Attached files
file | filename |
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EX-32.1 - EXHIBIT 32.1 - NNN 2002 VALUE FUND LLC | c08323exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - NNN 2002 VALUE FUND LLC | c08323exv31w1.htm |
EX-31.2 - EXHIBIT 31.2 - NNN 2002 VALUE FUND LLC | c08323exv31w2.htm |
EX-32.2 - EXHIBIT 32.2 - NNN 2002 VALUE FUND LLC | c08323exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2010
Or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 0-51098
NNN 2002 Value Fund, LLC
(Exact name of registrant as specified in its charter)
Virginia | 75-3060438 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
1551 N. Tustin Avenue, Suite 300 | ||
Santa Ana, California | 92705 | |
(Address of principal executive offices) | (Zip Code) |
(714) 667-8252
Registrants telephone number, including area code:
Registrants telephone number, including area code:
N/A
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). o Yes þ No
As of November 12, 2010, there were 5,960 units of NNN 2002 Value Fund, LLC outstanding.
NNN 2002 VALUE FUND, LLC
(A Virginia limited liability company)
(A Virginia limited liability company)
TABLE OF CONTENTS
Page | ||||||||
PART I FINANCIAL INFORMATION |
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2 | ||||||||
3 | ||||||||
4 | ||||||||
13 | ||||||||
20 | ||||||||
20 | ||||||||
PART II OTHER INFORMATION |
||||||||
21 | ||||||||
21 | ||||||||
23 | ||||||||
23 | ||||||||
23 | ||||||||
23 | ||||||||
23 | ||||||||
24 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
1
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. | Financial Statements. |
NNN 2002 VALUE FUND, LLC
CONDENSED CONSOLIDATED STATEMENTS OF NET ASSETS
(Liquidation Basis)
As of September 30, 2010 (Unaudited) and December 31, 2009 (Unaudited)
September 30, 2010 | December 31, 2009 | |||||||
ASSETS |
||||||||
Investment in unconsolidated real estate |
$ | 638,000 | $ | 572,000 | ||||
Cash and cash equivalents |
449,000 | 463,000 | ||||||
Asset for estimated receipts in excess of estimated costs during liquidation |
1,089,000 | 849,000 | ||||||
Total assets |
2,176,000 | 1,884,000 | ||||||
LIABILITIES |
||||||||
Commitments and contingencies (Note 8) |
||||||||
Net assets in liquidation |
$ | 2,176,000 | $ | 1,884,000 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Table of Contents
NNN 2002 VALUE FUND, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(Liquidation Basis)
For the Three and Nine Months Ended September 30, 2010 (Unaudited) and 2009 (Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net assets in liquidation, beginning of period |
$ | 1,921,000 | $ | 4,013,000 | $ | 1,884,000 | $ | 3,980,000 | ||||||||
Changes in net assets in liquidation: |
||||||||||||||||
Changes in asset for estimated receipts in excess of estimated
costs during liquidation: |
||||||||||||||||
Operating loss |
3,000 | 1,000 | 14,000 | 17,000 | ||||||||||||
Change in estimated receipts in excess of estimated costs
during liquidation |
321,000 | 323,000 | 226,000 | 775,000 | ||||||||||||
Net increase in asset for estimated receipts in excess of estimated
costs during liquidation |
324,000 | 324,000 | 240,000 | 792,000 | ||||||||||||
Change in fair value of assets and liabilities: |
||||||||||||||||
Change in fair value of investment in unconsolidated real estate |
(66,000 | ) | (2,235,000 | ) | 66,000 | (2,654,000 | ) | |||||||||
Change in assets and liabilities due to activity in asset for
estimated receipts in excess of estimated costs during
liquidation |
(3,000 | ) | (1,000 | ) | (14,000 | ) | (17,000 | ) | ||||||||
Net (decrease) increase
in fair value of assets and liabilities |
(69,000 | ) | (2,236,000 | ) | 52,000 | (2,671,000 | ) | |||||||||
Change in net assets in liquidation |
255,000 | (1,912,000 | ) | 292,000 | (1,879,000 | ) | ||||||||||
Net assets in liquidation, end of period |
$ | 2,176,000 | $ | 2,101,000 | $ | 2,176,000 | $ | 2,101,000 | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Table of Contents
NNN 2002 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The use of the words we, us or our refers to NNN 2002 Value Fund, LLC, except where the
context otherwise requires.
1. Organization and Description of Business
NNN 2002 Value Fund, LLC was formed as a Virginia limited liability company on May 15, 2002.
We were organized for the purpose of acquiring all or a portion of up to three unspecified
properties from unaffiliated sellers in accordance with our private placement memorandum dated May
15, 2002, as amended, or our Private Placement Memorandum. We expected to own and operate interests
in the properties acquired for approximately three to five years after the acquisition thereof. As
of September 30, 2010, we owned a 12.3% interest in one unconsolidated property, Congress Center,
located in Chicago, Illinois, or the Congress Center property. References herein to our property,
our one remaining unconsolidated property or our remaining asset are to our 12.3% interest in the
Congress Center property.
Grubb & Ellis Realty Investors, LLC, or Grubb & Ellis Realty Investors, or our Manager,
manages us pursuant to the terms of an operating agreement, or the Operating Agreement. Our Manager
is primarily responsible for managing our day-to-day operations and assets. While we have no
employees, certain employees and executive officers of our Manager provide services to us pursuant
to the Operating Agreement. Our Manager is managed by executive officers of our Manager. Our
Manager engages affiliated entities, including Triple Net Properties Realty, Inc., or Realty, to
provide various services for our one remaining unconsolidated property. Realty serves as our
property manager pursuant to the terms of the Operating Agreement and a property management
agreement, or the Management Agreement. The Operating Agreement terminates upon our dissolution.
The unit holders may not vote to terminate our Manager prior to the termination of the Operating
Agreement or our dissolution except for cause. The Management Agreement terminates with respect to
our one remaining unconsolidated property upon the earlier of the sale of such property or 10 years
from the date of acquisition, which would be January 9, 2013. Realty may be terminated with respect
to our one remaining unconsolidated property without cause prior to the termination of the
Management Agreement or our dissolution, subject to certain conditions, including the payment by us
to Realty of a termination fee as provided for in the Management Agreement.
Plan of Liquidation
At a special meeting of our unit holders on September 7, 2005, our unit holders approved our
plan of liquidation. Our plan of liquidation contemplates the orderly sale of all of our assets,
the payment of our liabilities and the winding up of operations and the dissolution of our company.
We engaged an independent third party to perform financial advisory services in connection with our
plan of liquidation, including rendering opinions as to whether our net real estate liquidation
value range estimate and our estimated per unit distribution range were reasonable. We continually
evaluate our interest in the Congress Center property and adjust our net real estate liquidation
value accordingly. It is our policy that when we execute a purchase and sale agreement or become
aware of market conditions or other circumstances that indicate that our current carrying value
materially differs from our expected net sales price, we will adjust our liquidation value
accordingly. Following the approval of our plan of liquidation by our unit holders, we adopted the
liquidation basis of accounting as of August 31, 2005 and for all periods subsequent to August 31,
2005.
Our plan of liquidation gives our Manager the power to sell any and all of our assets without
further approval by our unit holders and provides that liquidating distributions be made to our
unit holders as determined by our Manager. Based on current conditions in the real estate market,
we currently expect to sell our interest in the Congress Center property by December 31, 2012, and
anticipate completing our plan of liquidation by March 31, 2013. However, our interest in the
Congress Center property is held as a member of a limited liability company, or LLC, that holds an
undivided tenant-in-common, or TIC, interest in the property. Because of the nature of joint
ownership, we will need to agree with our co-owners on the terms of the property sale before the
sale can be affected. There can be no assurance that we will agree with our co-owners on
satisfactory sales terms for this property. If the parties are unable to agree, the matter could
ultimately be presented to a court of law, and a judicial partition could be sought. A failure to
reach an agreement with these parties regarding the sales terms of this property may significantly
delay the sale of the property, which would delay and possibly reduce liquidating distributions to
our unit holders. We may be unable to receive our expected value for this property because we hold
a minority interest in the LLC and, thus, cannot sell our property interest held in the LLC or
force the sale of the Congress Center property in its entirety.
4
Table of Contents
NNN 2002 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
2. Summary of Significant Accounting Policies
The summary of significant accounting policies presented below is designed to assist in
understanding our interim unaudited condensed consolidated financial statements. Such financial
statements and accompanying notes are the representations of our management, who are responsible
for their integrity and objectivity. These accounting policies conform to accounting principles
generally accepted in the United States of America, or GAAP, in all material respects, and have
been consistently applied in preparing the accompanying interim unaudited condensed consolidated
financial statements.
Interim Financial Data
Our accompanying interim unaudited condensed consolidated financial statements have been
prepared by us in accordance with GAAP and under the liquidation basis of accounting effective
August 31, 2005, in conjunction with the rules and regulations of the United States Securities and
Exchange Commission, or the SEC. Certain information and footnote disclosures required for annual
financial statements have been condensed or excluded pursuant to SEC rules and regulations.
Accordingly, our accompanying interim unaudited condensed consolidated financial statements do not
include all of the information and notes required by GAAP for complete financial statements. Our
accompanying interim unaudited condensed consolidated financial statements reflect all adjustments
which are, in our view, of a normal recurring nature and necessary for a fair presentation of our
financial position including net assets in liquidation and changes in net assets in liquidation for
the interim periods. Interim results of operations are not necessarily indicative of the results to
be expected for the full year; such results may be less favorable. Our accompanying interim
unaudited condensed consolidated financial statements should be read in conjunction with the
audited consolidated financial statements and the notes thereto included in our 2009 Annual Report
on Form 10-K, as filed with the SEC on March 5, 2010.
Principles of Consolidation
Our accompanying interim unaudited condensed consolidated financial statements include our
accounts and any variable interest entities, as defined in Financial Accounting Standards Board,
Accounting Standards Codification, or FASB Codification, Topic 810, Consolidation, that we have
concluded should be consolidated. All material intercompany transactions and account balances have
been eliminated in consolidation.
Liquidation Basis of Accounting
As a result of the approval of our plan of liquidation by our unit holders, we adopted the
liquidation basis of accounting as of August 31, 2005 and for all periods subsequent to August 31,
2005. Accordingly, all assets have been adjusted to their estimated fair value (on an undiscounted
basis). Liabilities, including estimated costs associated with implementing our plan of
liquidation, were adjusted to their estimated settlement amounts. Minority interest liabilities
were offset against the respective assets and liabilities. The valuation of our investment in
unconsolidated real estate is based on current contracts, estimates and other indications of sales
value net of estimated selling costs. Estimated future cash flows from property operations were
made based on the anticipated sales date of the asset. Due to the uncertainty in the timing of the
anticipated sale date and the cash flows therefrom, results of operations may differ materially
from amounts estimated. These amounts are presented in the accompanying interim unaudited condensed
consolidated statements of net assets. The net assets represent the estimated liquidation value of
our assets available to our unit holders upon liquidation. The actual values realized for assets
and settlement of liabilities may differ materially, perhaps in adverse ways, from the amounts
estimated.
We continually evaluate our 12.3% interest in the Congress Center property and adjust our net
real estate liquidation value accordingly. It is our policy that when we execute a purchase and
sale agreement or become aware of market conditions or other circumstances that indicate that our
present estimated liquidation value materially differs from our expected net sale price, we will
adjust our liquidation value accordingly.
5
Table of Contents
NNN 2002 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
Segments
FASB Codification Topic 280, Segment Reporting, establishes standards for reporting financial
and descriptive information about an enterprises reportable segments. We have determined that we
have one reportable segment, with activities related to investing in an unconsolidated office
building. As such, our operations have been aggregated into one reportable segment for the three
and nine months ended September 30, 2010 and 2009.
Recently Issued Accounting Pronouncements
In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a
Replacement of FASB Statement No. 162 (now contained in FASB Codification Topic 105). FASB
Codification Topic 105 establishes that the FASB Codification will become the single official
source of authoritative GAAP, other than guidance issued by the SEC. Following this statement, the
FASB will not issue new standards in the form of Statements, Staff Positions or Emerging Issues
Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates. All guidance
contained in the Codification carries an equal level of authority. The GAAP hierarchy will be
modified to include only two levels of GAAP: authoritative and non-authoritative. All
non-grandfathered, non-SEC accounting literature not included in the Codification became
non-authoritative. The Codification, which changes the referencing of financial standards, became
effective for interim and annual periods ending on or after September 15, 2009. We adopted FASB
Codification Topic 105 in the quarter ended September 30, 2009 and it did not have a material
impact on our consolidated financial statements.
3. Asset for Estimated Receipts in Excess of Estimated Costs during Liquidation
Under the liquidation basis of accounting, we are required to estimate the cash flows from
operations and accrue the costs associated with executing and completing our plan of liquidation.
Our Manager has agreed to bear all costs associated with public company filings, including legal,
accounting and liquidation costs. We currently estimate that we will have operating cash inflows
from our estimated receipts in excess of the estimated costs during liquidation. These amounts can
vary significantly due to, among other things, the timing and estimates for executing and renewing
leases, along with the estimates of tenant improvements incurred and paid, the timing of the sale
of the Congress Center property, the timing and amounts associated with discharging known and
contingent liabilities and the costs associated with winding up our operations. These costs are
estimated and are expected to be paid over the remaining liquidation period.
Effective July 1, 2008, monthly distributions to the Congress Center propertys investors were
suspended, including distributions to us. As a result of this suspension of monthly distributions,
our sole source of cash flow is expected to be proceeds from the anticipated sale of our interest
in the Congress Center property. It is anticipated that funds previously used for distributions
will be applied by the Congress Center property towards future tenanting costs to lease spaces not
covered by the lender reserve and to supplement the lender reserve funding as necessary. Prior to
the suspension of distributions, we received approximately $29,000 per month in distributions from
the Congress Center property.
The change in the asset for estimated receipts in excess of estimated costs during liquidation
for the nine months ended September 30, 2010 was as follows:
Cash Payments | Change in | |||||||||||||||
December 31, 2009 | and (Receipts) | Estimates | September 30, 2010 | |||||||||||||
Assets: |
||||||||||||||||
Estimated net
inflows from
unconsolidated
operating
activities |
$ | 1,270,000 | $ | (1,000 | ) | $ | 339,000 | $ | 1,608,000 | |||||||
Liabilities: |
||||||||||||||||
Liquidation costs |
(421,000 | ) | 14,000 | (112,000 | ) | (519,000 | ) | |||||||||
Total asset for
estimated receipts
in excess of
estimated costs
during liquidation |
$ | 849,000 | $ | 13,000 | $ | 227,000 | $ | 1,089,000 | ||||||||
6
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NNN 2002 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
The change in the asset for estimated receipts in excess of estimated costs during
liquidation for the nine months ended September 30, 2009 was as follows:
Cash Payments | Change in | |||||||||||||||
December 31, 2008 | and (Receipts) | Estimates | September 30, 2009 | |||||||||||||
Assets: |
||||||||||||||||
Estimated net
inflows from
unconsolidated
operating
activities |
$ | 1,148,000 | $ | (1,000 | ) | $ | 315,000 | $ | 1,462,000 | |||||||
Liabilities: |
||||||||||||||||
Liquidation costs |
(954,000 | ) | 18,000 | 460,000 | (476,000 | ) | ||||||||||
Total asset for
estimated receipts
in excess of
estimated costs
during liquidation |
$ | 194,000 | $ | 17,000 | $ | 775,000 | $ | 986,000 | ||||||||
4. Net Assets in Liquidation
Net assets in liquidation increased by $255,000, or $42.79 per unit, to $2,176,000 during the
three months ended September 30, 2010, compared to net assets in liquidation of $1,921,000 as of
June 30, 2010. The increase in our net assets was primarily due to an increase in our estimated
receipts in excess of estimated costs during liquidation of $324,000, or $54.36 per unit. Grubb &
Ellis Realty Investors, as manager of the Congress Center property, has agreed to waive a portion
of its fees from the management and disposition the Congress Center property, which resulted in an
increase in estimated receipts in excess of estimated costs during liquidation of approximately
$227,000. The increase in net assets in liquidation was also partly due to the extension of our
estimated sale date of the Congress Center property from June 30, 2011 to December 31, 2012 and the
associated changes in estimates of net cash flows, which was partially offset by a decrease in the
liquidation value of the Congress Center property of $66,000, or $11.07 per unit, due to a decrease
in the anticipated sale price.
Net assets in liquidation decreased by $1,912,000, or $320.81 per unit, to $2,101,000 during
the three months ended September 30, 2009, compared to net assets in liquidation of $4,013,000 as
of June 30, 2009. The primary reason for the decrease in our net assets was due to a decrease in
the liquidation value of $2,235,000 or $375.00 per unit, from our one remaining unconsolidated
property as a result of a decrease in the anticipated sales price, offset by an increase in our
estimated receipts in excess of estimated costs during liquidation of $324,000, or $54.36 per unit,
as a result of changes in estimates of net cash flows of our one remaining unconsolidated property.
Net assets in liquidation increased by $292,000, or $48.99 per unit, to $2,176,000 during the
nine months ended September 30, 2010, compared to net assets in liquidation of $1,884,000 as of
December 31, 2009. The increase in our net assets was primarily due to an increase in our estimated
receipts in excess of estimated costs during liquidation of $240,000, or $40.27 per unit. Grubb &
Ellis Realty Investors, as manager of the Congress Center property, has agreed to waive a portion
of its fees from the management and disposition the Congress Center property, which resulted in an
increase in estimated receipts in excess of estimated costs during liquidation of approximately
$227,000. The increase in net assets in liquidation was also partly due to the extension of our
estimated sale date of the Congress Center property from June 30, 2011 to December 31, 2012 and the
associated changes in estimates of net cash flows, as well as an increase in the liquidation value
of the Congress Center property of $66,000, or $11.07 per unit, due to an increase in the
anticipated sale price.
Net assets in liquidation decreased by $1,879,000, or $315.27 per unit, to $2,101,000 during
the nine months ended September 30, 2009, compared to net assets in liquidation of $3,980,000 as of
December 31, 2008. The primary reason for the decrease in our net assets was a decrease in the
liquidation value of our one remaining unconsolidated property of $2,654,000, or $445.30 per unit,
which is a result of a decrease in the anticipated sales price, offset by an increase of $792,000,
or $132.89 per unit, in our estimated receipts in excess of estimated costs during liquidation
caused by the extension of our estimated sale date from December 31, 2009 to December 31, 2010 and
associated changes in estimates of net cash flows of our one remaining unconsolidated property.
7
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NNN 2002 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
The net assets in liquidation of $2,176,000 as of September 30, 2010, plus liquidating
distributions paid to our unit holders of $18,900,000 through September 30, 2010, would result in
liquidating distributions to our unit holders per unit of approximately $3,695.82 for Class A,
$3,522.69 for Class B and $3,387.65 for Class C, of which $3,171.22 per unit for each class has
been paid. These estimates for liquidating distributions per unit include projections of costs and
expenses expected to be incurred during the period required to complete our plan of liquidation.
These projections could change materially based on the timing of the sale, the real estate market
conditions, the performance of the Congress Center property and changes in the underlying
assumptions of the projected cash flows.
5. Investment in Unconsolidated Real Estate
As of September 30, 2010 and December 31, 2009, our sole real estate investment is comprised
of a 12.3% interest in the Congress Center property. The Congress Center property has a gross
leaseable area, or GLA, of approximately 520,000 square feet. As of September 30, 2010, 92.8% of
the total GLA of the Congress Center property was leased to 15 tenants and 78.9% was occupied by 13
tenants.
6. Unit Holders Equity
There are three classes of units, each with different rights with respect to distributions. As
of September 30, 2010 and December 31, 2009, there were 2,000 Class A units, 2,000 Class B units
and 1,960 Class C units issued and outstanding. The rights and obligations of all unit holders are
governed by the Operating Agreement.
Cash from Operations, as defined in the Operating Agreement, is first distributed to all unit
holders pro rata until all Class A unit holders, Class B unit holders and Class C unit holders have
received a 10.0%, 9.0% and 8.0% cumulative (but not compounded) annual return on their contributed
and unrecovered capital, respectively. In the event that any distribution of Cash from Operations
is not sufficient to pay the return described above, all unit holders receive identical pro rata
distributions, except that Class C unit holders do not receive more than an 8.0% return on their
Class C units, and Class B unit holders do not receive more than a 9.0% return on their Class B
units. Excess Cash from Operations is then allocated pro rata to all unit holders on a per
outstanding unit basis and further distributed to the unit holders and our Manager based on
predetermined ratios providing our Manager with a share of 15.0%, 20.0% and 25.0% of the
distributions available to Class A units, Class B units and Class C units, respectively, of such
excess Cash from Operations. We had no excess Cash from Operations for the three or nine months
ended September 30, 2010 and 2009 and our Manager did not receive any such distributions for these
periods.
Cash from Capital Transactions, as defined in the Operating Agreement, is used as follows:
first, to satisfy our debt and liability obligations; second, to pay pro rata distributions to all
unit holders in accordance with their interests until all capital contributions are reduced to
zero; and third, to unit holders in accordance with the distributions as outlined above in the Cash
from Operations.
There were no distributions declared during the three or nine months ended September 30, 2010
and 2009. Class A units, Class B units and Class C units have received identical per-unit
distributions in the past; however, distributions, if any, will vary among the three classes of
units in the future.
Following the payment of the monthly April 2005 distribution, the then board of managers of
our Manager decided to discontinue the payment of monthly distributions. To the extent that prior
distributions have not conformed to the distribution priorities, we intend to adjust future
distributions in order to provide overall net distributions consistent with the priority provisions
of the Operating Agreement. Such distributions may be distributions from capital transactions and
may be completed in connection with our plan of liquidation.
7. Related Party Transactions
The Operating Agreement
Pursuant to the Operating Agreement, our Manager or its affiliates are entitled to receive the
following payments and fees described below. These payments and fees were not negotiated at arms
length and may be higher than payments and fees that would have resulted from an arms length
transaction with an unrelated third-party entity.
8
Table of Contents
NNN 2002 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
Expenses, Costs, or Fees
We have agreed to reimburse our Manager and its affiliates for certain expenses, costs and
fees incurred by our Manager, including, without limitation, for the cash payments, certain closing
costs, escrow deposits, loan commitment fees, project studies and travel expenses related to the
analysis and dispositions of our properties. Our Manager did not incur, and therefore, was not
reimbursed for any such expenses, costs or fees for the three and nine months ended September 30,
2010 and 2009.
Operating Expenses
We have agreed to reimburse our Manager or its affiliates for reasonable and necessary
expenses paid or incurred by our Manager or its affiliates in connection with our operation,
including any legal and accounting costs, and the costs incurred in connection with the disposition
of our properties, including travel, surveys, environmental and other studies and interest expense
incurred on deposits or expenses. In accordance with our plan of liquidation, the then board of
managers of our Manager voted and approved that all costs associated with public company compliance
would be borne by our Manager. As such, our Manager has incurred costs associated with our public
company compliance, but will not be reimbursed for such costs. Our Manager did not incur any
non-public company compliance costs, and therefore, was not reimbursed for any such costs for the
three and nine months ended September 30, 2010 and 2009.
Distributions to Our Manager
Our Manager is entitled to receive from us distributions that relate to cash from operations
and from capital transactions as discussed in Note 6, Unit Holders Equity. Our Manager did not
receive any such distributions for the three and nine months ended September 30, 2010 and 2009.
Based on the valuation of our one remaining unconsolidated property as of September 30, 2010 and
December 31, 2009, we have reserved an estimated distribution to our Manager of $455,000 and
$382,000, respectively, which is reflected in the asset for estimated receipts in excess of
estimated costs during liquidation in our interim unaudited condensed consolidated statements of
net assets.
The Management Agreement
Pursuant to the Operating Agreement and the Management Agreement, Realty is entitled to
receive the payments and fees described below. These payments and fees were not negotiated at arms
length and may be higher than payments and fees that would have resulted from an arms length
negotiation and transaction with an unaffiliated third party. We only incur and pay such fees on
consolidated properties, and for the three and nine months ended September 30, 2010 and 2009, we
did not have any consolidated properties.
Property Management Fees
We pay Realty, for its services in managing our properties, a monthly property management fee
of up to 5.0% of the gross revenues of the properties. We did not incur any property management
fees for the three and nine months ended September 30, 2010 and 2009.
Lease Commissions
We pay Realty or its affiliates a leasing commission for its services in leasing any of our
properties an amount equal to 6.0% of the value of any lease entered into during the term of the
Management Agreement and 3.0% with respect to any lease renewal. The value of such leases will be
calculated by totaling the minimum monthly rent for the term of the lease. The term of such leases
will not exceed five years for purposes of the computation and will not include option periods. We
did not incur any lease commissions for the three and nine months ended September 30, 2010 and
2009.
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NNN 2002 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
Project Fees
We pay Realty for its services in supervising any construction or repair project in or about
our properties, a construction management fee equal to 5.0% of any amount up to $25,000, 4.0% of
any amount over $25,000 but less than $50,000, and 3.0% of any amount over $50,000, which is
expended in any calendar year for construction or repair projects. We did not incur any
construction management fees for the three and nine months ended September 30, 2010 and 2009.
Real Estate Disposition Fees
We pay Realty a real estate disposition fee equal up to 5.0% of the sales price. Third party
brokers may be entitled to up to 80.0% of the 5.0% disposition fee. We did not incur any real
estate disposition fees for the three and nine months ended September 30, 2010 and 2009.
Loan Fees
We pay Realty a loan fee in the amount of 1.0% of the principal amount of all loans obtained
by it for our properties during the term of the Management Agreement. We did not incur any loan
fees for the three and nine months ended September 30, 2010 and 2009.
8. Commitments and Contingencies
Litigation
Neither we nor the Congress Center property are presently subject to any material litigation
nor, to our knowledge, is any material litigation threatened against us or the Congress Center
property, which if determined unfavorably to us would have a material adverse effect on our cash
flows, financial condition or results of operations.
Environmental Matters
We have a policy for monitoring the Congress Center property for the presence of hazardous or
toxic substances. While there can be no assurance that a material environmental liability does not
exist, we are not currently aware of any environmental liability with respect to our one remaining
unconsolidated property that would have a material adverse effect on our cash flows, financial
condition or results of operations. Further, we are not aware of any environmental liability or any
unasserted claim or assessment with respect to an environmental liability that we believe would
require additional disclosure or the recording of a loss contingency.
Unconsolidated Debt
Total mortgage debt of the Congress Center property was $92,424,000 and $93,486,000 as of
September 30, 2010 and December 31, 2009, respectively. Our pro rata share of the mortgage debt was
$11,350,000 and $11,480,000 as of September 30, 2010 and December 31, 2009, respectively.
The Congress Center property is required by the terms of its loan documents to meet certain
financial covenants and other requirements. As of September 30, 2010, the Congress Center property
was in compliance with all such requirements.
On February 17, 2010, we received a letter from our lender stating that our insurance policy
covering the Congress Center property was deficient because several of the carriers providing
coverage under our policy did not meet one or more of the carrier rating requirements as set forth
in the loan documents. Since the renewal of our insurance policy on March 5, 2010, we had been
working with our lender and our insurance carriers to cure the deficiencies, and our lender
extended the period of time allowed to bring such deficiencies into compliance with the
requirements set forth in the loan documents to September 30, 2010. On September 17, 2010, we cured
the deficiencies by obtaining a new insurance policy covering the Congress Center property with an
insurance carrier meeting the rating requirements as set forth in the loan documents. However, we
can give no assurance that we will be able to maintain such insurance coverage in compliance with
the loan documents.
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NNN 2002 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
On December 21, 2006, Realty received a termination notice from Employers Reinsurance
Corporation notifying Realty of their intent to exercise their option to terminate their lease for
approximately 67,000 square feet effective January 1, 2008 at the Congress Center property. From
January 1, 2008 and continuing through and including the payment date occurring on December 1,
2011, the lender is entitled to receive $83,000 on a monthly basis from the borrower. In January
2007, Employers Reinsurance Corporation paid $3,773,000 to the lender as an early termination fee
penalty pursuant to their lease agreement. We, along with G REIT Liquidating Trust (successor of G
REIT, Inc.) and T REIT Liquidating Trust (successor of T REIT, Inc.), or our affiliate co-owners,
paid the remaining $27,000 of the early termination fee penalty owed to the lender. As of September
30, 2010, we have advanced $112,000 to the lender for the reserves associated with the early lease
termination. It is anticipated that upon the sale of the Congress Center property, we, along with
our affiliate co-owners, will receive repayment of any advances made to the lender for reserves.
All payments to the lender are to be placed in a reserve account to be held by the lender for
reimbursement to the borrower for tenant improvement and leasing commissions incurred in connection
with re-leasing the space. In May 2009, NNN Congress Center, LLC entered into a lease agreement
with the Internal Revenue Service, or IRS, for approximately 28,000 square feet of space previously
leased by Employers Reinsurance Corporation. Occupancy is expected to commence in February 2011.
The lease is for a period of ten years, seven years firm, subject to termination rights pursuant to
the lease agreement at an annual rate of $31.00 per square foot. Pursuant to the lease agreement,
there are scheduled annual rent increases, and various rent concessions and commission credits have
been given to the IRS in lease years one and two. In June 2010, NNN Congress Center, LLC entered
into a lease agreement with the Department of Justice, or DOJ, for approximately 44,000 square feet
of space previously leased by Employers Reinsurance Corporation. Occupancy is expected to commence
in April 2011. The lease is for a period of ten years, five years firm, subject to termination
rights pursuant to the lease agreement at an initial annual rate of $39.00 per square foot.
Pursuant to the lease agreement, there are scheduled annual rent increases, and various rent
concessions have been given to the DOJ.
Other
Our other commitments and contingencies include the usual obligations of a real estate company
in the normal course of business. In the opinion of management, these matters are not expected to
have a material adverse affect on our financial position and consolidated results of operations.
9. Concentration of Credit Risk
Financial instruments that potentially subject us to a concentration of credit risk are
primarily cash investments and accounts receivable from tenants. Cash is generally placed in money
market accounts and the amount of credit exposure to any one party is limited. We have cash in
financial institutions that is insured by the Federal Deposit Insurance Corporation, or FDIC, up to
$250,000 per depositor per insured bank. As of September 30, 2010 and December 31, 2009, we had
cash accounts in excess of FDIC insured limits. We believe this risk is not significant.
Concentration of credit risk with respect to accounts receivable from tenants is limited. We
perform credit evaluations of prospective tenants and security deposits are obtained upon lease
execution.
As of September 30, 2010, we owned a 12.3% interest in the Congress Center property, located
in the state of Illinois. Accordingly, there is a geographic concentration of risk subject to
fluctuations in the states economy.
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NNN 2002 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
As of September 30, 2010, we had no consolidated properties, however, five tenants at the
Congress Center property accounted for 10.0% or more of the aggregate annual rental income at that
property, as follows:
Percentage of | Square | Lease | ||||||||||||||
2010 Annual | 2010 Annual | Footage | Expiration | |||||||||||||
Tenant | Base Rent (1) | Base Rent | (Approx.) | Date | ||||||||||||
Department of Homeland Security |
$ | 3,603,000 | 28.6 | % | 76,000 | Apr. 2012 | ||||||||||
North American Co. Life and Health Insurance |
$ | 2,522,000 | 20.0 | % | 101,000 | Feb. 2012 | ||||||||||
Akzo Nobel, Inc. |
$ | 2,176,000 | 17.3 | % | 91,000 | Dec. 2019 | ||||||||||
United States Treasury Department |
$ | 1,709,000 | 13.5 | % | 37,000 | Feb. 2013 | ||||||||||
National Railroad Passenger Corporation |
$ | 1,274,000 | 10.1 | % | 50,000 | Dec. 2011 |
(1) | Annualized rental income is based on contractual base rent set forth in leases in effect as of September 30, 2010. |
As of September 30, 2009, we had no consolidated properties, however, five tenants at the
Congress Center property accounted for 10.0% or more of the aggregate annual rental income at that
property, as follows:
Percentage of | Square | Lease | ||||||||||||||
2009 Annual | 2009 Annual | Footage | Expiration | |||||||||||||
Tenant | Base Rent (1) | Base Rent | (Approx.) | Date | ||||||||||||
Department of Homeland Security |
$ | 3,538,000 | 28.6 | % | 76,000 | Apr. 2012 | ||||||||||
North American Co. Life and Health Insurance |
$ | 2,472,000 | 20.0 | % | 101,000 | Feb. 2012 | ||||||||||
Akzo Nobel, Inc. |
$ | 2,131,000 | 17.2 | % | 91,000 | Dec. 2013 | ||||||||||
United States Treasury Department |
$ | 1,677,000 | 13.6 | % | 37,000 | Feb. 2013 | ||||||||||
National Railroad Passenger Corporation |
$ | 1,249,000 | 10.1 | % | 50,000 | Dec. 2011 |
(1) | Annualized rental income is based on contractual base rent set forth in leases in effect as of September 30, 2009. |
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Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
The use of the words we, us or our refers to NNN 2002 Value Fund, LLC, except where the
context otherwise requires.
The following discussion should be read in conjunction with our interim unaudited condensed
consolidated financial statements and notes accompanying this Quarterly Report on Form 10-Q. Such
financial statements and information have been prepared to reflect our net assets in liquidation as
of September 30, 2010 and December 31, 2009 (liquidation basis), together with the changes in net
assets for the three and nine months ended September 30, 2010 and 2009 (liquidation basis),
respectively.
Forward-Looking Statements
Historical results and trends should not be taken as indicative of future operations. Our
statements contained in this report that are not historical facts are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Actual results may differ materially from those
included in the forward-looking statements. We intend those forward-looking statements to be
covered by the safe-harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and we are including this statement for purposes of
complying with those safe-harbor provisions. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies and expectations of us, are generally
identifiable by use of the words believe, expect, intend, anticipate, estimate,
project, prospects, or similar expressions. Our ability to predict results or the actual effect
of future plans or strategies is inherently uncertain. Factors which could have an adverse effect
on our operations and future prospects on a consolidated basis include, but are not limited to:
changes in economic conditions generally and the real estate market specifically;
legislative/regulatory changes; availability of capital; changes in interest rates; competition in
the real estate industry; supply and demand for operating properties in our current market areas;
changes in accounting principles generally accepted in the United States of America, or GAAP,
policies and guidelines applicable to us; predictions of the amount of liquidating distributions to
be received by unit holders; statements regarding the timing of asset dispositions and the sales
price we will receive for assets; the effect of the liquidation; our ongoing relationship with our
Manager (as defined below); litigation; and the implementation and completion of our plan of
liquidation. These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Additional information
concerning us and our business, including additional factors that could materially affect our
financial results, is included herein and in our other filings with the United States Securities
and Exchange Commission, or the SEC.
Overview and Background
We were formed on May 15, 2002 as a Virginia limited liability company to purchase, own,
operate and subsequently sell all or a portion of up to three properties. We expected to own our
interests in the properties for approximately three to five years from the date of acquisition of
each asset. At the time of our formation, our principal objectives were to: (i) preserve our unit
holders capital investment; (ii) realize income through the acquisition, operation and sale of the
properties; (iii) make monthly distributions to our unit holders from cash generated from
operations in an amount equal to an 8.0% annual return of our unit holders investment; however,
the distributions among the Class A unit holders, Class B unit holders and Class C unit holders
will vary; and (iv) within approximately three to five years from the respective acquisition of
each asset, subject to market conditions, realize income from the sale of the properties and
distribute the proceeds of such sales to our unit holders.
Grubb & Ellis Realty Investors, LLC, or Grubb & Ellis Realty Investors, or our Manager,
manages us pursuant to the terms of an operating agreement, or the Operating Agreement. Our Manager
is primarily responsible for managing our day-to-day operations and assets. While we have no
employees, certain employees and executive officers of our Manager provide services to us pursuant
to the Operating Agreement. Our Manager engages affiliated entities, including Triple Net Property
Realty, Inc., or Realty, to provide various services to Congress Center, located in Chicago,
Illinois, or the Congress Center property, of which we own a 12.3% interest. Realty serves as our
property manager pursuant to the terms of the Operating Agreement and a property management
agreement, or the Management Agreement. The Operating Agreement terminates upon our dissolution.
The unit holders may not vote to terminate our Manager prior to the termination of the Operating
Agreement or our dissolution except for cause. The Management Agreement terminates with respect to
the Congress Center property upon the earlier of the sale of such property or ten years from the
date of acquisition. Realty may be terminated with respect to the Congress Center property without
cause prior to the termination of the Management Agreement or our dissolution, subject to certain
conditions, including the payment by us to Realty of a termination fee as provided in the
Management Agreement.
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Business Strategy and Plan of Liquidation
As set forth in our registration statement on Form 10, originally filed on December 30, 2004,
as amended, we were not formed with the expectation that we would be an entity that is required to
file reports pursuant to the Exchange Act. We became subject to the registration requirements of
Section 12(g) of the Exchange Act because the aggregate value of our assets exceeded applicable
thresholds and our units were held of record by 500 or more persons at December 31, 2003. As a
result of registration of our securities with the SEC under the Exchange Act, we became subject to
the reporting requirements of the Exchange Act. In particular, we are required to file Quarterly
Reports on Form 10-Q, Annual Reports on Form 10-K, and Current Reports on Form 8-K and otherwise
comply with the disclosure requirements of the Exchange Act applicable to issuers filing
registration statements pursuant to Section 12(g) of that act. As a result of (i) current market
conditions and (ii) the obligation to incur costs of corporate compliance (including, without
limitation, all federal, state and local regulatory requirements applicable to us, including the
Sarbanes-Oxley Act of 2002, as amended), during the fourth quarter of 2004, our Manager began to
investigate whether liquidation would provide our unit holders with a greater return on their
investment than any other alternative. After reviewing the issues facing us, our Manager approved a
plan of liquidation on June 14, 2005, which was thereafter approved by our unit holders at a
special meeting of unit holders on September 7, 2005.
Our plan of liquidation contemplates the orderly sale of all of our assets, the payment of our
liabilities and the winding up of operations and the dissolution of our company. We engaged an
independent third party to perform financial advisory services in connection with our plan of
liquidation, including rendering opinions as to whether our net real estate liquidation value range
estimate and our estimated per unit distribution range were reasonable.
Accordingly, we are engaged in an ongoing liquidation of our remaining asset. As of September
30, 2010, we owned a 12.3% interest in one unconsolidated property, Congress Center, located in
Chicago, Illinois, or the Congress Center property. References herein to our property, our one
remaining unconsolidated property or our remaining asset are to our 12.3% interest in the Congress
Center property.
We continually evaluate our investment in the Congress Center property and adjust our net real
estate liquidation value accordingly. It is our policy that when we execute a purchase and sale
agreement for the sale of our real property asset or become aware of market conditions or other
circumstances that indicate that the current carrying value of our real property asset materially differs
from our expected net sale price, we will adjust our liquidation value accordingly. Following the
approval of our plan of liquidation by our unit holders on September 7, 2005, we adopted the
liquidation basis of accounting as of August 31, 2005 and for all periods subsequent to August 31,
2005.
Our plan of liquidation gives our Manager the power to sell any and all of our assets without
further approval by our unit holders and provides that liquidating distributions be made to our
unit holders as determined by our Manager. Although we can provide no assurances, we currently
expect to sell our interest in the Congress Center property by December 31, 2012, and anticipate
completing our plan of liquidation by March 31, 2013.
In accordance with our plan of liquidation, the Congress Center property is actively managed
to seek to achieve higher occupancy rates, control operating expenses and maximize income from
ancillary operations and services. Due to the adoption of our plan of liquidation, we will not
acquire any new properties and are focused on liquidating our interest in the Congress Center
property.
For a more detailed discussion of our plan of liquidation, including the risk factors and
certain other uncertainties associated therewith, please read our definitive proxy statement filed
with the SEC on August 4, 2005.
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Property Dispositions
We did not have any property dispositions during the three and nine months ended September 30,
2010 and 2009.
Critical Accounting Policies
The complete listing of our Critical Accounting Policies was previously disclosed in our 2009
Annual Report on Form 10-K, as filed with the SEC on March 5, 2010.
Interim Financial Data
Our accompanying interim unaudited condensed consolidated financial statements have been
prepared by us in accordance with GAAP, and under the liquidation basis of accounting effective
August 31, 2005, in conjunction with the rules and regulations of the SEC. Certain information and
note disclosures required for annual financial statements have been condensed or excluded pursuant
to SEC rules and regulations. Accordingly, the interim unaudited condensed consolidated financial
statements do not include all of the information and notes required by GAAP for complete financial
statements. Our accompanying interim unaudited condensed consolidated financial statements reflect
all adjustments, which are, in our opinion, of a normal recurring nature and necessary for a fair
presentation of our financial position including net assets in liquidation and changes in net
assets in liquidation for the interim periods. Interim results of operations are not necessarily
indicative of the results to be expected for the full year; such results may be less favorable. Our
accompanying interim unaudited condensed consolidated financial statements and notes thereto should
be read in conjunction with the audited consolidated financial statements and the notes thereto
included in our 2009 Annual Report on Form 10-K, as filed with the SEC on March 5, 2010.
Factors Which May Influence Future Changes in Net Assets in Liquidation
Investment in Unconsolidated Real Estate
In calculating the estimated amount of liquidating distributions to our unit holders, we
assumed that we would be able to locate a buyer for the Congress Center property at an amount based
on our best estimate of market value for the property. However, we may have overestimated the sales
price that we will ultimately be able to obtain for this asset. If the market value of the Congress
Center property declines more than 4% from our current estimate of the market value as of September
30, 2010, our investment in unconsolidated real estate would be zero.
Rental Income
The amount of rental income generated by the Congress Center property depends principally on
our ability to maintain the occupancy rates of currently leased space, to lease currently available
space and space available from unscheduled lease terminations at the existing rental rates and the
timing of the disposition of the property. Negative trends in one or more of these factors could
adversely affect our rental income in future periods.
Scheduled Lease Expirations
As of September 30, 2010, the Congress Center property was 92.8% leased to 15 tenants, and
78.9% occupied by 13 tenants. None of the leases for the existing gross leaseable area, or GLA,
expire during 2010. Our leasing strategy through our plan of liquidation focuses on negotiating
renewals for leases scheduled to expire and identifying new tenants or existing tenants seeking
additional space to occupy the GLA for which we are unable to negotiate such renewals. For example,
in January 2010, we completed an early renewal on one of our major tenants, and extended its lease
expiration from December 2013 to December 2019.
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Changes in Net Assets in Liquidation
Three and Nine Months Ended September 30, 2010 and 2009
Net assets in liquidation increased by $255,000, or $42.79 per unit, to $2,176,000 during the
three months ended September 30, 2010, compared to net assets in liquidation of $1,921,000 as of
June 30, 2010. The increase in our net assets was primarily due to an increase in our estimated
receipts in excess of estimated costs during liquidation of $324,000, or $54.36 per unit. Grubb &
Ellis Realty Investors, as manager of the Congress Center property, has agreed to waive a portion
of its fees from the management and disposition the Congress Center property, which resulted in an
increase in estimated receipts in excess of estimated costs during liquidation of approximately
$227,000. The increase in net assets in liquidation was also partly due to the extension of our
estimated sale date of the Congress Center property from June 30, 2011 to December 31, 2012 and the
associated changes in estimates of net cash flows, which was partially offset by a decrease in the
liquidation value of the Congress Center property of $66,000, or $11.07 per unit, due to a decrease
in the anticipated sale price.
Net assets in liquidation decreased by $1,912,000, or $320.81 per unit, to $2,101,000 during
the three months ended September 30, 2009, compared to net assets in liquidation of $4,013,000 as
of June 30, 2009. The primary reason for the decrease in our net assets was due to a decrease in
the liquidation value of $2,235,000 or $375.00 per unit, from our one remaining unconsolidated
property as a result of a decrease in the anticipated sales price, offset by an increase in our
estimated receipts in excess of estimated costs during liquidation of $324,000, or $54.36 per unit,
as a result of changes in estimates of net cash flows of our one remaining unconsolidated property.
Net assets in liquidation increased by $292,000, or $48.99 per unit, to $2,176,000 during the
nine months ended September 30, 2010, compared to net assets in liquidation of $1,884,000 as of
December 31, 2009. The increase in our net assets was primarily due to an increase in our estimated
receipts in excess of estimated costs during liquidation of $240,000, or $40.27 per unit. Grubb &
Ellis Realty Investors, as manager of the Congress Center property, has agreed to waive a portion
of its fees from the management and disposition the Congress Center property, which resulted in an
increase in estimated receipts in excess of estimated costs during liquidation of approximately
$227,000. The increase in net assets in liquidation was also partly due to the extension of our
estimated sale date of the Congress Center property from June 30, 2011 to December 31, 2012 and the
associated changes in estimates of net cash flows, as well as an increase in the liquidation value
of the Congress Center property of $66,000, or $11.07 per unit, due to an increase in the
anticipated sale price.
Net assets in liquidation decreased by $1,879,000, or $315.27 per unit, to $2,101,000 during
the nine months ended September 30, 2009, compared to net assets in liquidation of $3,980,000 as of
December 31, 2008. The primary reason for the decrease in our net assets was a decrease in the
liquidation value of our one remaining unconsolidated property of $2,654,000, or $445.30 per unit,
which is a result of a decrease in the anticipated sales price, offset by an increase of $792,000,
or $132.89 per unit, in our estimated receipts in excess of estimated costs during liquidation
caused by the extension of our estimated sale date from December 31, 2009 to December 31, 2010 and
associated changes in estimates of net cash flows of our one remaining unconsolidated property.
The net assets in liquidation of $2,176,000 as of September 30, 2010, plus liquidating
distributions paid to our unit holders of $18,900,000 through September 30, 2010, would result in
liquidating distributions to our unit holders per unit of approximately $3,695.82 for Class A,
$3,522.69 for Class B and $3,387.65 for Class C, of which $3,171.22 per unit for each class has
been paid. These estimates for liquidating distributions per unit include projections of costs and
expenses expected to be incurred during the period required to complete our plan of liquidation.
These projections could change materially based on the timing of the sale, the performance of the
Congress Center property and changes in the underlying assumptions of the projected cash flows.
Liquidity and Capital Resources
As of September 30, 2010, our total assets and net assets in liquidation were $2,176,000. Our
ability to meet our obligations is contingent upon the disposition of our asset in accordance with
our plan of liquidation. Management estimates that the net proceeds from the sale of our interest
in the Congress Center property pursuant to our plan of liquidation will be adequate to pay our
obligations; however, we cannot provide any assurance as to the price we will receive for the
disposition of our one remaining asset or the net proceeds therefrom.
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Current Sources of Capital and Liquidity
We anticipate, but cannot assure, that our cash flow from operations and sale of our interest
in the Congress Center property will be sufficient during the liquidation period to fund our cash
needs for payment of expenses.
Effective July 1, 2008, monthly distributions to the Congress Center propertys investors were
suspended, including distributions to us. As a result of this suspension of monthly distributions,
our sole source of cash flow is expected to be proceeds from the anticipated sale of the Congress
Center property. It is anticipated that funds previously used for distributions will be applied
towards future tenanting costs to lease spaces not covered by the lender reserve and to supplement
the lender reserve funding as necessary. Prior to the suspension of distributions, we received
approximately $29,000 per month in distributions from the Congress Center property. In December
2009, our Manager approved a one-time distribution to the Congress Center propertys investors for
year-end tax purposes. We received approximately $97,000 from this one-time distribution.
Our plan of liquidation gives our Manager the power to sell our interest in the Congress
Center property without further approval by our unit holders and provides that liquidating
distributions be made to our unit holders as determined at the discretion of our Manager. Although
we can provide no assurances, we currently expect to sell our interest in the Congress Center
property by December 31, 2012, and anticipate completing our plan of liquidation by March 31, 2013.
Other Liquidity Needs
We believe that we will have sufficient capital resources to satisfy our liquidity needs
during the liquidation period. We did not pay any liquidating distributions to our unit holders
during the three and nine months ended September 30, 2010. Following payment of the monthly April
2005 distribution, the then board of managers of our Manager decided to discontinue the payment of
monthly distributions. In accordance with our plan of liquidation, our Manager can make liquidating
distributions from proceeds received from the sale of assets at their discretion.
As of September 30, 2010, we estimate that we will have $519,000 of commitments and
expenditures during the liquidation period, comprised mainly of $455,000 in liquidating
distributions to our Manager pursuant to the Operating Agreement. However, there can be no
assurance that we will not exceed the amounts of these estimated expenditures.
An adverse change in the net inflows from unconsolidated operating activities or net proceeds
expected from the liquidation of our one real estate asset may affect our ability to fund these
items and may affect our ability to satisfy the financial covenants under our mortgages on the
Congress Center property. If we fail to meet our financial covenants and are unable to reach a
satisfactory resolution with the lenders, the maturity dates for the secured notes on the
Congress Center property could be accelerated. Any of these circumstances could adversely
affect our ability to fund working capital, liquidation costs and unanticipated cash needs.
On February 17, 2010, we received a letter from our lender stating that our insurance policy
covering the Congress Center property was deficient because several of the carriers providing
coverage under our policy did not meet one or more of the carrier rating requirements as set forth
in the loan documents. Since the renewal of our insurance policy on March 5, 2010, we had been
working with our lender and our insurance carriers to cure the deficiencies, and our lender
extended the period of time allowed to bring such deficiencies into compliance with the
requirements set forth in the loan documents to September 30, 2010. On September 17, 2010, we cured
the deficiencies by obtaining a new insurance policy covering the Congress Center property with an
insurance carrier meeting the rating requirements as set forth in the loan documents. However, we
can give no assurance that we will be able to maintain such insurance coverage in compliance with
the loan documents.
Liquidating distributions will be determined by our Manager in its sole discretion and are
dependent on a number of factors, including the amount of funds available for distribution, our
financial condition, our capital expenditures on the Congress Center property, among other
factors our Manager may deem relevant. To the extent any distributions are made to our unit holders
in excess of accumulated earnings, the excess distributions are considered a return of capital to
our unit holders for federal income tax purposes to the extent of each unit holders basis in our
stock, and generally as capital gain thereafter.
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The stated range of unit holder distributions disclosed in our plan of liquidation are
estimates only and actual results may be higher or lower than estimated. The potential for variance
on either end of the range could occur for a variety of reasons, including, but not limited to: (i)
unanticipated costs could reduce net assets actually realized; (ii) if we wind up our business
significantly faster than anticipated, some of the anticipated costs may not be necessary and net
liquidation proceeds could be higher; (iii) a delay in our liquidation could result in higher than
anticipated costs and net liquidation proceeds could be lower; (iv) circumstances may change and
the actual net proceeds realized from the sale of our interest in the Congress Center property
might be less, or significantly less, than currently estimated, including, among other reasons, the
discovery of new environmental issues or loss of a tenant or tenants; and (v) actual proceeds
realized from the sale of our interest in the Congress Center property may be higher than currently
estimated if market values increase.
Subject to our Managers actions and in accordance with our plan of liquidation, we expect to
meet our liquidity requirements through the completion of the liquidation, through retained cash
flow, disposition of our interest in the Congress Center property, and unsecured borrowings. We do
not intend to reserve funds to retire existing debt upon maturity. We will, instead, seek to
refinance such debt at maturity or retire such debt through the disposition of the Congress Center
property.
If we experience lower occupancy levels and reduced rental rates at the Congress Center
property, reduced revenues as a result of asset sale, or increased capital expenditures and leasing
costs at the Congress Center property compared to historical levels due to competitive market
conditions for new and renewal leases, the effect would be a reduction of our net assets in
liquidation. This estimate is based on various assumptions, which are difficult to predict,
including the levels of leasing activity at year end and related leasing costs. Any changes in
these assumptions could adversely impact our financial results, our ability to pay current
liabilities as they come due and our other unanticipated cash needs.
Capital Resources
General
Prior to the adoption of our plan of liquidation, our primary sources of capital were our real
estate operations, our ability to leverage any increased market value in the real estate assets we
owned and our ability to obtain debt financing from third parties, including, our Manager or its
affiliates. Prior to July 1, 2008, our primary source of capital was distributions from the
Congress Center property. However, effective July 1, 2008, monthly distributions to the Congress
Center propertys investors were suspended, including distributions to us. As a result of this
suspension of monthly distributions, our sole source of cash flow is expected to be proceeds from
the anticipated sale of the Congress Center property. It is anticipated that funds previously used
for distributions will be applied towards future tenanting costs to lease spaces not covered by the
lender reserve and to supplement the lender reserve funding as necessary. Prior to the suspension
of distributions, we received approximately $29,000 per month in distributions from the Congress
Center property. In December 2009, our Manager approved a one-time distribution to the Congress
Center propertys investors for year-end tax purposes. We received approximately $97,000 from this
one-time distribution.
The primary uses of cash are to fund liquidating distributions to our unit holders and
operating expenses. We may also regularly require capital to invest in the Congress Center property
in connection with routine capital improvements, and leasing activities, including funding tenant
improvements, allowances and leasing commissions. The amounts of the leasing-related expenditures
can vary significantly depending on negotiations with tenants and the willingness of tenants to pay
higher base rents over the life of their leases.
In accordance with our plan of liquidation, we anticipate our source for the payment of our
liquidating distributions to our unit holders to be primarily from the net proceeds from the sale
of our interest in the Congress Center property.
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Financing
As of September 30, 2010 and December 31, 2009, we had no consolidated mortgage loans
outstanding.
We did not have any consolidated restricted cash balances as of September 30, 2010 and
December 31, 2009, held as credit enhancements and as reserves for property taxes, capital
expenditures and capital improvements.
We believe that our cash balance of $449,000 as of September 30, 2010, should provide
sufficient liquidity to meet our cash needs during the next twelve months from September 30, 2010.
While we anticipate that our existing cash balance will be sufficient to fund our cash needs for
corporate related expenses for the next twelve months, we can provide no assurance that this will
be the case.
Unconsolidated Debt
Total mortgage debt of the Congress Center property was $92,424,000 and $93,486,000 as of
September 30, 2010 and December 31, 2009, respectively. Our pro rata share of the mortgage debt was
$11,350,000 and $11,480,000 as of September 30, 2010 and December 31, 2009, respectively.
The Congress Center property is required by the terms of its loan documents to meet certain
financial covenants and other requirements. As of September 30, 2010, the Congress Center property
was in compliance with all such requirements.
On December 21, 2006, Realty received a termination notice from Employers Reinsurance
Corporation notifying Realty of their intent to exercise their option to terminate their lease for
approximately 67,000 square feet effective January 1, 2008 at the Congress Center property. From
January 1, 2008 and continuing through and including the payment date occurring on December 1,
2011, the lender is entitled to receive $83,000 on a monthly basis from the borrower. In January
2007, Employers Reinsurance Corporation paid $3,773,000 to the lender as an early termination fee
penalty pursuant to their lease agreement. We, along with G REIT Liquidating Trust (successor of G
REIT, Inc.) and T REIT Liquidating Trust (successor of T REIT, Inc.), or our affiliate co-owners,
paid the remaining $27,000 of the early termination fee penalty owed to the lender. As of September
30, 2010, we have advanced $112,000 to the lender for the reserves associated with the early lease
termination. It is anticipated that upon the sale of the Congress Center property, we, along with
our affiliate co-owners, will receive repayment of any advances made to the lender for reserves.
All payments to the lender are to be placed in a reserve account to be held by the lender for
reimbursement to the borrower for tenant improvement and leasing commissions incurred in connection
with re-leasing the space. In May 2009, NNN Congress Center, LLC entered into a lease agreement
with the Internal Revenue Service, or IRS, for approximately 28,000 square feet of space previously
leased by Employers Reinsurance Corporation. Occupancy is expected to commence in February 2011.
The lease is for a period of ten years, seven years firm, subject to termination rights pursuant to
the lease agreement at an annual rate of $31.00 per square foot. Pursuant to the lease agreement,
there are scheduled annual rent increases, and various rent concessions and commission credits have
been given to the IRS in lease years one and two. In June 2010, NNN Congress Center, LLC entered
into a lease agreement with the Department of Justice, or DOJ, for approximately 44,000 square feet
of space previously leased by Employers Reinsurance Corporation. Occupancy is expected to commence
in April 2011. The lease is for a period of ten years, five years firm, subject to termination
rights pursuant to the lease agreement at an initial annual rate of $39.00 per square foot.
Pursuant to the lease agreement, there are scheduled annual rent increases, and various rent
concessions have been given to the DOJ.
Commitments and Contingencies
Insurance Coverage
Property Damage, Business Interruption, Earthquake and Terrorism
The insurance coverage provided through third party insurance carriers is subject to coverage
limitations. Should an uninsured or underinsured loss occur, we could lose all or a portion of our
investment in, and anticipated cash flows from, the Congress Center property. In addition, there
can be no assurance that third party insurance carriers will be able to maintain reinsurance
sufficient to cover any losses that may be incurred.
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Debt Service Requirements
As of September 30, 2010, all consolidated debt has been repaid in full.
Contractual Obligations
As of September 30, 2010, all consolidated contractual obligations have been repaid in full.
Off-Balance Sheet Arrangements
There are no off-balance sheet transactions, arrangements or obligations (including contingent
obligations) that have, or are reasonably likely to have a current or future material effect on our
financial condition, changes in our financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
Inflation
We are exposed to inflation risk as income from long-term leases is expected to be the primary
source of cash flows from operations. We expect that there will be provisions in the majority of
our tenant leases that would provide some protection from the impact of inflation. These provisions
include rent steps, reimbursement billings for operating expense pass-through charges, real estate
tax and insurance reimbursements on a per square foot allowance. However, due to the long-term
nature of the leases, the leases may not reset frequently enough to cover inflation.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Market risks include risks that arise from changes in interest rates, foreign currency
exchange rates, commodity prices, equity prices and other market changes that affect market
sensitive instruments. We believe that the primary market risk to which we would be exposed would
be an interest rate risk. As of September 30, 2010, we had no outstanding consolidated debt,
therefore, we believe we have no interest rate or market risk. Additionally, our unconsolidated
debt related to our interest in the Congress Center property is at a fixed interest rate.
There were no material changes in the information regarding market risk that was provided in
our 2009 Annual Report on Form 10-K, as filed with the SEC on March 5, 2010, other than those
listed in Part II, Item 1A. Risk Factors.
Item 4. | Controls and Procedures. |
(a) Evaluation of disclosure controls and procedures. We maintain disclosure controls and
procedures that are designed to ensure that information required to be disclosed in our reports
under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed,
summarized and reported within the time periods specified in the rules and forms, and that such
information is accumulated and communicated to us, including our Managers president and chief
accounting officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of
September 30, 2010, was conducted under the supervision and with the participation of our Manager,
including our Managers president and chief accounting officer, of the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act). Based on this evaluation, our Managers president and chief accounting officer concluded that
our disclosure controls and procedures, as of September 30, 2010, were effective.
(b) Changes in internal control over financial reporting. There were no changes in our
internal control over financial reporting that occurred during the quarter ended September 30,
2010, that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
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PART II OTHER INFORMATION
The use of the words we, us or our refers to NNN 2002 Value Fund, LLC, except where the
context otherwise requires.
Item 1. | Legal Proceedings. |
Litigation
Neither we nor Congress Center, located in Chicago, Illinois, or the Congress Center property,
are presently subject to any material litigation nor, to our knowledge, is any material litigation
threatened against us or the Congress Center property which if determined unfavorably to us would
have a material adverse effect on our cash flows, financial condition or results of operations.
Item 1A. | Risk Factors. |
There were no material changes from the risk factors previously disclosed in our 2009 Annual
Report on Form 10-K, as filed with the Unites States Securities and Exchange Commission on March 5,
2010, except as noted below.
Our use of borrowings on the Congress Center property could result in its foreclosure and
unexpected debt service expenses upon refinancing, both of which could have an adverse impact on
our operations and cash flow. Additionally, restrictive covenants in our loan documents may
restrict our operating activities.
We rely on borrowings to partially fund capital expenditures and other items. As of September
30, 2010, there was $92,424,000 of debt outstanding related to the Congress Center property, our
proportionate share of which was $11,350,000. Accordingly, we are subject to the risks normally
associated with debt financing, including, without limitation, the risk that our cash flow may not
be sufficient to cover required debt service payments. There is also a risk that, if necessary,
existing indebtedness will not be able to be refinanced or that the terms of such refinancing will
not be as favorable as the terms of the existing indebtedness.
In addition, if we cannot meet our required mortgage payment obligations, the Congress Center
property could be foreclosed upon by, or otherwise transferred to, our lender, with a consequent
loss of income and asset value to us. For tax purposes, a foreclosure on our property would be
treated as a sale of the property for a purchase price equal to the outstanding balance of the debt
secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our
tax basis in the property, we would recognize taxable income on foreclosure, but we may not receive
any cash proceeds.
The mortgage on the Congress Center property contains customary restrictive covenants,
including provisions that limit the borrowing subsidiarys ability, without the prior consent of
the lender, to incur additional indebtedness, further mortgage or transfer the applicable property,
discontinue insurance coverage, change the conduct of its business or make loans or advances to,
enter into any transaction of merger or consolidation with any third party. In addition, any future
lines of credit or loans may contain financial covenants, further restrictive covenants and other
obligations.
If we materially breach such covenants or obligations under the Congress Center loan
agreement, the lender may have the right to seize our income from the property or legally declare a
default on the loan obligation, require us to repay the debt immediately and foreclose on the
property, among other remedies. If we were to breach such covenants or obligations, we may then
have to sell the Congress Center property either at a loss or at a time that prevents us from
achieving a higher price. Any failure to pay our indebtedness when due or failure to cure events of
default could result in higher interest rates during the period of the loan default and could
ultimately result in the loss of the property through foreclosure. Additionally, if the lender were
to seize our income from the property, we would no longer have any discretion over the use of the
income, which may adversely impact our ability to make liquidating distributions to our unit
holders.
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Losses for which we either could not or did not obtain insurance will adversely affect our earnings
and we may be unable to comply with insurance requirements contained in mortgage or other
agreements due to high insurance costs.
We endeavor to maintain comprehensive insurance on the property we own, including liability
and fire and extended coverage, in amounts sufficient to permit the replacement of the one
remaining unconsolidated property in the event of a total loss, subject to applicable deductibles.
However, we could still suffer a loss due to the cost to repair any damage to the one remaining
unconsolidated property that is not insured or is underinsured. There are types of losses,
generally of a catastrophic nature, such as losses due to terrorism, wars, earthquakes, floods or
acts of God that are either uninsurable or not economically insurable. If such a catastrophic event
were to occur, or cause the destruction of our one remaining unconsolidated property, we could lose
both our invested capital and anticipated profits from such one remaining unconsolidated property.
Additionally, we could default under debt or other agreements if the cost and/or availability of
certain types of insurance make it impractical or impossible to comply with covenants relating to
the insurance we are required to maintain under such agreements. In such instances, we may be
required to self-insure against certain losses or seek other forms of financial assurance.
Additionally, inflation, changes in building codes and ordinances, environmental considerations and
other factors also might make it infeasible to use insurance proceeds to replace a property if it
is damaged or destroyed. Under such circumstances, the insurance proceeds received by us might not
be adequate to restore our economic position with respect to the affected property.
On February 17, 2010, we received a letter from our lender stating that our insurance policy
covering the Congress Center property was deficient because several of the carriers providing
coverage under our policy did not meet one or more of the carrier rating requirements as set forth
in the loan documents. Since the renewal of our insurance policy on March 5, 2010, we had been
working with our lender and our insurance carriers to cure the deficiencies, and our lender
extended the period of time allowed to bring such deficiencies into compliance with the
requirements set forth in the loan documents to September 30, 2010. On September 17, 2010, we cured
the deficiencies by obtaining a new insurance policy covering the Congress Center property with an
insurance carrier meeting the rating requirements as set forth in the loan documents. However, we
can give no assurance that we will be able to maintain such insurance coverage in compliance with
the loan documents.
We may be unable to sell our interest in the Congress Center property within our expected timeframe
or at our expected value.
Based on current conditions in the real estate market, we currently expect to sell our
interest in the Congress Center property by December 31, 2012 and anticipate completing our plan of
liquidation by March 31, 2013. Our investment in the Congress Center property is held as a member
of a limited liability company, or LLC, that holds an undivided tenant-in-common, or TIC, interest
in the property. Under the liquidation basis of accounting, we account for this interest at its
estimated fair value. As of September 30, 2010, our proportionate share of the estimated fair value
of this property was $638,000. Because of the nature of joint ownership, we will need to agree with
our co-owners on the terms of the property sale before the sale can be affected. There can be no
assurance that we will agree with our co-owners on satisfactory sales terms for this property. If
the parties are unable to agree, the matter could ultimately be presented to a court of law, and a
judicial partition could be sought. A failure to reach agreement with these parties regarding the
sales terms of this property may significantly delay the sale of the property, which would delay
and possibly reduce liquidating distributions to our unit holders. We may be unable to receive our
expected value for this property because we hold a minority interest in the LLC and, thus, cannot
sell our property interest held in the LLC or force the sale of the Congress Center property in its
entirety.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None.
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4. | [Removed and Reserved.] |
Item 5. | Other Information. |
None.
Item 6. | Exhibits. |
The exhibits listed on the Exhibit Index (following the signatures section of this report) are
included, or incorporated by reference, in this quarterly report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.
NNN 2002 Value Fund, LLC | ||||
By: Grubb & Ellis Realty Investors, LLC, its Manager | ||||
November 12, 2010
|
/s/ Jeffrey T. Hanson | |||
Date
|
||||
President | ||||
Grubb & Ellis Realty Investors, LLC, | ||||
the Manager of NNN 2002 Value Fund, LLC | ||||
(principal executive officer) | ||||
November 12, 2010
|
/s/ Paul E. Henderson | |||
Date
|
||||
Chief Accounting Officer | ||||
Grubb & Ellis Realty Investors, LLC, | ||||
the Manager of NNN 2002 Value Fund, LLC | ||||
(principal financial officer) |
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EXHIBIT INDEX
Pursuant to Item 601(a)(2) of Regulation S-K, this Exhibit Index immediately precedes the
exhibits.
The following exhibits are included, or incorporated by reference, in this Quarterly Report on
Form 10-Q for the period ended September 30, 2010 (and are numbered in accordance with Item 601 of
Regulation S-K).
2.1 | NNN 2002 Value Fund, LLC Plan of Liquidation and Dissolution, as
approved by unit holders on September 7, 2005 and as currently in
effect (included as Exhibit A to our Definitive Proxy Statement
filed on August 4, 2005 and incorporated herein by reference) |
|||
3.1 | Articles of Organization of NNN 2002 Value Fund, LLC, dated May 1,
2002 (included as Exhibit 3.1 to our Amendment No. 1 to Form 10
Registration Statement filed on February 28, 2005 and incorporated
herein by reference) |
|||
10.1 | Operating Agreement of NNN 2002 Value Fund, LLC, (included as
Exhibit 10.1 to our Amendment No. 1 to Form 10 Registration
Statement filed on February 28, 2005 and incorporated herein by
reference) |
|||
10.2 | Management Agreement between NNN 2002 Value Fund, LLC and Triple
Net Properties Realty, Inc. (included as Exhibit 10.2 to our
Amendment No. 1 to Form 10 Registration Statement filed on February
28, 2005 and incorporated herein by reference) |
|||
31.1 | * | Certification of Principal Executive Officer, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
||
31.2 | * | Certification of Principal Financial Officer, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
||
32.1 | ** | Certification of Principal Executive Officer, pursuant to 18 U.S.C.
Section 1350, as created by Section 906 of the Sarbanes-Oxley Act
of 2002 |
||
32.2 | ** | Certification of Principal Financial Officer, pursuant to 18 U.S.C.
Section 1350, as created by Section 906 of the Sarbanes-Oxley Act
of 2002 |
* | Filed herewith. | |
** | Furnished herewith. |
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