Attached files
| file | filename |
|---|---|
| EX-31.2 - Hartman Short Term Income Properties XX, Inc. | v179431_ex31-2.htm |
| EX-31.1 - Hartman Short Term Income Properties XX, Inc. | v179431_ex31-1.htm |
| EX-32.1 - Hartman Short Term Income Properties XX, Inc. | v179431_ex32-1.htm |
| EX-32.1 - Hartman Short Term Income Properties XX, Inc. | v179431_ex32-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
|
x
|
Annual report pursuant to
section 13 or 15(d) of the Securities
Exchange Act of
1934 for the fiscal year ended
December 31, 2009
|
|
¨
|
Transition report pursuant to
section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number
000-53912
|
HARTMAN
SHORT TERM INCOME PROPERTIES XX, INC.
(Exact
name of registrant as specified in its charter)
|
Maryland
|
26-3455189
|
|
|
(State
of Organization)
|
(I.R.S.
Employer Identification Number)
|
|
|
2909
Hillcroft, Suite 420
Houston,
Texas
|
||
|
77057
|
||
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
(713)
467-2222
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12 (b) of the act: None
Securities
registered pursuant to Section 12 (g) of the Act:
Units
(Each Unit is equal to one common share, no par value and one Series A preferred
share)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes oNo 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 oNo 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 oNo x
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. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.:
|
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer o
(Do
not check if a smaller reporting company)
|
Smaller
reporting company x
|
|||
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes oNo x
There is
currently no established public market on which the Company’s common shares are
traded. Based upon the price of Hartman Short Term Income Properties XX, Inc.’s
common equity last sold, which was $10 on October 15, 2009, the aggregate market
value of the voting common equity held by non-affiliates of the registrant on
such date was $0. The Company does not have any non-voting common
equity.
The
number of common shares outstanding on March 31, 2010 was 19,000.
Documents
Incorporated by Reference – None.
Table
of Contents
|
PART
I
|
||||
|
Item
1.
|
Business
|
2
|
||
|
Item
1A.
|
Risk
Factors
|
3
|
||
|
Item
1B.
|
Unresolved
Staff Comments
|
7
|
||
|
Item
2.
|
Properties
|
7
|
||
|
Item
3.
|
Legal
Proceedings
|
7
|
||
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
7
|
||
|
PART
II
|
||||
|
Item
5.
|
Market
For Registrant’s Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities
|
8
|
||
|
Item
6.
|
Selected
Financial Data
|
12
|
||
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operation
|
12
|
||
|
Item
7A.
|
Quantitative
and Qualitative Disclosures about Market Risks
|
16
|
||
|
Item
8.
|
Financial
Statements and Supplementary Data
|
16
|
||
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
|
16
|
||
|
Item
9A(T).
|
Controls
and Procedures
|
17
|
||
|
Item
9B.
|
Other
Information
|
17
|
||
|
Item
10.
|
Directors,
Executive Officers and Corporate Governance
|
17
|
||
|
Item
11.
|
Executive
Compensation
|
17
|
||
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters
|
18
|
||
|
Item
13.
|
Certain
Relationships and Related Transactions and Director
Independence
|
18
|
||
|
Item
14.
|
Principal
Accounting Fees and Services
|
18
|
||
|
PART
IV
|
||||
|
Item
15.
|
Exhibits,
Financial Statement Schedules
|
18
|
Unless
the context otherwise requires, all references in this report to “we,” “us” or
“our” are to Hartman Short Term Income Properties XX, Inc..
Forward-Looking
Statements
This Form
10-K contains forward-looking statements, including discussion and analysis of
our financial condition, anticipated capital expenditures required to complete
projects, amounts of anticipated cash distributions to our shareholders in the
future and other matters. These forward-looking statements are not historical
facts but are the intent, belief or current expectations of our management based
on its knowledge and understanding of our business and industry. Forward-looking
statements are typically identified by the use of terms such as “may,” “will,”
“should,” “potential,” “predicts,” “anticipates,” “expects,” “intends,” “plans,”
“believes,” “seeks,” “estimates” or the negative of such terms and variations of
these words and similar expressions. These statements are not guarantees of
future performance and are subject to risks, uncertainties and other factors,
some of which are beyond our control, are difficult to predict and could cause
actual results to differ materially from those expressed or forecasted in the
forward-looking statements.
Forward-looking
statements that were true at the time made may ultimately prove to be incorrect
or false. You are cautioned to not place undue reliance on forward-looking
statements, which reflect our management’s view only as of the date of this Form
10-K. We undertake no obligation to update or revise forward-looking statements
to reflect changed assumptions, the occurrence of unanticipated events or
changes to future operating results. Factors that could cause actual results to
differ materially from any forward-looking statements made in this Form 10-K
include:
|
●
|
the imposition of federal taxes
if we fail to qualify as a REIT in any taxable year or forego an
opportunity to ensure REIT
status;
|
|
●
|
uncertainties related to the
national economy, the real estate industry in general and in our specific
markets;
|
|
●
|
legislative or regulatory
changes, including changes to laws governing
REITS;
|
|
●
|
construction costs that may
exceed estimates or construction
delays;
|
|
●
|
increases in interest
rates;
|
|
●
|
availability of credit or
significant disruption in the credit
markets;
|
|
●
|
litigation
risks;
|
|
●
|
lease-up
risks;
|
|
●
|
inability to obtain new tenants
upon the expiration of existing
leases;
|
|
●
|
inability to generate sufficient
cash flows due to market conditions, competition, uninsured losses,
changes in tax or other applicable laws;
and
|
|
●
|
the potential need to fund tenant
improvements or other capital expenditures out of operating cash
flow.
|
The
forward-looking statements should be read in light of these factors and the
factors identified in the “Risk Factors” sections of this Form
10-K.
1
PART
I
Item
1. Business
General
We are a
Maryland corporation formed on February 5, 2009, to acquire and invest in
income-producing commercial properties, including office buildings, shopping
centers, other retail and commercial properties, some of which may be actively
leased to a number of tenants having relatively short (1-3) year leases and
others may be net leased to a single tenant. We expect to make our
investments in or in respect of real estate assets located in the United States
based on our view of existing market conditions. We intend to qualify
as a real estate investment trust, or REIT, for federal income tax purposes
beginning with the taxable year that will end December 31,
2010.
As of
December 31, 2009 we have acquired no commercial properties.
We do not
currently intend to list our common shares on a stock exchange. Our
offices are located at 2909 Hillcroft, Suite 420, Houston, Texas
77057. Our telephone number is 713-467-2222. Information
regarding the Company is available via the internet at
www.hi-reit.com.
|
·
|
realize growth in the value of
our investments within five to ten years of the termination of this
offering;
|
|
·
|
to preserve, protect and return
your capital contribution;
|
|
·
|
to grow net cash from operations
such that more cash is available for distributions to you;
and
|
|
·
|
to enable you to realize a return
of your investment by beginning the process of liquidating and
distributing cash to you or by listing our shares for trading on a
national securities exchange within ten (10) years after termination of
this offering.
|
We intend
to begin the process of liquidating our assets or listing our shares within ten
years of the termination of this primary offering, unless we obtain the approval
of a majority of our shareholders to defer the liquidation or to approve an
alternate strategy.
Competition
We
anticipate that there will be competing properties in areas where we may acquire
properties. The amount of competition in a particular area could
impact our ability to acquire commercial real estate, lease space and impact the
amount of rent we are able to charge. We may be competing with owners, including
but not limited to, other REITs, insurance companies and pension funds, with
access to greater resources than those available to us.
We
operate under the direction of our board of directors, the members of which are
accountable to us and our shareholders. Our external advisor is Hartman Advisors, LLC
(“Hartman Advisors”) which is responsible for managing our affairs on a
day-to-day basis and for identifying and making acquisitions and investments on
our behalf. The key personnel of Hartman Advisors will be involved in
the selection, acquisition, financing and disposition of our properties, and
raising the capital to purchase. The key personnel of our advisor
have extensive experience in selecting and operating commercial real estate and
in operating investment entities that acquire commercial real
estate. Our property manager is Hartman Income REIT Management, Inc.
(“HIR Management”) which is responsible for maintaining and operating our
properties. HIR Management, Inc. is the wholly owned second tier
subsidiary of Hartman Income REIT, Inc. (“HIREIT”), a real estate investment
trust that has investment objectives that in many material respects are similar
to those that we intend to employ.
2
Employees
Although
we have executive officers who will manage our operations, we do not have any
paid employees. Substantially all of the paid services performed for
us are rendered through the advisor or the property manager, with respect to the
operation and maintenance of our properties.
Environmental
Matters
Under
various federal and state environmental laws and regulations, as an owner or
operator of real estate, we may be required to investigate and clean up certain
hazardous or toxic substances, asbestos-containing materials, or petroleum
product releases at our properties. We may also be held liable to a
governmental entity or to third parties for property damage and for
investigation and cleanup costs incurred by those parties in connection with the
contamination. In addition, some environmental laws create a lien on
the contaminated site in favor of the government for damages and costs it incurs
in connection with the contamination. The presence of contamination
or the failure to remediate contaminations at any of our properties may
adversely affect our ability to sell or lease the properties or to borrow using
the properties as collateral.
We will
not purchase any property unless and until we obtain what is generally referred
to as a “Phase I” environmental site assessment and are generally satisfied with
the environmental status of the property. A Phase I environmental
site assessment basically consists of a visual survey of the building and the
property in an attempt to identify areas of potential environmental concerns,
visually observing neighboring properties to assess surface conditions or
activities that may have an adverse environmental impact on the property, and
contacting local governmental agency personnel and performing a regulatory
agency file search in an attempt to determine any known environmental concerns
in the immediate vicinity of the property. A Phase I environmental
site assessment does not generally include any sampling or testing of soil,
groundwater or building materials from the property. Certain properties that we
have acquired contain, or contained, dry-cleaning establishments utilizing
solvents. Where believed to be warranted, samplings of building materials or
subsurface investigations were undertaken with respect to these and other
properties.
Website
Copies of
our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports
on Form 8-K, and amendments to those reports, as well as Reports on Forms 3, 4
and 5 regarding our officers, directors or 10% beneficial owners, filed or
furnished pursuant to Section 13(a), 15(d) or 16(a) of the Securities Exchange
Act of 1934 (the “Exchange Act”) are available free of charge through our
website (www.hi-reit.com) as
soon as reasonably practicable after we electronically file the material with,
or furnish it to, the Securities and Exchange Commission (“SEC”). We have also
made available on our website copies of our Audit Committee Charter,
Compensation Committee Charter, Nominating and Governance Committee Charter. In
the event of any changes to these charters or the code or guidelines, changed
copies will also be made available on our website. You may also read and copy
any materials we file with the SEC at the SEC’s Public Reference Room at 100 F
Street, NE, Washington, D.C. 20549. Materials on our website are not part of our
Annual Report on Form 10-K.
Recent
Developments
On
February 9, 2010 our common stock offering was declared effective by the
SEC.
Item
1A. Risk Factors
The
following describes risk factors which we believe are applicable to the
Company:
|
·
|
There
is no public trading market for our shares, and we cannot assure you that
one will ever develop. Until our shares are listed, if ever,
you may not sell your shares unless the buyer meets the applicable
suitability and minimum purchase standards. Furthermore, if we
do not achieve our goal of commencing a liquidation or listing within five
to ten years after the termination of this offering, your shares may
continue to be illiquid and you may, for an indefinite period of time, be
unable to convert your investment into cash easily with minimum
loss. In addition, our charter prohibits the ownership of more
than 9.8% of our outstanding shares of common or preferred stock, unless
exempted by our board of directors. Until our shares are
publicly traded, you will have difficulty selling your shares, and even if
you are able to sell your shares, you will likely have to sell them at a
substantial discount.
|
3
|
·
|
Our
board of directors arbitrarily set the offering price of our shares of
common stock, and this price bears no relationship to the book or net
value of our assets or to our expected operating
income. Pursuant to the Employee Retirement Income Security Act
of 1974, as amended (ERISA), and the rules of the Financial Industry
Regulatory Authority (FINRA), we will provide annual estimates of the
current value of a share of our common stock. Until eighteen
months after this offering of our shares (unless a subsequent offering is
underway within eighteen months of the close of this offering, in which
case the price at which our shares are then being offered will apply), we
intend to use the offering price of shares in our most recent primary
offering as the estimated value of a share of our common stock (unless we
have sold assets and made special distributions to stockholders of net
proceeds from such sales, in which case the estimated value of a share of
our common stock will equal the offering price less the amount of those
special distributions constituting a return of capital). This
valuation method may not result in an estimated per share value that
accurately reflects the proceeds you would receive upon liquidation or
upon the sale of your shares. Thereafter our board will
determine the value of our common stock based on the latest data
concerning our properties’ then current fair market value, as estimated by
our board, and based on the amount and terms of any debt that we may issue
and any classes of senior preferred stock that we may issue. The
board may but need not employ an independent appraiser to assist with the
valuation of the properties. If we engage in a subsequent
offering of our shares, we will rely on the offering price of our shares
to value our shares during that
offering.
|
|
·
|
We
have no operating history nor established financing sources, and the prior
performance of real estate investment programs sponsored by affiliates of
our advisor may not be an indication of our future
results.
|
|
·
|
This
is a “blind pool” offering because we do not currently own any properties
or other real estate assets, and we have not identified any assets to
acquire with proceeds from this offering. You will not have the
opportunity to evaluate our investments prior to our making
them. You must rely totally upon our advisor’s ability to
select our investments.
|
|
·
|
Our
ability to acquire, develop and operate our properties could be impacted
by the current slowing or recession in the U.S.
economy. Because the U.S. economy has slowed and has
been in recession, demand for our properties could be adversely impacted.
If the U.S. economy continues to operate at the present rates or if it
declines further, our strategy to acquire, develop, lease, finance and
sell our properties could be
impacted.
|
|
·
|
Acquisition
and ownership of real estate is subject to risks associated with
environmental hazards. We may be liable for environmental
hazards at our properties, including those created by prior owners or
occupants, existing tenants, abutters or other persons. Some of
the properties that we plan to develop or acquire may include facilities
and tanks for the storage of petroleum products and other hazardous
substances, all of which create the potential for environmental
damages. As a result, we may be expected to regularly incur
environmental clean up costs. We intend to include in the
leases that we enter with future tenants, an agreement for such tenants to
indemnify us from all environmental liabilities arising its activities at
such property during the term of the lease. Despite this
indemnity, various federal and state laws impose environmental liabilities
upon property owners, such as us, for any environmental damages arising on
properties they own or occupy, and we cannot be assured that we will not
be held liable for environmental clean up at our properties, including
environmental damages at sites we own and lease. As an owner or
previous owner of properties which contain environmental hazards, we also
may be liable to pay damages to governmental agencies or third parties for
costs and damages they incur arising from environmental hazards at the
properties. Moreover, the costs and damages which may arise from
environmental hazards are often difficult to project and our future
tenants may not have sufficient resources to pay its environmental
liabilities.
|
|
·
|
The
number of investments that we will make and the diversification of those
investments will be reduced to the extent that we sell less than the
maximum offering of 25,000,000 shares. If we do not sell
substantially more than the minimum offering amount of 200,000 shares, we
may make only one acquisition and the value of your investment may
fluctuate more widely with the performance of that specific
investment. There is a greater risk that you will lose money in
your investment if we cannot diversify our
portfolio.
|
4
|
·
|
Our
ability to achieve our investment objectives and to make distributions
depends on the performance of our advisor for the day-to-day management of
our business and the selection of our real estate properties, loans and
other investments.
|
|
·
|
Our
property acquisition strategy may involve the acquisition of properties in
markets that are depressed or overbuilt, and/or those with high growth
potential in real estate lease rates and sale prices. As a result of our
investment in these types of markets, we will face increased risks
relating to changes in local market conditions and increased competition
for similar properties in the same market, as well as increased risks that
these markets will not recover and the value of our properties in these
markets will not increase, or will decrease, over time. Our intended
approach to acquiring and operating income-producing properties involves
more risk than comparable real estate programs that have a targeted
holding period for investments longer than ours, utilize leverage to a
lesser degree and/or employ more conservative investment
strategies.
|
|
·
|
Until
the proceeds from this offering are invested and generating operating cash
flow sufficient to make distributions to our stockholders, some or all of
our distributions will be paid from other sources, such as from the
proceeds of this or other offerings, cash advances to us by our advisor,
cash resulting from a deferral of asset management fees, and borrowings
(including borrowings secured by our assets) in anticipation of future
operating cash flow, which may reduce the amount of capital we ultimately
invest in assets, and negatively impact the return on your investment and
the value of your investment. There is no limit on the amount of offering
proceeds we may use to fund
distributions.
|
|
·
|
We
expect to have little, if any, cash flow from operations available for
distribution until we make substantial investments and until we have
leased any properties developed by us. To the extent our
investments are in development or redevelopment projects or in properties
that have significant capital requirements, our ability to make
distributions may be negatively impacted, especially during our early
periods of operation.
|
|
·
|
We
will pay significant fees to our advisor and its affiliates, some of which
are payable based upon factors other than the quality of services provided
to us. These fees could influence our advisor’s advice to us as well as
the judgment of affiliates of our advisor performing services for
us.
|
|
·
|
Our
advisor and its affiliates will face various conflicts of interest
resulting from their activities, such as conflicts related to allocating
the purchase and leasing of properties and other assets between us and
other Hartman-sponsored programs, conflicts related to any joint ventures,
or other co-ownership arrangements between us and any such other programs
and conflicts arising from time demands placed on our advisor and its
executive officers in serving other Hartman-sponsored
programs.
|
|
·
|
We
have issued to Hartman Advisors, our advisor, 1,000 shares of our
convertible preferred stock at a purchase price of $10.00 per share. Our
convertible preferred stock will convert to shares of common stock if (1)
we have made total distributions on then outstanding shares of our common
stock equal to the “issue price” of those shares, i.e., the gross amount
originally paid to us for those shares, plus a 6% cumulative,
non-compounded, annual return on the issue price of those outstanding
shares, (2) we list our common stock for trading on a national securities
exchange if the sum of prior distributions on then outstanding shares of
our common stock plus the aggregate market value of our common stock
(based on the 30-day average closing price) meets the same 6% performance
threshold, or (3) our advisory agreement with Hartman Advisors expires
without renewal or is terminated (other than because of a material breach
by our advisor), and at the time of such expiration or termination we are
deemed to have met the foregoing 6% performance threshold based on our
enterprise value and prior distributions and, at or subsequent to the
expiration or termination, the stockholders actually realize such level of
performance upon listing or through total distributions. In general, our
convertible preferred stock will convert into shares of common stock with
a value equal to 15% of the excess of our enterprise value plus the
aggregate value of distributions paid to date on then outstanding shares
of our common stock over the aggregate issue price of those outstanding
shares plus a 6% cumulative, non-compounded, annual return on the issue
price of those outstanding shares. With respect to conversion in
connection with the termination of the advisory agreement, this
calculation is made at the time of termination even though the actual
conversion may occur later or not at
all.
|
|
·
|
We
may incur substantial debt. For the most part, loans we incur
will be secured by one or more of our properties, which will put those
properties at risk of forfeiture if we are unable to pay our debts and
could hinder our ability to make distributions to our stockholders or
could decrease the return on your investment and the value of your
investment in the event income on such properties, or their value,
falls. Principal and interest payments on these loans reduce
the amount of money available to make distributions to
you.
|
5
|
·
|
To
ensure that we continue to qualify as a REIT, our charter contains certain
protective provisions, including a provision that prohibits any
stockholder from owning more than 9.8% of our outstanding shares of common
or preferred stock during any time that we are qualified as a
REIT. However, our charter also allows our board to waive
compliance with certain of these protective provisions, which may have the
effect of jeopardizing our REIT status. Furthermore, this
limitation does not apply to the holder of our convertible preferred stock
or shares of common stock issued upon conversion of our convertible
preferred stock.
|
|
·
|
We
may not qualify or remain qualified as a REIT for federal income tax
purposes, which would subject us to the payment of tax on our income at
corporate rates and reduce the amount of funds available for payment of
distributions to our stockholders.
|
|
·
|
If
we hold and sell one or more properties through TRSs, our return to
stockholders would be diminished because the gain from any such sale would
be subject to a corporate-level tax, thereby reducing the net proceeds
from such sale available for distribution to our stockholders. Moreover,
if the ownership and sale of one of more of our properties by a TRS causes
the value of our non-mortgage securities in our TRSs to exceed 20% of the
value of all of our assets at the end of any calendar quarter, we may lose
our status as a REIT.
|
|
·
|
Real
estate investments are subject to general downturns in the industry as
well as downturns in specific geographic areas. We cannot predict what the
occupancy level will be in a particular building or that any tenant or
mortgage or other real estate-related loan borrower will remain solvent.
We also cannot predict the future value of our properties. Accordingly, we
cannot guarantee that you will receive cash distributions or appreciation
of your investment.
|
|
·
|
You
will not have preemptive rights as a stockholder; thus, any shares we
issue in the future may dilute your interest in
us.
|
|
·
|
We
may invest some of the offering proceeds to acquire vacant land on which a
building will be constructed in the future. Additionally, we may acquire
property for redevelopment. These types of investments involve risks
relating to the construction company’s ability to control construction
costs, failure to perform, or failure to build or redevelop in conformity
with plan specifications and timetables. We will be subject to potential
cost overruns and time delays for properties under construction or
redevelopment. Increased costs of newly constructed or redeveloped
properties may reduce our returns to you, while construction delays may
delay our ability to distribute cash to
you.
|
|
·
|
Each
of our executive officers, including Allen R. Hartman, who also serves as
the chairman of our board of directors, also serve as officers of our
advisor and other entities affiliated with our advisor, including the
advisors to other Hartman-sponsored real estate programs, and as a result
they will face conflicts of interest relating from their duties to these
other entities.
|
|
·
|
Because
federal income tax laws may restrict us, as a REIT from operating certain
of our properties, we have determined not to manage our
properties. Instead, we have retained a manager to manage our
properties pursuant to the Property Management
Agreement. Our income from our properties may be
adversely affected if our property manager fails to provide quality
services and amenities to our tenants. While we monitor our property
manager’s performance, we have limited recourse under our property
management agreement if we believe that the property manager is not
performing adequately. Failure by our property manager to fully
perform the duties agreed to in our property management agreement could
adversely affect our results of
operations.
|
|
·
|
We
may be unable to access the capital necessary to grow. To
retain our status as a REIT, we are required to distribute 90% of our
taxable income to shareholders and we generally cannot retain sufficient
income from operations to develop or invest in our properties or fund our
acquisitions. Accordingly, our business and growth strategy
depend, in part, upon our ability to raise additional capital at
reasonable costs to repay our debt maturities and to fund new
investments. However, the U.S. capital markets are
currently experiencing severe liquidity constraints and our ability to
raise reasonably priced capital is not guaranteed; we may be unable to
raise reasonably priced capital because of reasons related to our business
or for reasons beyond our control, such as the current restrictive market
conditions in the debt capital
market.
|
6
|
·
|
We
believe the deteriorating business conditions which have recently affected
the locations which we operate, including the impact of the slowing U.S.
economy, the weak U.S. dollar and the high and volatile fuel prices, could
adversely affect our tenants and may make it difficult for our tenants to
pay the rent due to us. A failure by our tenants to pay rents
to us may cause us to continue to experience losses or cause our losses to
increase.
|
None.
Item
2. Properties
We intend
to acquire, develop and own commercial, retail, industrial, and warehouse real
estate and real estate-related assets. Our properties may be
existing, income-producing properties developed by an affiliate of our advisor,
newly constructed properties or properties under development or
construction. As of December 31, 2009 we have acquired no commercial
real estate properties.
We may
invest in a wide variety of light commercial properties, including, without
limitation, office buildings, business and industrial parks, manufacturing
facilities, single-tenant properties, warehouses and distribution
facilities. We may purchase properties that have been constructed and
have operating histories, are newly constructed, are under development or
construction, or are not yet developed. Additionally, as a property reaches what
we believe to be its optimum value, we will consider disposing of the property
and may do so for the purpose of either distributing the net sale proceeds to
our stockholders or investing the proceeds in other properties that we believe
may produce a higher overall future return to our investors. We anticipate that
such dispositions typically would occur during the period from three to six
years after the termination of this offering. However, we may consider investing
in properties with a different anticipated holding period in the event such
properties provide an opportunity for an attractive overall return.
We may
enter into one or more joint ventures or other co-ownership arrangements for the
acquisition, development or improvement of properties with third parties or
certain affiliates of our advisor, including other present and future REITs and
real estate limited partnerships sponsored by affiliates of our
advisor. We may also serve as lender to these joint ventures or other
Hartman-sponsored programs. The Company will not make or invest in
mortgage loans, including construction loans, on any one Property if the
aggregate amount of all mortgage loans outstanding on the Property, including
our loans, would exceed an amount equal to 85% of the appraised value of the
Property as determined by appraisal unless substantial justification exists
because of the presence of other underwriting criteria.
Item
3. Legal Proceedings
The
Company is not presently subject to any material litigation nor, to the
Company’s knowledge, is any litigation threatened against the Company or any of
its properties, other than routine actions arising in the ordinary course of
business, some of which are expected to be covered by liability insurance and
all of which collectively are not expected to have a material adverse effect on
the Company’s business or financial condition or results of
operations.
Item
4. Submission of Matters to a Vote of Security Holders
None.
7
Item
5. Market For Registrant’s Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities
Common
Shares
There
is currently no established public market in which the Company’s common shares
are traded. As of December 31, 2009 there were 19,000 common shares
outstanding. All issued and outstanding common shares as of December
31, 2009 are held by our parent company, Hartman XX Holdings, Inc.
Dividend
Reinvestment Plan
We may
terminate the distribution reinvestment plan in our discretion at any time upon
ten days’ notice to plan participants. See the “Summary of Distribution
Reinvestment Plan and Automatic Purchase Plan” for further explanation of our
distribution reinvestment plan. A complete copy of our distribution reinvestment
plan and automatic purchase plan are located at pages C-1 and D-1 of the
prospectus .
Share Redemption
Program
Our board
of directors has adopted a share redemption program that permits you to sell
your shares back to us after you have held them for at least one year, subject
to the significant conditions and limitations described below. Our board of
directors can amend the provisions of our share redemption program without the
approval of our stockholders. The purchase price for shares redeemed under the
redemption program will be as set forth below. Our board of directors
will periodically value our properties and our other assets to determine the
value of our shares. Except for redemptions sought upon a stockholder’s death or
qualifying disability or redemptions sought upon a stockholder’s confinement to
a long-term care facility, the purchase price for shares redeemed under the
redemption program will equal:
|
·
|
in the first year, the amount by
which (a) the lesser of (1) 90% of the average gross price per share the
original purchaser or purchasers of your shares paid to us, which we refer
to as the “issue price,” for all of your shares (as adjusted for any stock
dividends, combinations, splits, recapitalizations and the like with
respect to our shares of common stock) or (2) 90% of the offering price of
shares in our most recent primary offering exceeds (b) the aggregate
amount of net sale proceeds per share, if any, distributed to investors
prior to the redemption date as a result of the sale of one or more of our
investments, or
|
|
·
|
in the second year, the amount by
which (a) the lesser of (1) 92.5% of the average gross price per share the
original purchaser or purchasers of your shares paid to us, which we refer
to as the “issue price,” for all of your shares (as adjusted for any stock
dividends, combinations, splits, recapitalizations and the like with
respect to our shares of common stock) or (2) 92.5% of the offering price
of shares in our most recent primary offering exceeds (b) the aggregate
amount of net sale proceeds per share, if any, distributed to investors
prior to the redemption date as a result of the sale of one or more of our
investments, or
|
8
|
·
|
in the third year, the amount by
which (a) the lesser of (1) 95% of the average gross price per share the
original purchaser or purchasers of your shares paid to us, which we refer
to as the “issue price,” for all of your shares (as adjusted for any stock
dividends, combinations, splits, recapitalizations and the like with
respect to our shares of common stock) or (2) 95% of the offering price of
shares in our most recent primary offering exceeds (b) the aggregate
amount of net sale proceeds per share, if any, distributed to investors
prior to the redemption date as a result of the sale of one or more of our
investments, or
|
|
·
|
in the fourth year, the amount by
which (a) the lesser of (1) 97.5% of the average gross price per share the
original purchaser or purchasers of your shares paid to us, which we refer
to as the “issue price,” for all of your shares (as adjusted for any stock
dividends, combinations, splits, recapitalizations and the like with
respect to our shares of common stock) or (2) 97.5% of the offering price
of shares in our most recent primary offering exceeds (b) the aggregate
amount of net sale proceeds per share, if any, distributed to investors
prior to the redemption date as a result of the sale of one or more of our
investments, or
|
|
·
|
thereafter the lesser of (1) 100%
of the average issue price per share for all of your shares (as adjusted
for any stock dividends, combinations, splits, recapitalizations and the
like with respect to our shares of common stock) or (2) 90% of the net
asset value per share, as determined by the board of
directors.
|
Our board of directors
reserves the right in its sole discretion at any time to (1) waive the
one-year holding period in the event of other exigent circumstances affecting a
stockholder such as bankruptcy or a mandatory distribution requirement under a
stockholder’s IRA, (2) reject any request for redemption, (3) change the
purchase price for redemptions, or (4) otherwise amend the terms of our
redemption program.
Subject
to the limitations described in this supplement and provided that the redemption
request is made within 270 days of the event giving rise to the following
special circumstances, we will waive the one-year holding requirement (a) upon
the request of the estate, heir or beneficiary of a deceased stockholder or (b)
upon the disability of a stockholder or upon a stockholder’s confinement
to a long-term care facility, provided that the condition causing such
disability or need for long-term care was not preexisting on the date that such
person became a stockholder
The
purchase price per share for shares redeemed upon the death or disability of the
stockholder or upon such stockholder’s confinement to a long-term care facility
will be equal to the amount by which (a) the average issue price per share for
all of your shares (as adjusted for any stock dividends, combinations, splits,
recapitalizations and the like with respect to the shares of common stock)
exceeds (b) the aggregate amount of net sale proceeds per share, if any,
distributed to investors prior to the redemption date as a result of the sale of
one or more of our investments.
We intend
to redeem shares quarterly under the program. We will not redeem in excess of 5%
of the weighted-average number of shares outstanding during the 12-month period
immediately prior to the date of redemption. Generally, the cash available for
redemption will be limited to proceeds from our distribution reinvestment plan
plus, if we had positive operating cash flow from the previous fiscal year, 1%
of all operating cash flow from the previous fiscal year. These limitations
apply to all redemptions, including redemptions sought upon a stockholder’s
death, qualifying disability or confinement to a long-term care facility. If
those limitations prevent us from redeeming shares, those shares will remain in
line to be redeemed with priority based on the date that the redemption is first
requested. The redemption price will be the value of the shares as of
the date of redemption. You may withdraw a request for redemption by
submitting written instructions withdrawing your redemption request at any time
prior to the date that we redeem your shares submitted. You will have no right
to request redemption of your shares if the shares are listed for trading on a
national securities exchange.
A request
for redemption may be withdrawn in whole or in part by a stockholder in writing
at any time prior to redemption. We cannot guarantee that the funds set aside
for the share redemption program will be sufficient to accommodate all requests
made in any particular redemption period. If we cannot accommodate a redemption
request due to the foregoing limitations, the stockholder or his or her estate,
heir or beneficiary can (1) withdraw the request for redemption, or (2) ask that
we honor the request at such time, if any, when the limitations no longer
prevent redemption. Such pending requests will be honored among all requests for
redemptions in any given redemption period, as follows: first, pro rata as
to redemptions sought upon a stockholder’s death or disability or sought upon a
stockholder’s confinement to a long-term care facility; next, pro rata as to
redemptions to stockholders who demonstrate, in the discretion of our board of
directors, another involuntary, exigent circumstance, such as bankruptcy; next,
pro rata as to redemptions to stockholders subject to a mandatory distribution
requirement under their IRAs; and, finally, pro rata as to other redemption
requests.
9
In
general, a stockholder or his or her estate, heir or beneficiary may present to
us fewer than all of the shares then owned for redemption, except that the
minimum number of shares that must be presented for redemption shall be at least
25% of the holder’s shares. However, as little as 10% of a stockholder’s shares
may be presented for redemption if the holder’s redemption request is made
within 270 days of the event giving rise to the special circumstances described
in this sentence, where redemption is being requested (1) on behalf of a
deceased stockholder; (2) by a stockholder with a qualifying disability, who is
deemed by our board of directors to be permanently disabled or who is seeking
redemption upon confinement to a long-term care facility; (3) by a stockholder
due to other involuntary, exigent circumstances, such as bankruptcy; or (4) by a
stockholder due to a mandatory distribution under such stockholder’s IRA;
provided, however, that any future redemption request by such stockholder must
present for redemption at least 25% of such stockholder’s remaining shares. In
the case of stockholders who undertake a series of partial redemptions,
appropriate adjustments in the purchase price for the redeemed shares will be
made so that the blended price per share for all redeemed shares is reflective
of the issue price per share of all shares owned by such stockholder through the
date of each redemption.
In
connection with a request for redemption, the stockholder or his estate, heir or
beneficiary will be required to certify to us that the stockholder acquired the
shares to be repurchased either (1) directly from us or (2) from the
original investor by way of (i) a bona fide gift not for value to, or for
the benefit of, a member of the investor’s immediate or extended family
(including the investor’s spouse, parents, siblings, children or grandchildren
and including relatives by marriage), (ii) a transfer to a custodian,
trustee or other fiduciary for the account of the investor or members of the
investor’s immediate or extended family in connection with an estate planning
transaction, including by bequest or inheritance upon death or
(iii) operation of law.
Distribution
Policy
Once we
begin making distributions, we intend to make them on a monthly basis to our
stockholders. Our board of directors will determine the amount of
each distribution. We anticipate that we will pay all or a
substantial portion of our initial distributions from sources other than cash
flow from operations in anticipation of future cash flow. The amount
of each distribution generally will be based upon such factors as the amount of
actual or expected distributable funds, capital available or anticipated to be
available from our investments, current and projected cash requirements, tax
considerations and other factors. Distributions in any period may
constitute a return of capital.
We
generally will not make in-kind distributions of property except for
distributions of beneficial interests in a liquidating trust established for the
dissolution of the Company and the liquidation of its assets in connection with
the termination of the Company or readily marketable securities unless: (i) the
Board of Directors advises each Stockholder of the risks associated with direct
ownership of the property, (ii) the Board of Directors offers each Stockholder
the election of receiving in-kind property distributions, and (iii) the Company
distributes in-kind property only to those Stockholders who accept such offer by
the Board of Directors.
10
Our stock
incentive plan is administered by the compensation committee of our board of
directors. The compensation committee may interpret the stock incentive plan and
may make all determinations necessary or desirable for the administration of the
stock incentive plan and has full power and authority to select the participants
to whom awards will be granted, to make any combination of awards to
participants, to accelerate the exercisability or vesting of any award and to
determine the specific terms and conditions of each award, subject to the
provisions of our stock incentive plan. All full-time and part-time officers,
employees, directors and other key persons (including consultants and
prospective employees) are eligible to participate in our stock incentive
plan.
We may
issue incentive stock options or non-qualified stock options under the stock
incentive plan. The incentive stock options granted under the stock incentive
plan are intended to qualify as incentive stock options. The exercise price of
stock options awarded under our stock incentive plan may not be less than 100%
of the fair market value of our common stock on the date of the option grant.
The compensation committee will determine at what time or times each option may
be exercised (provided that in no event may it exceed ten years from the date of
grant) and the period of time, if any, after retirement, death, disability or
other termination of employment during which options may be
exercised.
Stock
appreciation rights may be granted under our stock incentive plan. Stock
appreciation rights allow the participant to receive the appreciation in the
fair market value of our common stock between the exercise date and the date of
grant in the form of shares of our common stock. The exercise price of stock
appreciation rights awarded under our stock incentive plan may not be less than
100% of the fair market value of our common stock on the date of grant. The
compensation committee determines the terms of stock appreciation rights,
including when such rights become exercisable and the period of time, if any,
after retirement, death, disability or other termination of employment during
which stock appreciation rights may be granted.
Restricted
stock and deferred stock awards may also be granted under our stock incentive
plan. Restricted stock awards are shares of our common stock that vest in
accordance with terms and conditions established by the compensation committee.
The compensation committee may impose whatever conditions to vesting it
determines to be appropriate, including attainment of performance goals. Shares
of restricted stock that do not satisfy the vesting conditions are subject to
our right of repurchase or forfeiture. Deferred stock awards are stock units
entitling the participant to receive shares of stock paid out on a deferred
basis and subject to such restrictions and conditions as the compensation
committee shall determine. The compensation committee may impose whatever
conditions to vesting it determines to be appropriate, including attainment of
performance goals. Deferred stock awards that do not satisfy the vesting
conditions are subject to forfeiture.
Dividend
equivalent rights may also be granted under our stock incentive plan. These
rights entitle the participant to receive credits for dividends that would be
paid if the participant had held specified shares of our common stock. Dividend
equivalent rights may be granted as a component of another award or as a
freestanding award.
Other
stock-based awards under our stock incentive plan will include awards that are
valued in whole or in part by reference to shares of our common stock, other
convertible or exchangeable securities, partnership interests in a subsidiary or
our operating partnership (if formed), awards valued by reference to book value,
fair value or performance of a subsidiary, and any class of profits interest or
limited liability company membership interest.
Unless
the compensation committee provides otherwise, our stock incentive plan does not
generally allow for the transfer of awards, and only the participant may
exercise an award during his or her lifetime. In the event of a
change-in-control of the company, our board of directors and the board of
directors of the surviving or acquiring entity shall, as to outstanding awards
under our stock incentive plan, make appropriate provision for the continuation
or assumption of such awards and may provide for the acceleration of vesting
with respect to existing awards.
11
The terms
of the stock incentive plan provide that we may amend, suspend or terminate the
stock incentive plan at any time, but stockholder approval of any such action
will be obtained if required to comply with applicable law. Further, no action
may be taken that adversely affects any rights under outstanding awards without
the holder's consent. The stock incentive plan will terminate on the tenth
anniversary of the date on which stockholder approval was received.
Item
6. Selected Financial Data
Not
applicable.
We intend
to make an election under Section 856(c) of the Internal Revenue Code to be
taxed as a REIT, beginning with the taxable year ending December 31, 2010. If we
qualify as a REIT for federal income tax purposes, we generally will not be
subject to federal income tax on income that we distribute to our stockholders.
If we make an election to be taxed as a REIT and later fail to qualify as a REIT
in any taxable year, we will be subject to federal income tax on our taxable
income at regular corporate rates and will not be permitted to qualify for
treatment as a REIT for federal income tax purposes for four years following the
year in which our qualification is denied. Such an event could materially and
adversely affect our net income. However, we believe that we are organized and
will operate in a manner that will enable us to qualify for treatment as a REIT
for federal income tax purposes during the year ending December 31, 2010, and we
intend to continue to operate so as to remain qualified as a REIT for federal
income tax purposes.
The
following discussion and analysis should be read in conjunction with the
accompanying balance sheet and the notes thereto.
Below is
a discussion of the accounting policies that management believes will be
critical once we commence operations. We consider these policies critical
because they involve difficult management judgments and assumptions, require
estimates about matters that are inherently uncertain and because they are
important for understanding and evaluating our reported financial results. These
judgments affect the reported amounts of assets and liabilities and our
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. With different estimates or assumptions, materially different amounts
could be reported in our financial statements. Additionally, other companies may
utilize different estimates that may impact the comparability of our results of
operations to those of companies in similar businesses. Our most sensitive
estimates will involve the allocation of the purchase price of acquired
properties and evaluating our real estate-related investments for
impairment.
12
Principles
of Consolidation and Basis of Presentation
Our
financial statements will include our accounts, the accounts of variable
interest entities (VIEs) in which we are the primary beneficiary and the
accounts of other subsidiaries over which we have control. All inter-company
transactions, balances and profits will be eliminated in consolidation.
Interests in entities acquired will be evaluated for consolidation based on
Financial Accounting Standards Board Interpretation Accounting Standards
Codification (“ASC”) (ASC 810-10-15), which requires the consolidation of VIEs
in which we are deemed to be the primary beneficiary. If the interest in the
entity is determined to not be a VIE, then the entity is evaluated for
consolidation under ASC 970-323-25.
There are
judgments and estimates involved in determining if an entity in which we have
made an investment is a VIE and if so, if we are the primary beneficiary. The
entity is evaluated to determine if it is a VIE by, among other things,
calculating the percentage of equity being risked compared to the total equity
of the entity. ASC 810-10-15 provides some guidelines as to what the
minimum equity at risk should be, but the percentage can vary depending upon the
industry and/or the type of operations of the entity and it is up to management
to determine that minimum percentage as it relates to our business and the facts
surrounding each of our acquisitions. In addition, even if the entity’s equity
at risk is a very low percentage, we are required by ASC
810-10-15, to evaluate the equity at risk compared to the entity’s
expected future losses to determine if there could still in fact be sufficient
equity at the entity. Determining expected future losses involves assumptions of
various possibilities of the results of future operations of the entity,
assigning a probability to each possibility and using a discount rate to
determine the net present value of those future losses. A change in the
judgments, assumptions and estimates outlined above could result in
consolidating an entity that should not be consolidated or accounting for an
investment on the equity method that should in fact be consolidated, the effects
of which could be material to our financial statements.
Real
Estate
Upon the
acquisition of real estate properties, we will allocate the purchase price of
those properties to the tangible assets acquired, consisting of land, land
improvements, buildings, building improvements, furniture, fixtures and
equipment, identified intangible assets, asset retirement obligations and
assumed liabilities based on their relative fair values in accordance with ASC
805-10 - Business Combinations, and ASC 350-10 Intangibles- Goodwill and
other identified intangible assets consist of the fair value of above-market and
below-market leases, in-place leases, in-place tenant improvements, tenant
relationships and other intangible assets. Initial valuations are subject to
change until our information is finalized, which is no later than 12 months from
the acquisition date.
The fair
value of the tangible assets to be acquired, consisting of land, land
improvements, buildings, building improvements, furniture, fixtures and
equipment, will be determined by valuing the property as if it were vacant, and
the “as-if-vacant” value will then be allocated to the tangible assets. Land
values will be derived from appraisals, and building and land improvement values
will be calculated as replacement cost less depreciation or management’s
estimates of the relative fair value of these assets using discounted cash flow
analyses or similar methods. Furniture, fixtures and equipment values will be
determined based on current reproduction or replacement cost less depreciation
and other estimated allowances based on physical, functional or economic
factors. The values of the buildings will be depreciated over 40 years using the
straight-line method. Tenant
improvements and intangible lease assets will be depreciated over the lesser of
useful or the lease term.
We will
determine the value of above-market and below-market in-place leases for
acquired properties based on the present value (using an interest rate that
reflects the risks associated with the leases acquired) of the difference
between (1) the contractual amounts to be paid pursuant to the in-place leases
and (2) management’s estimate of current market lease rates for the
corresponding in-place leases, measured over a period equal to the remaining
non-cancelable terms of the respective leases. We will record the fair value of
above-market and below-market leases as intangible assets or intangible
liabilities, respectively, and amortize them as an adjustment to rental income
over the remaining non-cancelable terms of the respective leases and any bargain
renewal periods, if applicable.
The
total value of identified real estate intangible assets acquired will be further
allocated to in-place lease values, in-place tenant improvements, in-place
leasing commissions and tenant relationships based on management’s evaluation of
the specific characteristics of each tenant’s lease and our overall relationship
with that respective tenant. The aggregate value for tenant improvements and
leasing commissions will be based on estimates of these costs incurred at
inception of the acquired leases, amortized through the date of acquisition. The
aggregate value of in-place leases acquired and tenant relationships will be
determined by applying a fair value model. The estimates of fair value of
in-place leases will include an estimate of carrying costs during the expected
lease-up periods for the respective spaces considering current market
conditions. In estimating the carrying costs that would have otherwise been
incurred had the leases not been in place, management will include such items as
real estate taxes, insurance and other operating expenses as well as
lost rental revenue during the expected lease-up period based on current market
conditions. The estimates of the fair value of tenant relationships will also
include costs to execute similar leases including leasing commissions, legal and
tenant improvements, as well as an estimate of the likelihood of renewal as
determined by management on a tenant-by-tenant basis.
13
We will
amortize the value of in-place leases and in-place tenant improvements to
expense over the initial term of the respective leases. The value of tenant
relationship intangibles will be amortized to expense over the initial term and
any anticipated renewal periods, but in no event will the amortization period
for intangible assets exceed the remaining depreciable life of the building.
Should a tenant terminate its lease, the unamortized portion of the in-place
lease value and tenant relationship intangibles would be charged to
expense.
We will
determine the fair value of assumed debt by calculating the net present value of
the scheduled note payments using interest rates for debt with similar terms and
remaining maturities that we believe we could obtain. Any difference between the
fair value and stated value of the assumed debt will be recorded as a discount
or premium and amortized over the remaining life of the loan.
In
allocating the purchase price of each of our properties, management will make
assumptions and use various estimates, including, but not limited to, the
estimated useful lives of the assets, the cost of replacing certain assets,
discount rates used to determine present values, market rental rates per square
foot and the period required to lease the property up to its occupancy at
acquisition if it were vacant. Many of these estimates will be obtained from
independent third-party appraisals. However, management will be responsible for
the source and use of these estimates. A change in these estimates and
assumptions could result in the various categories of our real estate assets
and/or related intangibles being overstated or understated, which could result
in an overstatement or understatement of depreciation and/or amortization
expense. These variances could be material to our financial
statements.
Investment
Impairments
For real
estate we wholly own, our management will monitor events and changes in
circumstances indicating that the carrying amounts of the real estate assets may
not be recoverable. When such events or changes in circumstances are present, we
will assess potential impairment by comparing estimated future undiscounted
operating cash flows expected to be generated over the life of the asset and
from its eventual disposition to the carrying amount of the asset. In the event
that the carrying amount exceeds the estimated future undiscounted operating
cash flows, we will recognize an impairment loss to adjust the carrying amount
of the asset to estimated fair value.
For real
estate we own through an investment in a joint venture, tenant-in-common
interest or other similar investment structure, at each reporting date, we will
compare the estimated fair value of our investment to the carrying value. An
impairment charge will be recorded to the extent the fair value of our
investment is less than the carrying amount and the decline in value is
determined to be other than a temporary decline.
In
evaluating our investments for impairment, management will make several
estimates and assumptions, including, but not limited to, the projected date of
disposition of the properties, the estimated future cash flows of the properties
during our ownership and the projected sales price of each of the properties. A
change in these estimates and assumptions could result in understating or
overstating the book value of our investments, which could be material to our
financial statements.
The
current market for properties that meet our investment objectives is highly
competitive as is the leasing market for such properties. We compete with many
other entities engaged in real estate investment activities, including
individuals, corporations, bank and insurance company investment accounts,
REITs, other real estate limited partnerships, and other entities engaged in
real estate investment activities, many of which will have greater resources
than we will. We may also compete with other Hartman-sponsored programs to
acquire properties and other investments. In the event that an investment
opportunity becomes available that is suitable, under all of the factors
considered by our advisor, for both us and one or more other Hartman-sponsored
programs, and for which more than one of such entities has sufficient uninvested
funds, then the entity that has had the longest period of time elapse since it
was offered an investment opportunity will first be offered the investment
opportunity. It will be the duty of our advisor to ensure that this method is
applied fairly to us.
14
As of
December 31, 2009 we have not commenced any significant operations because we
are in our organization stage. We will not commence any significant operations
until we have raised at least $2,000,000 in this offering. Our management is not
aware of any material trends or uncertainties, other than national economic
conditions affecting real estate generally, that may reasonably be expected to
have a material impact, favorable or unfavorable, on revenues or income from the
acquisition and operation of real properties and real estate-related
investments, other than those referred to in this prospectus.
Liquidity
and Capital Resources
We will
not commence any significant operations until we have raised at least $2,000,000
in this offering. Our principal demands for funds will be for real estate and
real estate-related acquisitions, for the payment of operating expenses and
distributions, and for the payment of interest on our outstanding indebtedness.
Generally, we expect to meet cash needs for items other than acquisitions from
our cash flow from operations, and we expect to meet cash needs for acquisitions
from the net proceeds of this offering and from financings.
There may
be a delay between the sale of our shares and the purchase of properties or
other investments, which could result in a delay in our ability to make
distributions to our stockholders. Some or all of our distributions will be paid
from other sources, such as from the proceeds of this offerings, cash advances
to us by our advisor, cash resulting from a waiver of asset management fees and
borrowings secured by our assets in anticipation of future operating cash flow
until such time as we have sufficient cash flow from operations to fund fully
the payment of distributions. We expect to have little, if any, cash flow from
operations available for distribution until we make substantial investments and
currently have no plans regarding when distributions will commence. In addition,
to the extent our investments are in development or redevelopment projects or in
properties that have significant capital requirements, our ability to make
distributions may be negatively impacted, especially during our early periods of
operation.
We intend
to borrow money to acquire properties and make other investments. There is no
limitation on the amount we may invest in any single property or other asset or
on the amount we can borrow for the purchase of any individual property or other
investment. We do not expect that the maximum amount of our indebtedness will
exceed 300% of our “net assets” (as defined by the NASAA REIT Guidelines) as of
the date of any borrowing; however, we may exceed that limit if approved by a
majority of our independent directors and if disclosed to the stockholders in
the next quarterly report along with the explanation for such excess borrowings.
Our board of directors has adopted a policy to generally limit our aggregate
borrowings to approximately 50% of the aggregate value of our assets unless
substantial justification exists that borrowing a greater amount is in our best
interests. Our policy limitation, however, does not apply to individual
real estate assets and only will apply once we have ceased raising capital under
this or any subsequent offering and invested substantially all of our
capital. As a result, we expect to borrow more than 50% of the contract
purchase price of each real estate asset we acquire to the extent our board of
directors determines that borrowing these amounts is prudent. Our
policy of limiting the aggregate debt to equity ratio to 50% relates primarily
to mortgage loans and other debt that will be secured by our
properties. The NASAA guideline limitation of 300% of our net assets
includes secured and unsecured indebtedness that we may issue. We do
not anticipate issuing significant amounts of unsecured and therefore we intend
to limit the balance of our borrowings to 50% of the purchase prices, in the
aggregate, of our property portfolio.
Our
advisor may, but is not required to, establish capital reserves from gross
offering proceeds, out of cash flow generated by operating properties and other
investments or out of non-liquidating net sale proceeds from the sale of our
properties and other investments. Capital reserves are typically utilized for
non-operating expenses such as tenant improvements, leasing commissions and
major capital expenditures. Alternatively, a lender may require its own formula
for escrow of capital reserves.
15
Potential
future sources of capital include proceeds from secured or unsecured financings
from banks or other lenders, proceeds from the sale of properties and
undistributed funds from operations. If necessary, we may use financings or
other sources of capital in the event of unforeseen significant capital
expenditures. There can be no assurance that we will be able to
secure such financing.
Our board
of directors has approved our entering into the Advisory Agreement, the Property
Management Agreement and the Dealer Management Agreement.
Recent
Accounting Pronouncements
Management
does not believe that any recently issued, but not yet effective accounting
standards if currently adopted, would have a material effect on the accompanied
financial statements.
We will
be exposed to interest rate changes primarily as a result of long-term debt used
to acquire properties and make loans and other permitted investments. Our
interest rate risk management objectives will be to limit the impact of interest
rate changes on earnings and cash flows and to lower overall borrowing costs. To
achieve these objectives, we expect to borrow primarily at fixed rates or
variable rates with the lowest margins available and, in some cases, with the
ability to convert variable rates to fixed rates. With regard to variable rate
financing, we will assess interest rate cash flow risk by continually
identifying and monitoring changes in interest rate exposures that may adversely
impact expected future cash flows and by evaluating hedging
opportunities.
Item
8. Financial Statements and Supplementary Data
The
information required by this Item 8 is incorporated by reference to our
Financial Statements beginning on page F-1 of this Annual Report on Form
10-K.
On
February 24, 2010, the Company filed Form 8-K regarding Items 4.01: Change in
Registrant’s Certifying Accountant to disclose the dismissal of independent
registered public accountants GBH CPAs who audited our financial statements as
of September 30, 2009 and for the period from February 5, 2009 (date of
inception) to September 30, 2009 and to disclose the appointment and engagement
of RBSM LLP as independent registered public accountants to audit the financial
statements of the Company as of December 31, 2009 and for the period from
February 5, 2009 (date of inception) to December 31, 2009. There were
no disagreements with the GBH CPAs.
During
the period from February 5, 2009 (date of inception) and through the Engagement
Date, the Company has not consulted with RBSM regarding either:
|
(1)
|
the
application of accounting principles to any specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered
on the Company’s financial statements, and neither a written report was
provided to the Company nor oral advice was provided that RBSM concluded
was an important factor considered by the Company in reaching a decision
as to the accounting, auditing or financial reporting issue;
or
|
|
(2)
|
any
matter that was either the subject of a disagreement (as defined in
paragraph (a)(1)(iv) of Item 304 of Regulation S-K and the related
instructions thereto) or a reportable event (as described in paragraph
(a)(1)(v) of Item 304 of Regulation
S-K).
|
16
Item
9A(T). Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
In
connection with the preparation of this Form 10-K, as of December 31, 2009, an
evaluation was performed under the supervision and with the participation of the
Company’s management, including the CEO and CFO, of the effectiveness of the
design and operation of our disclosure controls and procedures as defined in
Rule 13a-15(e) under the Exchange Act. In performing this evaluation, management
reviewed the selection, application and monitoring of our historical accounting
policies. Based on that evaluation, the CEO and CFO concluded that as of
December 31, 2009, these disclosure controls and procedures were effective and
designed to ensure that the information required to be disclosed in our reports
filed with the SEC is recorded, processed, summarized and reported on a timely
basis. In designing and evaluating disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives. Management is required to apply judgment in
evaluating the cost-benefit relationship of possible controls and
procedures.
Management’s
Annual Report on Internal Control Over Financial Reporting and Attestation
Report of the Independent Registered Public Accounting Firm
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f). Under the supervision and with the participation of our management,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on our evaluation under the framework in Internal Control—Integrated
Framework, our management concluded that our internal control over
financial reporting was effective as of December 31, 2009.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the SEC that permit the
Company to provide only management’s report in this annual report.
Changes
in Internal Control Over Financial Reporting
There
have been no changes during the Company’s quarter ended December 31, 2009, in
the Company’s internal controls over financial reporting that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financing reporting.
None.
The
information required by Items 401, 405, 406 and 407(c)(3), (d)(4) and (d)(5) of
Regulation S-K will be set forth in the Company’s 2010 Proxy Statement. For the
limited purpose of providing the information necessary to comply with this Item
10, the 2010 Proxy Statement is incorporated herein by this
reference.
Item
11. Executive Compensation
The
information required by Items 402 and 407(e)(4) and (e)(5) of Regulation S-K
will be set forth in the Company’s 2010 Proxy Statement. For the limited purpose
of providing the information necessary to comply with this Item 11, the 2010
Proxy Statement is incorporated herein by this reference.
17
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters
The
information required by Items 201(d) and 403 of Regulation S-K will be set forth
in the Company’s 2010 Proxy Statement. For the limited purpose of providing the
information necessary to comply with this Item 12, the 2010 Proxy Statement is
incorporated herein by this reference.
Item
13. Certain Relationships and Related Transactions and Director
Independence
The
information required by Items 404 and 407(a) of Regulation S-K will be set forth
in the Company’s 2010 Proxy Statement. For the limited purpose of providing the
information necessary to comply with this Item 13, the 2010 Proxy Statement is
incorporated herein by this reference.
Item
14. Principal Accounting Fees and Services
This
information required by Item 9(e) of Schedule 14A will be set forth in the
Company’s 2010 Proxy Statement. For the limited purpose of providing the
information necessary to comply with this Item 14, the 2010 Proxy Statement is
incorporated herein by this reference.
PART
IV
Item
15. Exhibits, Financial Statement Schedules
|
1.
|
Financial
Statements. The list of our financial statements filed as part
of this Annual Report on Form 10-K is set forth on page F-1
herein.
|
|
2.
|
Financial
Statement Schedules. The financial statement schedules have
been omitted because the required information on such schedules is not
present, is not present in amounts sufficient to require a schedule or is
included in the consolidated financial
statements.
|
|
3.
|
Exhibits. This
list of exhibits filed as a part of this Annual Report on Form 10-K in
response to Item 601 of Regulation S-K is submitted on the Exhibit Index
attached hereto.
|
18
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
HARTMAN
SHORT TERM INCOME PROPERTIES XX, INC.
|
Date:
March 31, 2010
|
By:
|
/s/
Allen R. Hartman
|
|
|
Allen
R. Hartman,
|
|||
|
Chairman
of the Board and Chief
Executive Officer
|
|||
| (Principal Executive Officer) |
|
Date:
March 31, 2010
|
By:
|
/s/
Louis T. Fox, III
|
|
| Louis T. Fox, III, | |||
|
Chief
Financial Officer
|
|||
| (Principal Financial and Principal Accounting Officer) |
19
POWER
OF ATTORNEY
KNOW ALL
PERSONS BY THESE PRESENT, that each person whose signature appears below
constitutes and appoints Allen R. Hartman and Louis T. Fox, III, and each of
them, acting individually, as his attorney-in-fact, each with full power of
substitution and resubstitution, for him or her and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Annual
Report on Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith and about the premises, as fully to
all intents and purposes as he or she might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his or her substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the
Securities Exchange Act of 1934, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the date
indicated.
|
By:
|
/s/
Allen R. Hartman
|
Date:
March 31, 2010
|
||
|
Allen
R. Hartman, Director
|
||||
|
By:
|
/s/
Jack I. Tompkins
|
Date:
March 31, 2010
|
||
|
Jack
I. Tompkins., Director
|
||||
|
By:
|
/s/
Larry A. Bouffard
|
Date:
March 31, 2010
|
||
|
Larry
A. Bouffard, Director
|
||||
20
INDEX
TO FINANCIAL STATEMENTS
|
Page
#
|
||
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
|
Balance
Sheet as of December 31, 2009
|
F-3
|
|
|
Statement
of Operations for the period from February 5, 2009 (Date of Inception) to
December 31, 2009
|
F-4
|
|
|
Statement
of Shareholders’ Deficit for the period from February 5, 2009 (Date of
Inception) to December 31, 2009
|
F-5
|
|
|
Statement
of Cash Flows for the period from February 5, 2009 (Date of Inception) to
December 31, 2009
|
F-6
|
|
|
Notes
to Financial Statements
|
F-7
to F-13
|
F-1
Report
of Independent Registered Public Accounting Firm
To the
Board of Directors and Shareholders of
Hartman
Short Term Income Properties XX, Inc.
We have
audited the accompanying balance sheet of Hartman Short Term Income Properties
XX, Inc. (the “Company”), a development stage company as of December 31, 2009
and the related statements of operations, shareholders’ deficit and cash flows
for the period from February 5, 2009 (date of inception) to December 31,
2009. These financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis
for our opinion.
As
discussed in Note 4 to the financial statements, the Company is dependent
upon its affiliates for financial support, including provision of sufficient
working capital to fund the Company’s operations.
In
our opinion, the financial statements referred to the above present fairly, in
all material respects, the financial position of Hartman Short Term Income
Properties XX, Inc. as of December 31, 2009, and the results of operations and
its cash flows for the period from February 5, 2009 (date of inception) to
December 31, 2009 in conformity with accounting principles generally accepted in
the United States of America.
|
/s/
RBSM LLP
|
New York, New York
March 31, 2010
F-2
Hartman
Short Term Income Properties XX, Inc.
(A
Development Stage Company)
BALANCE
SHEET
December
31, 2009
|
ASSETS
|
||||
|
Cash
|
$ | 1,100 | ||
|
Total
assets
|
$ | 1,100 | ||
|
LIABILITIES
AND SHAREHOLDERS’ DEFICIT
|
||||
|
Accrued
expenses
|
$ | 4,607 | ||
|
Due
to an affiliated entity
|
128,479 | |||
|
Total
liabilities
|
$ | 133,086 | ||
|
Shareholders’
deficit
|
||||
|
Preferred
shares, $0.001 par value 200,000,000 shares authorized
|
||||
|
Preferred
shares - Series One, convertible, non-voting, 1,000 shares issued and
outstanding
|
1 | |||
|
Common
shares, $0.001 par value, 750,000,000 authorized, 19,000 shares issued and
outstanding
|
19 | |||
|
Additional
paid-in-capital
|
199,980 | |||
|
Deficit
accumulated during development stage
|
( 331,986 | ) | ||
|
Total
shareholders’ deficit
|
( 131,986 | ) | ||
|
Total
liabilities and shareholders’ deficit
|
$ | 1,100 | ||
The
accompanying notes are an integral part of these financial
statements.
F-3
Hartman
Short Term Income Properties XX, Inc.
(A
Development Stage Company)
STATEMENT
OF OPERATIONS
For the
Period from February 5, 2009 (Date of Inception) to December 31,
2009
|
Revenues
|
$ | - | ||
|
General
and administrative expenses
|
331,986 | |||
|
Total
expenses
|
331,986 | |||
|
Net
loss
|
$ | (331,986 | ) | |
|
Loss
per common share - basic and diluted
|
$ | (17.47 | ) | |
|
Weighted
average number of shares outstanding – basic and diluted
|
19,000 |
The
accompanying notes are an integral part of these financial
statements.
F-4
Hartman
Short Term Income Properties XX, Inc.
(A
Development Stage Company)
STATEMENT
OF SHAREHOLDER’S DEFICIT
For the
Period from February 5, 2009 (Date of Inception) to December 31,
2009
|
Preferred
Stock
|
Common
Stock
|
Deficit
Accumulated During
|
||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Additional
Paid-In-Capital
|
Development Stage
|
Total
|
||||||||||||||||||||||
|
Balance,
February 5, 2009
|
- | $ | - | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||
|
Issuance
of common shares
|
- | - | 19,000 | 19 | 189,981 | - | 190,000 | |||||||||||||||||||||
|
Issuance
of convertible preferred shares
|
1,000 | 1 | - | - | 9,999 | - | 10,000 | |||||||||||||||||||||
|
Net
loss
|
- | - | - | - | - | (331,986 | ) | (331,986 | ) | |||||||||||||||||||
|
Balance,
December 31, 2009
|
1,000 | $ | 1 | 19,000 | $ | 19 | $ | 199,980 | $ | (331,986 | ) | $ | (131,986 | ) | ||||||||||||||
The
accompanying notes are an integral part of these financial
statements.
F-5
Hartman
Short Term Income Properties XX, Inc.
(A
Development Stage Company)
STATEMENT
OF CASH FLOWS
For the
Period from February 5, 2009 (Date of Inception) to December 31,
2009
|
Cash
flows from operating activities:
|
||||
|
Net
loss
|
$ | (331,986 | ) | |
|
Adjustments
to reconcile net loss to cash used in operating
activities:
|
||||
|
Accrued
expenses
|
4,607 | |||
|
Due
to an affiliated entity
|
327,379 | |||
|
Net
cash used in operating activities
|
- | |||
|
Cash
flows from financing activities
|
||||
|
Proceeds
from the issuance of common shares
|
1,000 | |||
|
Proceeds
from the issuance of convertible preferred shares
|
100 | |||
|
Net
cash provided by financing activities
|
1,100 | |||
|
Net
change in cash
|
1,100 | |||
|
Cash
at the beginning of period
|
- | |||
|
Cash
at the end of period
|
$ | 1,100 | ||
|
Supplemental cash flow
information:
|
||||
|
Cash
paid for:
|
||||
|
Interest
|
$ | - | ||
|
Income
taxes
|
$ | - | ||
|
Supplemental
disclosures of non-cash investing and financing
activities:
|
||||
|
Issuance
of common shares in exchange of advance made by an
affiliate
|
$ | 189,000 | ||
|
Issuance
of convertible preferred share in exchange of advances made by an
affiliated company
|
$ | 9,900 | ||
The
accompanying notes are an integral part of these financial
statements.
F-6
Hartman
Short Term Income Properties XX, Inc.
(A
Development Stage Company)
Notes to
Financial Statements
December
31, 2009
Note
1 — Organization
Hartman
Short Term Income Properties XX, Inc. (the “Company”), incorporated on February
5, 2009, is a newly formed Maryland corporation that intends to qualify as a
real estate investment trust (“REIT”) beginning with the taxable year that will
end December 31, 2010. The Company is in the development stage. The
Company intends to offer for sale in public offering a maximum of
25,000,000 common shares (exclusive of 2,500,000 shares available pursuant to
the Company’s dividend reinvestment plan) at a price of $10.00 per
share. Until the first closing of the public offering of the
Company’s shares, which will occur when the Company has received and accepted
subscriptions for 200,000 common shares, the Company will be a majority owned
subsidiary of Hartman XX Holdings, Inc. Hartman XX Holdings, Inc. is
a Texas corporation wholly owned by Allen R. Hartman. The Company
sold 19,000 shares to Hartman XX Holdings, Inc. at a price of $10.00 per
share. The Company has also issued 1,000 shares of convertible preferred
shares to its advisor, Hartman Advisors LLC at a price of $10.00 per
share.
Hartman
Advisors LLC (the “Advisor”) is the Company’s advisor. The Advisor is owned 70%
by Allen R. Hartman and 30% by Hartman Income REIT Management,
Inc. The Company will seek to acquire and operate commercial real
estate properties. All such properties may be acquired and operated by the
Company alone or jointly with another party. As of the date of these financial
statements, the Company has neither purchased nor contracted to purchase any
properties, nor has the Advisor identified any properties in which there is a
reasonable probability that the Company will acquire. The Company may also
acquire mortgages secured by real estate.
The
management of the Company will be through the Advisor. Management of
the Company’s properties will be through Hartman Income REIT Management, Inc.
(“Property Manager”). American Beacon Partners, Inc. (formerly Pavek
Investments, Inc., the “Dealer Manager”) will serve as the dealer manager of the
Company’s public offering. These parties will receive compensation and fees for
services related to the offering and for the investment and management of the
Company’s assets. These entities will receive fees during the offering,
acquisition, operational and liquidation stages.
Note
2 — Summary of Significant Accounting Policies
Use
of Estimates in the Preparation of Financial Statements
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
Cash
and Cash Equivalents
All
highly liquid investments with original maturities of three months or less are
considered to be cash equivalents.
Investment
in Real Estate Assets
The
Company makes subjective assessments as to the useful lives of depreciable
assets. The Company considers the period of future benefit of the asset to
determine the appropriate useful lives. These assessments, which are based on
estimates, have a direct impact on net income. The estimated useful lives of
assets by class are generally as follows:
|
Buildings
|
40
years
|
|
|
Tenant
improvements
|
Lesser
of useful life or lease term
|
|
|
Intangible
lease assets
|
Lesser
of useful life or lease term
|
F-7
Hartman
Short Term Income Properties XX, Inc.
(A
Development Stage Company)
Notes to
Financial Statements
December
31, 2009
Allocation
of Purchase Price of Acquired Assets
Upon the
acquisition of real properties, it is the Company’s policy to allocate the
purchase price of properties to acquired tangible assets, consisting of land and
buildings, and identified intangible assets and liabilities, consisting of the
value of above-market and below-market leases, other value of in-place leases
and leasehold improvements and value of tenant relationships, based in each case
on their fair values. The Company utilizes internal valuation methods to
determine the fair values of the tangible assets of an acquired property (which
includes land and buildings).
The fair
values of above-market and below-market in-place lease values, including
below-market renewal options for which renewal has been determined to be
reasonably assured, are recorded based on the present value (using an interest
rate which reflects the risks associated with the leases acquired) of the
difference between (a) the contractual amounts to be paid pursuant to the
in-place leases and (b) an estimate of fair market lease rates for the
corresponding in-place leases and below-market renewal options, which is
generally obtained from independent appraisals, measured over a period equal to
the remaining non-cancelable term of the lease. The above-market and
below-market lease and renewal option values are capitalized as intangible lease
assets or liabilities and amortized as an adjustment of rental income over the
remaining expected terms of the respective leases.
The fair
values of in-place leases include direct costs associated with obtaining a new
tenant, opportunity costs associated with lost rentals which are avoided by
acquiring an in-place lease, and tenant relationships. Direct costs associated
with obtaining a new tenant include commissions, tenant improvements, and other
direct costs and are estimated based on independent appraisals and management’s
consideration of current market costs to execute a similar lease. These direct
costs are included in intangible lease assets and are amortized to expense over
the remaining terms of the respective leases. The value of opportunity costs is
calculated using the contractual amounts to be paid pursuant to the in-place
leases over a market absorption period for a similar lease. Customer
relationships are valued based on expected renewal of a lease or the likelihood
of obtaining a particular tenant for other locations. These intangibles will be
included in intangible lease assets in the balance sheet and are amortized to
expense over the remaining term of the respective leases.
The
determination of the fair values of the assets and liabilities acquired requires
the use of significant assumptions with regard to the current market rental
rates, rental growth rates, discount rates and other variables. The use of
inappropriate estimates would result in an incorrect assessment of the purchase
price allocations, which could impact the amount of the Company’s reported net
income.
Valuation
of Real Estate Assets
The
Company will continually monitor events and changes in circumstances that could
indicate that the carrying amounts of real estate and related intangible assets
may not be recoverable. When indicators of potential impairment are present that
indicate that the carrying amounts of real estate and related intangible assets
may not be recoverable, management assesses the recoverability of the assets by
determining whether the carrying value of the assets will be recovered through
the undiscounted future operating cash flows expected from the use of the assets
and their eventual disposition. In the event that such expected undiscounted
future cash flows do not exceed the carrying value, the Company will adjust the
real estate and related intangible assets to the fair value and recognize an
impairment loss.
Projections
of expected future cash flows require management to estimate future market
rental income amounts subsequent to the expiration of current lease agreements,
property operating expenses, discount rates, the number of months it takes to
re-lease the property and the number of years the property is held for
investment. The use of inappropriate assumptions in the future cash flow
analysis would result in an incorrect assessment of the property’s future cash
flow and fair value and could result in the overstatement of the carrying value
of our real estate and related intangible assets and net income.
Organization
and Offering Costs
The
Company has incurred certain expenses in connection with organizing the Company
and registering to sell common shares. These costs principally relate to
professional and filing fees. As of December 31, 2009, such costs totaled
$331,986 which have been expensed as incurred since the date of inception,
February 5, 2009.
F-8
Revenue
Recognition
Upon the
acquisition of real estate, certain properties will have leases where minimum
rent payments increase during the term of the lease. The Company will record
rental revenue for the full term of each lease on a straight-line basis. When
the Company acquires a property, the term of existing leases is considered to
commence as of the acquisition date for the purposes of this calculation. In
accordance with ASC 605-10-S99, Revenue Recognition, the Company will defer the
recognition of contingent rental income, such as percentage rents, until the
specific target that triggers the contingent rental income is achieved. Cost
recoveries from tenants are included in tenant reimbursement income in the
period the related costs are incurred.
Share-Based
Compensation
The
Company will follow ASC 718- Compensation- Stock Compensation with regard to
issuance of stock in payment of services. ASC 718 covers a wide range of
share-based compensation arrangements including share options, restricted share
plans, performance-based awards, share appreciation rights, and employee share
purchase plans. ASC 718 requires that compensation cost relating to share-based
payment transactions be recognized in financial statements. The cost is measured
based on the fair value of the equity or liability instruments issued. The
Company plans to pay a portion of directors’ compensation with restricted common
stock.
Income
Taxes
The
Company expects to qualify as a REIT under the Internal Revenue Code of 1986, as
amended. To qualify as a REIT, the Company must meet certain organizational and
operational requirements, including a requirement to distribute at least 90% of
the Company’s annual REIT taxable income to stockholders (which is computed
without regard to the dividends-paid deduction or net capital gain and which
does not necessarily equal net income as calculated in accordance with
GAAP). As a REIT, the Company generally will not be subject to
federal income tax on income that it distributes as dividends to its
stockholders. If the Company fails to qualify as a REIT in any
taxable year, it will be subject to federal income tax on its taxable income at
regular corporate income tax rates and generally will not be permitted to
qualify for treatment as a REIT for federal income tax purposes for the four
taxable years following the year during which qualification is lost, unless the
Internal Revenue Service grants the Company relief under certain statutory
provisions. Such an event could materially and adversely affect the
Company’s net income and net cash available for distribution to
stockholders. However, the Company believes that it is organized and
will operate in such a manner as to qualify for treatment as a
REIT.
Loss
Per Share
The
computations of basic and diluted loss per common share are based upon the
weighted average number of common shares outstanding and potentially dilutive
securities. The Company’s potentially dilutive securities include
preferred shares that are convertible into the Company’s common
stock. As of December 31, 2009, there were no shares issuable in
connection with these potentially dilutive securities. These
potentially dilutive securities were disregarded in the computations of diluted
net loss per share for the period ended December 31, 2009 because no shares are
issuable and inclusion of such potentially dilutive securities would have been
anti-dilutive.
Recently
Issued Accounting Standards
In May
2009, the FASB issued ASC Topic 855, Subsequent Events (“ASC
855”). ASC 855 establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. ASC
855 requires the disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date. This ASC also requires
public entities to evaluate subsequent events through the date that the
financial statements are issued. ASC 855 is effective for interim
periods and fiscal years ending after June 15, 2009. In February
2010, the FASB issued Accounting Standards Update (“ASU”) No.
2010-09. ASU No. 2010-09 amends ASC 855 and eliminates the
requirement to disclose the date through which subsequent events have been
evaluated for SEC filers. ASU No. 2010-09 is effective upon
issuance. The adoption of ASC 855 and ASU No. 2010-09 did not have a
material impact on the Company’s consolidated financial statements.
F-9
Hartman
Short Term Income Properties XX, Inc.
(A
Development Stage Company)
Notes to
Financial Statements
December
31, 2009
There are
no recently issued accounting standards that the Company expects to have a
material effect on its financial statements.
Note
3 — Shareholders’ Equity and Related Party Transactions
The
Company initially issued 100 shares the Company’s common stock to Hartman XX
Holdings, Inc. (“Holdings”) for $1,000. Holdings is a Texas
corporation wholly owned by Allen R. Hartman. Holdings was formed
solely for the purpose of facilitating the organization and offering of the
initial offering of the Company’s shares. Effective October 15, 2009
the Company issued an additional 18,900 shares to Holdings for
$189,000. Holdings contributed a related party liability in the
amount of $189,000 to the Company in exchange for the issuance of an additional
18,900 common shares of the Company. The transaction resulted in a
total of 19,000 common shares issued since inception for total consideration of
$190,000.
The
Company issued the Advisor, Hartman Advisors LLC, 1,000 shares of non-voting
convertible preferred stock for $100. Effective October 15, 2009 the
Company received additional consideration of $9,900 with respect to the
non-voting convertible preferred stock. The Advisor contributed a
related party liability in the amount of $9,900 to the Company as donated
capital related to the convertible common stock previously issued by the Company
to the Advisor. Accordingly, the overall issue price for the 1,000
convertible preferred shares is $10,000 or $10 per share. Upon the
terms described below, these shares may be converted into shares of the
Company’s common stock, resulting in dilution of the stockholders’ interest in
the Company.
As a
result of the foregoing transactions the capitalization of the Company is
$200,000.
Hartman
Advisors LLC, is a Texas limited liability company owned 70% by Allen R. Hartman
individually and 30% by the Property Manager. The Property Manager is
a wholly owned subsidiary of Hartman Income REIT Management, LLC, which is
wholly owned by Hartman Income REIT of which Allen R. Hartman is the Chief
Executive Officer and Chairman of the Board of Trustees.
Common Stock Issuable Upon
Conversion of Convertible Stock - The convertible preferred stock will
convert to shares of common stock if (1) the Company has made total
distributions on then outstanding shares of the Company’s common stock equal to
the issue price of those shares plus a 6% cumulative, non-compounded, annual
return on the issue price of those outstanding shares, (2) the Company lists its
common stock for trading on a national securities exchange if the sum of prior
distributions on then outstanding shares of our common stock plus the aggregate
market value of our common stock (based on the 30-day average closing price)
meets the same 6% performance threshold, or (3) the Company’s advisory agreement
with Hartman Advisors, LLC expires without renewal or is terminated (other than
because of a material breach by our advisor), and at the time of such expiration
or termination the Company is deemed to have met the foregoing 6% performance
threshold based on the Company’s enterprise value and prior distributions and,
at or subsequent to the expiration or termination, the shareholders actually
realize such level of performance upon listing or through total distributions.
In general, the convertible stock will convert into shares of common stock with
a value equal to 15% of the excess of the Company’s enterprise value plus the
aggregate value of distributions paid to date on then outstanding shares of
common stock over the aggregate issue price of those outstanding shares plus a
6% cumulative, non-compounded, annual return on the issue price of those
outstanding shares. With respect to conversion in connection with the
termination of the advisory agreement, this calculation is made at the time of
termination even though the actual conversion may occur later, or not at
all.
Costs of Formation and Fees to
Related Parties - The Company is dependent upon its majority owned-parent
company, Hartman XX Holdings, Inc., its affiliates, the Advisor and the Property
Manager (collectively, the “Affiliates”) for financial support. The
Affiliates have been advancing the necessary financial support, including the
payments of various organizational and offering expenses made on behalf of the
Company.
F-10
Hartman
Short Term Income Properties XX, Inc.
(A
Development Stage Company)
Notes to
Financial Statements
December
31, 2009
The
Affiliates have agreed not to demand payment of these advances for at least one
year and a day from the date of the filing of this
report. Furthermore, the Affiliates will write off all advances made
on behalf of the Company if the Company does not raise at least $2,000,000 in
this offering.
As of
December 31, 2009 the Company had a balance due to an affiliated entity, the
Property Manager of $128,479. The Property Manager has paid various organization
and offering expenses on behalf of the Company. The Advisor will reimburse
Hartman Income REIT Management, Inc., for expenses paid on behalf of the Company
from proceeds of the offering. Additional compensation will be paid
as outlined in the below compensation table below.
The
Company expects to pay the following fees to its Advisor and its affiliates
during its various stages of development:
|
Offering Stage
|
||
|
Selling
Commission
|
The
Company will pay Dealer Manager up to 7.0% of the gross proceeds of the
primary offering; the Company will not pay any selling commissions on
sales of shares under the distribution reinvestment plan; Dealer Manager
will re-allow all selling commissions to participating
broker-dealers.
|
|
|
Dealer
Manager Fee
|
The
Company will pay Dealer Manager up to 2.5% of gross proceeds of the
primary offering; the Company will not pay a dealer manager fee with
respect to sales under the distribution reinvestment plan; Dealer Manager
may re-allow up to 2.5% of its dealer manager fees to participating
broker-dealers.
|
|
|
Other
Organization and Offering Expenses
|
The
Company will reimburse Hartman Advisors LLC up to 1.5% of gross offering
proceeds for organization and offering expenses.
|
|
|
Acquisition and Development
Stage
|
||
|
Acquisition
and Advisory Fee
|
The
Company will pay Hartman Advisors LLC 2.5% of the funds paid and or
budgeted in respect of the purchase, development, construction or
improvement of each asset acquired.
|
|
|
Acquisition
Expenses
|
The
Company will reimburse Hartman Advisors LLC for all third party expenses
related to the selection and acquisition of assets, whether or not
acquired.
|
|
|
Debt
Financing Fee
|
The
Company will pay Hartman Advisors LLC 1% of the amount available under any
loan or line of credit made available to the Company.
|
|
|
Development
Fee
|
The
Company will pay Hartman Income REIT Management, Inc. a development fee in
an amount that is usual and customary for comparable services rendered to
similar projects in the geographic market of a project.
|
|
|
Operational Stage
|
||
|
Property
Management and Leasing Fees
|
The
Company will pay Hartman Income REIT Management Inc., property management
fees up to 5% of the gross revenues of properties managed. The
Company will pay Hartman Income REIT Management, Inc. leasing fees for
leasing services provided an amount equal to the leasing fees charged by
unaffiliated persons rendering comparable services in the same geographic
location of the applicable
property.
|
F-11
Hartman
Short Term Income Properties XX, Inc.
(A
Development Stage Company)
Notes to
Financial Statements
December
31, 2009
|
Asset
Management Fees
|
The
Company will pay Hartman Advisors LLC a monthly fee equal to 1/12th
of 0.75% of the sum of the higher of the cost or value of each asset,
where the cost equals the amount actually paid or budgeted (excluding
acquisition fees and expenses ). This fee is payable monthly in
advance on the first day of each month based on assets held by the Company
on that date, adjusted for appropriate closing dates for individual
property acquisitions.
|
|
|
Operating
Expenses
|
We
will reimburse Hartman Advisors LLC for all expenses paid or incurred by
Advisor in connection with the services provided to the Company, subject
to the limitation that we will not reimburse our advisor for any amount by
which our operating expenses (including the asset management fee) at the
end of the four preceding fiscal quarters exceeds the greater of: (A) 2%
of our average invested assets, or (B) 25% of our net income determined
without reduction for any additions to reserves for depreciation, bad
debts or other similar non-cash reserves and excluding any gain from the
sale of our assets for that period. If we have already reimbursed our
advisor for such excess operating expenses, our advisor will be required
to repay such amount to us. We expect to reimburse the advisor for the
salaries and other compensation paid to the advisor’s employees and other
service providers for services performed on our behalf, subject to the
reimbursement limitation described above in this paragraph.
Notwithstanding the above, we may reimburse our advisor for expenses in
excess of this limitation if a majority of the independent directors
determines that such excess expenses are justified based on unusual and
non-recurring factors.
|
|
|
Liquidation Stage
|
||
|
Disposition
Fee
|
If
our advisor provides a substantial amount of services, as determined by
our independent directors, in connection with the sale of one or more
assets, it will receive a disposition fee equal to (1) in the case of the
sale of real property, the lesser of: (A) one-half of the aggregate
brokerage commission paid (including the disposition fee) or, if none is
paid, the amount that customarily would be paid, or (B) 3% of the sales
price of each property sold, and (2) in the case of the sale of any asset
other than real property, 3% of the sales price of such
asset.
|
F-12
Note
4 – Commitments and Contingencies
Economic
Dependency
The
Company is dependent on the Advisor and the Dealer Manager for certain services
that are essential to the Company, including the sale of the Company’s shares of
common stock and preferred stock available for issue; the identification,
evaluation, negotiation, purchase and disposition of properties’, management of
the daily operations of the Company’s real estate portfolio, and other general
and administrative responsibilities. In the event that these
companies are unable to provide the respective services, the Company will be
required to obtain such services from other services.
Note
5 – Incentive Awards Plan
The
Company has adopted an incentive plan (the “2009 Omnibus Stock Incentive Plan”
or the “Incentive Plan”) that provides for the grant of incentive stock options,
non-qualified stock options, stock appreciation rights, deferred stock awards,
restricted stock awards, dividend equivalent rights and other stock-based awards
within the meaning of Internal Revenue Code Section 422, or any combination of
the foregoing. We have initially reserved 5,000,000 shares of our common stock
for the issuance of awards under our stock incentive plan, but in no event more
than ten (10%) percent of our issued and outstanding shares. The number of
shares reserved under our stock incentive plan is also subject to adjustment in
the event of a stock split, stock dividend or other change in our
capitalization. Generally, shares that are forfeited or canceled from awards
under our stock incentive plan also will be available for future
awards. No awards have been granted as of December 31,
2009.
F-13
EXHIBIT
INDEX
|
Exhibit
Number
|
Description
of Documents
|
|
|
1.1
|
Dealer
Manager Agreement (previously filed and incorporated by reference to
Exhibit 1.1 to the registrant’s registration statement on Form S-11
Amendment No. 4 (SEC File No. 333-154750) June 4, 2009)
|
|
|
3.1
|
Third
Amended and Restated Articles of Incorporation of the Registrant.
(Incorporated by reference to Exhibit EX-1 to the registrant’s
registration statement Form 8-A12G (SEC File No. 000-53912) March 22,
2010)
|
|
|
3.2
|
Bylaws
of the Registrant (Incorporated by reference to Exhibit 3.2 to the
registrant’s registration statement on Form 8-A12G (SEC File No.
000-53912) March 22, 2010)
|
|
|
10.1
|
Form
of Advisory Agreement between the Registrant and Hartman Advisors, LLC.
(Incorporated by reference to Exhibit 10.1 to the registrant’s
registration statement on Form S-11 Amendment No. 9 (SEC File No.
333-154750) November 24, 2009)
|
|
|
10.2
|
Form
of Property Management Agreement between the Registrant and Hartman Income
REIT Management, Inc. (Incorporated by reference to Exhibit 10.2 to
registrant’s registration statement on Form S-11 Amendment No. 9 (SEC File
No. 333-154750) November 24, 2009)
|
|
|
10.3
|
Form
of Employee and Director Incentive Share Plan (Incorporated by reference
to Exhibit 10.3 to registrant’s registration statement on Form S-11
Amendment No. 5 (SEC File No. 333-154750) July 14,
2009)
|
|
|
31.1
|
Certification
of the Company’s Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (FILED
HEREWITH)
|
|
|
31.2
|
Certification
of the Company’s Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (FILED
HEREWITH)
|
|
|
32.1
|
Certification
of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(FILED
HEREWITH)
|
|
|
32.2
|
Certification
of the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(FILED
HEREWITH)
|
20