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EX-21 - AGREE REALTY CORPv177141_ex21.htm
EX-23 - AGREE REALTY CORPv177141_ex23.htm
EX-31.2 - AGREE REALTY CORPv177141_ex31-2.htm
EX-32.2 - AGREE REALTY CORPv177141_ex32-2.htm
EX-12.1 - AGREE REALTY CORPv177141_ex12-1.htm
EX-31.1 - AGREE REALTY CORPv177141_ex31-1.htm
EX-32.1 - AGREE REALTY CORPv177141_ex32-1.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

Commission File Number 1-12928

AGREE REALTY CORPORATION
(Exact name of Registrant as specified in its charter)

Maryland
 
38-3148187
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
     
31850 Northwestern Highway
 
48334
Farmington Hills, Michigan
 
(Zip code)
 (Address of principal executive offices)
  
 

(248) 737-4190
(Registrant’s telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

Title of each class
 
Name of each exchange on which registered
Common Stock, $.0001 par value
  
New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
 
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 ¨ No x
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ¨  No ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
 
Indicate by check mark whether the registrant is 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 ¨
 
Accelerated filer x
 
Non-accelerated filer ¨
 
Smaller reporting company ¨
 
  
 
  
(Do not check if a smaller reporting company)
  
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ¨ No x
 
The aggregate market value of the Registrant’s shares of common stock held by non-affiliates was approximately $150,151,551 as of June 30, 2009, based on the closing price of $18.33 on the New York Stock Exchange on that date.
 
At February 26, 2010, there were 8,271,464 shares of common stock, $.0001 par value per share, outstanding.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Portions of the registrant’s definitive proxy statement for the annual stockholder meeting to be held in 2010 are incorporated by reference into Part III of this Form 10-K as noted herein.
 
 
 

 

TABLE OF CONTENTS
 
   
Part I
   
         
Item 1.
 
Business
 
1
         
Item 1A.
 
Risk Factors
 
4
         
Item 1B.
 
Unresolved Staff Comments
 
17
         
Item 2.
 
Properties
 
17
         
Item 3.
 
Legal Proceedings
 
24
         
Item 4.
 
Reserved
 
24
         
   
Part II
   
         
Item 5.
 
Market for Registrant’s Common Equity,  Related Stockholder Matters and Issuer Purchases of
   
   
Equity Securities
 
24
         
Item 6.
 
Selected Financial Data
 
26
         
Item 7.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
27
         
Item 7A
 
Quantitative and Qualitative Disclosures about Market Risk
 
32
         
Item 8
 
Financial Statements and Supplementary Data
 
33
         
Item 9
 
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
 
33
         
Item 9A
 
Controls and Procedures
 
33
         
Item 9B
 
Other Information
 
34
         
   
Part III
   
         
Item 10.
 
Directors, Executive Officers and Corporate Governance
 
34
         
Item 11.
 
Executive Compensation
 
34
         
Item 12.
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
   
   
Matters
 
34
         
Item 13.
 
Certain Relationships and Related Transactions, and Director Independence
 
35
         
Item 14.
 
Principal Accountant Fees and Services
 
35
         
   
Part IV
   
         
Item 15.
 
Exhibits and Financial Statement Schedules
 
36
         
Signatures   
  
39

 
 

 

PART I
 
FORWARD LOOKING STATEMENTS
 
          Management has included herein certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended (the “Securities Exchange Act”). These forward-looking statements represent our expectations, plans or beliefs concerning future events and may be identified by terminology such as “anticipate,” “estimate,” “should,” “expect,” “believe,” “intend” and similar expressions. Although the forward-looking statements made in this report are based on good faith beliefs, reasonable assumptions and our best judgment reflecting current information, certain factors could cause actual results to differ materially from such forward–looking statements, including but not limited to: the ongoing U.S. recession, the existing global credit and financial crisis and other changes in general economic, financial and real estate market conditions; risks that our acquisition and development projects will fail to perform as expected; financing risks, such as the inability to obtain debt or equity financing on favorable terms or at all; the level and volatility of interest rates; loss or bankruptcy of one or more of our major retail tenants; a failure of our properties to generate additional income to offset increases in operating expenses; and other factors discussed in Item 1A. “Risk Factors” and elsewhere in this report and in subsequent filings with the Securities and Exchange Commission (“SEC”).  Given these uncertainties, you should not place undue reliance on our forward-looking statements.  Except as required by law, we assume no obligation to update these forward–looking statements, even if new information becomes available in the future.
 
Item 1. 
BUSINESS
 
General
 
Agree Realty Corporation, a Maryland corporation, is a fully-integrated, self-administered and self-managed real estate investment trust (“REIT”).  The terms “Registrant”, “Company”, “we”, “our” or “us” refer to Agree Realty Corporation and/or its majority owned operating partnership, Agree Limited Partnership (“Operating Partnership”), and/or its majority owned and controlled subsidiaries, including its qualified taxable REIT subsidiaries (“TRS”), as the context may require.  Our assets are held by and all of our operations are conducted through, directly or indirectly, the Operating Partnership, of which we are the sole general partner and in which we held a 95.93% interest as of December 31, 2009.  Under the partnership agreement of the Operating Partnership, we, as the sole general partner, have exclusive responsibility and discretion in the management and control of the Operating Partnership.
 
We are focused primarily on the ownership, development, acquisition and management of retail properties net leased to national tenants.  We were incorporated in December 1993 to continue and expand the business founded in 1971 by our current Chief Executive Officer and Chairman, Richard Agree.  We specialize in developing retail properties for national tenants who have executed long-term net leases prior to the commencement of construction.  As of December 31, 2009, approximately 89% of our annualized base rent was derived from national tenants.  As of December 31, 2009, approximately 70% of our annualized base rent was derived from our top three tenants:  Walgreen Co. (“Walgreen”) – 30%; Borders Group, Inc. (“Borders”) – 29%; and Kmart Corporation (“Kmart”) - 11%.
 
At December 31, 2009, our portfolio consisted of 73 properties, located in 16 states containing an aggregate of approximately 3.5 million square feet of gross leasable area (“GLA”).  As of December 31, 2009, our portfolio included 61 freestanding net leased properties and 12 community shopping centers that were 98.1% leased with a weighted average lease term of approximately 10.3 years remaining.  All of our freestanding property tenants and the majority of our community shopping center tenants have triple-net leases, which require the tenant to be responsible for property operating expenses including property taxes, insurance and maintenance.  We believe this strategy provides a generally consistent source of income and cash for distributions.  See Item 2. “Properties” for a summary of our developments and acquisitions in 2009, as well as other information regarding our tenants, leases and properties as of December 31, 2009.
 
 
 

 

We expect to continue to grow our asset base primarily through the development of retail properties that are pre-leased on a long-term basis to national tenants.  We focus on development because we believe, based on our historical returns we have been able to achieve, it generally provides us a higher return on investment than the acquisition of similarly located properties and does not entail the risk associated with speculative development. Since our initial public offering in 1994, we have developed 60 of our 73 properties, including 48 of our 61 freestanding properties and all 12 of our community shopping centers.  As of December 31, 2009, the properties that we developed accounted for approximately 84% of our annualized base rent.  We expect to continue to expand our tenant relationships and diversify our tenant base to include other quality national tenants.
 
Growth Strategy
 
Development.  Our growth strategy is to develop retail properties pre-leased on a long-term basis to national tenants.  We believe that this strategy produces superior risk adjusted returns.  Our development process commences with the identification of a land parcel we believe is situated in an attractive retail location. The location must be in a concentrated retail corridor and have high traffic counts, good visibility and demographics compatible with the needs of a particular retail tenant.  After assessing the feasibility of development, we propose to the tenants that we execute long-term net leases for the finished development on that site.
 
Upon the execution of the leases, we purchase the land and pursue all the necessary approvals to begin development.  We direct all aspects of the development, including construction, design, leasing and management.  Property management and the majority of the leasing activities are handled directly by our personnel.  We believe that this approach enhances our ability to maximize the long-term value of our properties and results in an efficient use of our capital resources.
 
Acquisitions.  We selectively acquire single tenant properties when we have determined that a potential acquisition meets our return on investment criteria and such acquisition will diversify our rental income.
 
Financing Strategy
 
The majority of our mortgage indebtedness is fixed rate, non-recourse and long-term in nature.  Whenever feasible, we enter into long-term financing for our properties to match the underlying long-term leases.  We intend to limit our floating rate debt to borrowings under our credit facilities, which are primarily used to finance new development and acquisitions.  Once development of a project is completed, we typically consider refinancing this floating rate debt with fixed rate, non-recourse debt.  As of December 31, 2009, our total mortgage debt was approximately $75.6 million with a weighted average maturity of 8.8 years.  Of this total mortgage indebtedness, approximately $51.4 million is fixed rate, self–amortizing debt with a weighted average interest rate of 6.56% and a weighted average maturity of 11.3 years.  The remaining mortgage debt of approximately $24.2 million bears interest at 150 basis points over LIBOR or 1.74% as of December 31, 2009 and has a maturity date of July 14, 2013, which can be extended at our option for two additional years.  In January 2009, we entered into an interest rate swap agreement that fixes the interest rate during the initial term of the variable interest mortgage at 3.744%.   In addition to our mortgage debt, we had $29.0 million outstanding under our credit facilities as of December 31, 2009 with a weighted average interest rate of 1.26%.  We intend to maintain a ratio of total indebtedness (including construction and acquisition financing) to market capitalization of 65% or less.  At December 31, 2009, our ratio of indebtedness to market capitalization assuming the conversion of our operating partnership units, was approximately 52.5%.  The decrease in our ratio of indebtedness to market capitalization from 2008 to 2009 was primarily the result of an increase in the market price of our common stock.
 
We are evaluating our borrowing policies on an on-going basis in light of current economic conditions, relative costs of debt and equity capital, market value of properties, growth and acquisition opportunities and other factors.  There is no contractual limit or any limit in our organizational documents on our ratio of total indebtedness to total market capitalization, and accordingly, we may modify our borrowing policy and may increase or decrease our ratio of debt to market capitalization without stockholder approval.
 
 
2

 

Property Management
 
We maintain a proactive leasing and capital improvement program that, combined with the quality and locations of our properties, has made our properties attractive to tenants.  We intend to continue to hold our properties for long-term investment and, accordingly, place a strong emphasis on quality construction and an on-going program of regular maintenance.  Our properties are designed and built to require minimal capital improvements other than renovations or expansions paid for by tenants.  At our 12 community shopping centers properties, we sub-contract on-site functions such as maintenance, landscaping, snow removal and sweeping and the cost of these functions is generally reimbursed by our tenants.  Personnel from our corporate headquarters conduct regular inspections of each property and maintain regular contact with major tenants.
 
We have a management information system designed to provide management with the operating data necessary to make informed business decisions on a timely basis.  This computer system provides us rapid access to store availability, lease data, tenants’ sales history, cash flow budgets and forecasts, and enables us to maximize cash flow from operations and closely monitor corporate expenses.
 
Major Tenants
 
As of December 31, 2009, approximately 69% of our GLA was leased to Walgreen, Borders, and Kmart and approximately 70% of our total annualized base rents were attributable to these tenants.  At December 31, 2009, Walgreen occupied approximately 12% of our GLA and accounted for approximately 30% of the annualized base rent.  At December 31, 2009, Borders occupied approximately 28% of our GLA and accounted for approximately 29% of the annualized base rent.  At December 31, 2009, Kmart occupied approximately 29% of our GLA and accounted for approximately 11% of the annualized base rent.  No other tenant accounted for more than 10% of gross leasable area or annualized base rent in 2009.  The loss of any of these anchor tenants or a significant number of their stores, or the inability of any of them to pay rent, would have a material adverse effect on our business.
 
Tax Status
 
We have operated and intend to operate in a manner to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”).  In order to maintain qualification as a REIT, we must, among other things, distribute at least 90% of our REIT taxable income and meet certain asset and income tests.  Additionally, our charter limits ownership of our Company, directly or constructively, by any single person to 9.8% of the value of our outstanding common stock and preferred stock, subject to certain exceptions.  As a REIT, we are not subject to federal income tax with respect to that portion of our income that meets certain criteria and is distributed annually to the stockholders.
 
We established TRS entities pursuant to the provisions of the REIT Modernization Act.  Our TRS entities are able to engage in activities resulting in income that previously would have been disqualified from being eligible REIT income under the federal income tax regulations.  As a result, certain activities of our Company which occur within our TRS entities are subject to federal and state income taxes.
 
Competition
 
The U.S. commercial real estate investment market continues to be highly competitive.  We actively compete with many other entities engaged in the development, acquisition and operation of commercial properties.  As such, we compete for a limited supply of properties and financing for these properties.  Investors include large institutional investors, insurance companies, credit companies, pension funds, private individuals, investment companies and other REITs, many of which have greater financial and other resources than we do.  There can be no assurance that we will be able to compete successfully with such entities in our development, acquisition and leasing activities in the future.

 
3

 

Potential Environmental Risks
 
Investments in real property create a potential for environmental liability on the part of the owner or operator of such real property.  If hazardous substances are discovered on or emanating from a property, the owner or operator of the property may be held strictly liable for all costs and liabilities relating to such hazardous substances.  We have obtained a Phase I environmental study (which involves inspection without soil sampling or ground water analysis) conducted by independent environmental consultants on each of our properties.  Furthermore, we have adopted a policy of conducting a Phase I environmental study on each property we acquire and if necessary conducting additional investigation as warranted.
 
We conducted Phase I environmental studies on the five properties we developed in 2009. The results of the Phase I studies indicated that in three of our developments no further action was required, including no further soil sampling or ground water analysis.  On the remaining two developments, in addition to the Phase I environmental study, we conducted additional investigation including in one instance a Phase II environmental assessment and in two instances base line environmental assessments were performed.  In addition, we have no knowledge of any hazardous substances existing on any of our properties in violation of any applicable laws; however, no assurance can be given that such substances are not located on any of the properties.  We carry no insurance coverage for the types of environmental risks described above.
 
We believe that we are in compliance, in all material respects, with all federal, state and local ordinances and regulations regarding hazardous or toxic substances.  Furthermore, we have not been notified by any governmental authority of any noncompliance, liability or other claim in connection with any of the properties.
 
Employees
 
As of February 26, 2010, we employed 10 persons.  Employee responsibilities include accounting, construction, leasing, property coordination and administrative functions for the properties.  Our employees are not covered by a collective bargaining agreement, and we consider our employee relations to be satisfactory.
 
Financial Information About Industry Segments
 
We are in the business of development, acquisition and management of freestanding net leased properties and community shopping centers.  We consider our activities to consist of a single industry segment.  See the Consolidated Financial Statements and Notes thereto included in this Annual Report on Form 10-K.
 
Available Information
 
Our headquarters are located at 31850 Northwestern Highway, Farmington Hills, MI  48334 and our telephone number is (248) 737-4190.  Our web site address is www.agreerealty.com.  Our reports electronically filed with or furnished to the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act can be accessed through this site, free of charge, as soon as reasonably practicable after we electronically file or furnish such reports.  These filings are also available on the SEC’s website at www.sec.gov.
 
ITEM 1A.
RISK FACTORS
 
Risks Related to Our Business and Operations
 
The recent global economic and financial market crisis has had and may continue to have a negative effect on our business and operations.  
 
The recent global economic and financial market crisis has caused, among other things, a general tightening in the credit markets, lower levels of liquidity, increases in the rates of default and bankruptcy, lower consumer and business spending, and lower consumer confidence and net worth, all of which has had and may continue to have a negative effect on our business, results of operations, financial condition and liquidity.  Many of our tenants have been affected by the current economic turmoil.  Current or potential tenants may delay or postpone entering into long-term net leases with us which could continue to lead to reduced demand for commercial real estate.  We are also limited in our ability to reduce costs to offset the results of a prolonged or severe economic downturn given certain fixed costs and commitments associated with our operations.

 
4

 

The timing and nature of any recovery in the credit and financial markets remains uncertain, and there can be no assurance that market conditions will improve in the near future or that our results will not continue to be materially and adversely affected.  Such conditions make it very difficult to forecast operating results, make business decisions and identify and address material business risks.  The foregoing conditions may also impact the valuation of certain long-lived or intangible assets that are subject to impairment testing, potentially resulting in impairment charges which may be material to our financial condition or results of operations.
 
Capital markets are currently experiencing a period of dislocation and instability, which has had and could continue to have a negative impact on the availability and cost of capital.  
 
The general disruption in the U.S. capital markets has impacted the broader worldwide financial and credit markets and reduced the availability of debt and equity capital for the market as a whole.  These conditions could persist for a prolonged period of time or worsen in the future.  Our ability to access the capital markets may be restricted at a time when we would like, or need, to access those markets, which could have an impact on our flexibility to react to changing economic and business conditions.  The resulting lack of available credit, lack of confidence in the financial sector, increased volatility in the financial markets and reduced business activity could materially and adversely affect our business, financial condition, results of operations and our ability to obtain and manage our liquidity.  In addition, the cost of debt financing and the proceeds of equity financing may be materially adversely impacted by these market conditions.
 
Single tenant leases involve significant risks of tenant default.  
 
We focus our development and investment activities on ownership of real properties that are leased to a single tenant.  Therefore, the financial failure of, or other default in payment by, a single tenant under its lease is likely to cause a significant reduction in our operating cash flows from that property and a significant reduction in the value of the property, and could cause a significant reduction in our revenues and a significant impairment loss.  We may also experience difficulty or a significant delay in re-leasing such property.  The current economic conditions and the credit crisis may put financial pressure on and increase the likelihood of the financial failure of, or other default in payment by, one or more of the tenants to whom we have exposure.
 
Failure by any major tenant with leases in multiple locations to make rental payments to us, because of a deterioration of its financial condition or otherwise, would have a material adverse effect on us.
 
We derive substantially all of our revenue from tenants who lease space from us at our properties.  Therefore, our ability to generate cash from operations is dependent on the rents that we are able to charge and collect from our tenants.  At any time, our tenants may experience a downturn in their business that may significantly weaken their financial condition, particularly during periods of economic uncertainty.  As a result, our tenants may delay lease commencements, decline to extend or renew leases upon expiration, fail to make rental payments when due, close a number of stores or declare bankruptcy.  Any of these actions could result in the termination of the tenant’s leases and the loss of rental income attributable to the terminated leases.  In addition, lease terminations by a major tenant or a failure by that major tenant to occupy the premises could result in lease terminations or reductions in rent by other tenants in the same shopping centers under the terms of some leases.  In that event, we may be unable to re-lease the vacated space at attractive rents or at all.  The occurrence of any of the situations described above would have a material adverse effect on our results of operations and our financial condition.
 
We rely significantly on three major tenants, and therefore, are subject to tenant credit concentrations that make us more susceptible to adverse events with respect to those tenants.  
 
As of December 31, 2009, we derived approximately 70% of our annualized base rent from three major tenants:

 
5

 

 
·
approximately 30% of our annualized base rent was from Walgreen;
 
 
·
approximately 29% of our annualized base rent was from Borders; and
 
 
·
approximately 11%, of our annualized base rent was from Kmart.
 
In addition, a significant portion of our 2008 and 2009 development projects were for Walgreen Co.  In the event of a default by any of these tenants under their leases, we may experience delays in enforcing our rights as lessor and may incur substantial costs in protecting our investment.  Any bankruptcy, insolvency or failure to make rental payments by, or any adverse change in the financial condition of, one or more of these tenants, or any other tenant to whom we may have a significant credit concentration now or in the future, would likely result in a material reduction of our cash flows or material losses to our company.
 
As discussed in more detail below under Item 2. “Properties—Development and Acquisition Summary,” Borders reported its annual net (loss) for its 2008 fiscal year ended January 31, 2009 was approximately ($187 million).
 
Bankruptcy laws will limit our remedies if a tenant becomes bankrupt and rejects the lease.
 
If a tenant becomes bankrupt or insolvent, that could diminish the income we receive from that tenant’s leases.  We may not be able to evict a tenant solely because of its bankruptcy.  On the other hand, a bankruptcy court might authorize the tenant to terminate its leases with us.  If that happens, our claim against the bankrupt tenant for unpaid future rent would be an unsecured prepetition claim subject to statutory limitations, and therefore such amounts received in bankruptcy are likely to be substantially less than the remaining rent we otherwise were owed under the leases.  In addition, any claim we have for unpaid past rent could be substantially less than the amount owed.  Circuit City, a tenant who occupied one location in our portfolio filed for bankruptcy protection in December 2008 and is in the process of liquidation.
 
Certain of our tenants at our community shopping centers have the right to terminate their leases if other tenants cease to occupy a property.  
 
In the event that certain tenants cease to occupy a property, although under most circumstances such a tenant would remain liable for its lease payments, such an action may result in certain other tenants at our community shopping centers having the right to terminate their leases at the affected property, which could adversely affect the future income from that property.  As of December 31, 2009, each of our 12 community shopping centers had tenants with those provisions in their leases.
 
Our portfolio has limited geographic diversification, which makes us more susceptible to adverse events in these areas.  
 
Our properties are located primarily in the Midwestern United States and in particular, the State of Michigan (with 42 properties).  An economic downturn or other adverse events or conditions such as terrorist attacks or natural disasters in these areas, or any other area where we may have significant concentration now or in the future, could result in a material reduction of our cash flows or material losses to our company.
 
Risks associated with our development and acquisition activities. 
 
We intend to continue development of new properties and to consider possible acquisitions of existing properties.  We anticipate that our new developments will be financed under lines of credit or other forms of construction financing that will result in a risk that permanent financing on newly developed projects might not be available or would be available only on disadvantageous terms.  In addition, new project development is subject to a number of risks, including risks of construction delays or cost overruns that may increase project costs, risks that the properties will not achieve anticipated occupancy levels or sustain anticipated rent levels, and new project commencement risks such as receipt of zoning, occupancy and other required governmental permits and authorizations and the incurrence of development costs in connection with projects that are not pursued to completion.  If permanent debt or equity financing is not available on acceptable terms to refinance new development or acquisitions undertaken without permanent financing, further development activities or acquisitions might be curtailed or cash available for distribution might be adversely affected.  Acquisitions entail risks that investments will fail to perform in accordance with expectations and that judgments with respect to the costs of improvements to bring an acquired property up to standards established for the market position intended for that property will prove inaccurate, as well as general investment risks associated with any new real estate investment.

 
6

 

Properties that we acquire or develop may be located in new markets where we may face risks associated with investing in an unfamiliar market.
 
We may acquire or develop properties in markets that are new to us.  When we acquire or develop properties located in these markets, we may face risks associated with a lack of market knowledge or understanding of the local economy, forging new business relationships in the area and unfamiliarity with local government and permitting procedures.
 
We own several of our properties subject to ground leases that expose us to the loss of such properties upon breach or termination of the ground leases and may limit our ability to sell these properties.
 
We own several of our properties through leasehold interests in the land underlying the buildings and we may acquire additional buildings in the future that are subject to similar ground leases.  As lessee under a ground lease, we are exposed to the possibility of losing the property upon termination, or an earlier breach by us, of the ground lease, which may have a material adverse effect on our business, financial condition and results of operations, our ability to make distributions to our stockholders and the trading price of our common stock.
 
Our ground leases contain certain provisions that may limit our ability to sell certain of our properties.  In order to assign or transfer our rights and obligations under certain of our ground leases, we generally must obtain the consent of the landlord which, in turn, could adversely impact the price realized from any such sale.
 
Joint venture investments will expose us to certain risks.
 
We may from time to time enter into joint venture transactions for portions of our existing or future real estate assets.  Investing in this manner subjects us to certain risks, among them the following:
 
 
·
We will not exercise sole decision-making authority regarding the joint venture’s business and assets and, thus, we may not be able to take actions that we believe are in our company’s best interests.
 
 
·
We may be required to accept liability for obligations of the joint venture (such as recourse carve-outs on mortgage loans) beyond our economic interest.
 
 
·
Our returns on joint venture assets may be adversely affected if the assets are not held for the long-term.
 
The availability and timing of cash distributions is uncertain.
 
We expect to continue to pay quarterly distributions to our stockholders.  However, we bear all expenses incurred by our operations, and our funds generated by operations, after deducting these expenses, may not be sufficient to cover desired levels of distributions to our stockholders.  In addition, our board of directors, in its discretion, may retain any portion of such cash for working capital.  We cannot assure our stockholders that sufficient funds will be available to pay distributions.

 
7

 

We depend on our key personnel.  
 
Our success depends to a significant degree upon the continued contributions of certain key personnel including, but not limited to, our executive officers, each of whom would be difficult to replace.  If any of our key personnel were to cease employment with us, our operating results could suffer. Our ability to retain our executive officers or to attract suitable replacements should any members of the management group leave is dependent on the competitive nature of the employment market.  The loss of services from key members of the management group or a limitation in their availability could adversely impact our future development or acquisition operations, our financial condition and cash flows.  Further, such a loss could be negatively perceived in the capital markets.  We have not obtained and do not expect to obtain key man life insurance on any of our key personnel.
 
We face significant competition.  
 
We face competition in seeking properties for acquisition and tenants who will lease space in these properties from insurance companies, credit companies, pension or private equity funds, private individuals, investment companies, other REITs and other industry participants, many of which have greater financial and other resources than we do.  There can be no assurance that we will be able to successfully compete with such entities in our development, acquisition and leasing activities in the future.
 
General Real Estate Risk
 
Our performance and value are subject to general economic conditions and risks associated with our real estate assets.
 
There are risks associated with owning and leasing real estate.  Although many of our leases contain terms that obligate the tenants to bear substantially all of the costs of operating our properties, investing in real estate involves a number of risks.  Income from and the value of our properties may be adversely affected by:
 
 
·
changes in general or local economic conditions;
 
 
·
the attractiveness of our properties to potential tenants;
 
 
·
changes in supply of or demand for similar or competing properties in an area;
 
 
·
bankruptcies, financial difficulties or lease defaults by our tenants;
 
 
·
changes in operating costs and expense and our ability to control rents;
 
 
·
our ability to lease properties at favorable rental rates;
 
 
·
our ability to sell a property when we desire to do so at a favorable price;
 
 
·
unanticipated changes in costs associated with known adverse environmental conditions or retained liabilities for such conditions;
 
 
·
changes in or increased costs of compliance with governmental rules, regulations and fiscal policies, including changes in tax, real estate, environmental and zoning laws, and our potential liability thereunder; and
 
 
·
unanticipated expenditures to comply with the Americans with Disabilities Act and other similar regulations.
 
The global economic and financial market crisis has exacerbated many of the foregoing risks.  If a tenant fails to perform on its lease covenants, that would not excuse us from meeting any mortgage debt obligation secured by the property and could require us to fund reserves in favor of our mortgage lenders, thereby reducing funds available for payment of cash dividends on our shares of common stock.

 
8

 

The fact that real estate investments are relatively illiquid may reduce economic returns to investors.  
 
We may desire to sell a property in the future because of changes in market conditions or poor tenant performance or to avail ourselves of other opportunities.  We may also be required to sell a property in the future to meet secured debt obligations or to avoid a secured debt loan default.  Real estate properties cannot always be sold quickly, and we cannot assure you that we could always obtain a favorable price, especially in light of the current global economic and financial market crisis.  We may be required to invest in the restoration or modification of a property before we can sell it.  This lack of liquidity may limit our ability to vary our portfolio promptly in response to changes in economic or other conditions and, as a result, could adversely affect our financial condition, results of operations, cash flows and our ability to pay distributions on our common stock.
 
Our ability to renew leases or re-lease space on favorable terms as leases expire significantly affects our business.  
 
We are subject to the risks that, upon expiration of leases for space located in our properties, the premises may not be re-let or the terms of re-letting (including the cost of concessions to tenants) may be less favorable than current lease terms.  If a tenant does not renew its lease or if a tenant defaults on its lease obligations, there is no assurance we could obtain a substitute tenant on acceptable terms.  If we cannot obtain another tenant with comparable structural needs, we may be required to modify the property for a different use, which may involve a significant capital expenditure and a delay in re-leasing the property.  Further, if we are unable to re-let promptly all or a substantial portion of our retail space or if the rental rates upon such re-letting were significantly lower than expected rates, our net income and ability to make expected distributions to stockholders would be adversely affected.  There can be no assurance that we will be able to retain tenants in any of our properties upon the expiration of their leases.
 
A property that incurs a vacancy could be difficult to sell or re-lease.
 
A property may incur a vacancy either by the continued default of a tenant under its lease or the expiration of one of our leases.  Certain of our properties may be specifically suited to the particular needs of a tenant.  We may have difficulty obtaining a new tenant for any vacant space we have in our properties.  If the vacancy continues for a long period of time, we may suffer reduced revenues resulting in less cash available to be distributed to stockholders.  In addition, the resale value of a property could be diminished because the market value of a particular property will depend principally upon the value of the leases of such property.
 
Potential liability for environmental contamination could result in substantial costs.  
 
Under federal, state and local environmental laws, we may be required to investigate and clean up any release of hazardous or toxic substances or petroleum products at our properties, regardless of our knowledge or actual responsibility, simply because of our current or past ownership or operation of the real estate.  If unidentified environmental problems arise, we may have to make substantial payments, which could adversely affect our cash flow and our ability to make distributions to our stockholders.  This potential liability results from the following:
 
 
·
As owner we may have to pay for property damage and for investigation and clean-up costs incurred in connection with the contamination.
 
 
·
The law may impose clean-up responsibility and liability regardless of whether the owner or operator knew of or caused the contamination.
 
 
·
Even if more than one person is responsible for the contamination, each person who shares legal liability under environmental laws may be held responsible for all of the clean-up costs.
 
 
·
Governmental entities and third parties may sue the owner or operator of a contaminated site for damages and costs.
 
These costs could be substantial and in extreme cases could exceed the value of the contaminated property.  The presence of hazardous substances or petroleum products or the failure to properly remediate contamination may adversely affect our ability to borrow against, sell or lease an affected property.  In addition, some environmental laws create liens on contaminated sites in favor of the government for damages and costs it incurs in connection with a contamination.

 
9

 

A majority of our leases require our tenants to comply with environmental laws and to indemnify us against environmental liability arising from the operation of the properties. However, we could be subject to strict liability under environmental laws because we own the properties.  There is also a risk that tenants may not satisfy their environmental compliance and indemnification obligations under the leases.  Any of these events could substantially increase our cost of operations, require us to fund environmental indemnities in favor of our secured lenders and reduce our ability to service our secured debt and pay dividends to stockholders and any debt security interest payments.  Environmental problems at any properties could also put us in default under loans secured by those properties, as well as loans secured by unaffected properties.
 
Uninsured losses relating to real property may adversely affect our returns.  
 
Our leases require tenants to carry comprehensive liability and extended coverage insurance on our properties.  However, there are certain losses, including losses from environmental liabilities, terrorist acts or catastrophic acts of nature, that are not generally insured against or that are not generally fully insured against because it is not deemed economically feasible or prudent to do so.  If there is an uninsured loss or a loss in excess of insurance limits, we could lose both the revenues generated by the affected property and the capital we have invested in the property.  In the event of a substantial unreimbursed loss, we would remain obligated to repay any mortgage indebtedness or other obligations related to the property.
 
Risks Related to Our Debt Financings
 
Leveraging our portfolio subjects us to increased risk of loss, including loss of properties in the event of a foreclosure.  
 
At December 31, 2009, our ratio of indebtedness to market capitalization (assuming conversion of Operating Partnership units) was approximately 53%.  The use of leverage presents an additional element of risk in the event that (1) the cash flow from lease payments on our properties is insufficient to meet debt obligations, (2) we are unable to refinance our debt obligations as necessary or on as favorable terms or (3) there is an increase in interest rates.  If a property is mortgaged to secure payment of indebtedness and we are unable to meet mortgage payments, the property could be foreclosed upon with a consequent loss of income and asset value to us.  Under the “cross-default” provisions contained in mortgages encumbering some of our properties, our default under a mortgage with a lender would result in our default under mortgages held by the same lender on other properties resulting in multiple foreclosures.
 
We intend to maintain a ratio of total indebtedness (including construction or acquisition financing) to market capitalization of 65% or less.  Nevertheless, we may operate with debt levels which are in excess of 65% of market capitalization for extended periods of time.  Our organization documents contain no limitation on the amount or percentage of indebtedness which we may incur.  Therefore, our board of directors, without a vote of the stockholders, could alter the general policy on borrowings at any time.  If our debt capitalization policy were changed, we could become more highly leveraged, resulting in an increase in debt service that could adversely affect our operating cash flow and our ability to make expected distributions to stockholders, and could result in an increased risk of default on our obligations.
 
Covenants in our credit agreements could limit our flexibility and adversely affect our financial condition.
 
The terms of our credit facilities and other indebtedness require us to comply with a number of customary financial and other covenants.  These covenants may limit our flexibility in our operations, and breaches of these covenants could result in defaults under the instruments governing the applicable indebtedness even if we have satisfied our payment obligations.  Our credit facility contains certain cross-default provisions which are triggered in the event that our other indebtedness is in default.  These cross-default provisions may require us to repay or restructure the credit facility in addition to any mortgage or other debt that is in default. If our properties were foreclosed upon, or if we are unable to refinance our indebtedness at maturity or meet our payment obligations, the amount of our distributable cash flows and our financial condition would be adversely affected.

 
10

 

Credit market developments may reduce availability under our credit agreements.  
 
Due to the current volatile state of the credit markets, there is risk that lenders, even those with strong balance sheets and sound lending practices, could fail or refuse to honor their legal commitments and obligations under existing credit commitments, including but not limited to: extending credit up to the maximum permitted by a credit facility, allowing access to additional credit features and/or honoring loan commitments.  If our lender(s) fail to honor their legal commitments under our credit facilities, it could be difficult in the current environment to replace our credit facilities on similar terms.  The failure of any of the lenders under our credit facility may impact our ability to finance our operating or investing activities.
 
Risks Related to Our Corporate Structure
 
Our charter and Maryland law contain provisions that may delay, defer or prevent a change of control transaction.
 
Our charter contains a 9.8% ownership limit. Our charter, subject to certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT and to limit any person to actual or constructive ownership of no more than 9.8% of the value of our outstanding shares of common stock and preferred stock, except that the any member of the Agree-Rosenberg Group (as defined in our charter) (the “Agree-Rosenberg Group”) may own up to 24%.  Our board of directors, in its sole discretion, may exempt, subject to the satisfaction of certain conditions, any person from the ownership limit. However, our board of directors may not grant an exemption from the ownership limit to any person whose ownership, direct or indirect, in excess of 9.8% of the value of our outstanding shares of common stock and preferred stock could jeopardize our status as a REIT.  These restrictions on transferability and ownership will not apply if our board of directors determines that it is no longer in our best interests to attempt to qualify, or to continue to qualify, as a REIT.  The ownership limit may delay or impede, and we may use the ownership limit deliberately to delay or impede, a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.
 
We have a staggered board.  Our directors are divided into three classes serving three-year staggered terms.  The staggering of our board of directors may discourage offers for our company or make an acquisition more difficult, even when an acquisition is in the best interest of our stockholders.
 
We have a shareholder rights plan. Under the terms of this plan, we can in effect prevent a person or group from acquiring more than 15% of the outstanding shares of our common stock because, unless we approve of the acquisition, after the person acquires more than 15% of our outstanding common stock, all other stockholders will have the right to purchase securities from us at a price that is less than their then fair market value.  This would substantially reduce the value and influence of the stock owned by the acquiring person.  Our board of directors can prevent the plan from operating by approving the transaction in advance, which gives us significant power to approve or disapprove of the efforts of a person or group to acquire a large interest in our company.
 
We could issue stock without stockholder approval. Our board of directors could, without stockholder approval, issue authorized but unissued shares of our common stock or preferred stock.  In addition, our board of directors could, without stockholder approval, classify or reclassify any unissued shares of our common stock or preferred stock and set the preferences, rights and other terms of such classified or reclassified shares.  Our board of directors could establish a series of stock that could, depending on the terms of such series, delay, defer or prevent a transaction or change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.
 
Provisions of Maryland law may limit the ability of a third party to acquire control of our company.  Certain provisions of Maryland law may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under certain circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then prevailing market price of such shares, including:

 
11

 

 
·
“business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our shares or an affiliate thereof) for five years after the most recent date on which the stockholder becomes an interested stockholder and thereafter would require the recommendation of our board of directors and impose special appraisal rights and special stockholder voting requirements on these combinations; and
 
 
·
“control share” provisions that provide that “control shares” of our company (defined as shares which, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.
 
The business combination statute permits various exemptions from its provisions, including business combinations that are approved or exempted by the board of directors before the time that the interested stockholder becomes an interested stockholder.  Our board of directors has exempted from the business combination provisions of the MGCL any business combination with Mr. Richard Agree or any other person acting in concert or as a group with Mr. Agree.
 
In addition, our bylaws contain a provision exempting from the control share acquisition statute any members of the Agree-Rosenberg Group, our other officers, our employees, any of the associates or affiliates of the foregoing and any other person acting in concert of as a group with any of the foregoing. 
 
Additionally, Title 3, Subtitle 8 of the Maryland General Corporation Law, or MGCL, permits our board of directors, without stockholder approval and regardless of what is currently provided in our charter or our bylaws, to implement takeover defenses.  These provisions may have the effect of inhibiting a third party from making an acquisition proposal for our company or of delaying, deferring or preventing a change in control of our company under circumstances that otherwise could provide the holders of our common stock with the opportunity to realize a premium over the then-current market price.
 
Our charter, our bylaws, the limited partnership agreement of our operating partnership and Maryland law also contain other provisions that may delay, defer or prevent a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.
 
Our board of directors can take many actions without stockholder approval.
 
Our board of directors has overall authority to oversee our operations and determine our major corporate policies. This authority includes significant flexibility.  For example, our board of directors can do the following:
 
 
·
change our investment and financing policies and our policies with respect to certain other activities, including our growth, debt capitalization, distributions, REIT status and investment and operating policies;
 
 
·
within the limits provided in our charter, prevent the ownership, transfer and/or accumulation of shares in order to protect our status as a REIT or for any other reason deemed to be in the best interests of us and our stockholders;
 
 
·
issue additional shares without obtaining stockholder approval, which could dilute the ownership of our then-current stockholders;
 
 
·
classify or reclassify any unissued shares of our common stock or preferred stock and set the preferences, rights and other terms of such classified or reclassified shares, without obtaining stockholder approval;
 
 
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·
employ and compensate affiliates;
 
 
·
direct our resources toward investments that do not ultimately appreciate over time;
 
 
·
change creditworthiness standards with respect to third-party tenants; and
 
 
·
determine that it is no longer in our best interests to attempt to qualify, or to continue to qualify, as a REIT.
 
Any of these actions could increase our operating expenses, impact our ability to make distributions or reduce the value of our assets without giving our stockholders the right to vote.
 
Future offerings of debt and equity may not be available to us or may adversely affect the market price of our common stock.
 
We expect to continue to increase our capital resources by making additional offerings of equity and debt securities in the future, which would include classes of preferred stock, common stock and senior or subordinated notes.  Our ability to raise additional capital may be adversely impacted by market conditions, and we do not know when market conditions will stabilize or improve.  All debt securities and other borrowings, as well as all classes of preferred stock, will be senior to our common stock in a liquidation of our company.  Additional equity offerings could dilute our stockholders’ equity, reduce the market price of shares of our common stock, or be of preferred stock having a distribution preference that may limit our ability to make distributions on our common stock.  Continued market dislocations could cause us to seek sources of potentially less attractive capital.  Our ability to estimate the amount, timing or nature of additional offerings is limited as these factors will depend upon market conditions and other factors.
 
The market price of our stock may vary substantially.
 
The market price of our common stock could be volatile, and investors in our common stock may experience a decrease in the value of their shares, including decreases unrelated to our operating performance or prospects.  Among the market conditions that may affect the market price of our common stock are the following:
 
 
·
our financial condition and operating performance and the performance of other similar companies;
 
 
·
actual or anticipated variations in our quarterly results of operations;
 
 
·
the extent of investor interest in our company, real estate generally or commercial real estate specifically;
 
 
·
the reputation of REITs generally and the attractiveness of their equity securities in comparison to other equity securities, including securities issued by other real estate companies, and fixed income securities;
 
 
·
changes in expectations of future financial performance or changes in estimates of securities analysts;
 
 
·
fluctuations in stock market prices and volumes; and
 
 
·
announcements by us or our competitors of acquisitions, investments or strategic alliances.
 
Certain officers and directors may have interests that conflict with the interests of stockholders.
 
Certain of our officers and members of our board of directors own operating partnership units in our Operating Partnership.  These individuals may have personal interests that conflict with the interests of our stockholders with respect to business decisions affecting us and our Operating Partnership, such as interests in the timing and pricing of property sales or refinancings in order to obtain favorable tax treatment.  As a result, the effect of certain transactions on these unit holders may influence our decisions affecting these properties.

 
13

 

Federal Income Tax Risks
 
Complying with REIT requirements may cause us to forgo otherwise attractive opportunities.
 
To qualify as a REIT for federal income tax purposes and to maintain our exemption from the 1940 Act, we must continually satisfy numerous income, asset and other tests, thus having to forgo investments we might otherwise make and hindering our investment performance.
 
Failure to qualify as a REIT could adversely affect our operations and our ability to make distributions.
 
We will be subject to increased taxation if we fail to qualify as a REIT for federal income tax purposes.  Although we believe that we are organized and operate in such a manner so as to qualify as a REIT under the Internal Revenue Code, no assurance can be given that we will remain so qualified.  Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial or administrative interpretations.  The complexity of these provisions and applicable Treasury Regulations is also increased in the context of a REIT that holds its assets in partnership form.  The determination of various factual matters and circumstances not entirely within our control may affect our ability to qualify as a REIT.  A REIT generally is not taxed at the corporate level on income it distributes to its stockholders, as long as it distributes annually at least 100% of its taxable income to its stockholders.  We have not requested and do not plan to request a ruling from the Internal Revenue Service that we qualify as a REIT.
 
If we fail to qualify as a REIT, we will face tax consequences that will substantially reduce the funds available for payment of cash dividends:
 
 
·
We would not be allowed a deduction for dividends paid to stockholders in computing our taxable income and would be subject to federal income tax at regular corporate rates.
 
 
·
We could be subject to the federal alternative minimum tax and possibly increased state and local taxes.
 
 
·
Unless we are entitled to relief under statutory provisions, we could not elect to be treated as a REIT for four taxable years following the year in which we were disqualified.
 
In addition, if we fail to qualify as a REIT, we will no longer be required to pay dividends (other than any mandatory dividends on any preferred shares we may offer).  As a result of these factors, our failure to qualify as a REIT could adversely effect the market price for our common stock.
 
Changes in tax laws may prevent us from maintaining our qualification as a REIT.  
 
As we have previously described, we intend to maintain our qualification as a REIT for federal income tax purposes. However, this intended qualification is based on the tax laws that are currently in effect. We are unable to predict any future changes in the tax laws that would adversely affect our status as a REIT. If there is a change in the tax laws that prevent us from qualifying as a REIT or that requires REITs generally to pay corporate level income taxes, we may not be able to make the same level of distributions to our stockholders.
 
An investment in our stock has various tax risks that could affect the value of your investment, including the  treatment of distributions in excess of earnings and the inability to apply “passive losses” against distributions.
 
An investment in our stock has various tax risks. Distributions in excess of current and accumulated earnings and profits, to the extent that they exceed the adjusted basis of an investor’s stock, will be treated as long-term capital gain (or short-term capital gain if the shares have been held for less than one year). Any gain or loss realized upon a taxable disposition of shares by a stockholder who is not a dealer in securities will be treated as a long-term capital gain or loss if the shares have been held for more than one year, and otherwise will be treated as short-term capital gain or loss. Distributions that we properly designate as capital gain distributions will be treated as taxable to stockholders as gains (to the extent that they do not exceed our actual net capital gain for the taxable year) from the sale or disposition of a capital asset held for greater than one year. Distributions we make and gain arising from the sale or exchange by a stockholder of shares of our stock will not be treated as passive income, meaning stockholders generally will not be able to apply any “passive losses” against such income or gain.

 
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Excessive non-real estate asset values may jeopardize our REIT status.  
 
In order to qualify as a REIT, at least 75% of the value of our assets must consist of investments in real estate, investments in other REITs, cash and cash equivalents, and government securities. Therefore, the value of any properties we own that are not considered real estate assets for federal income tax purposes must represent in the aggregate less than 25% of our total assets. In addition, under federal income tax law, we may not own securities in any one issuer (other than a REIT, a qualified REIT subsidiary or a TRS) which represent in excess of 10% of the voting securities or 10% of the value of all securities of any one issuer, or which have, in the aggregate, a value in excess of 5% of our total assets, and we may not own securities of one or more TRSs which have, in the aggregate, a value in excess of 25% of our total assets.  We may invest in securities of another REIT, and our investment may represent in excess of 10% of the voting securities or 10% of the value of the securities of the other REIT. If the other REIT were to lose its REIT status during a taxable year in which our investment represented in excess of 10% of the voting securities or 10% of the value of the securities of the other REIT as of the close of a calendar quarter, we may lose our REIT status.
 
Compliance with the asset tests is determined at the end of each calendar quarter. Subject to certain mitigation provisions, if we fail to meet any such test at the end of any calendar quarter, we will cease to qualify as a REIT.
 
We may have to borrow funds or sell assets to meet our distribution requirements.  
 
Subject to some adjustments that are unique to REITs, a REIT generally must distribute 90% of its taxable income.  For the purpose of determining taxable income, we may be required to accrue interest, rent and other items treated as earned for tax purposes but that we have not yet received. In addition, we may be required not to accrue as expenses for tax purposes some items which actually have been paid, including, for example, payments of principal on our debt, or some of our deductions might be disallowed by the Internal Revenue Service. As a result, we could have taxable income in excess of cash available for distribution. If this occurs, we may have to borrow funds or liquidate some of our assets in order to meet the distribution requirement applicable to a REIT.
 
Future distributions may include a significant portion as a return of capital.
 
Our distributions may exceed the amount of our income as a REIT. If so, the excess distributions will be treated as a return of capital to the extent of the stockholder’s basis in our stock, and the stockholder’s basis in our stock will be reduced by such amount. To the extent distributions exceed a stockholder’s basis in our stock, the stockholder will recognize capital gain, assuming the stock is held as a capital asset.
 
Our ownership of and relationship with any TRS which we recently formed or acquire in the future will be limited, and a failure to comply with the limits would jeopardize our REIT status and may result in the application of a 100% excise tax.
 
A REIT may own up to 100% of the stock of one or more TRSs. A TRS may earn income that would not be qualifying income if earned directly by the parent REIT.  Overall, no more than 25% of the value of a REIT’s assets may consist of stock or securities of one or more TRSs.  A TRS will typically pay federal, state and local income tax at regular corporate rates on any income that it earns.  In addition, the TRS rules impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis.  The TRS that we recently formed will pay federal, state and local income tax on its taxable income, and its after-tax net income will be available for distribution to us but will not be required to be distributed to us.  There can be no assurance that we will be able to comply with the 25% limitation discussed above or to avoid application of the 100% excise tax discussed above.

 
15

 

Liquidation of our assets may jeopardize our REIT qualification.
 
To qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate our investments to repay obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any gain if we sell assets in transactions that are considered to be “prohibited transactions,” which are explained in the risk factor below.
 
We may be subject to other tax liabilities even if we qualify as a REIT.
 
Even if we qualify as a REIT for federal income tax purposes, we will be required to pay certain federal, state and local taxes on our income and property.  For example, we will be subject to income tax to the extent we distribute less than 100% of our REIT taxable income (including capital gains).  Additionally, we will be subject to a 4% nondeductible excise tax on the amount, if any, by which dividends paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from prior years.  Moreover, if we have net income from “prohibited transactions,” that income will be subject to a 100% tax.  In general, prohibited transactions are sales or other dispositions of property held primarily for sale to customers in the ordinary course of business.  The determination as to whether a particular sale is a prohibited transaction depends on the facts and circumstances related to that sale.  While we will undertake sales of assets if those assets become inconsistent with our long-term strategic or return objectives, we do not believe that those sales should be considered prohibited transactions, but there can be no assurance that the IRS would not contend otherwise.  The need to avoid prohibited transactions could cause us to forego or defer sales of properties that might otherwise be in our best interest to sell.
 
In addition, any net taxable income earned directly by our TRS, or through entities that are disregarded for federal income tax purposes as entities separate from our TRS, will be subject to federal and possibly state corporate income tax.  To the extent that we and our affiliates are required to pay federal, state and local taxes, we will have less cash available for distributions to our stockholders.
 
Dividends payable by REITs do not qualify for the reduced tax rates on dividend income from regular corporations.
 
The maximum tax rate for dividends payable to domestic stockholders that are individuals, trusts and estates were reduced in recent years to 15% (through 2010). Dividends payable by REITs, however, are generally not eligible for the reduced rates. Although this legislation does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our stock.
 
Our ownership limit contained in our charter may be ineffective to preserve our REIT status.
 
In order for us to qualify as a REIT for each taxable year, no more than 50% in value of our outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals during the last half of any calendar year (the “5/50 Rule”).  Individuals for this purpose include natural persons, private foundations, some employee benefit plans and trusts, and some charitable trusts.  In order to preserve our REIT qualification, our charter generally prohibits (i) any member of the Agree-Rosenberg Group from directly or indirectly owning more than 24% of the value of our outstanding stock and (ii) any other person from directly or indirectly owning more than 9.8% of the value of our outstanding common stock and preferred stock, subject to certain exceptions.  Because of the way our ownership limit is written, including because of the limit on persons other than a member of the Agree-Rosenberg Group is not less than 9.8%, our charter limitation may be ineffective to ensure that we do not violate the 5/50 Rule.

 
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Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.
 
The REIT provisions of the Internal Revenue Code substantially limit our ability to hedge our liabilities. Any income from a hedging transaction we enter into to manage risk of interest rate changes, price changes or currency fluctuations with respect to borrowings made or to be made to acquire or carry real estate assets does not constitute qualifying income for purposes of income tests that apply to us as a REIT.  To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of the income tests.  As a result of these rules, we may need to limit our use of advantageous hedging techniques or implement those hedges through a TRS. This could increase the cost of our hedging activities because our TRS would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in our TRSs will generally not provide any tax benefit, except for being carried forward against future taxable income in the TRSs.
 
ITEM 1B.
UNRESOLVED STAFF COMMENTS
 
None
 
ITEM 2. 
PROPERTIES
 
Our properties consist of 61 freestanding net leased properties and 12 community shopping centers that, as of December 31, 2009, were 98.1% leased, with a weighted average lease term of 10.3 years.  Approximately 89% of our annualized base rent was attributable to national retailers.  Among these retailers are Walgreen, Borders and Kmart which, at December 31, 2009, collectively represented approximately 70% of our annualized base rent.  A majority of our properties were built for or are leased to national tenants who require a high quality location with strong retail characteristics.  We developed 48 of our 61 freestanding properties and all 12 of our community shopping centers.  Properties we have developed (including our community shopping centers) account for approximately 84% of our annualized base rent as of December 31, 2009.  Our 61 freestanding properties are comprised of 60 retail locations and Borders’ corporate headquarters.  See Notes 4 and 5 to the Consolidated Financial Statements included herein for information regarding mortgage debt and other debt related to our properties.
 
A substantial portion of our income consists of rent received under net leases.  A majority of our leases provide for the payment of fixed base rentals monthly in advance and for the payment by tenants of a pro rata share of the real estate taxes, insurance, utilities and common area maintenance of the shopping center as well as payment to us of a percentage of the tenant’s sales.  We received percentage rents of $15,366, $15,396 and $37,111 for the fiscal years 2009, 2008 and 2007, respectively.  Included in those amounts were percentage rents from Kmart of $-0-, $-0- and $10,221 for fiscal years 2009, 2008 and 2007, respectively.  Leases with Borders do not contain percentage rent provisions.  Leases with Walgreen do contain percentage rent provisions; however, no percentage rent was received from Walgreen during these periods.  Some of our leases require us to make roof and structural repairs, as needed.
 
Development and Acquisition Summary
 
During 2009, we completed the following developments and redevelopments:
 
Tenant(s)
 
Location
 
Cost
Walgreen (drug store)
 
Brighton, Michigan
 
$4.2 million
Walgreen (drug store)
 
Silver Spring Shores, Florida
 
$4.5 million
Walgreen (drug store)
 
Port St John, Florida
 
$4.7 million
Walgreen (drug store)
 
Lowell, Michigan
 
$2.8 million
Chase (retail bank)
 
Southfield, Michigan
 
$1.3 million
 
 
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During 2009, we commenced the following developments:
 
Tenant(s)
 
Location
 
Budgeted Cost
 
Anticipated Completion
Walgreen (drug store)
 
Ann Arbor, Michigan
 
$3.3 million
 
Third quarter 2010
Walgreen (drug store)
 
St Augustine Shores, Florida
 
$3.5 million
 
Fourth quarter 2010
Walgreen (drug store)
 
Atlantic Beach, Florida
 
$3.5million
 
Third quarter 2010

We did not complete or commence any acquisitions in 2009.  We did not sell any properties in 2009.
 
Major Tenants
 
The following table sets forth certain information with respect to our major tenants:
 
   
Number
of Leases
   
Annualized Base
Rent as of
December 31, 2009
   
Percent of Total
Annualized Base Rent as
of December 31, 2009
 
Walgreen
    28     $ 10,246,099       30 %
Borders
    18       9,938,796       29  
Kmart
    12       3,847,911       11  
Total
    58     $ 24,032,806       70 %
 
Walgreen is a leader of the U.S. chain drugstore industry and trades on the New York Stock Exchange under the symbol “WAG”.  Walgreen operated 7,496 locations in 50 states, the District of Columbia, Puerto Rico and Guam and had total assets of approximately $25.1 billion as of August 31, 2009.  As of February 10, 2010, Walgreen’s long-term debt had a Standard and Poor’s rating of A+ and a Moody’s rating of A2 . For its fiscal year ended August 31, 2009, Walgreen reported that its annual net sales were $63.3 billion, its annual net income was $2.0 billion and it had stockholders’ equity of $14.4 billion.
 
Borders trades on the New York Stock Exchange under the symbol “BGP”.  Borders is the second largest operator of book, music and movie superstores and the largest operator of mall-based bookstores in the world based upon both sales and number of stores.  At January 31, 2009, Borders operated 518 superstores under the Borders name, including 515 in the United States.  Borders also operated 386 mall-based and other bookstores, including stores operated under the Waldenbooks, Borders Express and Borders Outlet names as well as Borders-branded airport stores.  Borders employed approximately 25,600 people worldwide as of such date.  Borders has reported that its annual revenues for its 2008 fiscal year ended January 31, 2009 were approximately $3.3 billion, its annual net (loss) for 2008 was approximately ($187 million) and its total stockholders’ equity at fiscal year end 2008 was approximately of $263 million.
 
Kmart is a mass merchandising company that offers customers quality products through a portfolio of brands and labels. As of October 31, 2009, Kmart operated approximately 1,380 stores across 49 states, Guam, Puerto Rico and the U.S. Virgin Islands.  Kmart is a wholly-owned subsidiary of Sears Holdings Corporation (“Sears”), which trades on the Nasdaq stock market under the symbol “SHLD”.  Sears is a broadline retailer with approximately 2,300 full-line and 1,200 specialty retail stores in the United States operating through Kmart and Sears and approximately 380 full-line and specialty retail stores in Canada operating through Sears Canada, Inc. (“Sears Canada”), a 70%-owned subsidiary.  As of October 31, 2009, Sears had total assets of $27.1 billion, total liabilities of $17.8 billion and stockholders equity of $9.3 billion.  All of our Kmart properties are in the traditional Kmart format and these Kmart properties average 85,000 square feet per property.
 
 
18

 
 
The financial information set forth above with respect to Walgreen, Borders and Kmart was derived from the annual reports on Form 10-K filed by Borders and Walgreen with the SEC with respect to their 2008 fiscal years and the quarterly report on form 10-Q filed by Sears Holdings Corporation with the SEC with respect to the third quarter of 2009.  Additional information regarding Borders, Walgreen or Kmart may be found in their respective public filings.  These filings can be accessed at www.sec.gov.  We are unable to confirm, and make no representations with respect to, the accuracy of these reports and therefore you should not place undue reliance on such information as it pertains to our operations.
 
Location of Properties in the Portfolio
 
State
 
Number
of
Properties
   
Total Gross
Leasable Area
(Sq. feet)
   
Percent of GLA Leased
on December 31, 2009
 
California
   
1
      38,015       100 %
Florida
   
7
      298,458       89  
Georgia
   
1
      14,820       100  
Illinois
   
1
      20,000       90  
Indiana
   
2
      15,844       100  
Kansas
   
2
      45,000       100  
Kentucky
   
1
      116,212       100  
Maryland
   
2
      53,000       100  
Michigan
   
42
      2,126,184       99  
Nebraska
   
2
      55,000       100  
New Jersey
   
1
      10,118       100  
New York
   
2
      27,626       100  
Ohio
   
1
      21,000       100  
Oklahoma
   
4
      99,282       100  
Pennsylvania
   
1
      28,604       100  
Wisconsin
   
3
      523,036       98  
Total/Average
   
73
      3,492,199       98 %
 
Lease Expirations
 
The following table shows lease expirations for our community shopping centers and wholly-owned freestanding properties, assuming that none of the tenants exercise renewal options.
 
         
December 31, 2009
 
         
Gross Leasable Area
   
Annualized Base Rent
 
Expiration Year
 
Number
of Leases
Expiring
   
Square
Footage
   
Percent
of Total
   
Amount
   
Percent
of Total
 
2010
   
9
      182,100       5.3 %   $ 1,017,912       3.0 %
2011
   
23
      136,636       4.0 %     1,110,428       3.2 %
2012
   
28
      267,986       7.8 %     1,375,067       4.0 %
2013
   
20
      314,713       9.2 %     1,662,241       4.8 %
2014
   
9
      190,458       5.6 %     985,856       2.9 %
2015
   
18
      768,841       22.4 %     5,443,351       15.8 %
2016
   
7
      124,841       3.6 %     1,922,928       5.6 %

 
19

 

         
December 31, 2009
 
         
Gross Leasable Area
   
Annualized Base Rent
 
Expiration Year
 
Number
of Leases
Expiring
   
Square
Footage
   
Percent
of Total
   
Amount
   
Percent
of Total
 
2017
   
4
      30,844       0.9 %     351,995       1.0 %
2018
   
13
      249,732       7.3 %     4,396,756       12.8 %
2019
   
6
      70,170       2.0 %     1,741,879       5.1 %
Thereafter
   
41
      1,090,336       31.9 %     14,341,431       41.8 %
Total
   
178
      3,426,657       100.0 %   $ 34,349,844       100.0 %
 
We have made preliminary contact with the nine tenants whose leases expire in 2010.  Of those tenants, three tenants, at their option, have the right to extend their lease term and six tenants have leases expiring in 2010.  We expect two tenants, to terminate their leases in 2010 and seven tenants to extend their leases or enter into lease extensions.
 
Annualized Base Rent of our Properties
 
The following is a breakdown of base rents in place at December 31, 2009 for each type of retail tenant:
 
Type of Tenant
 
Annualized
Base Rent
   
Percent of
Annualized
Base Rent
 
National(1)
  $ 30,614,320       89 %
Regional(2)
    2,659,992       8  
Local
    1,075,532       3  
Total
  $ 34,349,844       100 %
 

(1)
Includes the following national tenants:  Walgreen, Borders, Kmart, Wal-Mart, Fashion Bug, Rite Aid, JC Penney, Avco Financial, GNC Group, Radio Shack, Super Value, Maurices, Payless Shoes, Blockbuster Video, Family Dollar, H&R Block, Sally Beauty, Jo Ann Fabrics, Staples, Best Buy, Dollar Tree, TGI Friday’s and Pier 1 Imports.
 
(2)
Includes the following regional tenants: Roundy’s Foods, Meijer, Dunham’s Sports, Christopher Banks and Beall’s Department Stores.
 
Freestanding Properties
 
At December 31, 2009, our 61 of freestanding properties were leased to Walgreen (27), Borders (18),  Rite Aid (7), Kmart (2), JP Morgan Chase (1), Fajita Factory (1), Citizens Bank (1), Lake Lansing RA Associates, LLC (1),  Meijer (1), Wal-Mart (Sam’s Club) (1). Our freestanding properties provided $24,264,289, or approximately 70.6%, of our annualized base rent as of December 31, 2009, at an average base rent per square foot of $14.90.  These properties contain, in the aggregate, 1,629,543 square feet of GLA or approximately 46.7% of our total GLA as of December 31, 2009.  Our freestanding properties tend to have high traffic counts, are generally located in densely populated areas and are leased to a single tenant on a long term basis.  Of our 61 freestanding properties, 48 were developed by us.  As of December 31, 2009, we had one vacant free standing property.  Our freestanding properties had a weighted average lease term of 12.6 years as of December 31, 2009.
 
Our freestanding properties range in size from 4,426 to 458,729 square feet of GLA and are located in the following states: California (1), Florida (6), Georgia (1), Indiana (2), Kansas (2), Maryland (2), Michigan (36), Nebraska (2), New Jersey (1), New York (2), Ohio (1), Oklahoma (4) and Pennsylvania (1).

 
20

 
 
Freestanding Properties 
 
Tenant
 
Location
 
Year
Completed/
Expanded
 
Total GLA
 
Lease Expiration(2)
(Option expiration)
Borders (1)
 
Aventura, FL
 
1996
 
30,000
 
Jan 31, 2016 (2036)
Borders
 
Columbus, OH
 
1996
 
21,000
 
Jan 23, 2016 (2036)
Borders
 
Monroeville, PA
 
1996
 
28,604
 
Nov 8, 2016 (2036)
Borders
 
Norman, OK
 
1996
 
24,641
 
Sep 20, 2016 (2036)
Borders (8)
 
Omaha, NE
 
1995
 
30,000
 
Nov 3, 2015 (2035)
Borders
 
Santa Barbara, CA
 
1995
 
38,015
 
Nov 17, 2015 (2035)
Borders (8)
 
Wichita, KS
 
1995
 
25,000
 
Nov 10, 2015 (2035)
Borders (8)
 
Lawrence, KS
 
1997
 
20,000
 
Oct 16, 2022 (2042)
Borders
 
Tulsa, OK
 
1998
 
25,000
 
Sep 30, 2018 (2038)
Borders (8)
 
Oklahoma City, OK
 
2002
 
24,641
 
Jan 31, 2018 (2038)
Borders (8)
 
Omaha, NE
 
2002
 
25,000
 
Jan 31, 2018 (2038)
Borders (8)
 
Indianapolis, IN
 
2002
 
15,844
 
Dec 31, 2017 (2038)
Borders (8)
 
Columbia, MD
 
1999
 
28,000
 
Jan 31, 2018 (2038)
Borders (8)
 
Germantown, MD
 
2000
 
25,000
 
Jan 31, 2018 (2038)
Borders Headquarters (8)
 
Ann Arbor, MI
 
1996/1998
 
458,729
 
Jan 29, 2023 (2043)
Borders
 
Tulsa, OK
 
1996
 
25,000
 
Sep 30, 2018 (2038)
Borders (8)
 
Boynton Beach, FL
 
1996
 
20,745
 
July 20, 2024 (2044)
Borders (8)
 
Ann Arbor, MI
 
1996
 
110,000
 
Jan 31, 2025 (2045)
Citizens Bank
 
Flint, MI
 
2003
 
4,426
 
Apr 15, 2023
Rite Aid (8)
 
Webster, NY
 
2004
 
13,813
 
Feb 24, 2024 (2044)
Rite Aid (8)
 
Albion, NY
 
2004
 
13,813
 
Oct 12, 2024 (2044)
Fajita Factory
 
Lansing, MI
 
2004
 
Note (3)
 
Aug 31, 2014 (2032)
                 
Lake Lansing RA Associates, LLC
 
East Lansing, MI
 
2004
 
Note (4)
 
Dec 31, 2028 (2078)
Kmart
 
Grayling, MI
 
1984
 
52,320
 
Sep 30, 2009 (2059)
Kmart
 
Oscoda, MI
 
1984/1990
 
90,470
 
Sep 30, 2009 (2059)
Meijer
 
Plainfield, IN
 
2007
 
Note (5)
 
Nov 5, 2027 (2047)
Rite Aid (8)
 
Canton Twp, MI
 
2003
 
11,180
 
Oct 31, 2019 (2049)
Rite Aid (8)
 
Roseville, MI
 
2005
 
11,060
 
June 30, 2025 (2050)
Rite Aid
 
Mt Pleasant, MI
 
2005
 
11,095
 
Nov 30, 2025 (2065)
Rite Aid
 
N Cape May, NJ
 
2005
 
10,118
 
Nov 30, 2025 (2065)
Rite Aid (8)
 
Summit Twp, MI
 
2006
 
11,060
 
Oct 31, 2019 (2039)
Sam’s Club
 
Roseville, MI
 
2002
 
Note (6)
 
Aug 4, 2022 (2082)
Walgreen (8)
 
Waterford, MI
 
1997
 
13,905
 
Feb 28, 2018 (2058)
Walgreen (8)
 
Chesterfield, MI
 
1998
 
13,686
 
July 31, 2018 (2058)
Walgreen (8)
 
Pontiac, MI
 
1998
 
13,905
 
Oct 31, 2018 (2058)
Walgreen (8)
 
Grand Blanc, MI
 
1998
 
13,905
 
Feb 28, 2019 (2059)
Walgreen (8)
 
Rochester, MI
 
1998
 
13,905
 
June 30, 2019 (2059)
Walgreen (8)
 
Ypsilanti, MI
 
1999
 
15,120
 
Dec 31, 2019 (2059)
Walgreen (1) (8)
 
Petoskey, MI
 
2000
 
13,905
 
Apr 30, 2020 (2060)
Walgreen (8)
 
Flint, MI
 
2000
 
14,490
 
Dec 31, 2020 (2060)

 
21

 

Tenant
 
Location
 
Year
Completed/
Expanded
 
Total GLA
 
Lease Expiration(2)
(Option expiration)
Walgreen (8)
 
Flint, MI
 
2001
 
15,120
 
Feb 28, 2021 (2061)
Walgreen (8)
 
N Baltimore, MI
 
2001
 
14,490
 
Aug 31, 2021 (2061)
Walgreen (8)
 
Flint, MI
 
2002
 
14,490
 
Apr 30, 2027 (2077)
Walgreen
 
Big Rapids, MI
 
2003
 
13,560
 
Apr 30, 2028 (2078)
Walgreen (8)
 
Flint, MI
 
2004
 
14,560
 
Feb 28, 2029 (2079)
Walgreen (8)
 
Flint, MI
 
2004
 
13,650
 
Oct 31, 2029 (2079)
Walgreen
 
Midland, MI
 
2005
 
14,820
 
July 31, 2030 (2080)
Walgreen (8)
 
Grand Rapids, MI
 
2005
 
14,820
 
Aug 30, 2030 (2080)
Walgreen (8)
 
Delta Township, MI
 
2005
 
14,559
 
Nov 30, 2030 (2080)
Walgreen and Retail space (8)
 
Livonia, MI
 
2007
 
19,390
 
June 30, 2032 (2082)
Walgreen
 
Barnesville, GA
 
2007
 
14,820
 
Nov 30, 2032 (2082)
Walgreen and Chase Bank (8)
 
Macomb Township, MI
 
2008
 
14,820
 
Mar 31, 2033 (2083)
Walgreen
 
Ypsilanti, MI
 
2008
 
13,650
 
Mar 31, 2032 (2082)
Walgreen
 
Marion County, FL
 
2008
 
14,820
 
Apr 30, 2032 (2082)
Walgreen (1) (8)
 
Shelby Township, MI
 
2008
 
14,820
 
Jul 31, 2033 (2083)
Walgreen
 
Brighton, MI
 
2009
 
14,550
 
Jan 31, 2034 (2084)
Walgreen
 
Silver Springs Shores, FL
 
2009
 
14,550
 
Dec 31, 2033 (2083)
Walgreen
 
Port St John, FL
 
2009
 
14,550
 
Apr 30, 2034 (2084)
Walgreen
 
Lowell, MI
 
2009
 
13,650
 
Sep 30, 2034 (2084)
Chase Bank
 
Southfield, MI
 
2009
 
Note (7)
 
Oct 31, 2029 (2059)
Vacant space
 
Boynton Beach, FL
     
32,459
   
                 
Total
         
1,629,543
   
 

(1)
Properties subject to long-term ground leases where a third party owns the underlying land and has leased the land to us to construct or operate freestanding properties. We pay rent for the use of the land and we are generally responsible for all costs and expenses associated with the building and improvements. At the end of the lease terms, as extended (Aventura, FL 2036, Petoskey, MI 2074 and Shelby Township, MI 2084), the land together with all improvements revert to the land owner. We have an option to purchase the Petoskey property after August 7, 2019 and the Shelby property after July 5, 2018.
 
(2)
At the expiration of tenant’s initial lease term, each tenant (except Citizens Bank) has an option, subject to certain requirements, to extend its lease for an additional period of time.
 
(3)
This 2.03 acre property is leased from us by Fajita Factory, LLC pursuant to a ground lease.  The tenant occupies a 5,448 square foot building.
 
(4)
This 11.3 acre property is leased from us by Lake Lansing RA Associates, LLC pursuant to a ground lease.  The land owner has constructed a 14,564 square foot building.
 
(5)
This 32.5 acre property is leased from us by Meijer pursuant to a ground lease.  Meijer expects to construct an estimated 210,000 square foot super center.
 
(6)
This 12.68 acre property is leased from us by Wal-Mart pursuant to a ground lease.  Wal-Mart has constructed a Sam’s Club retail building containing approximately 132,332 square feet.
 
 (7)
This 1.0 acre property is leased from us by JP Morgan Chase Bank pursuant to a ground lease.  JP Morgan Chase has constructed a retail bank branch containing approximately 4,270 square feet.
 
(8)
Properties subject to a mortgage/debt or pledged pursuant to our credit facilities
 
 
22

 
 
Community Shopping Centers
 
Our 12 community shopping centers range in size from 20,000 to 241,458 square feet of GLA. The community shopping centers are located in five states as follows: Florida (1), Illinois (1), Kentucky (1), Michigan (6) and Wisconsin (3). Our community shopping centers tend to be located in high traffic, market dominant centers in which customers of our tenants purchase day-to-day necessities. Our community shopping centers are anchored by national tenants.
 
The location, general character and primary occupancy information with respect to the community shopping centers as of December 31, 2009 are set forth below:
 
Property Location
 
Location
 
Year
Completed/
Expanded
   
Gross
Leasable
Area
Sq. Ft.
   
Annualized
Base Rent (2)
   
Average
Base
Rent per
Sq. Ft.(3)
   
Percent
Occupied
at
December
31,
2009
   
Percent
Leased at
December
31,
2009 (4)
 
Anchor Tenants (Lease
expiration/Option period
expiration) (5)
Capital Plaza,(1)
 
Frankfort, KY
 
1978/ 2006
      116,212     $ 587,000     $ 5.05       100 %     100 %
Kmart(2013/2053)
                                                   
Walgreen (2031/2052)
Charlevoix Commons
 
Charlevoix, MI
 
1991
      137,375       686,495       5.00       100 %     100 %
Kmart (2015/2065)
                                                   
Roundy’s (2011)
Family Farm (2016)
Chippewa Commons (6)
 
Chippewa Falls, WI
 
1991
      168,311       979,023       5.82       100 %     100 %
Kmart (2014/2064)
                                                   
Roundy’s (2010/2030)
                                                   
Fashion Bug (2011/2021)
Ironwood Commons
 
Ironwood, MI
 
1991
      185,535       907,793       5.01       98 %     98 %
Kmart (2015/2065)
                                                   
Super Value (2011/2036)
                                                   
Fashion Bug (2011/2021)
Marshall Plaza
 
Marshall, MI
 
1990
      119,279       690,959       5.79       100 %     100 %
Kmart (2015/2065)
Central Michigan Commons
 
Mt. Pleasant, MI
 
1973/ 1997
      241,458       988,562       5.03       96 %     96 %
Kmart (2008/2048)
                                                   
J.C. Penney Co. (2010/2020)
                                                   
Staples, Inc. (2010/2025)
North Lakeland Plaza (6)
 
Lakeland, FL
 
1987
      171,334       1,301,574       7.68       99 %     99 %
Best Buy (2013/2028)
                                                   
Beall’s (2020/2035)
Petoskey Town Center (6)
 
Petoskey, MI
 
1990
      174,870       1,031,073       5.95       99 %     99 %
Kmart (2015/2065)
                                                   
Roundy’s (2010/2030)
                                                   
Fashion Bug (2012/2022)
Plymouth Commons
 
Plymouth, WI
 
1990
      162,031       792,369       5.09       96 %     96 %
Kmart (2015/2065)
                                                   
Roundy’s (2015/2030)
Ferris Commons
 
Big Rapids, MI
 
1990
      173,557       1,013,336       5.98       98 %     98 %
Kmart (2015/2065)
                                                   
MC Sports (2018/2033)
                                                   
Peebles (2019/2039)
Shawano Plaza (6)
 
Shawano, WI
 
1990
      192,694       983,371       5.21       98 %     98 %
Kmart (2014/2064)
                                                   
Roundy’s (2015/2030)
                                                   
J.C. Penney Co. (2010/2025)
                                                   
Fashion Bug (2010/2021)
West Frankfort Plaza
 
West Frankfort, IL
 
1982
      20,000       124,000       6.89       90 %     90 %
Fashion Bug (2012)
                                                     
Total/Average
              1,862,656     $ 10,085,555     $ 5.51       98 %     98 %  
 

 
23

 
(1)
All community shopping centers except Capital Plaza (which is subject to a long-term ground lease expiring in 2053 from a third party) are wholly-owned by us.
 
(2)
Total annualized base rents of our Company as of December 31, 2009.
 
(3)
Calculated as total annualized base rents, divided by gross leaseable area actually leased as of December 31, 2009.
 
(4)
Roundy’s has sub-leased the space it leases at Charlevoix Commons (35,896 square feet, rented at a rate of $5.97 per square foot). The lease with Roundy’s will expire on December 31, 2011.  We have entered into a lease with Family Farm and Home, Inc (the Roundy’s sub-tenant).  The Family Farm lease commences January 1, 2012, has a term of 5 years and a rental rate of $2.00 per square foot.
 
(5)
The option to extend the lease beyond its initial term is only at the option of the tenant.
 
(6)
Properties subject to a mortgage/debt or pledged pursuant to our credit facilities.
 
ITEM 3.
LEGAL PROCEEDINGS
 
From time to time, we are involved in legal proceedings in the ordinary course of business.  We are not presently involved in any litigation nor, to our knowledge, is any other litigation threatened against us, other than routine litigation arising in the ordinary course of business, which is expected to be covered by our liability insurance and all of which collectively is not expected to have a material adverse effect on our liquidity, results of operations or business or financial condition.
 
ITEM 4.
RESERVED
 
PART II
 
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Our common stock is traded on the New York Stock Exchange under the symbol “ADC”.  The following table sets forth the high and low closing prices of our common stock, as reported on the New York Stock Exchange, and the dividends declared per share of common stock by us for each calendar quarter in the last two fiscal years.  Dividends were paid in the periods immediately subsequent to the periods in which such dividends were declared.
 
Quarter Ended
 
High
   
Low
   
Dividends Declared Per
Common Share
 
                   
March 31, 2009
  $ 19.32     $ 9.31     $ 0.50  
June 30, 2009
  $ 18.66     $ 14.89     $ 0.50  
September 30, 2009
  $ 24.61     $ 17.10     $ 0.51  
December 31, 2009
  $ 24.94     $ 21.01     $ 0.51  
 
                       
March 31, 2008
  $ 31.02     $ 26.74     $ 0.50  
June 30, 2008
  $ 29.14     $ 21.48     $ 0.50  
September 30, 2008
  $ 29.25     $ 23.05     $ 0.50  
December 31, 2008
  $ 27.49     $ 9.48     $ 0.50  
 
On March 3, 2010, the reported closing sale price per share of common stock on the New York Stock Exchange was $21.27.
 
At February 26, 2010, there were 8,271,464 shares of our common stock issued and outstanding which were held by approximately 200 stockholders of record.  The number of stockholders of record does not reflect persons or entities who held their shares in nominee or “street” name.  In addition, at December 31, 2009 there were 347,619 Operating Partnership units outstanding held by limited partners other than our Company.  The units are exchangeable into shares of common stock on a one for one basis.

 
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For 2009, we paid $2.02 per share of common stock in dividends. Of the $2.02, 100.0% represented ordinary income, and 0.0% represented return of capital, for tax purposes. For 2008, we paid $2.00 per share of common stock in dividends. Of the $2.00, 98.0% represented ordinary income, and 2.0% represented return of capital, for tax purposes.
 
We intend to continue to declare quarterly dividends to our stockholders.  However, our distributions are determined by our board of directors and will depend on a number of factors, including the amount of our funds from operations, the financial and other condition of our properties, our capital requirements, restrictions in our debt instruments, our annual distribution requirements under the provisions of the Internal Revenue Code applicable to REITs and such other factors as our board of directors deems relevant.  We have historically paid cash dividends, although we may choose to pay a portion in stock dividends in the future.  To qualify as a REIT, we must distribute at least 90% of our REIT taxable income prior to net capital gains to our stockholders, as well as meet certain other requirements. We must pay these distributions in the taxable year the income is recognized, or in the following taxable year if they are declared during the last three months of the taxable year, payable to stockholders of record on a specified date during such period and paid during January of the following year. Such distributions are treated as paid by us and received by our stockholders on December 31 of the year in which they are declared. In addition, at our election, a distribution for a taxable year may be declared in the following taxable year if it is declared before we timely file our tax return for such year and if paid on or before the first regular dividend payment after such declaration. These distributions qualify as dividends paid for the 90% REIT distribution test for the previous year and are taxable to holders of our capital stock in the year in which paid.
 
During the year ended December 31, 2009, we did not sell any unregistered securities.  During the fourth quarter of 2009, we did not repurchase any of our equity securities.
 
For information about our equity compensation plan, please see Part III, Item 12 of this report.

 
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ITEM 6.
SELECTED FINANCIAL DATA
 
The following table sets forth our selected financial information on a historical basis and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and all of the financial statements and notes thereto included elsewhere in this Form 10-K.  Certain amounts have been reclassified to conform to the current presentation of discontinued operations.  The balance sheet for the periods ending December 31, 2005 through 2009 and operating data for each of the periods presented were derived from our audited financial statements.
 
Selected Financial Data
(in thousands, except per share, number of properties, and percentage leased information)
 
    
Year Ended December 31,
 
    
2009
   
2008
   
2007
   
2006
   
2005
 
Operating Data
                             
Total Revenue
  $ 37,260     $ 35,654     $ 34,468     $ 32,908     $ 31,579  
Expenses
                                       
Property Expense (1)
    4,363       4,448       4,310       4,219       4,545  
General and Administrative
    4,559       4,361       4,462       4,019       4,191  
Interest
    4,635       5,179       4,896       4,625       4,159  
Depreciation and Amortization
    5,709       5,384       5,017       4,851       4,637  
Total Expenses
    19,266       19,372       18,685       17,714       17,532  
Other Income (2)
    -       -       1,044       -       6  
Income Before Discontinued Operations
    17,994       16,282       16,827       15,194       14,053  
                                         
Gain on Sale of Asset From Discontinued Operations
    -       -       -       -       2,654  
Income From Discontinued Operations
    -       -       -       -       486  
Net Income
    17,994       16,282       16,827       15,194       17,193  
                                         
Less Net Income Attributable to Non-Controlling Interest
    950       1,265       1,345       1,220       1,145  
                                         
Net Income Attributable to Agree Realty Corporation
  $ 17,044     $ 15,017     $ 15,482     $ 13,974     $ 16,048  
                                         
Number of Properties
    73       68       64       60       59  
Number of Square Feet
    3,492       3,439       3,385       3,355       3,363  
Percentage Leased
    98 %     99 %     99 %     99 %     99 %
                                         
Per Share Data – Diluted
                                       
                                         
Income Before Discontinued Operations
  $ 2.14     $ 1.95     $ 2.01     $ 1.83     $ 1.72  
Discontinued Operations
 
-
   
-
   
-
   
-
      .42  
Net Income
  $ 2.14     $ 1.95     $ 2.01     $ 1.83     $ 2.14  
                                         
Weighted Average of Common Shares Outstanding – Diluted
      7,966         7,718       7,716       7,651       7,491  
                                         
Cash Dividends
  $ 2.02     $ 2.00     $ 1.97     $ 1.96     $ 1.96  
                                         
Balance Sheet Data
                                       
Real Estate (before accumulated depreciation)
  $ 320,444     $ 311,343     $ 290,074     $ 268,248     $ 258,232  
Total Assets
  $ 261,789     $ 256,897     $ 239,348     $ 223,515     $ 223,460  
Total Debt, including accrued interest
  $ 104,814     $ 101,069     $ 82,889     $ 69,031     $ 68,504  

(1)
Property expense includes real estate taxes, property maintenance, insurance, utilities and land lease expense.
 
(2)
Other income is composed of development fee income, gain on land sales, and equity in net income of unconsolidated entities.
 
(3)
Net income per share has been computed by dividing the net income by the weighted average number of shares of common stock outstanding and the effect of dilutive securities outstanding.
 
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ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Overview
 
We were established to continue to operate and expand the retail property business of our predecessor.  We commenced our operations in April 1994.  Our assets are held by and all operations are conducted through, directly or indirectly, the Operating Partnership, of which we are the sole general partner and held a 95.93% interest as of December 31, 2009.  We are operating so as to qualify as a REIT for federal income tax purposes.
 
The following should be read in conjunction with the Consolidated Financial Statements of Agree Realty Corporation, including the respective notes thereto, which are included elsewhere in this Form 10-K.
 
Recent Accounting Pronouncements
 
In June 2009, the Financial Accounting Standards Board (“FASB”) issued “Accounting Standards Update 2009-01 Topic 105-Generally Accepted Accounting Principles amendments based on Statement of Financial Accounting Standards No. 168-The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (“ASU 2009-01”), “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162” (“SFAS 168”).  ASU 2009-01, or the FASB Accounting Standards Codification (“Codification”), will become the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities.  On the effective date of ASU 2009-01, the Codification will supersede all then-existing non-SEC accounting and reporting standards.  All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative.  ASU 2009-01 is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The adoption of the standard did not have a material impact on our consolidated financial position, results of operations, or cash flows.

Critical Accounting Policies
 
Critical accounting policies are those that are both significant to the overall presentation of our financial condition and results of operations and require management to make difficult, complex or subjective judgments.  For example, significant estimates and assumptions have been made with respect to revenue recognition, capitalization of costs related to real estate investments, potential impairment of real estate investments, operating cost reimbursements, and taxable income.
 
Minimum rental income attributable to leases is recorded when due from tenants.  Certain leases provide for additional percentage rents based on tenants’ sales volumes.  These percentage rents are recognized when determinable by us.  In addition, leases for certain tenants contain rent escalations and/or free rent during the first several months of the lease term; however, such amounts are not material.
 
Real estate assets are stated at cost less accumulated depreciation.  All costs related to planning, development and construction of buildings prior to the date they become operational, including interest and real estate taxes during the construction period, are capitalized for financial reporting purposes and recorded as property under development until construction has been completed.  The viability of all projects under construction or development are regularly evaluated under applicable accounting requirements, including requirements relating to abandonment of assets or changes in use. To the extent a project, or individual components of the project, are no longer considered to have value, the related capitalized costs are charged against operations.  Subsequent to completion of construction, expenditures for property maintenance are charged to operations as incurred, while significant renovations are capitalized.  Depreciation of the buildings is recorded on the straight-line method using an estimated useful life of forty years.

 
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We evaluate real estate for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows from the use of these assets.  When any such impairment exists, the related assets will be written down to fair value and such excess carrying value is charged to income.  The expected cash flows of a project are dependent on estimates and other factors subject to change, including (1) changes in the national, regional, and/or local economic climates, (2) competition from other shopping centers, stores, clubs, mailings, and the internet, (3) increases in operating costs, (4) bankruptcy and/or other changes in the condition of third parties, including tenants, (5) expected holding period, and (6) availability of credit. These factors could cause our expected future cash flows from a project to change, and, as a result, an impairment could be considered to have occurred.

Substantially all of our leases contain provisions requiring tenants to pay as additional rent a proportionate share of operating expenses (“operating cost reimbursements”) such as real estate taxes, repairs and maintenance, insurance, etc.  The related revenue from tenant billings is recognized in the same period the expense is recorded.
 
We have elected to be taxed as a REIT under the Internal Revenue Code, commencing with our 1994 tax year.  As a result, we are not subject to federal income taxes to the extent that we distribute annually at lease 90% of our REIT taxable income to our stockholders and satisfy certain other requirements defined in the Internal Revenue Code.
 
We established TRS entities pursuant to the provisions of the REIT Modernization Act.  Our TRS entities are able to engage in activities resulting in income that previously would have been disqualified from being eligible REIT income under the federal income tax regulations.  As a result, certain activities of our Company which occur within our TRS entities are subject to federal and state income taxes.  As of December 31, 2009 and 2008, we had accrued a deferred income tax amount of $705,000.  In addition, we have recorded an income tax liability of  $62,000 as of December 31, 2009.
 
Comparison of Year Ended December 31, 2009 to Year Ended December 31, 2008
 
Minimum rental income increased $1,307,000, or 4%, to $34,157,000 in 2009, compared to $32,850,000 in 2008.  The increase was the result of the development of a Walgreen drug store and a bank land lease in Macomb Township, Michigan in March 2008, the development of a Walgreen drug store located in Ypsilanti, Michigan in May 2008, the development of a Walgreen drug store in Ocala, Florida in June 2008, the development of a Walgreen drug store in Shelby Township, Michigan in July 2008, the development of a Walgreen drug store in Silver Springs Shores, Florida in January 2009, the development of a Walgreen drug store in Brighton, Michigan in February 2009, the development of a Walgreen drug store in Port St John, Florida in June 2009, the development of a Walgreen drug store in Lowell, Michigan in September 2009 and the development of a Chase bank branch land lease in Southfield, Michigan in October 2009. Our revenue increases from these developments amounted to $1,694,000.  In addition, rental income from our Big Rapids, Michigan shopping center increased by $182,000 as a result of redevelopment activities and rental income decreased ($569,000) as a result of the closing of a Circuit City store in Boynton Beach, Florida and other rental adjustments.
 
Operating cost reimbursements decreased $137,000, or 5%, to $2,647,000 in 2009, compared to $2,784,000 in 2008.  Operating cost reimbursements decreased due to the net decrease in property operating expenses as explained below.
 
We earned development fee income of $410,000 in 2009 related to a project we have commenced in Oakland, California.  There was no development fee income in 2008.  We expect to earn development fee income in 2010.
 
Other income increased $26,000 to $30,000 in 2009, compared to $4,000 in 2008.
 
Real estate taxes increased $71,000, or 4%, to $1,938,000 in 2009 compared to $1,867,000 in 2008.  The increase is the result of general assessment increases on the properties.
 
Property operating expenses (shopping center maintenance, snow removal, insurance and utilities) decreased $247,000, or 14%, to $1,566,000 in 2009 compared to $1,813,000 in 2008.  The decrease was the result of a decrease in shopping center maintenance expenses of ($73,000); decreased snow removal costs of ($175,000); increased utility costs of $29,000; and decreased insurance costs of ($28,000) in 2009 versus 2008.

 
28

 
Land lease payments increased $92,000, or 12%, to $859,000 in 2009 compared to $767,000 for 2008.  The increase is the result of our leasing of land for our Shelby Township, Michigan development.

General and administrative expenses increased $198,000, or 5%, to $4,559,000 in 2009 compared to $4,361,000 in 2008.  The increase was primarily the result of increased dead deal costs related to property searches in Michigan and Florida and compensation related expenses.  General and administrative expenses as a percentage of rental income remained at 13.3% for 2009 and 2008.

Depreciation and amortization increased $324,000, or 6%, to $5,709,000 in 2009 compared to $5,385,000 in 2008.  The increase was the result the development and acquisition of four properties in 2008 and five properties in 2009.

Interest expense decreased $544,000, or 11%, to $4,635,000 in 2009, from $5,179,000 in 2008.  The decrease in interest expense resulted from substantial reductions in interest rates in 2009 as compared to 2008.

Our net income increased $1,712,000, or 11%, to $17,994,000 in 2009, from $16,282,000 in 2008 as a result of the foregoing factors.

Comparison of Year Ended December 31, 2008 to Year Ended December 31, 2007

Minimum rental income increased $1,214,000, or 4%, to $32,850,000 in 2008, compared to $31,636,000 in 2007.  The increase was the result of the development of a Walgreen drug store in Livonia, Michigan in June 2007, the development of a Walgreen drug store in Barnesville, Georgia in October 2007, the development of a parcel of land located in East Lansing, Michigan in November 2007, the development of a parcel of land located in Plainfield, Indiana in November 2007, the development of a Walgreen drug store and a bank land lease in Macomb Township, Michigan in March 2008, the development of a Walgreen drug store located in Ypsilanti, Michigan in May 2008, the development of a Walgreen drug store in Ocala, Florida in June 2008 and the development of a Walgreen drug store in Shelby Township, Michigan in July 2008.  Our revenue increases from these developments amounted to $2,010,000.  Our increase in rental income was partially offset by a lease termination payment related to our Big Rapids, Michigan shopping center that was received in 2007 of ($608,000), a reduction in rental of income related to our redevelopment of our Big Rapids, Michigan shopping center of ($143,000) and a reduction of rent at our only Circuit City store of ($56,000).

Percentage rents decreased $22,000, or 59%, to $15,000 in 2008, compared to $37,000 in 2007.  The decrease was primarily the result of decreased tenant sales.

Operating cost reimbursements increased $25,000, or 1%, to $2,784,000 in 2008, compared to $2,759,000 in 2007.  Operating cost reimbursements increased due to the increase in property operating expenses as explained below.

Other income decreased $31,000 to $4,000 in 2008, compared to $35,000 in 2007.

Real estate taxes increased $18,000, or 1%, to $1,867,000 in 2008 compared to $1,849,000 in 2007.  The increase is the result of general assessment increases on the properties.

Property operating expenses (shopping center maintenance, snow removal, insurance and utilities) increased $28,000, or 2%, to $1,813,000 in 2008 compared to $1,785,000 in 2007.  The increase was the result of a decrease in shopping center maintenance expenses of ($64,000); increased snow removal costs of $68,000; increased utility costs of $29,000; and decreased insurance costs of ($5,000) in 2008 versus 2007.

Land lease payments increased $91,000, or 14%, to $767,000 in 2008 compared to $676,000 for 2007.  The increase is the result of our leasing of land for our Shelby Township, Michigan development.

 
29

 

General and administrative expenses decreased $101,000, or 2%, to $4,361,000 in 2008 compared to $4,462,000 in 2007.  The decrease was the result of an increase in compensation related expenses of $58,000; decreased contracted services to investigate development opportunities of ($165,000) and increased property management related expenses of $6,000.  General and administrative expenses as a percentage of rental income decreased from 14.1% for 2007 to 13.3% for 2008.

Depreciation and amortization increased $368,000, or 7%, to $5,385,000 in 2008 compared to $5,017,000 in 2007.  The increase was the result of the development and acquisition of four properties in 2008 and four properties in 2007.

Interest expense increased $283,000, or 6%, to $5,179,000 in 2008, from $4,896,000 in 2007.  The increase in interest expense was the result of increased borrowings to fund the development and acquisition of four properties in 2008 and four properties in 2007.

In October 2007, we completed the sale of our interest in two contracts to acquire a 14.9 acre parcel of land to a national home improvement superstore.  The transaction resulted in a gain of $1,044,000 net of deferred income taxes of $705,000.  We established a TRS to facilitate this transaction.  We elected to defer the recognition of the gain from the transaction for income tax purposes by making an election under Section 1031 of the Internal Revenue Code.  There were no gains from property sales in 2008.

Our net income decreased $545,000, or 3%, to $16,282,000 in 2008, from $16,827,000 in 2007 as a result of the foregoing factors.

Liquidity and Capital Resources

Our principal demands for liquidity are operations, distributions to our stockholders, debt repayment, development of new properties, redevelopment of existing properties and future property acquisitions.  We intend to meet our short-term liquidity requirements, including capital expenditures related to the leasing and improvement of the properties, through cash flow provided by operations and the Line of Credit and the Credit Facility (as defined below).  We believe that adequate cash flow will be available to fund our operations and pay dividends in accordance with REIT requirements for at least the next 12 months.  We may obtain additional funds for future development or acquisitions through other borrowings or the issuance of additional shares of common stock, although current market conditions have severely limited the availability of new sources of financing and capital, which will likely have an impact on our ability to obtain construction financing for planned new development projects in the near term.  We believe that these financing sources will enable us to generate funds sufficient to meet both our short-term and long-term capital needs.

We intend to maintain a ratio of total indebtedness (including construction or acquisition financing) to market capitalization of 65% or less.  Nevertheless, we may operate with debt levels which are in excess of 65% of market capitalization for extended periods of time.  At December 31, 2009, our ratio of indebtedness to market capitalization was approximately 53%.  This ratio decreased from 65% as of December 31, 2008 as a result of an increase in the market value of our common stock.

During the quarter ended December 31, 2009, we declared a quarterly dividend of $.51 per share.  The cash dividend was paid on January 5, 2010 to holders of record on December 21, 2009.

Our cash flows from operations increased $1,650,000 to $23,580,000 in 2009, compared to $21,930,000 in 2008.  Cash used in investing activities decreased $12,670,000 to $8,749,000 in 2009, compared to $21,419,000 in 2008.  Cash used in financing activities increased $14,424,000 to $14,811,000 in 2009, compared to $387,000 in 2008.  Our cash and cash equivalents increased by $20,000 to $689,000 as of December 31, 2009 as a result of the foregoing factors.

As of December 31, 2009, we had total mortgage indebtedness of $75,552,802.  Of this total mortgage indebtedness, $51,398,837 is fixed rate, self-amortizing debt with a weighted average interest rate of 6.56% and the remaining mortgage debt of $24,153,965 has a maturity date of July 14, 2013, can be extended at our option for two additional years and bears interest at 150 basis points over LIBOR (or 1.74% as of December 31, 2009).  The proceeds from this mortgage loan were used to reduce amounts outstanding under our Credit Facility (as defined below).  In January 2009, we entered into an interest rate swap agreement that will fix the interest rate during the initial term of the mortgage at 3.744%.

 
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In addition, the Operating Partnership has in place a $55 million credit facility (the “Credit Facility”) with Bank of America, as the agent, which is guaranteed by our Company.  The Credit Facility matures in November 2011.  Advances under the Credit Facility bear interest within a range of one-month to 12-month LIBOR plus 100 basis points to 150 basis points or the lender’s prime rate, at our option, based on certain factors such as the ratio of our indebtedness to the capital value of our properties.  The Credit Facility generally is used to fund property acquisitions and development activities.  As of February 15, 2010, $28,500,000 was outstanding under the Credit Facility bearing a weighted average interest rate of 1.23%.

We also have in place a $5 million line of credit (the “Line of Credit”), which matures in November 2011. The Line of Credit bears interest at the lender’s prime rate less 75 basis points or 150 basis points in excess of the one-month to 12-month LIBOR rate, at our option.  The purpose of the Line of Credit is to generally provide working capital and fund land options and start-up costs associated with new projects.  As of February 15, 2010, $2,791,750 was outstanding under the Line of Credit bearing a weighted average interest rate of 2.50%.

The following table outlines our contractual obligations (in thousands) as of December 31, 2009:

   
Total
   
Yr 1
   
2-3 Yrs
   
4-5 Yrs
   
Over 5 Yrs
 
Mortgages Payable
  $ 75,553     $ 4,026     $ 8,879     $ 31,511     $ 31,137  
Notes Payable
    29,000       -       29,000       -       -  
Land Lease Obligations
    13,975       891       1,813       1,813       9,458  
Other Long-Term Liabilities
    -       -       -       -       -  
Estimated Interest Payments on Mortgages and Notes Payable
    18,624       3,830       6,547       4,044