operations and distribute to unit holders, which could
result in a decline in the value of our unit holders investments.
The Congress Center property faces significant competition.
We face significant competition from other owners, operators and developers of office
properties. The Congress Center property faces competition from similar properties owned by others
in the same market and also from new construction of similar properties. Such competition may
affect our ability to attract and retain tenants and may reduce the rents we are able to charge.
These competing properties may have vacancy rates higher than the Congress Center property, which
may cause their owners to rent space at lower rental rates than those charged by us or to provide
greater tenant improvement allowances or other leasing concessions than we provide to our tenants.
As a result, we may be required to provide rent concessions, incur charges for tenant improvements
and other inducements, or we may not be able to timely lease the space, all of which would
adversely impact our liquidity and net assets in liquidation, which could reduce distributions to
our unit holders. At the time we sell our interest in the Congress Center property, we will be in
competition with sellers of similar properties to locate suitable purchasers, which may result in
us receiving lower proceeds from the disposal or result in us not being able to dispose of the
property due to the lack of an acceptable return.
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The sale of our interest in the Congress Center property could cause our unit holders to recognize
income in excess of cash distributions to our unit holders.
We plan to sell, transfer or otherwise dispose of our interest in the Congress Center property
in accordance with our plan of liquidation. The sale of the Congress Center property will generate
taxable income or loss that must be taken into account by our unit holders based upon the amount of
income or loss allocated to our unit holders. The amount of income, if any, derived from the sale
of our interest in the Congress Center property may be greater than the amount of cash distributed
to our unit holders in connection with such sale. Under certain circumstances, such cash
distributions may not be sufficient to pay our unit holders tax liabilities resulting from the
sale.
Lack of diversification and illiquidity of real estate may make it difficult for us to sell or
recover our investment in the Congress Center property.
Our business is subject to risks associated with an investment solely in real estate. Real
estate investments are relatively illiquid. Pursuant to our plan of liquidation, we expect to sell
the Congress Center property by December 31, 2010. However, due to the illiquid nature of real
estate and the short timeframe that we have to sell the Congress Center property, we may not recoup
the estimated fair value we have recorded as of December 31, 2009 by December 31, 2010. We cannot
provide assurance that we will be able to dispose of the Congress Center property by December 31,
2010, which could adversely impact the timing and amount of distributions.
Lack of geographic diversity may expose us to regional economic downturns that could adversely
impact our operations or our ability to recover our investment in the Congress Center property.
Our portfolio lacks geographic diversity due to its limited size and the fact that as of March
5, 2010, we only have one unconsolidated property, located in Chicago, Illinois. The geographic
concentration of the Congress Center property exposes us to economic downturns in this region. A
regional recession impacting this state could adversely affect our ability to generate or increase
operating revenues, attract new tenants or dispose of the Congress Center property. In addition,
our property may face competition in this geographic region from other properties owned, operated
or managed by our Manager or its affiliates or third parties. Our Manager or its affiliates have
interests that may vary from ours in such geographic markets.
Due to our ownership of only a single property interest in the Congress Center property, we are
dependent upon those tenants that generate significant rental income at Congress Center, which may
have a negative impact on our financial condition if these tenants are unable to meet their rental
obligations to us, or if we are unable to retain our current tenants.
As of March 5, 2010, rent paid by the tenants at the Congress Center property represented 100%
of our annualized revenues. The revenue generated by the Congress Center property is substantially
dependent on our ability to retain our current tenants and on the financial condition of the
significant tenants at the property. Three of our current tenants, which represent approximately
44.0% of the gross leasable area, or GLA, of the Congress Center property, have leases that will
expire in the next 26 months. Our inability to retain our significant tenants or any event of
bankruptcy, insolvency or a general downturn in the business of any of our significant tenants may
result in the failure or delay of such tenants rental payments to us, which may have an adverse
impact on our financial performance and our ability to pay distributions to our unit holders.
On December 21, 2006, Realty received a termination notice from Employers Reinsurance
Corporation notifying Realty of their intent to exercise their option to terminate their lease for
approximately 67,000 square feet effective January 1, 2008 at the Congress Center property. From
January 1, 2008 and continuing through and including the payment date occurring on December 1,
2011, the lender is entitled to receive $83,000 on a monthly basis from the borrower. In January
2007, Employers Reinsurance Corporation paid $3,773,000 to the lender as an early termination fee
penalty pursuant to their lease agreement. We, along with G REIT Liquidating Trust (successor of
G REIT, Inc.) and T REIT Liquidating Trust (successor of T REIT, Inc), or our Affiliate co-owners,
paid the remaining $27,000 of the early termination fee penalty owed to the lender. As of
December 31, 2009, we have advanced $112,000 to the lender for the reserves associated with the
early lease termination. It is anticipated that upon the sale of the Congress Center property, we,
along with our Affiliate co-owners will receive repayment of any advances
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made to the lender for reserves. In May 2009, NNN Congress Center LLC entered into a
lease agreement with the Internal Revenue Service, or IRS, for approximately 28,000 square feet of
space previously leased by Employers Reinsurance Corporation. The lease begins on April 1, 2010
for a period of ten years, seven years firm, subject to termination rights pursuant to the lease
agreement at an annual rate of $31.00 per square foot. Pursuant to the lease agreement, there are
scheduled annual rent increases, and various rent concessions and commission credits have been
given to the IRS in lease years one and two. We will continue our marketing efforts to re-lease
the remaining un-leased space. Our failure to re-lease this space may reduce or delay our
liquidating distributions to our unit holders.
Losses for which we either could not or did not obtain insurance will adversely affect our
earnings and we may be unable to comply with insurance requirements contained in mortgage or other
agreements due to high insurance costs.
We endeavor to maintain comprehensive insurance on the property we own, including liability
and fire and extended coverage, in amounts sufficient to permit the replacement of the one
remaining unconsolidated property in the event of a total loss, subject to applicable deductibles.
However, we could still suffer a loss due to the cost to repair any damage to the one remaining
unconsolidated property that is not insured or is underinsured. There are types of losses,
generally of a catastrophic nature, such as losses due to terrorism, wars, earthquakes, floods or
acts of God that are either uninsurable or not economically insurable. If such a catastrophic event
were to occur, or cause the destruction of our one remaining unconsolidated property, we could lose
both our invested capital and anticipated profits from such one remaining unconsolidated property.
Additionally, we could default under debt or other agreements if the cost and/or availability of
certain types of insurance make it impractical or impossible to comply with covenants relating to
the insurance we are required to maintain under such agreements. In such instances, we may be
required to self-insure against certain losses or seek other forms of financial assurance.
Additionally, inflation, changes in building codes and ordinances, environmental considerations and
other factors also might make it infeasible to use insurance proceeds to replace a property if it
is damaged or destroyed. Under such circumstances, the insurance proceeds received by us might not
be adequate to restore our economic position with respect to the affected property.
On
February 17, 2010, we received a letter from our lender stating that our insurance policy
covering the Congress Center property is deficient because several of the carriers providing
coverage under our policy do not meet one or more of the carrier rating requirements as set forth
in the loan documents. We are obligated to bring the insurance deficiencies into compliance with
the requirements set forth in the loan documents upon the renewal or replacement of our insurance
policy and in no event later than thirty days after the expiration date of the policy, which is set
to expire on March 7, 2010. If we are unable to cure the insurance deficiencies, or obtain a waiver
from the lender, it could result in our lender exercising the rights and remedies afforded to it
under the loan documents, including but not limited to the right to force-place the insurance
coverage at any time, the right to accelerate all amounts outstanding under the loan, and/or
foreclosure of the property. We can give no assurance that we will be able to cure the insurance
deficiencies within the timeframe stated above, or at all, or that if we are successful in
obtaining the required insurance coverage that we will be able to maintain such insurance coverage
in compliance with the loan documents.
There is currently no public market for our units. Therefore, it will likely be difficult for our
unit holders to sell their units and, if our unit holders are able to sell their units in a fully
liquid manner, our unit holders may elect to do so at a substantial discount from the price our
unit holders paid for these matters.
There currently is no public market for our units. Additionally, the Operating Agreement
contains restrictions on the ownership and transfer of our units, and these restrictions may
inhibit our unit holders ability to sell their units. It may be difficult for our unit holders to
sell their units promptly or at all. If our unit holders are able to sell their units, our unit
holders may only be able to do so at a substantial discount from the price our unit holders paid.
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The Congress Center property was purchased at a time when the commercial real estate market was
experiencing substantial influxes of capital investment and competition for properties; therefore
the Congress Center property may not maintain its current value or may further decrease in value.
The commercial real estate market experienced a substantial influx of capital from investors
prior to the recent market turmoil. This substantial flow of capital, combined with significant
competition for real estate, resulted in inflated purchase prices for such assets. The Congress
Center property was purchased in such an environment, therefore we are subject to the risk that if
the real estate market ceases to attract the same level of capital investment in the future as it
has attracted, or if the number of companies seeking to acquire such assets decreases, our returns
will be lower. The current estimated value of the Congress Center property is less than our
purchase price and we can give no assurance that the property will maintain its current value, or
that the value will not continue to decrease even further.
We have terminated our regular monthly distributions; future distributions are at the discretion
of our Manager.
Following payment of the April 2005 monthly distribution to our unit holders, the then board
of managers of our Manager decided to discontinue the payment of monthly distributions to our unit
holders. Future liquidating distributions to our unit holders will be made from net proceeds
received by us from the sale of our one remaining unconsolidated property, and will be determined
at the discretion of our Manager. Liquidating distribution amounts to our unit holders will depend
on net proceeds received from the sale of our one remaining unconsolidated property, our
anticipated cash needs to satisfy liquidation and other expenses, financial condition and capital
requirements and other factors our Manager may deem relevant. Our ability to pay liquidating
distributions to our unit holders may be adversely affected by the risks described herein.
Our past performance is not a predictor of our future results.
Neither the track record of our Manager in managing us, nor its performance with entities
similar to ours shall imply or predict (directly or indirectly) any level of our future performance
or the future performance of our Manager. Our Managers performance and our performance is
dependent on future events and is, therefore, inherently uncertain. Past performance cannot be
relied upon to predict future events for a variety of factors, including, without limitation,
varying business strategies, different local and national economic circumstances, different supply
and demand characteristics relevant to buyers and sellers of assets, varying degrees of competition
and varying circumstances pertaining to the capital markets.
The conflicts of interest of our Managers executives and employees with us mean we will not be
managed by our Manager solely in the best interest of our unit holders.
Our Managers executives and employees have conflicts of interest relating to the management
of our business and property. Accordingly, those parties may make decisions or take actions based
on factors other than in the best interest of our unit holders.
Our Manager also advises G REIT Liquidating Trust and T REIT Liquidating Trust, and manages
NNN 2003 Value Fund, LLC, as well as private TIC programs and other real estate investment
programs, all of which may compete with us or otherwise have similar business interests and/or
investment objectives. Some of the executive officers and employees of our Manager also serve as
officers of NNN 2003 Value Fund, LLC. Additionally, our Manager is a wholly owned indirect
subsidiary of Grubb & Ellis Company, or Grubb & Ellis, and certain executive officers and employees
of our Manager own de-minimis interests in Grubb & Ellis. As officers, directors, and partial
owners of entities that do business with us or that have interests in competition with our own
interests, these individuals will experience conflicts between their obligations to us and their
obligations to, and pecuniary interests in, our Manager, Grubb & Ellis and their affiliated
entities. These conflicts of interest could:
| limit the time and services that our Manager devotes to us, because it will be providing similar services to G REIT Liquidating Trust, T REIT Liquidating Trust, NNN 2003 Value Fund, LLC and other real estate investment programs and properties; |
19
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| impair our ability to compete for tenants in geographic areas where other properties are advised by our Manager and its affiliates; and |
| impair our ability to compete for the disposition of properties with other real estate entities that are also advised by our Manager and its affiliates and seeking to dispose of properties at or about the same time as us. |
If our Manager or its affiliates breach their fiduciary obligations to us, we may not meet our
investment objectives, which could reduce the expected cash available for distribution to our unit
holders.
The absence of arms length bargaining may mean that our agreements are not as favorable to our
unit holders as these agreements otherwise would have been.
Any existing or future agreements between us and our Manager, Realty or their affiliates were
not and will not be reached through arms length negotiations. Thus, such agreements may not solely
reflect our unit holders interests as a unit holder. For example, the Operating Agreement was not
the result of arms length negotiations. As a result, these agreements may be relatively more
favorable to the other counterparty than to us.
Increases in our insurance rates could adversely affect our cash flow and our ability to make
liquidating distributions to our unit holders.
We cannot assure that we will be able to renew our insurance coverage at our current or
reasonable rates or that we can estimate the amount of potential increases of policy premiums. As a
result, our cash flow could be adversely impacted by increased premiums. In addition, the sales
price of the Congress Center property may be affected by rising insurance costs and adversely
affect our ability to make liquidating distributions to our unit holders.
We do not expect to register as an investment company under the Investment Company Act and,
therefore, we will not be subject to the requirements imposed on an investment company by such
Act.
We believe that we will not operate in a manner that requires us to register as an investment
company under the Investment Company Act of 1940, as amended, or the Investment Company Act.
Investment companies subject to the Investment Company Act are required to comply with a variety of
substantive requirements such as requirements relating to:
| limitations on the capital structure of the entity; |
| restrictions on certain investments; |
| prohibitions on transactions with affiliated entities; and |
| public reporting disclosures, record keeping, voting procedures, proxy disclosure and similar corporate governance rules and regulations. |
Many of these requirements are intended to provide benefits or protections to security holders
of investment companies. Because we do not expect to be subject to these requirements, our unit
holders will not be entitled to these benefits or protections.
In order to maintain our exemption from regulation under the Investment Company Act, we must
engage primarily in the business of buying real estate. In addition, in order to operate in a
manner to avoid being required to register as an investment company we may be unable to sell assets
we would otherwise want to sell, and we may need to sell assets we would otherwise wish to retain.
This may reduce the cash available for distribution to unit holders and possibly lower their
returns.
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If we are required to register as an investment company under the Investment Company Act, the
additional expenses and operational limitations associated with such registration may reduce our
unit holders investment return.
We do not expect that we will operate in a manner that requires us to register as an
investment company under the Investment Company Act. However, the analysis relating to whether a
company qualifies as an investment company can involve technical and complex rules and regulations.
If we own assets that qualify as investment securities, as such term is defined under this Act, and
the value of such assets exceeds 40.0% of the value of our total assets, we may be deemed to be an
investment company. It is possible that many, if not all, of our interests in real estate may be
held through other entities and some or all of these interests in other entities may be deemed to
be investment securities.
If we held investment securities and the value of these securities exceeded 40.0% of the value
of our total assets, we may be required to register as an investment company. Investment companies
are subject to a variety of substantial requirements that could significantly impact our
operations. The costs and expenses we would incur to register and operate as an investment company,
as well as the limitations placed on our operations, could have an adverse impact on our operations
and our unit holders investment return.
If we were required to register as an investment company but failed to do so, we would be
prohibited from engaging in our business, criminal and civil actions could be brought against us,
our contracts would be unenforceable unless a court were to require enforcement, and a court could
appoint a receiver to take control of us and liquidate our business.
Item 1B. | Unresolved Staff Comments. |
Not applicable.
Item 2. | Properties. |
Real Estate Investments
As of December 31, 2009, we owned a 12.3% interest in the Congress Center property. Our
interest in the Congress Center property is held as a member of a limited liability company, or
LLC, that owns a TIC interest in the property. The Congress Center property has an aggregate GLA
of approximately 520,000 square feet.
The following table presents certain information about the Congress Center property as of
December 31, 2009:
Property | GLA | % | Date | Annual | % Physical | Annual Rent | ||||||||||||||||||||||
Property Name | Location | (Sq Ft) | Owned | Acquired | Rent(1) | Occupancy(2) | Per Sq Ft(3) | |||||||||||||||||||||
Congress Center |
Chicago, IL | 520,000 | 12.3 | % | 1/9/03 | $ | 12,374,000 | 78.9 | % | $ | 30.15 |
(1) | Annualized rental income is based on contractual base rent from leases in effect as of December 31, 2009. | |
(2) | Physical occupancy as of December 31, 2009. | |
(3) | Average effective annual rent per occupied square foot as of December 31, 2009. |
Prior to the adoption of our plan of liquidation, our investment in unconsolidated real estate
was accounted for under the equity method. Under the liquidation basis of accounting, our
investment in unconsolidated real estate is recorded at fair value (on an undiscounted basis).
The following information generally applies to the Congress Center property as of December 31,
2009:
| we have no plans for any material renovations, improvements or development of the property, except in accordance with planned budgets; and |
| our property is located in a market where we are subject to competition for attracting new tenants and retaining current tenants. |
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The following is a summary of our organizational structure and ownership information for the
Congress Center property as of December 31, 2009:
NNN 2002 Value Fund, LLC
Congress Center
The following is a summary of our relationship with entities with ownership interests in the
Congress Center property as of December 31, 2009:
Indebtedness
As of December 31, 2009, there were two secured mortgage loans outstanding related to the
Congress Center property, our proportionate share of which approximates $11,480,000. See Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations, and
Note 8 Commitments and Contingencies, to the consolidated financial statements included with
this report.
Item 3. | Legal Proceedings. |
None.
Item 4. | [Reserved.] |
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PART II
Item 5. | Market for Registrants Common Equity, Related Unit Holder Matters and Issuer Purchases of Equity Securities. |
Market Information
There is no established public trading market for our units.
As of March 5, 2010, there were no outstanding options or warrants to purchase, or securities
convertible into, units. In addition, there were no units that could be sold pursuant to Rule 144
under the Securities Act or that we have agreed to register under the Securities Act for sale by
unit holders, and there were no units that are being, or have been publicly proposed to be,
publicly offered by us.
Unit Holders
As of March 5, 2010, there were 548 unit holders of record, with 205, 210 and 209 holders of
Class A units, Class B units and Class C units, respectively. Certain of our unit holders hold
units in more than one class of units.
Distributions
The Operating Agreement provides that Class A unit holders receive a 10.0% per annum
cumulative return, or a 10.0% priority return, Class B unit holders receive a 9.0% per annum
cumulative return, or a 9.0% priority return, and Class C unit holders receive an 8.0% per annum
cumulative return, or an 8.0% priority return.
The distributions declared per Class A unit in each quarter since January 1, 2007 are as
follows:
Quarters Ended | 2009 | 2008 | 2007 | |||||||||
March 31 |
N/A | N/A | N/A | |||||||||
June 30 |
N/A | N/A | N/A | |||||||||
September 30 |
N/A | N/A | N/A | |||||||||
December 31 |
N/A | N/A | $ | 67.11 |
The distributions declared per Class B unit in each quarter since January 1, 2007 are as
follows:
Quarters Ended | 2009 | 2008 | 2007 | |||||||||
March 31 |
N/A | N/A | N/A | |||||||||
June 30 |
N/A | N/A | N/A | |||||||||
September 30 |
N/A | N/A | N/A | |||||||||
December 31 |
N/A | N/A | $ | 67.11 |
The distributions declared per Class C unit in each quarter since January 1, 2007 are as
follows:
Quarters Ended | 2009 | 2008 | 2007 | |||||||||
March 31 |
N/A | N/A | N/A | |||||||||
June 30 |
N/A | N/A | N/A | |||||||||
September 30 |
N/A | N/A | N/A | |||||||||
December 31 |
N/A | N/A | $ | 67.11 |
At a special meeting of our unit holders on September 7, 2005, our unit holders approved our
plan of liquidation. Our plan of liquidation gives our Manager the power to sell any and all of our
assets without further approval by our unit holders and provides that liquidating distributions be
made to our unit holders as determined by our Manager in their sole discretion. Liquidating
distributions to our unit holders will be determined based on a number of factors, including the
amount of funds available for distribution, our financial condition, our capital expenditures and
other
factors our Manager may deem relevant. Following the payment of the April 2005 monthly
distribution to our unit holders, the then board of managers decided to discontinue the payment of
monthly distributions.
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Class A units, Class B units and Class C units have received identical per-unit distributions;
however, distributions will vary among the three classes in the future. To the extent that prior
distributions have been inconsistent with the distribution priorities specified in the Operating
Agreement, we intend to adjust future distributions in order to provide overall net distributions
consistent with the priority provisions of the Operating Agreement. Such distributions may be
distributions from capital transactions and may be completed in connection with our plan of
liquidation.
Distributions payable to unit holders have included a return of capital as well as a return in
excess of capital. Distributions exceeding taxable income will constitute a return of capital for
federal income tax purposes to the extent of a unit holders adjusted tax basis. Distributions in
excess of adjusted tax basis will generally constitute capital gain.
The stated ranges of unit holder distributions disclosed in our plan of liquidation are
estimates only and actual results may be higher or lower than estimated. The potential for variance
on either end of the range could occur for the following reasons: (i) unanticipated costs could
reduce net assets actually realized; (ii) if we wind up our business significantly faster than
anticipated, some of the anticipated costs may not be necessary and net assets could be higher;
(iii) a delay in our liquidation could result in higher than anticipated costs and net liquidation
proceeds could be lower; and (iv) circumstances may change and the actual net proceeds realized
from the sale of some of the assets might be less, or significantly less, than currently estimated.
Equity Compensation Plan Information
We have no equity compensation plans as of December 31, 2009.
Item 6. | Selected Financial Data. |
The following should be read with Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations and the consolidated financial statements and the notes
thereto. Our historical results are not necessarily indicative of results for any future period.
The information on changes to our net assets since our adoption of the liquidation basis of
accounting on August 31, 2005 is presented in the table below in a format consistent with our
consolidated financial statements under Item 15 of this Annual Report on Form 10-K. The following
tables present summarized consolidated financial information including changes in net assets in
liquidation, operating results, net assets in liquidation, balance sheet information and cash flows
on the liquidation and going concern bases for the respective periods.
Liquidation Basis | ||||||||||||||||||||
As of December 31, | ||||||||||||||||||||
Selected Financial Data(1) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
STATEMENT OF NET ASSETS: |
||||||||||||||||||||
Total assets |
$ | 1,884,000 | $ | 3,980,000 | $ | 6,191,000 | $ | 6,884,000 | $ | 9,571,000 | ||||||||||
Net assets in liquidation(2) |
$ | 1,884,000 | $ | 3,980,000 | $ | 5,928,000 | $ | 6,819,000 | $ | 8,689,000 | ||||||||||
Net asset value per Class A unit(2) |
$ | 472.55 | $ | 846.06 | $ | 1,193.31 | $ | 1,347.99 | $ | 1,401.37 | ||||||||||
Net asset value per Class B unit(2) |
$ | 302.48 | $ | 654.02 | $ | 980.85 | $ | 1,130.38 | $ | 1,190.51 | ||||||||||
Net asset value per Class C unit(2) |
$ | 170.49 | $ | 500.09 | $ | 806.51 | $ | 950.90 | $ | 1,017.77 |
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Liquidation Basis | ||||||||||||||||||||
Period from | ||||||||||||||||||||
August 31, | ||||||||||||||||||||
2005 | ||||||||||||||||||||
Year Ended | Year Ended | Year Ended | Year Ended | through | ||||||||||||||||
December 31, | December 31, | December 31, | December 31, | December 31, | ||||||||||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
STATEMENT OF CHANGES IN NET ASSETS: |
||||||||||||||||||||
Net assets in liquidation, beginning of period |
$ | 3,980,000 | $ | 5,928,000 | $ | 6,819,000 | $ | 8,689,000 | $ | 24,845,000 | ||||||||||
Changes to reserve for estimated costs in
excess of estimated receipts during
liquidation |
655,000 | 457,000 | (198,000 | ) | 806,000 | (652,000 | ) | |||||||||||||
Net (decrease) increase in fair value |
(2,751,000 | ) | (2,405,000 | ) | (293,000 | ) | (176,000 | ) | 496,000 | |||||||||||
Distributions to unit holders |
| | (400,000 | ) | (2,500,000 | ) | (16,000,000 | ) | ||||||||||||
Change in net assets in liquidation |
(2,096,000 | ) | (1,948,000 | ) | (891,000 | ) | (1,870,000 | ) | (16,156,000 | ) | ||||||||||
Net assets in liquidation, end of period |
$ | 1,884,000 | $ | 3,980,000 | $ | 5,928,000 | $ | 6,819,000 | $ | 8,689,000 | ||||||||||
Going Concern Basis | ||||
Period from | ||||
January 1, | ||||
2005 | ||||
through | ||||
August 31, | ||||
2005 | ||||
OPERATING DATA: |
||||
Total revenues |
$ | | ||
Income (loss) from continuing operations before
discontinued operations and gain on sale of real
estate investments |
431,000 | |||
Discontinued operations, including gain on sale |
7,723,000 | |||
Net income (loss) |
$ | 8,154,000 | ||
OTHER DATA: |
||||
Cash flows provided by operating activities |
$ | 3,378,000 | ||
Cash flows provided by (used in) investing activities |
22,977,000 | |||
Cash flows used in financing activities |
(22,334,000 | ) | ||
Distributions declared |
$ | 12,844,000 | ||
Distributions declared per unit(3) |
$ | 2,155 |
(1) | Pursuant to our plan of liquidation, certain amounts in the prior years have been reclassified as discontinued operations related to all properties. | |
(2) | The net assets in liquidation as of December 31, 2009, 2008, 2007, 2006 and 2005 of $1,884,000, $3,980,000, $5,928,000, $6,819,000 and $8,689,000, respectively, plus the cumulative liquidating distributions to our unit holders through December 31, 2009, 2008, 2007, 2006 and 2005 of approximately $18,900,000, $18,900,000, $18,900,000, $18,500,000 and $16,000,000 respectively, would result in liquidating distributions per unit, per class share, as follows as of December 31 of each year. |
2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
Cumulative
liquidating
distributions made |
$ | 3,171.22 | $ | 3,171.22 | $ | 3,171.22 | $ | 3,104.10 | $ | 2,936.24 | ||||||||||
Total liquidating
distributions: |
||||||||||||||||||||
Class A |
$ | 3,643.77 | $ | 4,017.28 | $ | 4,364.53 | $ | 4,452.09 | $ | 4,337.61 | ||||||||||
Class B |
$ | 3,473.70 | $ | 3,825.24 | $ | 4,152.07 | $ | 4,234.48 | $ | 4,126.75 | ||||||||||
Class C |
$ | 3,341.71 | $ | 3,671.31 | $ | 3,977.73 | $ | 4,055.00 | $ | 3,954.01 |
(3) | Distributions per unit are based upon our weighted-average number of units outstanding. |
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Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
The use of the words we, us or our refers to NNN 2002 Value Fund, LLC, except where the
context otherwise requires.
The following discussion should be read in conjunction with our consolidated financial
statements and notes appearing elsewhere in this Annual Report on Form 10-K. Such consolidated
financial statements and information have been prepared to reflect our net assets in liquidation as
of December 31, 2009 and 2008 (liquidation basis), together with the changes in net assets for the
three years ended December 31, 2009, 2008 and 2007.
Forward-Looking Statements
Historical results and trends should not be taken as indicative of future operations. Our
statements contained in this report that are not historical facts are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results may differ materially from those
included in the forward-looking statements. We intend those forward-looking statements to be
covered by the safe-harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and are including this statement for purposes of
complying with those safe-harbor provisions. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies and expectations of us, are generally
identifiable by use of the words believe, expect, intend, anticipate, estimate,
project, prospects, or similar expressions. Our ability to predict results or the actual effect
of future plans or strategies is inherently uncertain. Factors which could have an 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; availability of capital; changes in interest rates; competition in
the real estate industry; supply and demand for operating properties in our current market areas;
changes in accounting principles generally accepted in the United States of America, or GAAP,
policies and guidelines applicable to us; predictions of the amount of liquidating distributions to
be received by unit holders; statements regarding the timing of asset dispositions and the sales
price we will receive for assets; the effect of the liquidation; our ongoing relationship with our
Manager (as defined below); litigation; and the implementation and completion of our plan of
liquidation. These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Additional information
concerning us and our business, including additional factors that could materially affect our
financial results, is included herein and in our other filings with the United States Securities
and Exchange Commission, or the SEC.
Overview and Background
We are a Virginia limited liability company which was formed on May 15, 2002 to purchase, own,
operate and subsequently sell all or a portion of up to three properties. We expected to own our
interests in the properties for approximately three to five years from the date of acquisition of
each asset. At the time of our formation, our principal objectives were to: (i) preserve our unit
holders capital investment; (ii) realize income through the acquisition, operation and sale of the
properties; (iii) make monthly distributions to our unit holders from cash generated from
operations in an amount equal to an 8.0% annual return of our unit holders investment; however,
the distributions among the Class A unit holders, Class B unit holders and Class C unit holders
will vary; and (iv) within approximately three to five years from the respective acquisition of
each asset, subject to market conditions, realize income from the sale of the properties and
distribute the proceeds of such sales to our unit holders.
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Grubb & Ellis Realty Investors, LLC (formerly known as Triple Net Properties, LLC), or Grubb &
Ellis Realty Investors, or our Manager, manages us pursuant to the terms of an operating agreement,
or the Operating Agreement. Our Manager is primarily responsible for managing our day-to-day
operations and assets. While we have no employees, certain employees and executive officers of our
Manager provide services to us pursuant to the Operating Agreement. Our Manager is managed by
executive officers of our Manager. Our Manager engages affiliated entities, including Triple Net
Property Realty, Inc., or Realty, to provide various services for our one
remaining unconsolidated property. Realty serves as our property manager pursuant to the terms
of the Operating Agreement and a property management agreement, or the Management Agreement. The
Operating Agreement terminates upon our dissolution. The unit holders may not vote to terminate our
Manager prior to the termination of the Operating Agreement or our dissolution except for cause.
The Management Agreement terminates with respect to our one remaining unconsolidated property upon
the earlier of the sale of such property or ten years from the date
of acquisition, which would be January 9, 2013. Realty may be
terminated with respect to our one remaining unconsolidated property without cause prior to the
termination of the Management Agreement or our dissolution, subject to certain conditions,
including the payment by us to Realty of a termination fee as provided in the Management Agreement.
Business Strategy and Plan of Liquidation
As set forth in our registration statement on Form 10, originally filed on December 30, 2004,
as amended, we were not formed with the expectation that we would be an entity that is required to
file reports pursuant to the Securities and Exchange Act of 1934, as amended, or the Exchange Act.
We became subject to the registration requirements of Section 12(g) of the Exchange Act because the
aggregate value of our assets exceeded applicable thresholds and our units were held of record by
500 or more persons at December 31, 2003. As a result of registration of our securities with the
SEC under the Exchange Act, we became subject to the reporting requirements of the Exchange Act. In
particular, we are required to file Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K,
and Current Reports on Form 8-K and otherwise comply with the disclosure requirements of the
Exchange Act applicable to issuers filing registration statements pursuant to Section 12(g) of that
act. As a result of (i) current market conditions and (ii) the obligation to incur costs of
corporate compliance (including, without limitation, all federal, state and local regulatory
requirements applicable to us, including the Sarbanes-Oxley Act of 2002, as amended, or the
Sarbanes-Oxley Act), during the fourth quarter of 2004, our Manager began to investigate whether
liquidation would provide our unit holders with a greater return on their investment than any other
alternative. After reviewing the issues facing us, our Manager approved a plan of liquidation on
June 14, 2005, which was thereafter approved by our unit holders at a special meeting of unit
holders on September 7, 2005.
Our plan of liquidation contemplates the orderly sale of all of our assets, the payment of our
liabilities and the winding up of operations and the dissolution of our company. We engaged an
independent third party to perform financial advisory services in connection with our plan of
liquidation, including rendering opinions as to whether our net real estate liquidation value range
estimate and our estimated per unit distribution range were reasonable.
Accordingly, we are engaged in an ongoing liquidation of our remaining asset. As of
December 31, 2009, we owned a 12.3% interest in one unconsolidated property, Congress Center,
located in Chicago, Illinois, or the Congress Center property. References herein to our property,
our one remaining unconsolidated property or our remaining asset are to our 12.3% interest in the
Congress Center property.
We continually evaluate our investment in the Congress Center property and adjust our net real
estate liquidation value accordingly. It is our policy that when we execute a purchase and sale
agreement for the sale of our real property asset or become aware of market conditions or other
circumstances that indicate that the present value of our real property asset materially differs
from our expected net sales price, we will adjust our liquidation value accordingly. Following the
approval of our plan of liquidation by our unit holders, we adopted the liquidation basis of
accounting as of August 31, 2005 and for all periods subsequent to August 31, 2005.
Our plan of liquidation gives our Manager the power to sell any and all of our assets without
further approval by our unit holders and provides that liquidating distributions be made to our
unit holders as determined by our Manager. Although we can provide no assurances, we currently
expect the Congress Center property to sell by December 31, 2010 and anticipate completing our plan
of liquidation by March 31, 2011.
In accordance with our plan of liquidation, the Congress Center property is actively managed
to seek to achieve higher occupancy rates, control operating expenses and maximize income from
ancillary operations and services. However, due to the adoption of our plan of liquidation, we will
not acquire any new properties, and are focused on liquidating our interest in the Congress Center
property.
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For a more detailed discussion of our plan of liquidation, including the risk factors and
certain other uncertainties associated therewith, please read our definitive proxy statement filed
with the SEC on August 4, 2005.
Dispositions in 2009, 2008 and 2007
We did not have any property dispositions during the years ended December 31, 2009, 2008 and
2007.
Critical Accounting Policies
Use of Estimates
The preparation of financial statements in accordance with GAAP and under the liquidation
basis of accounting requires us to make estimates and judgments that affect the reported amounts of
assets (including net assets in liquidation), liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We believe that our critical accounting policies
are those that require significant judgments and estimates. These estimates are 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. Actual results could vary from those
estimates, perhaps in material adverse ways, and those estimates could be different under different
assumptions or conditions.
Liquidation Basis of Accounting
As a result of the approval of our plan of liquidation by our unit holders, we adopted the
liquidation basis of accounting as of August 31, 2005, and for all periods subsequent to August 31,
2005. Accordingly, all assets have been adjusted to their estimated fair value (on an undiscounted
basis). Liabilities, including estimated costs in excess of estimated receipts associated with
implementing and completing our plan of liquidation, were adjusted to their estimated settlement
amounts. Minority interest liabilities were offset against the respective assets and liabilities.
The valuation of our investment in unconsolidated real estate is based on current contracts,
estimates and other indications of sales value net of estimated selling costs. Estimated future
cash flows from property operations were made based on the anticipated sale dates of the asset. Due
to the uncertainty in the timing of the anticipated sale date and the cash flows therefrom, results
of operations may differ materially from amounts estimated. These amounts are presented in the
accompanying statement of net assets. The net assets represent the estimated liquidation value of
our assets available to our unit holders upon liquidation. The actual values realized for assets
and settlement of liabilities may differ materially, perhaps in adverse ways, from the amounts
estimated.
The Congress Center property is continually evaluated and we adjust our net real estate
liquidation value accordingly. It is our policy that when we execute a purchase and sale agreement
or become aware of market conditions or other circumstances that indicate that our current value
materially differs from our expected net sales price, we will adjust our liquidation value
accordingly.
Asset (Reserve) for Estimated Receipts (Costs) in Excess of Estimated Costs (Receipts) During
Liquidation
Under the liquidation basis of accounting, we are required to estimate the cash flows from
operations and accrue the costs associated with implementing and completing our plan of
liquidation. Our Manager has agreed to bear all costs associated with public company filings,
including legal, accounting and liquidation costs. We currently estimate that we will have
operating cash inflows from our estimated receipts in excess of the estimated costs during
liquidation. These amounts can vary significantly due to, among other things, the timing and
estimates for executing and renewing leases, along with the estimates of tenant improvements
incurred and paid, the timing of the sale of the Congress Center property, the timing and amounts
associated with discharging known and contingent liabilities and the costs associated with winding
up our operations. These costs are estimated and are expected to be paid over the remaining
liquidation period.
Effective July 1, 2008, monthly distributions to the Congress Center propertys investors were
suspended, including distributions to us. As a result of this suspension of monthly distributions,
our sole source of cash flow is expected to be proceeds from the anticipated sale of the Congress
Center property. It is anticipated that funds previously used for distributions will be applied by
the Congress Center property towards future tenanting costs to lease spaces not covered by the
lender reserve and to supplement the lender reserve funding as necessary. Prior to
the suspension of distributions, we received approximately $29,000 per month in distributions
from the Congress Center property. In December 2009, our Manager approved a one-time distribution
to the Congress Center propertys investors for year-end tax purposes. We received approximately
$97,000 from this one-time distribution.
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The change in the asset (reserve) for estimated receipts (costs) in excess of estimated costs
(receipts) during liquidation for the year ended December 31, 2009 was as follows:
December 31, | Cash Payments | Change in | December 31, | |||||||||||||
2008 | and (Receipts) | Estimates | 2009 | |||||||||||||
Assets: |
||||||||||||||||
Estimated net
inflows from
consolidated and
unconsolidated
operating
activities |
$ | 1,148,000 | $ | (99,000 | ) | $ | 221,000 | $ | 1,270,000 | |||||||
Liabilities: |
||||||||||||||||
Liquidation costs |
(954,000 | ) | 21,000 | 512,000 | (421,000 | ) | ||||||||||
Total asset
(reserve) for
estimated receipts
(costs) in excess
of estimated costs
(receipts) during
liquidation |
$ | 194,000 | $ | (78,000 | ) | $ | 733,000 | $ | 849,000 | |||||||
The change in the asset (reserve) for estimated receipts (costs) in excess of estimated costs
(receipts) during liquidation for the year ended December 31, 2008 was as follows:
December 31, | Cash Payments | Change in | December 31, | |||||||||||||
2007 | and (Receipts) | Estimates | 2008 | |||||||||||||
Assets: |
||||||||||||||||
Estimated net
inflows from
consolidated and
unconsolidated
operating
activities |
$ | 1,228,000 | $ | (177,000 | ) | $ | 97,000 | $ | 1,148,000 | |||||||
Liabilities: |
||||||||||||||||
Liquidation costs |
(1,491,000 | ) | 52,000 | 485,000 | (954,000 | ) | ||||||||||
Total asset
(reserve) for
estimated receipts
(costs) in excess
of estimated costs
(receipts) during
liquidation |
$ | (263,000 | ) | $ | (125,000 | ) | $ | 582,000 | $ | 194,000 | ||||||
Net Assets in Liquidation
The net assets in liquidation of $1,884,000 plus cumulative liquidating distributions of
$18,900,000 as of December 31, 2009, would result in liquidating distributions per unit of
approximately $3,643.77 for Class A, $3,473.70 for Class B and $3,341.71 for Class C. These
estimates for liquidating distributions per unit include projections of costs and expenses expected
to be incurred during the period required to complete our plan of liquidation. These projections
could change materially based on the timing of any sale, the performance of the underlying assets
and any changes in the underlying assumptions of the projected cash flow.
Revenue Recognition
Rental revenue is recorded on the contractual basis under the liquidation basis of accounting.
Factors Which May Influence Future Changes in Net Assets in Liquidation
Investment in Unconsolidated Real Estate
In calculating the estimated amount of liquidating distributions to our unit holders, we
assumed that we would be able to locate a buyer for the Congress Center property at an amount based
on our best estimate of market value for the property. However, we may have overestimated the
sales price that we will ultimately be able to obtain for this asset. If the market value of the
Congress Center property declines more than 4% from our current estimate of the market value as of
December 31, 2009, our investment in unconsolidated real estate would be zero.
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Rental Income
The amount of rental income generated by our properties depends principally on our ability to
maintain the occupancy rates of currently leased space, to lease currently available space and
space available from unscheduled lease terminations at the existing rental rates and the timing of
the disposition of the properties. Negative trends in one or more of these factors could adversely
affect our rental income in future periods.
Scheduled Lease Expirations
As of December 31, 2009, the Congress Center property was 84.3% leased to 13 tenants and 78.9%
occupied by 12 tenants. None of the leases at the Congress Center property expire during 2010. Our
leasing strategy through our plan of liquidation focuses on negotiating renewals for leases
scheduled to expire and identifying new tenants or existing tenants seeking additional space for
which we are unable to negotiate such renewals. For example, in January 2010, we completed an
early renewal on one of our major tenants, and extended their lease expiration from December 2013
to December 2019.
Changes in Net Assets In Liquidation
For the Year Ended December 31, 2009
Net assets in liquidation decreased $2,096,000, or $351.68 per unit, during the year ended
December 31, 2009. The primary reason for the decrease in our net assets in liquidation was a
decrease in the value of our interest in the Congress Center property of $2,829,000, or $474.66 per
unit, as a result of a decrease in the anticipated sales price, offset by an increase in estimated
receipts in excess of estimated costs during liquidation of $655,000, or $109.90 per unit, which
was a result of changes in estimates of net cash flows of our one remaining unconsolidated
property.
For the Year Ended December 31, 2008
Net assets in liquidation decreased $1,948,000, or $326.85 per unit, during the year ended
December 31, 2008. The primary reason for the decrease in our net assets in liquidation was a
decrease in the value of our interest in the Congress Center property of $2,530,000, or $424.50 per
unit. This decrease in value was a result of a decrease in the anticipated sales price offset by a
decrease in estimated costs in excess of estimated receipts during liquidation of $457,000, or
$76.68 per unit, which was a result of a change in estimate primarily due to the change in the
projected sale date of the Congress Center property. The decrease in the reserve for estimated
costs in excess of estimated receipts during liquidation resulted in an asset for estimated
receipts in excess of estimated costs as of
December 31, 2008.
For the Year Ended December 31, 2007
Net assets in liquidation decreased $891,000, or $149.50 per unit, during the year ended
December 31, 2007. The primary reason for the decrease in our net assets in liquidation was the
payment of $400,000, or $67.11 per unit, in distributions to our unit holders in December 2007 and
a decrease in the value of our interest in the Congress Center property of $544,000, or $91.28 per
unit. This decrease in value was a result of a decrease in the anticipated sales price offset by a
decrease in estimated costs in excess of estimated receipts during liquidation of $198,000, or
$33.22 per unit, which was a result of a change in estimate primarily due to the change in the
projected sales date of the Congress Center property.
Liquidity and Capital Resources
As of December 31, 2009, our total assets and net assets in liquidation were $1,884,000. Our
ability to meet our obligations is contingent upon the disposition of our interest in the Congress
Center property in accordance with our plan of liquidation. We estimate that the net proceeds from
the sale of our interest in the Congress Center property pursuant to our plan of liquidation will
be adequate to pay our obligations; however, we cannot provide any assurance as to the price we
will receive for the disposition of our interest in the Congress Center property or the net
proceeds therefrom.
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Current Sources of Capital and Liquidity
We anticipate, but cannot assure, that our cash flow from operations and sale of the Congress
Center property will be sufficient during the liquidation period to fund our cash needs for payment
of expenses, capital expenditures, recurring debt service payments and repayment of debt
maturities.
Effective July 1, 2008, monthly distributions to the Congress Center propertys investors were
suspended, including distributions to us. As a result of this suspension of monthly distributions,
our sole source of cash flow is expected to be proceeds from the anticipated sale of the Congress
Center property. It is anticipated that funds previously used for distributions will be applied
towards future tenanting costs to lease spaces not covered by the lender reserve and to supplement
the lender reserve funding as necessary. Prior to the suspension of distributions, we received
approximately $29,000 per month in distributions from the Congress Center property. In December
2009, our Manager approved a one-time distribution to the Congress Center propertys investors for
year-end tax purposes. We received approximately $97,000 from this one-time distribution.
Our plan of liquidation gives our Manager the power to sell our interest in the Congress
Center property without further approval by our unit holders and provides that liquidating
distributions be made to our unit holders as determined at the discretion of our Manager. Although
we can provide no assurances, we currently expect to sell the Congress Center property by
December 31, 2010 and anticipate completing our plan of liquidation by
March 31, 2011.
Other Liquidity Needs
We believe that we will have sufficient capital resources to satisfy our liquidity needs
during the liquidation period. During the years ended December 31, 2009 and 2008, we paid no
liquidating distributions. We paid liquidating distributions of $400,000, or $67.11 per unit, to
our unit holders during the year ended December 31, 2007. The source for payment of these
distributions was funds from operating activities. Following payment of the April 2005 monthly
distribution, the then board of managers of our Manager decided to discontinue the payment of
monthly distributions. In accordance with our plan of liquidation, our Manager can make liquidating
distributions from proceeds received from the sale of assets at its discretion.
As of December 31, 2009, we estimate that we will have $421,000 of commitments and
expenditures during the liquidation period, comprised mainly of $382,000 in liquidating
distributions to our Manager pursuant to the Operating Agreement. However, there can be no
assurance that we will not exceed the amounts of these estimated expenditures.
An adverse change in the net cash provided by operating activities or net proceeds expected
from the liquidation of the Congress Center property may affect our ability to fund these items and
may affect our ability to satisfy the financial performance covenants under our mortgage loans. If
we fail to meet our financial performance covenants and are unable to reach a satisfactory
resolution with the lender, the maturity dates for the mortgage loans could be accelerated. Any of
these circumstances could adversely affect our ability to fund working capital, liquidation costs
and unanticipated cash needs.
On
February 17, 2010, we received a letter from our lender stating that our insurance policy
covering the Congress Center property is deficient because several of the carriers providing
coverage under our policy do not meet one or more of the carrier rating requirements as set forth
in the loan documents. We are obligated to bring the insurance deficiencies into compliance with
the requirements set forth in the loan documents upon the renewal or replacement of our insurance
policy and in no event later than thirty days after the expiration date of the policy, which is set
to expire on March 7, 2010. If we are unable to cure the insurance deficiencies, or obtain a waiver
from the lender, it could result in our lender exercising the rights and remedies afforded to it
under the loan documents, including but not limited to the right to force-place the insurance
coverage at any time, the right to accelerate all amounts outstanding under the loan, and/or
foreclosure of the property. We can give no assurance that we will be able to cure the insurance
deficiencies within the timeframe stated above, or at all, or that if we are successful in
obtaining the required insurance coverage that we will be able to maintain such insurance coverage
in compliance with the loan documents.
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Liquidating distributions will be determined by our Manager in its sole discretion and are
dependent on a number of factors, including the amount of funds available for distribution, our
financial condition, our capital expenditures, among other factors our Manager may deem relevant.
To the extent any distributions are made to our unit holders in excess of accumulated earnings, the
excess distributions are considered a return of capital to our unit holders for federal income tax
purposes to the extent of basis in our stock, and generally as capital gain thereafter.
The stated range of unit holder distributions disclosed in our plan of liquidation are
estimates only and actual results may be higher or lower than estimated. The potential for variance
on either end of the range could occur for a variety of reasons, including, but not limited to:
(i) unanticipated costs could reduce net assets actually realized; (ii) if we wind up our business
significantly faster than anticipated, some of the anticipated costs may not be necessary and net
liquidation proceeds could be higher; (iii) a delay in our liquidation could result in higher than
anticipated costs and net liquidation proceeds could be lower; (iv) circumstances may change and
the actual net proceeds realized from the sale of some of the assets might be less, or
significantly less, than currently estimated, including, for among other reasons, the discovery of
new environmental issues or loss of a tenant or tenants; and (v) actual proceeds realized from the
sale of some of the assets may be higher than currently estimated if market values increase.
Subject to our Managers actions and in accordance with our plan of liquidation, we expect to
meet our liquidity requirements through the completion of the liquidation, through retained cash
flow, disposition of assets, and unsecured borrowings. We do not intend to reserve funds to retire
existing debt upon maturity. We will, instead, seek to refinance such debt at maturity or retire
such debt through the disposition of the Congress Center property.
If we experience lower occupancy levels and reduced rental rates at the Congress Center
property, reduced revenues as a result of asset sales, or increased capital expenditures and
leasing costs at the Congress Center property compared to historical levels due to competitive
market conditions for new and renewal leases, the effect would be a reduction of our net assets in
liquidation. This estimate is based on various assumptions which are difficult to predict,
including the levels of leasing activity at year end and related leasing costs. Any changes in
these assumptions could adversely impact our financial results, our ability to pay current
liabilities as they come due and our other unanticipated cash needs.
Capital Resources
General
Prior to the adoption of our plan of liquidation, our primary sources of capital were our real
estate operations, our ability to leverage any increased market value in the real estate assets we
owned and our ability to obtain debt financing from third parties, including, our Manager or its
affiliates. Prior to July 1, 2008, our primary source of capital was distributions from the
Congress Center property. However, effective July 1, 2008, monthly distributions to the Congress
Center propertys investors were suspended, including distributions to us. As a result of this
suspension of monthly distributions, our sole source of cash flow is expected to be proceeds from
the anticipated sale of our interest in the Congress Center property. It is anticipated that funds
previously used for distributions will be applied towards future tenanting costs to lease spaces
not covered by the lender reserve and to supplement the lender reserve funding as necessary. Prior
to the suspension of distributions, we received approximately $29,000 per month in distributions
from the Congress Center property. In December 2009, our Manager approved a one-time distribution
to the Congress Center propertys investors for year-end tax purposes. We received approximately
$97,000 from this one-time distribution.
The primary uses of cash are to fund liquidating distributions to our unit holders and for
operating expenses. We may also regularly require capital to invest in the Congress Center property
in connection with routine capital improvements, and leasing activities, including funding tenant
improvements, allowances and leasing commissions. The amounts of the leasing-related expenditures
can vary significantly depending on negotiations with tenants and the willingness of tenants to pay
higher base rents over the life of their leases.
In accordance with our plan of liquidation, we anticipate our source for the payment of our
liquidating distributions to our unit holders to be primarily from the net proceeds from the sale
of our interest in the Congress Center property.
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Financing
As of December 31, 2009 and 2008, there are no consolidated mortgage loan payables
outstanding.
As of December 31, 2009 and 2008, there were no consolidated restricted cash balances held as
credit enhancements or as reserves for property taxes, capital expenditures and capital
improvements.
We believe that our cash balance of $463,000 as of December 31, 2009, should provide
sufficient liquidity to meet our cash needs during the next 12 months from December 31, 2009.
While we anticipate that our cash flow from operations will be sufficient to fund our cash needs
for corporate related expenses for the next 12 months, we cannot assure that this will be the case.
Unconsolidated Debt
Total mortgage debt of the Congress Center property was $93,486,000 and $94,839,000 as of
December 31, 2009 and 2008, respectively. Our proportionate share of the mortgage debt was
$11,480,000 and $11,646,000 as of December 31, 2009 and 2008, respectively.
The Congress Center property is required by the terms of the applicable loan documents to meet
certain minimum loan to value, performance covenants and other requirements. As of December 31,
2009, the Congress Center property was in compliance with all such covenants.
On December 21, 2006, Realty received a termination notice from Employers Reinsurance
Corporation notifying Realty of their intent to exercise their option to terminate their lease for
approximately 67,000 square feet effective January 1, 2008 at the Congress Center property. From
January 1, 2008 and continuing through and including the payment date occurring on December 1,
2011, the lender is entitled to receive $83,000 on a monthly basis from the borrower. In January
2007, Employers Reinsurance Corporation paid $3,773,000 to the lender as an early termination fee
penalty pursuant to their lease agreement. We, along with G REIT Liquidating Trust (successor of
G REIT, Inc.) and T REIT Liquidating Trust (successor of T REIT, Inc.), or our Affiliate co-owners,
paid the remaining $27,000 of the early termination fee penalty owed to the lender. As of
December 31, 2009, we have advanced $112,000 to the lender for the reserves associated with the
early lease termination. It is anticipated that upon the sale of the Congress Center property, we,
along with our Affiliate co-owners will receive repayment of any advances made to the lender for
reserves. In May 2009, NNN Congress Center, LLC entered into a lease agreement with the Internal
Revenue Service, or IRS, for approximately 28,000 square feet of space previously leased by
Employers Reinsurance Corporation. The lease begins on April 1, 2010, for a period of ten years,
seven years firm, subject to termination rights pursuant to the lease agreement at an annual rate
of $31.00 per square foot. Pursuant to the lease agreement, there are scheduled annual rent
increases, and various rent concessions and commission credits have been given to the IRS in lease
years one and two. We will continue our marketing efforts to re-lease the remaining un-leased
space. Our failure to re-lease this space may reduce or delay our liquidating distributions to our
unit holders.
Commitments and Contingencies
Insurance Coverage
Property Damage, Business Interruption, Earthquake and Terrorism
The insurance coverage provided through third-party insurance carriers is subject to coverage
limitations. Should an uninsured or underinsured loss occur, we could lose all or a portion of our
investment in, and anticipated cash flows from, one or more of the properties. In addition, there
can be no assurance that third-party insurance carriers will be able to maintain reinsurance
sufficient to cover any losses that may be incurred.
Debt Service Requirements
As of December 31, 2009, all consolidated debt has been repaid in full.
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Contractual Obligations
As of December 31, 2009, all consolidated contractual obligations have been repaid in full.
Off-Balance Sheet Arrangements
There are no off-balance sheet transactions, arrangements or obligations (including contingent
obligations) that have, or are reasonably likely to have a current or future material effect on our
financial condition, changes in our financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
Inflation
We will be exposed to inflation risk as income from long-term leases is expected to be the
primary source of cash flows from operations. We expect that there will be provisions in the
majority of our tenant leases that would provide some protection from the impact of inflation.
These provisions include rent steps, reimbursement billings for operating expense pass-through
charges, real estate tax and insurance reimbursements on a per square foot allowance. However, due
to the long-term nature of the leases, the leases may not re-set frequently enough to cover
inflation.
Recently Issued Accounting Pronouncements
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a
Replacement of FASB Statement No. 162 (now contained in FASB Codification Topic 105). FASB
Codification Topic 105 establishes that the FASB Codification will become the single official
source of authoritative U.S. GAAP, other than guidance issued by the SEC. Following this statement,
the FASB will not issue new standards in the form of Statements, Staff Positions or Emerging Issues
Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates. All guidance
contained in the Codification carries an equal level of authority. The GAAP hierarchy will be
modified to include only two levels of GAAP: authoritative and non-authoritative. All
non-grandfathered, non-SEC accounting literature not included in the Codification will become
non-authoritative. The Codification, which changes the referencing of financial standards, becomes
effective for interim and annual periods ending on or after September 15, 2009. We adopted FASB
Codification Topic 105 in the quarter ended September 30, 2009 and it did not have a material
impact on our consolidated financial statements.
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
Market risks include 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. We believe that the primary market risk to which we would be exposed would
be an interest rate risk. As of December 31, 2009, we had no outstanding consolidated debt,
therefore we believe we have no interest rate or market risk. Additionally, our unconsolidated debt
related to our unconsolidated property is at a fixed interest rate.
Item 8. | Financial Statements and Supplementary Data. |
See the index at Item 15. Exhibits and Financial Statement Schedules.
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. |
None.
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Item 9A(T). | Controls and Procedures. |
(a) Evaluation of disclosure controls and procedures. We maintain disclosure controls and
procedures that are designed to ensure that information required to be disclosed in our reports
under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed,
summarized and reported within the time periods
specified in the rules and forms, and that such information is accumulated and communicated
to us, including our Managers president and chief financial officer, as appropriate, to allow
timely decisions regarding required disclosure. In designing and evaluating the disclosure controls
and procedures, we recognize that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control objectives, as
ours are designed to do, and we necessarily were required to apply our judgment in evaluating
whether the benefits of the controls and procedures that we adopt outweigh their costs.
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of
December 31, 2009, was conducted under the supervision and with the participation of our Manager,
including our Managers president and chief financial officer, of the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act). Based on this evaluation, our Managers president and chief financial officer concluded that
our disclosure controls and procedures, as of December 31, 2009, were effective for the purposes
stated above.
(b) Managements Report on Internal Control over Financial Reporting. The management of our
Manager is responsible for establishing and maintaining adequate
internal control over our financial
reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under
the supervision, and with the participation, of the management of our Manager, including our
Managers president and chief financial officer, we conducted an evaluation of the effectiveness of
our internal control over financial reporting based on the framework in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Therefore, even those systems determined to be effective can only provide
reasonable assurance with respect to financial statement preparation and presentation.
Based on our evaluation under the Internal Control-Integrated Framework, our management
concluded that our internal control over financial reporting was effective as of December 31, 2009.
(c) Changes in internal control over financial reporting. There were no changes in our
internal control over financial reporting that occurred during the quarter ended December 31, 2009
that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
This Annual Report on Form 10-K does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial reporting. Managements
report was not subject to attestation by our independent registered public accounting firm pursuant
to the rules of the SEC for non-accelerated filers that permit us to provide only managements
report in this Annual Report on Form 10-K.
Item 9B. | Other Information. |
None.
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PART III
Item 10. | Directors, Executive Officers and Corporate Governance. |
As of March 5, 2010, we have no directors or executive officers.
We are managed by Grubb & Ellis Realty Investors, LLC, or our Manager, and the executive
officers and employees of our Manager provide services to us pursuant to the terms of an operating
agreement, or the Operating Agreement. As such, we do not have a board of directors or executive
officers other than our Managers executive officers.
Our Manager shall remain our Manager until (i) we are dissolved, (ii) removed for cause by a
majority vote of our unit holders, or (iii) our Manager, with the consent of our unit holders and
in accordance with the Operating Agreement, assigns its interest in us to a substitute manager. For
this purpose, removal of our Manager for cause means removal due to the:
| gross negligence or fraud of our Manager; |
| willful misconduct or willful breach of the Operating Agreement by our Manager; or |
| bankruptcy, insolvency or inability of our Manager to meet its obligations as they come due. |
The following table and biographical descriptions set forth certain information with respect
to our principal executive officer and principal accounting officer, as of March 5, 2010.
Name | Age | Position | Term of Office | |||||
Jeffrey T. Hanson |
39 | Principal Executive Officer | Since 2008 | |||||
Michael J. Rispoli |
38 | Principal Accounting Officer | Since 2008 |
There are no family relationships between our principal executive officer and principal
accounting officer.
Jeffrey T. Hanson has served as the president and chief investment officer of our Manager
since December 2007 and January 2007, respectively. In connection with his capacity as president of
our Manager, Mr. Hanson has served as our principal executive officer since July 2008. He has also
served as the chief investment officer and executive vice president, investment programs, of
Grubb & Ellis Company, or Grubb & Ellis, the parent company of our Manager, since December 2007,
having served in various capacities within the organization since July 2006 including serving as
the president and chief executive officer of Triple Net Properties Realty, Inc., or Realty.
Mr. Hansons responsibilities include managing our Manager and its affiliates real estate
portfolio and directing acquisitions and dispositions nationally for their public and private real
estate programs. Mr. Hanson has also served as the chief executive officer and chairman of the
board of directors of Grubb & Ellis Healthcare REIT II, Inc. since January 2009. From 1996 to July
2006, Mr. Hanson served in various capacities with Grubb & Ellis Companys Institutional Investment
Group in the firms Newport Beach office, including senior vice president. Mr. Hanson is a member
of the Sterling College Board of Trustees and formerly served as a member of the Grubb & Ellis
Presidents Counsel and Institutional Investment Group Board of Advisors. Mr. Hanson received a
B.S. degree in Business from the University of Southern California with an emphasis in Real Estate
Finance.
Michael J. Rispoli has served as the chief financial officer of our Manager since October
2008. In connection with his capacity as chief financial officer of our Manager, Mr. Rispoli has
served as our principal financial officer since October 2008. He has also served as Grubb & Ellis
senior vice president, strategic planning and investor relations since he joined Grubb & Ellis in
May 2007. From 2004 to 2007, Mr. Rispoli was executive director and corporate controller of
Conexant Systems, Inc., a publicly traded semiconductor company with $1 billion in annual revenue.
Prior to such time, Mr. Rispoli spent three years as corporate controller of GlobespanVirata, Inc.,
which was merged with Conexant Systems, Inc. in February 2004. Mr. Rispoli began his career as
manager of audit and business assurance services at PricewaterhouseCoopers LLP in 1993. A
certified public accountant, Mr. Rispoli received a B.S. degree in Accounting from Seton Hall
University.
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Fiduciary Relationship of our Manager to Us
Our Manager is deemed to be in a fiduciary relationship to us pursuant to the Operating
Agreement and under applicable law. Our Managers fiduciary duties include responsibility for our
control and management and exercising good faith and integrity in handling our affairs. Our Manager
has a fiduciary responsibility for the safekeeping and use of all of our funds and assets, whether
or not they are in its immediate possession and control and may not use or permit another to use
such funds or assets in any manner except for our exclusive benefit.
Our funds will not be commingled with the funds of any other person or entity except for
operating revenue from our properties.
Our Manager may employ persons or firms to carry out all or any portion of our business. Some
or all such persons or entities employed may be affiliates of our Manager. It is not clear under
current law the extent, if any, that such parties will have a fiduciary duty to us or our unit
holders. Investors who have questions concerning the fiduciary duties of our Manager should consult
with their own legal counsel.
Committees of Our Board of Directors
We do not have our own board of directors or board committees. We rely upon our Manager to
provide recommendations regarding dispositions, compensation and financial disclosure.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our officers, directors and persons who own 10.0%
or more of a registered class of our equity securities to report their beneficial ownership of our
units (and any related options) to the SEC. Their initial report must be filed using the SECs
Form 3 and they must report subsequent stock purchases, sales, option exercises and other changes
using the SECs Form 4, which must be filed within two business days of most transactions. In some
cases, such as changes in ownership arising from gifts and inheritances, the SEC allows delayed
reporting at year-end on Form 5. Officers, directors and greater than 10.0% unit holders are
required by SEC regulations to furnish us with copies of all of reports they file pursuant to
Section 16(a).
We believe that since we have become publicly registered no Section 16(a) filings have been
made (we have no officers or directors of our own, and there are no unit holders who own 10.0% or
more of our units).
Code of Ethics
Since we have no officers, directors or employees, we do not have our own code of ethics.
Grubb & Ellis has a Code of Business Conduct and Ethics that is
applicable to employees of our Manager, a copy of which is available
at www.grubb-ellis.com and upon request and without charge by writing
to NNN 2002 Value Fund, LLC at 1551 N. Tustin Avenue, Suite 300,
Santa Ana, California 97205.
Item 11. | Executive Compensation. |
Executive and Director Compensation
We have no employees, executive officers or directors to whom we pay compensation.
Additionally, we do not currently intend to hire any employees or pay any compensation directly to
our principal executive officer or our principal accounting officer. Our day-to-day management is
performed by certain employees and executive officers of our Manager and its affiliates. We pay
these entities fees and reimburse expenses pursuant to our Operating Agreement. As a result, we do
not have a compensation policy or program and have not included a Compensation Discussion and
Analysis in this Form 10-K.
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Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Unit Holder Matters. |
Principal Unit Holders
The following table shows, as of March 5, 2010, the number and percentage of units owned by
| any person who is known to us to be the beneficial owner of more than 5.0% of our outstanding units; our Manager; |
| our Managers officer and key employee who serve as our principal executive officer and principal accounting officer; and |
| all of our directors and executive officers as a group. |
Beneficially | Percentage of | |||||||
Owned No. | Outstanding | |||||||
Name of Beneficial Owners(1) | of Units | Units | ||||||
Our Manager |
None | 0.0 | % | |||||
Jeffrey T. Hanson |
None | 0.0 | % | |||||
Michael J. Rispoli |
None | 0.0 | % | |||||
All of our directors and executive officers as a group(2) |
None | 0.0 | % |
(1) | The address of each beneficial owner listed is 1551 N. Tustin Avenue, Suite 300, Santa Ana, California 92705. | |
(2) | We have no directors or executive officers of our own. |
We are not aware of any arrangements which may, at a subsequent date, result in a change in
control of us.
Equity Compensation Plan Information
We have no equity compensation plans as of December 31, 2009.
Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
Our Manager is responsible for managing the day to day business affairs and assets. Our
Manager is a Virginia limited liability company that was formed in April of 1998 to advise
syndicated limited partnerships, limited liability companies and other entities regarding the
acquisition, management and disposition of real estate assets.
The Operating Agreement
Pursuant to the Operating Agreement, our Manager or Realty is entitled to receive the
following payments and fees described below. These payments and fees were not negotiated at arms
length and may be higher than payments and fees that would have resulted from an arms length
transaction with an unrelated entity.
Expenses, Costs, or Fees
We have agreed to reimburse our Manager and its affiliates certain expenses, costs and fees
incurred by our Manager, including, without limitation, for the cash payments, certain closing
costs, escrow deposits, loan commitment fees, project studies and travel expenses related to the
analysis and acquisitions of our properties. Our Manager did not incur and, therefore, was not
reimbursed for, any such expenses, costs or fees for the years ended December 31, 2009, 2008 and
2007.
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Operating Expenses
We have agreed to reimburse our Manager or its affiliates for reasonable and necessary
expenses paid or incurred by our Manager or its affiliates in connection with our operation,
including any legal and accounting costs, and the costs incurred in connection with the disposition
of our properties, including travel, surveys, environmental and other studies and interest expense
incurred on deposits or expenses. In accordance with our plan of liquidation, the then board of
managers of our Manager voted and agreed that all costs associated with public company compliance
would be borne by our Manager. As such, our Manager has incurred costs associated with our public
company compliance, but will not be reimbursed for such costs. For the years ended December 31,
2009, 2008 and 2007, we reimbursed our Manager for $17,000, $4,000 and $13,000, respectively, in
non-public company compliance costs.
Distributions to Our Manager
Our Manager is entitled to receive from us distributions that relate to cash from operations
and from capital transactions as discussed in Note 6 Unit Holders Equity. Our Manager did not
receive any such distributions for the years ended December 31, 2009, 2008 and 2007. Based on the
valuation of our portfolio as of December 31, 2009 and 2008, we have reserved for an estimated
distribution to our Manager of $382,000 and $905,000, respectively.
The Management Agreement
Pursuant to the Operating Agreement and the Management Agreement, Realty is entitled to
receive the payments and fees described below. These payments and fees were not negotiated at arms
length and may be higher than payments and fees that would have resulted from an arms length
negotiation and transaction with an unrelated entity. We only incur and pay such fees on
consolidated properties, and for the years ended December 31, 2009, 2008 and 2007, we did not have
any consolidated properties.
Property Management Fees
We pay Realty, for its services in managing our properties, a monthly management fee of up to
5.0% of the gross revenue of the properties. For the years ended December 31, 2009, 2008, and 2007,
we did not incur any property management fees to Realty.
Lease Commissions
We pay Realty or its affiliates a leasing commission for its services in leasing any of our
properties an amount equal to 6.0% of the value of any lease entered into during the term of the
Management Agreement and 3.0% with respect to any lease renewal. The value of such leases will be
calculated by totaling the minimum monthly rent for the term of the lease. The term of such leases
will not exceed five years for purposes of the computation and will not include option periods. For
the years ended December 31, 2009, 2008, and 2007, we did not incur any lease commissions to
Realty.
Project Fees
We pay Realty for its services in supervising any construction or repair project in or about
our properties, a construction management fee equal to 5.0% of any amount up to $25,000, 4.0% of
any amount over $25,000 but less than $50,000, and 3.0% of any amount over $50,000 which is
expended in any calendar year for construction or repair projects. For the years ended December 31,
2009, 2008, and 2007, we did not incur any project fees to Realty.
Real Estate Disposition Fees
We pay Realty a real estate disposition fee equal up to 5.0% of the sales price. In addition,
third party brokers may be entitled up to 80.0% of the 5.0% disposition fee. For the years ended
December 31, 2009, 2008, and 2007, we did not incur any real estate disposition fees to Realty.
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Loan Fees
We pay Realty a loan fee in the amount of 1.0% of the principal amount of all loans obtained
by it for our properties during the term of the Management Agreement. For the years ended
December 31, 2009, 2008, and 2007, we did not incur any loan fees to Realty.
Managers Ownership Interest in the Company
As of December 31, 2009 and 2008, our Manager and its executive officers did not own any of
our units.
Costs Incurred in Connection with Public Company Filings and Rent
Our Manager has agreed that all costs associated with compliance with public company filings
will be borne by our Manager, therefore, such costs are not included in our financial statements.
These costs include, but are not limited to, audit and legal fees as well as the cost of compliance
with the Sarbanes-Oxley Act. We do not maintain offices separate from those of our Manager. While
our Manager allows us to use a portion of the Managers office space located at 1551 N. Tustin
Avenue, Suite 300 in Santa Ana, California, our Manager does not collect rent from us for our use
of that space.
Item 14. | Principal Accounting Fees and Services. |
Deloitte & Touche, LLP, has served as our independent registered public accounting firm since
February 8, 2004 and has audited our financial statements for the years ended December 31, 2009,
2008 and 2007.
Our Manager, which acts in the capacity of our audit committee, has voted and approved that
all audit fees and other costs associated with our public company filings will be borne by our
Manager. The following table lists the fees for services rendered by the independent registered
public accounting firm for 2009 and 2008:
Services | 2009 | 2008 | ||||||
Audit Fees(1) |
$ | 135,000 | $ | 127,000 |
(1) | Audit fees billed in 2009 and 2008 consisted of the audits of our annual financial statements, reviews of our quarterly financial statements, and other services related to filings with the SEC. |
Our Manager preapproves all auditing services and permitted non-audit services (including the
fees and terms thereof) to be performed for us by our independent auditor, subject to the de
minimis exceptions for non-audit services described in Section 10a(i)(1)(b) of the Exchange Act and
the rules and regulations of the SEC.
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PART IV
Item 15. | Exhibits and Financial Statement Schedules. |
(a)(1) Financial Statements:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages | ||||
42 | ||||
43 | ||||
44 | ||||
45 | ||||
(a)(2) Financial Statement Schedules:
All schedules have been omitted as the required information is inapplicable or the information
is presented in the consolidated financial statements or related notes.
(a)(3) Exhibits:
The exhibits listed on the Exhibit Index (following the signatures section of this report) are
included, or incorporated by reference, in this annual report.
(b) Exhibits:
See item 15(a)(3) above.
(c) Financial Statement Schedules:
All schedules have been omitted as the required information is inapplicable or the information
is presented in the consolidated financial statements or related notes.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Manager and Unit Holders of
NNN 2002 Value Fund, LLC
NNN 2002 Value Fund, LLC
We have audited the accompanying consolidated statements of net assets in liquidation of NNN
2002 Value Fund, LLC and subsidiaries (the Company) as of December 31, 2009 and 2008 and the
related consolidated statements of changes in net assets in liquidation for the years ended
December 31, 2009, 2008 and 2007. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
As described in Note 1 to the consolidated financial statements, the unit holders of the
Company approved a plan of liquidation and, as a result, the Company changed its basis of
accounting from the going concern basis to the liquidation basis effective August 31, 2005.
In our opinion, such consolidated financial statements present fairly, in all material
respects, the statements of net assets in liquidation of NNN 2002 Value Fund, LLC and subsidiaries
as of December 31, 2009 and 2008 and the related statements of changes in net assets in liquidation
for the years ended December 31, 2009, 2008 and 2007, in conformity with accounting principles
generally accepted in the United States of America applied on the basis described in the preceding
paragraph.
/s/ Deloitte & Touche, LLP |
Los Angeles, California
March 5, 2010
March 5, 2010
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NNN 2002 VALUE FUND, LLC
CONSOLIDATED STATEMENTS OF NET ASSETS
(Liquidation Basis)
As of December 31, 2009 and 2008
(Liquidation Basis)
As of December 31, 2009 and 2008
As of December 31, | ||||||||
2009 | 2008 | |||||||
ASSETS | ||||||||
Investment in unconsolidated real estate |
$ | 572,000 | $ | 3,401,000 | ||||
Cash and cash equivalents |
463,000 | 385,000 | ||||||
Asset for estimated receipts in excess of estimated costs during liquidation |
849,000 | 194,000 | ||||||
Total assets |
1,884,000 | 3,980,000 | ||||||
LIABILITIES | ||||||||
Commitments and contingencies (Note 8) |
||||||||
Net assets in liquidation |
$ | 1,884,000 | $ | 3,980,000 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
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NNN 2002 VALUE FUND, LLC
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(Liquidation Basis)
For the Years Ended December 31, 2009, 2008 and 2007
(Liquidation Basis)
For the Years Ended December 31, 2009, 2008 and 2007
Year Ended | Year Ended | Year Ended | ||||||||||
December 31, | December 31, | December 31, | ||||||||||
2009 | 2008 | 2007 | ||||||||||
Net assets in liquidation, beginning of year |
$ | 3,980,000 | $ | 5,928,000 | $ | 6,819,000 | ||||||
Changes in net assets in liquidation: |
||||||||||||
Changes to asset (reserve) for estimated receipts
(costs) in excess of estimated costs (receipts)
during liquidation: |
||||||||||||
Operating loss |
19,000 | 48,000 | 144,000 | |||||||||
Distributions received from unconsolidated property |
(97,000 | ) | (173,000 | ) | (395,000 | ) | ||||||
Change in estimated receipts in excess of costs
during liquidation |
733,000 | 582,000 | 53,000 | |||||||||
Changes to asset (reserve) for estimated receipts
(costs) in excess of estimated costs (receipts)
during liquidation |
655,000 | 457,000 | (198,000 | ) | ||||||||
Change in fair value of assets and liabilities: |
||||||||||||
Change in fair value of real estate investments |
(2,829,000 | ) | (2,530,000 | ) | (544,000 | ) | ||||||
Change in assets and liabilities due to activity
in the asset (reserve) for estimated receipts
(costs) in excess of estimated costs (receipts)
during liquidation |
78,000 | 125,000 | 251,000 | |||||||||
Net decrease in fair value |
(2,751,000 | ) | (2,405,000 | ) | (293,000 | ) | ||||||
Distributions to unit holders |
| | (400,000 | ) | ||||||||
Change in net assets in liquidation |
(2,096,000 | ) | (1,948,000 | ) | (891,000 | ) | ||||||
Net assets in liquidation, end of year |
$ | 1,884,000 | $ | 3,980,000 | $ | 5,928,000 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
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NNN 2002 VALUE FUND, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Description of Business
The use of the words we, us or our refers to NNN 2002 Value Fund, LLC, except where the
context otherwise requires.
NNN 2002 Value Fund, LLC was formed as a Virginia limited liability company on May 15, 2002.
We were organized for the purpose of acquiring all or a portion of up to three unspecified
properties from unaffiliated sellers in accordance with our private placement memorandum dated
May 15, 2002, as amended, or our Private Placement Memorandum. We expected to own and operate
interests in the properties for approximately three to five years after the acquisition thereof. As
of December 31, 2009, we own a 12.3% interest in one unconsolidated property, Congress Center,
located in Chicago, Illinois, or the Congress Center property. References herein to our property,
our one remaining unconsolidated property or our remaining asset are to our 12.3% interest in the
Congress Center property.
Grubb & Ellis Realty Investors, LLC (formerly known as Triple Net Properties, LLC) or Grubb &
Ellis Realty Investors, or our Manager, manages us pursuant to the terms of an operating agreement,
or the Operating Agreement. Our Manager is primarily responsible for managing our day-to-day
operations and assets. While we have no employees, certain employees and executive officers of our
Manager provide services to us pursuant to the Operating Agreement. Our Manager is managed by
executive officers of our Manager. Our Manager engages affiliated entities, including Triple Net
Properties Realty, Inc., or Realty, to provide various services for our one remaining
unconsolidated property. Realty serves as our property manager pursuant to the terms of the
Operating Agreement and a property management agreement, or the Management Agreement. The Operating
Agreement terminates upon our dissolution. The unit holders may not vote to terminate our Manager
prior to the termination of the Operating Agreement or our dissolution except for cause. The
Management Agreement terminates with respect to our one remaining unconsolidated property upon the
earlier of the sale of such property or ten years from the date of
acquisition, which would be January 9, 2013. Realty may be
terminated with respect to our one remaining unconsolidated property without cause prior to the
termination of the Management Agreement or our dissolution, subject to certain conditions,
including the payment by us to Realty of a termination fee as provided in the Management Agreement.
Plan of Liquidation
At a special meeting of our unit holders on September 7, 2005, our unit holders approved our
plan of liquidation. Our plan of liquidation contemplates the orderly sale of all of our assets,
the payment of our liabilities and the winding up of operations and the dissolution of our company.
We engaged an independent third party to perform financial advisory services in connection with
our plan of liquidation, including rendering opinions as to whether our net real estate liquidation
value range estimate and our estimated per unit distribution range are reasonable. We continually
evaluate our investment in the Congress Center property and adjust our net real estate liquidation
value accordingly. It is our policy that when we execute a purchase and sale agreement or become
aware of market conditions or other circumstances that indicate that our present value materially
differs from our expected net sales price, we will adjust our liquidation value accordingly.
Following the approval of our plan of liquidation by our unit holders, we adopted the liquidation
basis of accounting as of August 31, 2005 and for all periods subsequent to August 31, 2005.
Our plan of liquidation gives our Manager the power to sell any and all of our assets without
further approval by our unit holders and provides that liquidating distributions be made to our
unit holders as determined by our Manager. Although we can provide no assurances, we currently
expect to sell our interest in the Congress Center property by December 31, 2010 and anticipate
completing our plan of liquidation by March 31, 2011.
2. Summary of Significant Accounting Policies
The summary of significant accounting policies presented below is designed to assist in
understanding our consolidated financial statements. Such financial statements and accompanying
notes are the representations of our management, who are responsible for their integrity and
objectivity. These accounting policies conform to accounting principles generally accepted in the
United States of America, or GAAP, in all material respects, and have been consistently applied in
preparing the accompanying consolidated financial statements.
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NNN 2002 VALUE FUND, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Use of Estimates
The preparation of financial statements in accordance with GAAP and under the liquidation
basis of accounting requires us to make estimates and judgments that affect the reported amounts of
assets (including net assets in liquidation), liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We believe that our critical accounting policies
are those that require significant judgments and estimates. These estimates are 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. Actual results could vary from those
estimates, perhaps in material adverse ways, and those estimates could be different under different
assumptions or conditions.
Liquidation Basis of Accounting
As a result of the approval of our plan of liquidation by our unit holders, we adopted the
liquidation basis of accounting as of August 31, 2005 and for all periods subsequent to August 31,
2005. Accordingly, all assets have been adjusted to their estimated fair value (on an undiscounted
basis). Liabilities, including estimated costs associated with implementing our plan of
liquidation, were adjusted to their estimated settlement amounts. Minority interest liabilities
were offset against the respective assets and liabilities. The valuation of our investment in
unconsolidated real estate is based on current contracts, estimates and other indications of sales
value net of estimated selling costs. Estimated future cash flows from property operations were
made based on the anticipated sale dates of the asset. Due to the uncertainty in the timing of the
anticipated sale date and the cash flows there from, results of operations may differ materially
from amounts estimated. These amounts are presented in the accompanying consolidated statements of
net assets. The net assets represent the estimated liquidation value of our assets available to our
unit holders upon liquidation. The actual values realized for assets and settlement of liabilities
may differ materially, perhaps in adverse ways, from the amounts estimated.
We continually evaluate our investment in the Congress Center property and adjust our net real
estate liquidation value accordingly. It is our policy that when we execute a purchase and sale
agreement or become aware of market conditions or other circumstances that indicate that our
present value materially differs from our expected net sales price, we will adjust our liquidation
value accordingly.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with a maturity of three months
or less when purchased. Certificates of deposit and short-term investments with remaining
maturities of three months or less when acquired are considered cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject us to a concentration of credit risk are
primarily cash investments and accounts receivable from tenants. Cash is generally invested in
investment-grade short-term instruments and the amount of credit exposure to any one commercial
issuer is limited. We have cash in financial institutions which is insured by the Federal Deposit
Insurance Corporation, or FDIC, up to $250,000 per depositor per insured bank. As of December 31,
2009 and 2008, we had cash accounts in excess of FDIC insured limits. We believe this risk is not
significant. Concentration of credit risk with respect to accounts receivable from tenants is
limited. We perform credit evaluations of prospective tenants, and security deposits are obtained
upon lease execution.
As
of December 31, 2009 and 2008, we had an unconsolidated interest in the Congress Center property
located in Chicago, Illinois. Accordingly, there is a geographic concentration of risk subject to
fluctuations in that states economy.
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NNN 2002 VALUE FUND, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2009, we had no consolidated properties, however, five tenants at the
Congress Center property accounted for 10.0% or more of the aggregate annual rental income at that
property for the year ended December 31, 2009, as follows:
Percentage of | Square | Lease | ||||||||||||||
2009 Annual | 2009 Annual | Footage | Expiration | |||||||||||||
Tenant | Base Rent* | Base Rent | (Approximate) | Date** | ||||||||||||
Department of Homeland Security |
$ | 3,538,000 | 28.6 | % | 76,000 | April 2012 | ||||||||||
North American Co. Life and Health Ins |
$ | 2,472,000 | 20.0 | % | 101,000 | Feb. 2012 | ||||||||||
Akzo Nobel, Inc. |
$ | 2,131,000 | 17.2 | % | 91,000 | Dec. 2013 | ||||||||||
United States Treasury Department |
$ | 1,677,000 | 13.6 | % | 37,000 | Feb. 2013 | ||||||||||
National Railroad Passenger Corporation |
$ | 1,249,000 | 10.1 | % | 37,000 | Dec. 2011 |
* | Annualized rental income is based on contractual base rent from leases in effect as of December 31, 2009. | |
** | In January 2010, we completed a lease extension on the Akzo Nobel, Inc. lease to December 2019. |
As of December 31, 2008, we had no consolidated properties, however, four tenants at the
Congress Center property accounted for 10.0% or more of the aggregate annual rental income at that
property for the year ended December 31, 2008, as follows:
Percentage of | Square | Lease | ||||||||||||||
2008 Annual | 2008 Annual | Footage | Expiration | |||||||||||||
Tenant | Base Rent* | Base Rent | (Approximate) | Date** | ||||||||||||
Department of Homeland Security |
$ | 3,473,000 | 28.8 | % | 76,000 | April 2012 | ||||||||||
North American Co. Life and Health Ins |
$ | 2,421,000 | 20.0 | % | 101,000 | Feb. 2012 | ||||||||||
Akzo Nobel, Inc. |
$ | 2,073,000 | 17.2 | % | 91,000 | Dec. 2013 | ||||||||||
United States Treasury Department |
$ | 1,645,000 | 13.6 | % | 37,000 | Feb. 2013 |
* | Annualized rental income is based on contractual base rent from leases in effect as of December 31, 2008. | |
** | In January 2010, we completed a lease extension on the Akzo Nobel, Inc. lease to December 2019. |
Revenue Recognition
Rental revenue is recorded on the contractual basis under the liquidation basis of accounting.
Income Taxes
We are a pass-through entity for income tax purposes and taxable income is reported by our
unit holders on their individual tax returns. Accordingly, no provision has been made for income
taxes in the accompanying consolidated statements of operations except for insignificant amounts
related to state franchise and income taxes.
Segments
FASB Codification Topic 280, Segment Reporting, establishes standards for reporting financial
and descriptive information about an enterprises reportable segments. We have determined that we
have one reportable segment, with activities related to investing in an unconsolidated office
building. As such, our operations have been aggregated into one reportable segment for all periods
presented.
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NNN 2002 VALUE FUND, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Recently Issued Accounting Pronouncements
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a
Replacement of FASB Statement No. 162 (now contained in FASB Codification Topic 105). FASB
Codification Topic 105 establishes that the FASB Codification will become the single official
source of authoritative U.S. GAAP, other than guidance issued by the SEC. Following this statement,
the FASB will not issue new standards in the form of Statements, Staff Positions or Emerging Issues
Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates. All guidance
contained in the Codification carries an equal level of authority. The GAAP hierarchy will be
modified to include only two levels of GAAP: authoritative and non-authoritative. All
non-grandfathered, non-SEC accounting literature not included in the Codification will become
non-authoritative. The Codification, which changes the referencing of financial standards, becomes
effective for interim and annual periods ending on or after September 15, 2009. We adopted FASB
Codification Topic 105 in the quarter ended September 30, 2009 and it did not have a material
impact on our consolidated financial statements.
3. Asset (Reserve) for Estimated Receipts (Costs) in Excess of Estimated Costs (Receipts) During
Liquidation
Under the liquidation basis of accounting, we are required to estimate the cash flows from
operations and accrue the costs associated with implementing and completing our plan of
liquidation. Our Manager has agreed to bear all costs associated with public company filings,
including legal, accounting and liquidation costs. We currently estimate that we will have
operating cash inflows from our estimated receipts in excess of the estimated costs of liquidation.
These amounts can vary significantly due to, among other things, the timing and estimates for
executing and renewing leases, along with the estimates of tenant improvements incurred and paid,
the timing of the sale of the Congress Center property, the timing and amounts associated with
discharging known and contingent liabilities and the costs associated with winding up our
operations. These costs are estimated and are expected to be paid over the remaining liquidation
period.
Effective July 1, 2008, monthly distributions to the Congress Center propertys investors were
suspended, including distributions to us. As a result of this suspension of monthly distributions,
our sole source of cash flow is expected to be proceeds from the anticipated sale of our interest
in the Congress Center property. It is anticipated that funds previously used for distributions
will be applied by the Congress Center property towards future tenanting costs to lease spaces not
covered by the lender reserve and to supplement the lender reserve funding as necessary. Prior to
the suspension of distributions, we received approximately $29,000 per month in distributions from
the Congress Center property. In December 2009, our Manager approved a one-time distribution to
the Congress Center propertys investors for year-end tax purposes. We received approximately
$97,000 from this one-time distribution.
The change in the asset (reserve) for estimated receipts (costs) in excess of estimated costs
(receipts) during liquidation for the year ended December 31, 2009 was as follows:
Cash | ||||||||||||||||
December 31, | Payments and | Change in | December 31, | |||||||||||||
2008 | (Receipts) | Estimates | 2009 | |||||||||||||
Assets: |
||||||||||||||||
Estimated net
inflows from
consolidated and
unconsolidated
operating
activities |
$ | 1,148,000 | $ | (99,000 | ) | $ | 221,000 | $ | 1,270,000 | |||||||
Liabilities: |
||||||||||||||||
Liquidation costs |
(954,000 | ) | 21,000 | 512,000 | (421,000 | ) | ||||||||||
Total asset
(reserve) for
estimated receipts
(costs) in excess
of estimated costs
(receipts) during
liquidation |
$ | 194,000 | $ | (78,000 | ) | $ | 733,000 | $ | 849,000 | |||||||
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NNN 2002 VALUE FUND, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The change in the asset (reserve) for estimated receipts (costs) in excess of estimated costs
(receipts) during liquidation for the year ended December 31, 2008 was as follows:
Cash | ||||||||||||||||
December 31, | Payments and | Change in | December 31, | |||||||||||||
2007 | (Receipts) | Estimates | 2008 | |||||||||||||
Assets: |
||||||||||||||||
Estimated net
inflows from
consolidated and
unconsolidated
operating
activities |
$ | 1,228,000 | $ | (177,000 | ) | $ | 97,000 | $ | 1,148,000 | |||||||
Liabilities: |
||||||||||||||||
Liquidation costs |
(1,491,000 | ) | 52,000 | 485,000 | (954,000 | ) | ||||||||||
Total asset
(reserve) for
estimated receipts
(costs) in excess
of estimated costs
(receipts) during
liquidation |
$ | (263,000 | ) | $ | (125,000 | ) | $ | 582,000 | $ | 194,000 | ||||||
4. Net Assets in Liquidation
Net assets in liquidation decreased $2,096,000, or $351.68 per unit, during the year ended
December 31, 2009. The primary reason for the decrease in our net assets in liquidation was a
decrease in the value of our interest in the Congress Center property of $2,829,000, or $474.66 per
unit, as a result of a decrease in the anticipated sales price, offset by an increase in estimated
receipts in excess of estimated costs during liquidation of $655,000, or $109.90 per unit, which
was a result of changes in estimates of net cash flows of our one remaining unconsolidated
property.
Net assets in liquidation decreased $1,948,000, or $326.85 per unit, during the year ended
December 31, 2008. The primary reason for the decrease in our net assets in liquidation was a
decrease in the value of our interest in the Congress Center property of $2,530,000, or $424.50 per
unit. This decrease was a result of a decrease in the anticipated sales price offset by a decrease
in estimated costs in excess of estimated receipts during liquidation of $457,000, or $76.68 per
unit, which was a result of a change in estimate primarily due to the change in the projected sales
date of the Congress Center property. The decrease in the reserve for estimated costs in excess of
estimated receipts during liquidation resulted in an asset for estimated receipts in excess of
estimated costs as of December 31, 2008.
Net assets in
liquidation decreased $891,000, or $149.50 per unit, during the year ended
December 31, 2007. The primary reason for the decrease in our net assets
in liquidation was the payment of $400,000, or $67.11 per unit, in
distributions to our unit holders in December 2007 and a decrease in the
value of our interest in the Congress Center property of $544,000, or $91.28
per unit. This decrease in value was a result of a decrease in the anticipated
sales price offset by a decrease in estimated costs in excess of estimated
receipts during liquidation of $198,000, or $33.22 per unit, which was a result
of a change in estimate primarily due to the change in the projected sales date
of the Congress Center property.
The net assets in liquidation of $1,884,000 plus cumulative liquidating distributions of
$18,900,000 as of December 31, 2009, would result in liquidating distributions per unit of
approximately $3,643.77 for Class A, $3,473.70 for Class B and $3,341.71 for Class C. These
estimates for liquidating distributions per unit include projections of costs and expenses expected
to be incurred during the period required to complete our plan of liquidation. These projections
could change materially based on the timing of any sale, the performance of the underlying assets
and any changes in the underlying assumptions of the projected cash flows.
5. Real Estate Investments
As of December 31, 2009 and 2008, our real estate investment is comprised of a 12.3% interest
in the Congress Center property, located in Chicago, Illinois. We did not have any property
dispositions during the years ended December 31, 2009, 2008 and 2007.
6. Unit Holders Equity
There are three classes of units with different rights with respect to distributions. As of
December 31, 2009 and 2008, there were 2,000 Class A units, 2,000 Class B units and 1,960 Class C
units issued and outstanding. The rights and obligations of all unit holders are governed by the
Operating Agreement.
49
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NNN 2002 VALUE FUND, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash from Operations, as defined in the Operating Agreement, is first distributed to all unit
holders pro rata until all Class A unit holders, Class B unit holders and Class C unit holders have
received a 10.0%, 9.0% and 8.0% cumulative (but not compounded) annual return on their contributed
and unrecovered capital, respectively. In the
event that any distribution of Cash from Operations is not sufficient to pay the return
described above, all unit holders receive identical pro rata distributions, except that Class C
unit holders do not receive more than an 8.0% return on their Class C units, and Class B unit
holders do not receive more than a 9.0% return on their Class B units. Excess Cash from Operations
is then allocated pro rata to all unit holders on a per outstanding unit basis and further
distributed to the unit holders and the Manager based on predetermined ratios providing the Manager
with a share of 15.0%, 20.0% and 25.0% of the distributions available to Class A units, Class B
units and Class C units, respectively, of such excess Cash from Operations. We had no excess Cash
from Operations for the years ended December 31, 2009, 2008 and 2007 and our Manager did not
receive any such distributions for these periods.
Cash from Capital Transactions, as defined in the Operating Agreement, is used as follows:
first, to satisfy our debt and liability obligations; second, to pay pro rata to all unit holders
in accordance with their interests until all capital contributions are reduced to zero; and third,
to unit holders in accordance with the distributions as outlined above in the Cash from Operations.
During the years ended December 31, 2009, 2008 and 2007, distributions of $0, $0, and
$400,000, respectively, were declared. Class A units, Class B units and Class C units have received
identical per-unit distributions; however, distributions will vary among the three classes of units
in the future.
Following the payment of the April 2005 monthly distribution, the then board of managers of
our Manager decided to discontinue the payment of monthly distributions the payment of monthly
distributions. To the extent that prior distributions have not conformed to the distribution
priorities, we intend to adjust future distributions in order to provide overall net distributions
consistent with the priority provisions of the Operating Agreement. Such distributions may be
distributions from capital transactions and may be completed in connection with our plan of
liquidation.
7. Related Party Transactions
The Operating Agreement
Pursuant to the Operating Agreement, our Manager or its affiliates are entitled to receive the
following payments and fees described below. These payments and fees were not negotiated at arms
length and may be higher than payments and fees that would have resulted from an arms length
transaction with an unrelated entity.
Expenses, Costs, or Fees
We have agreed to reimburse our Manager and its affiliates certain expenses, costs and fees
incurred by our Manager, including, without limitation, for the cash payments, certain closing
costs, escrow deposits, loan commitment fees, project studies and travel expenses related to the
analysis and acquisitions of our properties. Our Manager did not incur and, therefore, was not
reimbursed for, any such expenses, costs or fees for the years ended December 31, 2009, 2008 and
2007.
Operating Expenses
We have agreed to reimburse our Manager or its affiliates for reasonable and necessary
expenses paid or incurred by our Manager or its affiliates in connection with our operation,
including any legal and accounting costs, and the costs incurred in connection with the disposition
of our properties, including travel, surveys, environmental and other studies and interest expense
incurred on deposits or expenses. In accordance with our plan of liquidation, the then board of
managers of our Manager voted and agreed that all costs associated with public company compliance
would be borne by our Manager. As such, our Manager has incurred costs associated with our public
company compliance, but will not be reimbursed for such costs.
For the years ended December 31, 2009, 2008 and 2007, we reimbursed our Manager for $17,000,
$4,000 and $13,000, respectively, in non-public company compliance costs.
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NNN 2002 VALUE FUND, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Distributions to Our Manager
Our Manager is entitled to receive from us distributions that relate to cash from operations
and from capital transactions as discussed in Note 6 Unit Holders Equity. Our Manager did not
receive any such distributions for the years ended December 31, 2009, 2008 and 2007. Based on the
valuation of our portfolio as of December 31, 2009 and 2008, we have reserved for an estimated
distribution to our Manager of $382,000 and $905,000, respectively.
The Management Agreement
Pursuant to the Operating Agreement and the Management Agreement, Realty is entitled to
receive the payments and fees described below. These payments and fees were not negotiated at arms
length and may be higher than payments and fees that would have resulted from an arms length
negotiation and transaction with an unrelated entity. We only incur and pay such fees on
consolidated properties, and for the years ended December 31, 2009, 2008 and 2007, we did not have
any consolidated properties.
Property Management Fees
We pay Realty, for its services in managing our properties, a monthly management fee of up to
5.0% of the gross revenue of the properties. For the years ended December 31, 2009, 2008, and 2007,
we did not incur any property management fees to Realty.
Lease Commissions
We pay Realty or its affiliates a leasing commission for its services in leasing any of our
properties an amount equal to 6.0% of the value of any lease entered into during the term of the
Management Agreement and 3.0% with respect to any lease renewal. The value of such leases will be
calculated by totaling the minimum monthly rent for the term of the lease. The term of such leases
will not exceed five years for purposes of the computation and will not include option periods. For
the years ended December 31, 2009, 2008, and 2007, we did not incur any lease commissions to
Realty.
Project Fees
We pay Realty for its services in supervising any construction or repair project in or about
our properties, a construction management fee equal to 5.0% of any amount up to $25,000, 4.0% of
any amount over $25,000 but less than $50,000, and 3.0% of any amount over $50,000 which is
expended in any calendar year for construction or repair projects. For the years ended December 31,
2009, 2008, and 2007, we did not incur any project fees to Realty.
Real Estate Disposition Fees
We pay Realty a real estate disposition fee equal up to 5.0% of the sales price. In addition,
third party brokers may be entitled up to 80.0% of the 5.0% disposition fee. For the years ended
December 31, 2009, 2008, and 2007, we did not incur any real estate disposition fees to Realty.
Loan Fees
We pay Realty a loan fee in the amount of 1.0% of the principal amount of all loans obtained
by it for our properties during the term of the Management Agreement. For the years ended
December 31, 2009, 2008, and 2007, we did not incur any loan fees to Realty.
51
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NNN 2002 VALUE FUND, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Commitments and Contingencies
Litigation
Neither we nor the Congress Center property are presently subject to any other material
litigation nor, to our knowledge, is any material litigation threatened against us or our one
remaining unconsolidated property which if determined unfavorably to us would have a material
adverse effect on our cash flows, financial condition or results of operations.
Environmental Matters
We follow the policy of monitoring the Congress Center property for the presence of hazardous
or toxic substances. While there can be no assurance that a material environmental liability does
not exist, we are not currently aware of any environmental liability with respect to the Congress
Center property that would have a material adverse effect on our cash flows, financial condition or
results of operations. Further, we are not aware of any environmental liability or any unasserted
claim or assessment with respect to an environmental liability that we believe would require
additional disclosure or the recording of a loss contingency.
Unconsolidated Debt
Total mortgage debt of the Congress Center property was $93,486,000 and $94,839,000 as of
December 31, 2009 and 2008, respectively. Our proportionate share of the mortgage debt was
$11,480,000 and $11,646,000 as of December 31, 2009 and 2008, respectively.
The Congress Center property is required by the terms of the applicable loan documents to meet
certain minimum loan to value, performance covenants and other requirements. As of December 31,
2009, the Congress Center property was in compliance with all such covenants.
On
February 17, 2010, we received a letter from our lender stating that our insurance policy
covering the Congress Center property is deficient because several of the carriers providing
coverage under our policy do not meet one or more of the carrier rating requirements as set forth
in the loan documents. We are obligated to bring the insurance deficiencies into compliance with
the requirements set forth in the loan documents upon the renewal or replacement of our insurance
policy and in no event later than thirty days after the expiration date of the policy, which is set
to expire on March 7, 2010. If we are unable to cure the insurance deficiencies, or obtain a waiver
from the lender, it could result in our lender exercising the rights and remedies afforded to it
under the loan documents, including but not limited to the right to force-place the insurance
coverage at any time, the right to accelerate all amounts outstanding under the loan, and/or
foreclosure of the property. We can give no assurance that we will be able to cure the insurance
deficiencies within the timeframe stated above, or at all, or that if we are successful in
obtaining the required insurance coverage that we will be able to maintain such insurance coverage
in compliance with the loan documents.
On December 21, 2006, Realty received a termination notice from Employers Reinsurance
Corporation notifying Realty of their intent to exercise their option to terminate their lease for
approximately 67,000 square feet effective January 1, 2008 at the Congress Center property. From
January 1, 2008 and continuing through and including the payment date occurring on December 1,
2011, the lender is entitled to receive $83,000 on a monthly basis from the borrower. In January
2007, Employers Reinsurance Corporation paid $3,773,000 to the lender as an early termination fee
penalty pursuant to their lease agreement. We, along with G REIT Liquidating Trust (successor of G
REIT, Inc.) and T REIT Liquidating Trust (successor of T REIT, Inc.), or our affiliate co-owners,
paid the remaining $27,000 of the early termination fee penalty owed to the lender. As of December
31, 2009, we have advanced $112,000 to the lender for the reserves associated with the early lease
termination. It is anticipated that upon the sale of the Congress Center property, we, along with
our affiliate co-owners, will receive repayment of any advances made to the lender for reserves. In
May 2009, NNN Congress Center, LLC entered into a lease agreement with the Internal Revenue
Service, or IRS, for approximately 28,000 square feet of space previously leased by Employers
Reinsurance Corporation. The lease begins on April 1, 2010, for a period of ten years, seven years
firm, subject to termination rights pursuant to the lease agreement at an annual rate of $31.00 per
square foot. Pursuant to
the lease agreement, there are scheduled annual rent increases, and various rent concessions
and commission credits have been given to the IRS in lease years one and two. We will continue our
marketing efforts to re-lease the remaining un-leased space.
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NNN 2002 VALUE FUND, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other
Our other commitments and contingencies include the usual obligations of a real estate company
in the normal course of business. In the opinion of management, these matters are not expected to
have a material impact on our financial position and consolidated results of operations.
9. Selected Quarterly Financial Data (Unaudited)
Set forth below is the unaudited selected quarterly financial data. We believe that all
necessary adjustments, consisting only of normal recurring adjustments, have been included in the
amounts stated below to present fairly, and in accordance with generally accepted accounting
principles, the unaudited selected quarterly financial data when read in conjunction with the
consolidated financial statements.
Liquidation Basis | ||||||||||||||||
Quarters Ended | ||||||||||||||||
December 31, | September 30, | June 30, | March 31, | |||||||||||||
2009 | 2009 | 2009 | 2009 | |||||||||||||
Net assets in liquidation, beginning of period |
$ | 2,101,000 | $ | 4,013,000 | $ | 3,518,000 | $ | 3,980,000 | ||||||||
Change to asset (reserve) for estimated receipts
(costs) in excess of estimated receipts (costs)
during liquidation |
(137,000 | ) | 324,000 | 452,000 | 16,000 | |||||||||||
Net (decrease) increase in fair value |
(80,000 | ) | (2,236,000 | ) | 43,000 | (478,000 | ) | |||||||||
Change in net assets in liquidation |
(217,000 | ) | (1,912,000 | ) | 495,000 | (462,000 | ) | |||||||||
Net assets in liquidation, end of period |
$ | 1,884,000 | $ | 2,101,000 | $ | 4,013,000 | $ | 3,518,000 | ||||||||
Liquidation Basis | ||||||||||||||||
Quarters Ended | ||||||||||||||||
December 31, | September 30, | June 30, | March 31, | |||||||||||||
2008 | 2008 | 2008 | 2008 | |||||||||||||
Net assets in liquidation, beginning of period |
$ | 4,579,000 | $ | 5,543,000 | $ | 5,970,000 | $ | 5,928,000 | ||||||||
Change to asset (reserve) for estimated receipts
(costs) in excess of estimated receipts (costs)
during liquidation |
(4,000 | ) | 314,000 | 229,000 | (82,000 | ) | ||||||||||
Net (decrease) increase in fair value |
(595,000 | ) | (1,278,000 | ) | (656,000 | ) | 124,000 | |||||||||
Change in net assets in liquidation |
(599,000 | ) | (964,000 | ) | (427,000 | ) | 42,000 | |||||||||
Net assets in liquidation, end of period |
$ | 3,980,000 | $ | 4,579,000 | $ | 5,543,000 | $ | 5,970,000 | ||||||||
53
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
NNN 2002 Value Fund, LLC | ||||||||
(Registrant) | ||||||||
By
|
Grubb & Ellis Realty Investors, LLC, | |||||||
its Manager | ||||||||
By
|
/s/ Jeffrey T. Hanson
|
President Grubb & Ellis Realty Investors, LLC, the Manager of NNN 2002 Value Fund LLC (principal executive officer) |
||||||
Date March 5, 2010 | ||||||||
By
|
/s/ Michael J. Rispoli
|
Chief Financial Officer Grubb & Ellis Realty Investors, LLC, the Manager of NNN 2002 Value Fund LLC (principal accounting officer) |
||||||
Date March 5, 2010 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By
|
/s/ Jeffrey T. Hanson
|
President Grubb & Ellis Realty Investors, LLC, the Manager of NNN 2002 Value Fund LLC (principal executive officer) |
||||||
Date March 5, 2010 | ||||||||
By
|
/s/ Michael J. Rispoli
|
Chief Financial Officer Grubb & Ellis Realty Investors, LLC, the Manager of NNN 2002 Value Fund LLC (principal accounting officer) |
||||||
Date March 5, 2010 |
54
Table of Contents
EXHIBIT INDEX
Pursuant to Item 601(a)(2) of Regulation S-K, this exhibit index immediately precedes the
exhibits.
The following exhibits are included, or incorporated by reference, in this Annual Report on
Form 10-K for the fiscal year 2009 (and are numbered in accordance with Item 601 of
Regulation S-K).
Item No. | Description | |||
2.1 | NNN 2002 Value Fund, LLC Plan of Liquidation and Dissolution,
as approved by unit holders on September 7, 2005 and as
currently in effect (included as Exhibit A to our Definitive
Proxy Statement filed on August 4, 2005 and incorporated
herein by reference) |
|||
3.1 | Articles of Organization of NNN 2002 Value Fund, LLC, dated
May 1, 2002. (included as Exhibit 3.1 to our Amendment No. 1
to Form 10 Registration Statement filed on February 28, 2005
and incorporated herein by reference.) |
|||
10.1 | Operating Agreement of NNN 2002 Value Fund, LLC, (included as
Exhibit 10.1 to our Amendment No. 1 to Form 10 Registration
Statement filed on February 28, 2005 and incorporated herein
by reference.) |
|||
10.2 | Management Agreement between NNN 2002 Value Fund, LLC and
Triple Net Properties Realty, Inc. (included as Exhibit 10.2
to our Amendment No. 1 to Form 10 Registration Statement
filed on February 28, 2005 and incorporated herein by
reference.) |
|||
21.1* | Subsidiaries of NNN 2002 Value Fund, LLC |
|||
31.1* | Certification of Principal Executive Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
31.2* | Certification of Principal Accounting Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
32.1** | Certification of Principal Executive Officer, pursuant to
18 U.S.C. Section 1350, as created by Section 906 of the
Sarbanes-Oxley Act of 2002. |
|||
32.2** | Certification of Principal Accounting Officer, pursuant to
18 U.S.C. Section 1350, as created by Section 906 of the
Sarbanes-Oxley Act of 2002. |
* | Filed herewith. | |
** | Furnished herewith. |
55