UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-K

 

 

Commission file number 1-8122

GRUBB & ELLIS COMPANY
(Exact name of registrant as specified in its charter)

 

 

1551 North Tustin Avenue, Suite 300, Santa Ana, California 92705
(Address of principal executive offices) (Zip Code)

 

(714) 667-8252

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

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 þ     No o

 

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 its definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

The aggregate market value of voting common stock held by non-affiliates of the registrant as of June 30, 2010 was approximately $46,658,151 based on the last sales price on June 30, 2010 on the New York Stock Exchange of $0.98 per share for the registrant’s common stock.

 

The number of shares outstanding of the registrant’s common stock as of March 28, 2011 was 69,921,581 shares.

 

 

GRUBB & ELLIS COMPANY
FORM 10-K

TABLE OF CONTENTS

 

GRUBB & ELLIS COMPANY

 

PART I

 

 

General

 

Grubb & Ellis Company (which we may refer to as we, us, or our) was founded more than 50 years ago with a single office in San Francisco. Today, Grubb & Ellis is a commercial real estate services and investment management company with over 5,200 professionals in more than 100 company-owned and affiliate offices throughout the United States (“U.S.”). Our professionals draw from a unique platform of real estate services, practice groups and investment products to deliver comprehensive, integrated solutions to real estate owners, tenants, investors, lenders and corporate occupiers. Our range of services includes tenant representation, property and agency leasing, commercial property and corporate facilities management, property sales, appraisal and valuation and commercial mortgage brokerage and investment management. Our transaction, management, consulting and investment services are supported by highly regarded proprietary market research and extensive local expertise. Through our investment management business, we are a leading sponsor of real estate investment programs, including public non-traded real estate investment trusts (“REITs”).

 

During 2010, we generated revenue of $575.5 million, a 9 percent increase compared with 2009. This increase was largely attributable to the investments we have made in talent over the past two years, the expansion of our service platform and the improvement in overall market conditions. We recruited 122 senior brokerage professionals to our company in 2010 and expanded our service offerings to include debt and equity placement and appraisal and valuation services. We also expanded our geographic reach by opening owned offices in Cincinnati, Phoenix and San Diego and acquiring our affiliates in Las Vegas and central Florida, adding offices in Orlando, Tampa and Melbourne. We also took steps to rationalize our cost structure, reducing our corporate overhead by 24 percent to $34.0 million in 2010, from $44.7 million in 2009.

 

Recent Strategic and Financing Initiatives

 

On March 21, 2011, we announced, among other things, that we had retained JMP Securities LLC as an advisor to explore strategic alternatives for the Company, including a potential merger or sale transaction. On March 30, 2011, we entered into a commitment letter and exclusivity agreement with Colony Capital Acquisitions, LLC, pursuant to which, as discussed more fully below, (i) Colony Capital Acquisitions, LLC and one or more of its affiliates (collectively, “Colony”) agreed to provide an $18.0 million senior secured multiple draw term loan credit facility (the “Senior Secured Credit Facility”), and (ii) Colony obtained the exclusive right for sixty (60) days, commencing on March 30, 2011, to negotiate a strategic transaction with the Company. The entering into the Senior Secured Credit Facility, and all closings thereunder, are subject to customary terms and provisions, including delivery of opinions, good standing certificates, and customary representations, warranties and covenants.

 

Under the Senior Secured Credit Facility, we will have the right, upon twelve (12) business days notice and prior to May 15, 2011, to effect an initial draw of the lesser of $9.0 million or 100% of the eligible accounts receivable of (i) Grubb & Ellis Company (“Parent”) plus (ii) its subsidiary, Grubb & Ellis Management Services, Inc. (the “Borrower”). Thereafter, we will have the right to draw up to the lesser of $18.0 million or 100% of the eligible accounts receivable of the Parent and Borrower; provided, that, we may not make more than two (2) draws during the term (the “Loan”). The Loan, which will mature on March 1, 2012, will bear interest at the rate of 11% per annum and increases by 50 basis points at the end of each three (3) month period the Loan is outstanding. The Loan will be required to be prepaid upon certain events, including upon acceleration of or a monetary default under our Convertible Notes, and may be prepaid at our option at a premium equal to 4% of the principal amount of the Loan outstanding in the event only the initial draw is made under the Senior Secured Credit Facility and 2% of the principal amount of the Loan outstanding if both draws have been made under the Senior Secured Credit Facility. The Loan will be secured by a first priority lien on all of our assets, subject to certain customary exceptions, and the Senior Credit Facility will expressly permit the sale of our Daymark subsidiary. Upon the closing of the Senior Secured

Credit Facility, Colony will receive (i) a closing fee of $180,000, plus (ii) a three (3) year common stock purchase warrant, exercisable for a nominal consideration, for up to 6,712,000 shares of our common stock, provided that the warrants shall not be exercisable unless (x) a fundamental change occurs and the price paid for our common stock is equal to $1.10 per share (subject to customary adjustments), or (y) the volume weighted average price of our common stock for any consecutive 30-day period is equal to or greater than $1.10 per share. The warrant holder will be entitled to cashless exercise, and will also be entitled to piggyback and demand registration rights with respect to the shares of common stock issuable upon the exercise of the warrant. In addition, we will be entitled to make, in lieu of cash interest, payment-in-kind interest payments on the Loan, in which event there will be a formulaic increase in the number of shares issuable upon the exercise of the warrant. We are also obligated to pay Colony’s reasonable costs to effect the Loan transaction.

 

Pursuant to the exclusivity agreement, Colony has sixty (60) days, commencing on March 30, 2011, to negotiate a strategic transaction with us. In the event we and Colony enter into a definitive agreement for a strategic transaction, we then have twenty-five (25) business days to conduct a market check to solicit a competing transaction, subject to a twenty-four (24) hour matching right by Colony, as well as a 1% termination fee. Following this twenty-five (25) business day market check, the strategic transaction entered into with Colony will be subject to a customary no shop and fiduciary out with a 3% termination fee.

 

Business Segments

 

In the fourth quarter of 2010, we added a fourth reporting segment with the creation of Daymark Realty Advisors, Inc. (“Daymark”) to manage our legacy tenant-in-common (“TIC”) portfolio. Our four business segments are as follows: (1) Management Services, which includes property management, corporate facilities management, project management, client accounting, business services and engineering services for corporate occupier and real estate investor clients (2) Transaction Services, which comprises our real estate brokerage, valuation and appraisal operations; (3) Investment Management, which encompasses acquisition, financing, disposition and asset management services for our investment programs and dealer-manager services by our securities broker-dealer, which facilitates capital raising transactions for its real estate investment trust (“REIT”) and other investment programs; and (4) Daymark, which includes our legacy TIC business. Additional information on these business segments can be found in Note 26 of Notes to Consolidated Financial Statements in Item 8 of this Report.

 

Management Services

 

We deliver a full suite of integrated property, facility, asset, construction, business and engineering management services to corporate and institutional clients as well as property owners and tenants. Additionally, we provide consulting services, including site selection, feasibility studies, exit strategies, market forecasts, appraisals, strategic planning and research services.

 

We manage a broad range of properties including headquarters, facilities and office space for a broad cross section of corporations, including Fortune 500 companies. Our skills extend to management of industrial, manufacturing and warehousing facilities as well as data centers and retail outlets for real estate users and investors.

 

Our business objective is to provide customized programs that focus on cost-efficient operations and tenant retention, and we believe that Grubb & Ellis has differentiated itself in this highly competitive arena through service quality and a commitment to value-added solutions.

 

We are focused on expanding the scope of products and services offered, while ensuring that we continue to build client relationships with best-in-class service. In 2010, we announced a strategic alliance with Manhattan Software, Inc. (“Manhattan”), the global leader in enterprise real estate software, creating a unique real estate management partnership which we will offer to new and existing clients. By partnering with Manhattan, we will be able to provide corporate real estate users best-in-class workplace management technology and a truly integrated real estate management solution.

Our Management Services business ended 2010 with 255.1 million square feet of property under management, up from 240.7 million square feet a year earlier. During 2010, we added six new corporate outsourcing relationships and expanded the work we do for an additional 14 clients. During the fourth quarter of 2010, we were selected by a Fortune 100 global financial services provider to manage its more than 10-million-square-foot U.S. real estate portfolio.

 

Our Management Services segment’s five largest customers accounted for 37.2% of Management Services revenue in 2010, including 13.7% and 11.9% from its largest and second largest customers, respectively.

 

Transaction Services

 

With over 1,500 brokerage sales professionals within our owned and affiliate offices, we are one of the largest real estate brokerage firms in the country. Each year, our professionals successfully complete thousands of transactions on behalf of our clients. As of December 31, 2010, we operated 109 owned and affiliate offices throughout North America (56 owned and 53 affiliates). Focusing on the overall business objectives of our clients, we utilize our research capabilities, local knowledge, extensive properties database and the skill of our brokerage professionals to create, buy, sell and lease opportunities for both users and owners of commercial real estate. With a comprehensive approach to transactions, we offer a full suite of services to clients, from site selection and sale negotiations to needs analysis, occupancy projections, prospect qualification, pricing recommendations, long-term value consultation, tenant representation and consulting services.

 

We actively engage our brokerage sales professionals in the execution of our marketing strategy. Regional and metro-area managing directors, who are responsible for operations in each major market, facilitate the professional development of our brokers. Through our specialty practice groups, sales professionals share information regarding local, regional and national industry trends and participate in national marketing activities, including trade shows and seminars. This ongoing communication among brokers serves to enhance client service as well as the expertise of our professionals. We also support the continuing education of our brokerage sales professionals through more formal education, including programs offering sales and motivational training and cross-functional networking and business development opportunities.

 

In the local markets in which we do not own offices, we have affiliation agreements with independent real estate services providers that conduct business under our brand. These affiliate relationships are primarily in key secondary and tertiary markets where our clients have a need for real estate services, but would not support an owned office. Our affiliation agreements, which are generally multi-year contracts, provide for exclusive mutual referrals in their respective markets, generating referral fees. Through our affiliate offices, we have access to over 550 brokers with local market research capabilities. During 2010, as part of our strategy to increase our presence in the Top 50 markets, we acquired our affiliates in Las Vegas and central Florida, and opened offices in Cincinnati, Phoenix and San Diego, all markets in which we previously operated with an affiliate.

 

Our Corporate Services Group provides comprehensive coordination of real estate related services to help realize the needs of corporate occupiers’ real estate portfolios and to maximize their business objectives. These services include consulting services, lease administration, strategic planning, project management, account management and international services.

 

During 2010, we extended our service offerings to include appraisal services and debt and equity brokerage services. In the fourth quarter of 2010, we launched Grubb & Ellis Landauer Valuation Advisory Services taking space in 24 existing office locations, creating a national appraisal platform for these services. As of December 31, 2010, we had 73 employees in this business and expect to significantly grow and expand this platform. In addition, as of December 31, 2010, we had 11 debt and equity-focused brokers located in a number of key markets.

 

Investment Management

 

Grubb & Ellis and its subsidiaries sponsor real estate investment programs that provide individual investors the opportunity to invest in a broad range of real estate investment vehicles, with a primary focus on

public non-traded REITs. We brand our investment programs to capitalize on the strength of the Grubb & Ellis brand and to leverage our various real estate service platforms.

 

Investment management products are distributed through our broker-dealer subsidiary, which is registered with the U.S. Securities and Exchange Commission (the “SEC”), the Financial Industry Regulatory Authority (“FINRA”) and all 50 states and the District of Columbia. Our securities company has agreements with an extensive network of broker dealers with selling relationships providing access to thousands of licensed registered representatives. Part of our focus is to continue to expand our network of broker-dealers which increases the opportunity to raise the amount of equity in our various investment programs.

 

Through our subsidiary, Grubb & Ellis Equity Advisors, LLC (“GEEA”), we sponsor and advise Grubb & Ellis Healthcare REIT II, Inc. (“Healthcare REIT II”), a public non-traded REIT focused on healthcare-related real estate that is registered with the SEC but is not listed on a national securities exchange. During 2010, Healthcare REIT II raised $136.9 million, up from $14.9 million in 2009 when the REIT first began raising equity. As of December 31, 2010, Healthcare REIT II’s portfolio consisted of nearly $200.0 million in healthcare related assets.

 

According to the Stanger Report, Winter 2011, published by Robert A. Stanger and Co., an independent investment banking firm, approximately $8.0 billion was raised in the non-traded REIT sector in 2010, an increase of over 19% from 2009, and we believe it is an industry in which we have considerable expertise and the opportunity to expand our operations.

 

Our Investment Management segment earns substantially all of its revenue from Healthcare REIT II.

 

Daymark Realty Advisors

 

On February 10, 2011, we announced the creation of Daymark, a wholly owned and separately managed subsidiary that is responsible for the management of our tenant-in-common portfolio. Subsequent thereto we announced that we had retained FBR Capital Markets & Co to explore strategic alternatives with respect to Daymark and its portfolio, which includes over 8,700 multi-family units and 33.3 million square feet of commercial office properties. Daymark will provide specialized services to our TIC portfolio, which require unique expertise and client focus, especially as the commercial real estate industry begins to recover from the significant downturn of the past few years. Daymark will provide strategic asset management, property management, structured finance, accounting and loan advisory services to our existing portfolio.

 

On March 25, 2011, we entered into a Services Agreement (the “Services Agreement”) with certain of our wholly-owned subsidiaries, including Daymark, pursuant to which we will provide certain corporate, administrative and other services to the various subsidiaries, and in connection therewith, such subsidiaries shall recognize the provision of such services and the allocation of the costs associated therewith. The Services Agreement, among other things, memorializes the intercompany account balances between us and certain of our subsidiaries and the treatment of such intercompany balances upon the occurrence of certain events.

 

Our Strategy

 

As one of the oldest and most recognized brands in the commercial real estate industry, Grubb & Ellis is known for its broad geographic reach, long-term client relationships and full range of product and service offerings. Our strategy is to leverage these strengths to broaden our real estate services to the industry. We are focused on four primary goals: increasing the scale and productivity of our leasing and investment sales brokerage professionals; increasing the scope of innovative comprehensive solutions and services we provide to our commercial real estate clients; expanding our owner and occupier property and facilities management portfolio; and growing our position in the sponsorship of public non-traded REITs.

 

Convertible Notes

 

During the second quarter of 2010, we completed an offering (“Offering”) of $31.5 million of unsecured convertible notes (“Convertible Notes”) to qualified institutional buyers pursuant to Section 144A of the

Securities Act of 1933, as amended. The Convertible Notes pay interest at a rate of 7.95% per year semi-annually in arrears on May 1 and November 1 of each year, beginning November 1, 2010. The Convertible Notes mature on May 1, 2015. We received net proceeds from the Offering of approximately $29.4 million after deducting all offering expenses. We used the net proceeds from the Offering to fund growth initiatives, short-term working capital and for general corporate purposes.

 

Holders of the Convertible Notes may convert notes into shares of our common stock at the initial conversion rate of 445.583 shares per $1,000 principal amount of the Convertible Notes (equal to a conversion price of approximately $2.24 per share of our common stock), subject to adjustment in certain events (but not for accrued interest) at any time prior to the close of business on the scheduled trading day before the stated maturity date. In addition, following certain corporate transactions, we will increase the conversion rate for a holder who elects to convert in connection with such corporate transaction by a number of additional shares of our common stock as set forth in the indenture.

 

No holder of the Convertible Notes will be entitled to acquire shares of common stock delivered upon conversion to the extent (but only to the extent) such receipt would cause such converting holder to become, directly or indirectly, a “beneficial owner” (within the meaning of Section 13(d) of the Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder) of more than 14.99% of the shares of our common stock outstanding at such time.

 

We may not redeem the Convertible Notes prior to May 6, 2013. On or after May 6, 2013 and prior to the maturity date, we may redeem for cash all or part of the Convertible Notes at 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest, including any additional interest, up to but excluding the redemption date.

 

Under certain circumstances following a fundamental change, which is substantially similar to a fundamental change with respect to our Preferred Stock, we will be required to make an offer to purchase all of the Convertible Notes at a purchase price of 100% of their principal amount, plus accrued and unpaid interest, if any, to the date of repurchase.

 

The Convertible Notes are our unsecured senior obligations that:

 

 

The indenture provides for customary events of default, including our failure to pay any indebtedness for borrowed money, other than non-recourse mortgage debt, when due in excess of $1.0 million.

 

On March 8, 2011, we commenced a consent solicitation to amend the indenture under which the Convertible Notes were issued to exclude our subsidiaries, Daymark and NNN Realty Advisors, Inc. (and each of their direct and indirect subsidiaries) from certain events of default under the Convertible Notes. The consent solicitation was initially scheduled to expire on March 21, 2011 and was extended by us on that date to March 25, 2011. We subsequently extended the expiration date of the consent solicitation a second time on March 25, 2011 to April 4, 2011. We offered a consent fee to holders of the Convertible Notes who consented to this amendment in the form of restricted shares of our common stock, subject to registration rights. Specifically, we initially offered a consent fee to consenting Note holders of approximately 36 restricted shares of common stock per each $1,000 principal amount of the Convertible Notes. In connection with the second extension of the consent solicitation, we increased the consent fee to an amount equal to 4% of the principal amount of the Convertible Notes held by the consenting holder divided by the closing price of the common stock on the expiration of the consent solicitation, but in no event greater than $.99 per share and in no event less than $.89 per share. In the event that we obtain the requisite consents, the restricted shares of common stock that we will issue to those holders of Convertible Notes who properly consent are subject to registration rights. Pursuant to a registration rights agreement we have agreed to enter into with the consenting holders of Convertible Notes, we will promptly file a shelf registration statement registering the resale of the restricted

stock with the Securities and Exchange Commission (the “Commission”), and will use commercially reasonable efforts to cause the shelf registration statement to become effective within 30 days after the date the shelf registration statement is filed (or within 75 days of the date the shelf registration statement is filed if the registration statement is reviewed by the Commission). We will use its commercially reasonable efforts to keep the shelf registration statement effective until the earlier to occur of: (x) the date all of the restricted shares of common stock have been sold pursuant to the shelf registration statement, (y) the one-year anniversary of the latest issue date of restricted shares of common stock, and (z) the date all restricted shares of common stock have been sold pursuant to Rule 144. If we default on our registration obligations under the registration rights agreement, we will have to pay the holder cash in an amount that shall accrue at a rate of 2.0% per month on the average daily aggregate market value of the restricted stock issued as payment of the consent fee, determined daily by multiplying the amount of such Restricted Stock by $1.11 per share, until all such registration defaults are cured.

 

Property Dispositions

 

On December 30, 2010, we completed the sale of NNN/SOF Avallon LLC (“Avallon”), an office building located in Austin, Texas, to an unaffiliated entity for a sales price of $37.0 million.

 

Industry and Competition

 

The U.S. commercial real estate services industry is large and highly fragmented, with thousands of companies providing asset management, investment management and brokerage sales and leasing transaction services. In recent years the industry has experienced substantial consolidation, a trend that is expected to continue.

 

We compete in a variety of service businesses within the commercial real estate industry. Each of these business areas is highly competitive on a national as well as local level. We face competition not only from other regional and national service providers, but also from global real estate providers, boutique real estate advisory firms and appraisal firms. Although many of our competitors are local or regional firms that are substantially smaller than us, some competitors are substantially larger than us on a local, regional, national and/or international basis.

 

Within the management services business, according to a recent survey published in 2010 by National Real Estate Investor, the top 25 companies in the industry manage over 10.5 billion square feet of commercial property. We rank as the seventh largest property management company in this survey with 304.7 million square feet under management at year end 2009, including property under management in our affiliate offices. The largest company in the survey had 2.5 billion square feet under management.

 

Our investment management business is subject to competition on a number of different levels. We compete with both large and small investment sponsors of non-traded REITs and face competition from new entrants or entrants that focus on raising capital through the same channels as us. With regard to fundraising in the retail securities arena, our securities company faces competition to acquire limited shelf space in selling group firms and faces fundraising challenges from an industry-wide oversupply of product seeking limited investor dollars. Separate from fundraising competition, the investment programs themselves face competition generally from REITs, institutional pension plans and other public and private real estate companies and private real estate investors for the acquisition of properties and for the limited financing available to real estate investors.

 

While there can be no assurances that we will be able to continue to compete effectively, maintain current fee levels or margins, or maintain or increase our market share, based on our competitive strengths, we believe that we have the infrastructure and personnel to continue to operate in this highly competitive industry. Specifically, as our business involves the management, leasing, acquisition, disposition, and financing of commercial properties, many of such activities are dependent, either directly or indirectly, and in whole or in part, on the availability and cost of credit. In addition, the performance of real estate investment and leasing markets is dependent on the level of economic activity on a regional and local basis.

Environmental Regulation

 

Federal, state and local laws and regulations impose environmental zoning restrictions, use controls, disclosure obligations and other restrictions that impact the management, development, use, and/or sale of real estate. Such laws and regulations tend to discourage sales and leasing activities, as well as the willingness of mortgage lenders to provide financing, with respect to some properties. If transactions in which we are involved are delayed or abandoned as a result of these restrictions, the brokerage business could be adversely affected. In addition, a failure by us to disclose known environmental concerns in connection with a real estate transaction may subject us to liability to a buyer or lessee of property.

 

We generally undertake a third-party Phase I investigation of potential environmental risks when evaluating an acquisition for a sponsored program. A Phase I investigation is an investigation for the presence or likely presence of hazardous substances or petroleum products under conditions that indicate an existing release, a post release or a material threat of a release. A Phase I investigation does not typically include any sampling. Our programs may acquire a property with environmental contamination, subject to a determination of the level of risk and potential cost of remediation.

 

Various environmental laws and regulations also can impose liability for the costs of investigating or remediation of hazardous or toxic substances at sites currently or formerly owned or operated by a party, or at off-site locations to which such party sent wastes for disposal. In addition, an increasing number of federal, state, local and foreign governments have enacted various treaties, laws and regulations that apply to environmental and climate change, in particular seeking to limit or penalize the discharge of materials such as green house gas into the environment or otherwise relating to the protection of the environment. As a property manager, we could be held liable as an operator for any such contamination or discharges, even if the original activity was legal and we had no knowledge of, or did not cause, the release or contamination. Further, because liability under some of these laws is joint and several, we could be held responsible for more than our share, or even all, of the costs for such contaminated site if the other responsible parties are unable to pay. We could also incur liability for property damage or personal injury claims alleged to result from environmental contamination or discharges, or from asbestos-containing materials or lead-based paint present at the properties that it manages. Insurance for such matters may not always be available, or sufficient to cover our losses. Certain requirements governing the removal or encapsulation of asbestos-containing materials, as well as recently enacted local ordinances obligating property managers to inspect for and remove lead-based paint in certain buildings, could increase our costs of legal compliance and potentially subject us to violations or claims. Although such costs have not had a material impact on our financial results or competitive position in 2010, the enactment of additional regulations, or more stringent enforcement of existing regulations, could cause us to incur significant costs in the future, and/or adversely impact the brokerage and management services businesses.

 

Seasonality

 

A substantial portion of our revenues are derived from brokerage transaction services, which are seasonal in nature. As a consequence, our revenue stream and the related commission expense are also subject to seasonal fluctuations. However, our non-variable operating expenses, which are treated as expenses when incurred during the year, are relatively constant in total dollars on a quarterly basis. We typically experience our lowest quarterly revenue from transaction services in the quarter ending March 31 of each year with higher and more consistent revenue in the quarters ending June 30 and September 30. The quarter ending December 31 has historically provided the highest quarterly level of revenue due to increased activity caused by the desire of clients to complete transactions by calendar year-end. Transaction services revenue represented 41.5% of total revenue for 2010.

 

Regulation

 

Transaction and Property Management Services

 

We along with our brokers, salespersons, appraisers and, in some instances, property managers are regulated by the states in which we conduct business. These regulations may include licensing procedures,

prescribed professional responsibilities and anti-fraud provisions. Our activities are also subject to various local, state, national and international jurisdictions’ fair advertising, trade, housing and real estate settlement laws and regulations and are affected bylaws and regulations relating to real estate and real estate finance and development. Because of the size and scope of real estate sales transactions there is difficulty of ensuring compliance with the numerous state statutory requirements and licensing regimes and there is possible liability resulting from non-compliance.

 

Dealer-Manager Services

 

The securities industry is subject to extensive regulation under federal and state law. Broker-dealers are subject to regulations covering all aspects of the securities business. In general, broker-dealers are required to register with the SEC and to be members of FINRA. As a member of FINRA, our securities companies are subject to the requirements of the Securities Exchange Act of 1934 as amended (the “Exchange Act”) and the rules promulgated thereunder and to applicable FINRA rules. These regulations establish, among other things, the minimum net capital requirements for the broker-dealers. Such business is also subject to regulation under various state laws in all 50 states and the District of Columbia, including registration requirements.

 

Service Marks

 

We have registered trade names and service marks for the “Grubb & Ellis” name and logo and certain other trade names. The “Grubb & Ellis” brand name is considered an important asset of ours and we actively defend and enforce such trade names and service marks.

 

Real Estate Markets

 

Our business is highly dependent on the commercial real estate markets, which in turn are impacted by numerous factors, including but not limited to the general economy, availability and terms of credit and demand for real estate in local markets. Changes in one or more of these factors could either favorably or unfavorably impact the volume of transactions, demand for real estate investments and prices or lease terms for real estate. Consequently, our revenue from transaction services, investment management operations and property management fees, operating results, cash flow and financial condition are impacted by these factors, among others.

 

Employees

 

As of December 31, 2010, we had over 4,500 employees including more than 950 transaction professionals working in 56 owned offices as well as over 550 affiliate transaction professionals working in 53 affiliate offices. Nearly 2,350 employees serve as property and facilities management staff at our client-owned properties and our clients reimburse us fully for their salaries and benefits. We consider our relationship with our employees to be good and have not experienced any interruptions of our operations as a result of labor disagreements.

 

Availability of this Report

 

Our internet address is www.grubb-ellis.com. On the Investor Relations page on this web site, we post our Annual Reports on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K and our proxy statements as soon as reasonably practicable after it files them electronically with the SEC. All such filings on the Investor Relations web page are available to be viewed free of charge. In addition, the SEC maintains a website that contains these reports at www.sec.gov. Information contained on our website and the SEC website is not part of this Report on Form 10-K or our other filings with the SEC. We assume no obligation to update or revise any forward-looking statements in the Annual Report on Form 10-K, whether as a result of new information, future events or otherwise, unless we are required to do so by law.

 

In addition, a copy of this Report on Form 10-K is available without charge by contacting Investor Relations, Grubb & Ellis Company, 1551 North Tustin Avenue, Suite 300, Santa Ana, California 92705.

 

Risks Related to Our Business in General

 

Our current cash on-hand and cash flow from operations may not be sufficient to fund our future operating costs and liabilities or our growth strategy.

 

There can be no assurances that our current cash on-hand and anticipated cash flow from operations will be sufficient to meet all of our cash requirements. As December 31, 2010, our consolidated cash and cash equivalents balance was $30.9 million. Given the seasonality of our business, we anticipate net negative cash flow over the course of at least the first two quarters of the year. We have historically relied upon access to the credit markets from time to time as a source of liquidity for the portion of our working capital requirements not provided by cash from operations.

 

A failure to close our Senior Secured Credit Facility with Colony Capital would have a material adverse affect on our business and financial condition.

 

On March 30, 2011 we entered into a commitment letter with respect to the $18.0 million Senior Secured Credit Facility. The entering into of the Senior Secured Credit Facility, and all closings thereunder, are subject to customary terms and provisions, including delivery of opinions, good standing certificates, and customary representations, warranties and covenants. In the event that we are not successful in meeting such conditions and are unable to obtain the full $18.0 million of funding under the Senior Secured Credit Facility, or an alternative funding facility, it could create substantial doubt about our ability to continue as a going concern for the twelve month period ending December 31, 2011.

 

We may not have sufficient liquidity to satisfy our intercompany payable to NNN Realty Advisors, Inc., should such obligation become due and payable.

 

Since our merger with NNNRA in December of 2007, we, on the one hand, and NNN Realty Advisors, Inc. (“NNNRA”) and its subsidiaries, on the other hand, have engaged in on-going intercompany transactions and services in the normal course of business. It has been our long-standing practice to calculate and report these intercompany balances on a net basis. As of December 31, 2010, based upon unaudited numbers, the cumulative net result of these transactions and services was an intercompany balance payable from us to NNNRA in the amount of approximately $13.9 million. Furthermore, NNNRA and its subsidiaries held approximately $8.1 million of cash and cash equivalents at December 31, 2010, of our total cash and cash equivalents of approximately $30.9 million. The intercompany balance will fluctuate over time as a result of ongoing intercompany transactions. Similarly, the amount of cash and cash equivalents held by NNNRA and its subsidiaries may increase or decrease over time based on such entities’ results of operations. In the event of any adversity between us and NNNRA, there can be no assurance that NNNRA will not make an immediate demand for payment of the intercompany payable or that we will have access to the cash and cash equivalents held by NNNRA. Moreover, the ability to net debits and credits between us, NNNRA and our subsidiaries in the event of a bankruptcy filing by all or any one of these entities may be limited by 11 U.S.C. § 553 and the case law interpreting 11 U.S.C. § 553.

 

We and our Daymark affiliate are involved in litigation relating to its tenant-in-common portfolio that may have a material adverse effect.

 

We and our Daymark affiliate have been named as defendants in multiple lawsuits relating to certain of our investment management offerings, in particular Daymark’s TIC programs. These lawsuits allege a variety of claims in connection with these offerings, including mismanagement, breach of contract, negligence, fraud,

breach of fiduciary duty and violations of state and federal securities laws, among other claims. Plaintiffs in these suits seek a variety of remedies, including rescission, actual and punitive damages, injunctive relief, and attorneys’ fees and costs. In many instances, the damages being sought are unspecified and to be determined at trial. It is difficult to predict the ultimate disposition of these lawsuits and our ultimate liability with respect to such claims and lawsuits. It is also difficult to predict the cost of defending these matters and to what extent claims will be covered by our existing insurance policies. In the event of an unfavorable outcome, the amounts we may be required to pay in the discharge of liabilities or settlements could have a material adverse effect on our cash flows, financial position and results of operations. Additional information on our legal proceedings can be found in Item 3.

 

We may be required to satisfy guaranty and indemnity obligations in connection with loans that were used to finance properties acquired by our investment programs now managed by Daymark.

 

Historically our investment management subsidiaries provided non-recourse carve-out guarantees or indemnities relating to loans for properties now under the management of Daymark. As of December 31, 2010, there were 133 properties under management with non-recourse carve-out loan guarantees or indemnities of approximately $3.1 billion in total principal outstanding with terms ranging from 1 to 10 years, secured by properties with a total aggregate purchase price of approximately $4.3 billion as of December 31, 2010.

 

A “non-recourse carve-out” guarantee or indemnity potentially imposes liability on the guarantor or indemnitor in the event the borrower engages in certain acts prohibited by the loan documents. Each non-recourse/carve-out guarantee or indemnity is an individual document entered into with the mortgage lender in connection with the purchase or refinance of an individual property. While there is not a standard document evidencing these guarantees and indemnities, liability under the non-recourse/carve-out guarantees or indemnities generally may be triggered by, among other things, any or all of the following:

 

 

Certain acts (typically the first three listed above) may render the entire debt balance recourse to the guarantor or indemnitor, while the liability for other acts is typically limited to the damages incurred by the lender. Notice and cure provisions vary between guarantees and indemnities. Generally the guarantor or indemnitor irrevocably and unconditionally guarantees or indemnifies the lender the payment and performance of the guaranteed or indemnified obligations as and when the same shall be due and payable, whether by lapse of time, by acceleration or maturity or otherwise, and the guarantor or indemnitor covenants and agrees that it is liable for the guaranteed or indemnified obligations as a primary obligor.

 

In addition, the consolidated variable interest entities (“VIEs”) and unconsolidated VIEs are jointly and severally liable on the non-recourse mortgage debt related to the interests in our TIC investments totaling

$405.3 million and $277.0 million for the consolidated VIEs as of December 31, 2010 and 2009, respectively, and $0 and $93.3 million for the unconsolidated VIEs as of December 31, 2010 and 2009, respectively.

 

If property values and performance decline, the risk of exposure under these guarantees increases. Management initially evaluates these guarantees to determine if the guarantee meets the criteria required to record a liability in accordance with the requirements of ASC Topic 460, Guarantees, (“Guarantees Topic”). As of December 31, 2010 and 2009, we had recourse guarantees of $24.9 million and $33.9 million, respectively, relating to debt of properties under management (of which $12.0 million and $12.0 million, respectively, is recourse back to Grubb & Ellis Company, the remainder of which is recourse to our Daymark subsidiary). As of December 31, 2010 and 2009, approximately $9.5 million and $9.8 million, respectively, of these recourse guarantees relate to debt that has matured, is in default, or is not currently in compliance with certain loan covenants (of which $2.0 million and $0, respectively, is recourse back to Grubb & Ellis Company, the remainder of which is recourse to our Daymark subsidiary). In addition, as of December 31, 2010, we had $8.0 million of recourse guarantees related to debt that will mature in the next twelve months (of which the entire amount is recourse back to Grubb & Ellis Company). Our evaluation of the potential liability arising from guarantees may prove to be inaccurate and liabilities may exceed estimates. In the event that actual losses materially exceed estimates, individual investment management subsidiaries may not be able to pay such obligations as they become due. Failure of any of our subsidiaries to pay such debts as they become due would likely have a materially negative impact on our ongoing business, and the investment management operations in particular. As of December 31, 2010 and 2009, we recorded a liability of $0.8 million and $3.8 million, respectively, which is included in other current liabilities, related to our estimate of probable loss related to recourse guarantees of debt of properties under management and previously under management.

 

Failure by our subsidiaries to pay liabilities arising under the non-recourse carve-out guarantees and indemnities when due, or the insolvency of Daymark or certain of its subsidiaries, including NNNRA, may trigger a cross default under our Convertible Notes.

 

In the event we or our Daymark subsidiaries incur liabilities under the non-recourse carve-out guarantees and indemnities in excess of $1,000,000 which are not satisfied when due, or Daymark or certain of its subsidiaries go into bankruptcy, it may result in a cross default under our Convertible Notes. Upon a cross default the entire $31.5 million principal amount of Convertible Notes could become due and payable, which would have a material and adverse effect on our liquidity and financial position.

 

There are no assurances that we will be able to obtain the requisite consents from our holders of Convertible Notes to amend the Convertible Note indenture to eliminate certain events of default, certain of which could occur as a consequence of recent events.

 

Our Convertible Notes contain various events of default, including, among others, that in the event we or any of our subsidiaries fail to pay any indebtedness for borrowed money in excess of $1,000,000 (other than non-recourse mortgage debt) when due, or go into bankruptcy, it could result in a cross default under our Convertible Notes. We are currently seeking the consent of holders of Convertible Notes holding in excess of 50% of the principal amount of the Convertible Notes to amend the indenture with respect to the Convertible Notes so as to eliminate these potential cross defaults with respect to our Daymark subsidiary and all of Daymark’s direct and indirect subsidiaries. Currently, in connection with bankruptcy filings effected by two unaffiliated, individual investor entities which are minority owners in two TIC programs located in Texas, Met Center 10 and 2400 West Marshall, that were originally sponsored by a subsidiary of Daymark, such subsidiary may become liable for amounts in excess of $1,000,000 with respect to either or both of these properties. In the event such were to occur, and we do not obtain the requisite consents and were unable to pay these amounts, it could result in a cross default of the Convertible Notes and accelerate the entire $30 million principal amount of the Convertible Notes, which would have a material adverse effect on our liquidity and financial position.

The insolvency of Daymark or one or more of its subsidiaries, including NNNRA and GERI, could subject us to variety of legal claims, cause reputational damage, result in a loss of business and employees and may have a material adverse effect on our business.

 

The current market value of many of the properties managed by Daymark and its affiliates have decreased as a result of the overall decline in the economy and commercial real estate markets and resulted in reductions in distributions in numerous investment programs, in many instances to a zero percent distribution rate. In addition, there have been a number of lawsuits initiated regarding the Daymark portfolio and its operations and, as noted above, Daymark and its subsidiaries may be liable with respect to certain loan guarantees, including partial recourse and non-recourse carve-out guarantees and indemnities. A materially adverse outcome with respect to these various factors, either individually or in their totality, may result in Daymark or one or more of its subsidiaries seeking protection from creditors through an insolvency proceeding. In such event, all or part of Daymark’s assets and operations would come under the supervision of the bankruptcy court. Because a bankruptcy or other insolvency proceeding involves an adjustment of the assets and liabilities of the bankrupt entity, a bankruptcy proceeding may result in adverse claims being brought against us and involve an adjustment of intercompany claims, including with respect to the intercompany payable from us to NNNRA, the result of which may result in material liabilities to us and our related parties and affiliates. In addition, a bankruptcy of Daymark or one or more of its affiliates may cause us reputational damage and may, among other things, negatively affect our ongoing investment management programs, including our sponsored non-traded REIT, which could have a material adverse effect on our business.

 

We are obligated to pay quarterly dividends with respect to our Preferred Stock; we failed to make our last preferred dividend payment.

 

We are obligated to pay quarterly dividends with respect to the 12% Preferred Stock and in the event such dividends are in arrears for six or more quarters, whether or not consecutive, subject to certain limitations, holders representing a majority of shares of Preferred Stock (voting together as a class with the holders of all other classes or series of preferred stock upon which like voting rights have been conferred and are exercisable) will be entitled to nominate and vote for the election of two additional directors to serve on our Board of Directors (the “Preferred Stock Directors”), until all unpaid dividends with respect to the Preferred Stock and any other class or series of preferred stock upon which like voting rights have been conferred and are exercisable have been paid or declared and a sum sufficient for payment is set aside for such payment; provided that the election of any such Preferred Stock Directors will not cause us to violate the corporate governance requirements of the New York Stock Exchange (“NYSE”) (or any other exchange or automated quotation system on which our securities may be listed or quoted) that requires listed or quoted companies to have a majority of independent directors; and provided further that the Board of Directors will, at no time, include more than two Preferred Stock Directors.

 

We failed to pay our last dividend which was due on March 31, 2011.

 

The ongoing weakness in the general economy and the real estate market has negatively impacted and could continue to negatively impact our business and financial results.

 

Periods of economic slowdown or recession can significantly reduce access to credit, lower employment levels, decreased demand for real estate, decreased real estate values or the perception that any of these events may occur, can reduce transaction volumes or demand for services for each of our business lines. The current condition of the national economy and the downturn in real estate markets have resulted in and may continue to result in:

 

 

 

The weakened real estate market in the United States, the limited availability of credit, high levels of unemployment, and the current general business and economic environment have impacted real estate services and investment management firms like ours through reduced transaction volumes, falling transaction values, lower real estate valuations, liquidity restrictions, market volatility, and the loss of confidence. We are not able to predict with certainty these economic and real estate market factors. The real estate market tends to be cyclical and related to the condition of the overall economy and to the perceptions of investors, developers and other market participants as to the economic outlook. A continued downturn in the real estate market or weakening of the national economy could negatively impact our business and results of operation.

 

We may not be able to comply with the NYSE’s continued listing requirements, which failure would cause our common stock to be delisted from trading on the NYSE, trigger a “fundamental change” and repurchase obligation under our Convertible Notes, and could have a material adverse effect on the liquidity and value of our common stock.

 

The NYSE’s continued listing standards require that we maintain an average market capitalization and shareowners’ equity of not less than $50.0 million and that our common stock, among other things, not have an average closing price of at least $1.00 over a consecutive thirty trading day period. As of December 31, 2010, we had a market capitalization and shareowner’s deficit of $89.1 million and $68.1 million, respectively, and a stock price of $1.27 per share. As of March 30, 2011, we had a stock price of $0.75 per share and a thirty day average of $1.04 per share. There can be no assurance that we will be able to maintain the minimum levels of market capitalization and shareowner’s equity and stock price as required by the NYSE. If we are unable to maintain compliance with the NYSE’s continued listing standard, our common stock will be delisted from the NYSE. As a result, we likely would have our common stock listed on another national exchange or quoted on the Over-the-Counter Bulletin Board (“OTC BB”) in order to have our common stock continue to be traded on a public market. Securities that trade on the OTC BB generally have less liquidity and greater volatility than securities that trade on the NYSE. Delisting from the NYSE and failure to register on another national exchange would trigger a “fundamental change” under the indenture for our Convertible Notes and allow the holders of the Convertible Notes to trigger a repurchase obligation by us of the Convertible Notes. We may not have sufficient funds to repurchase the Convertible Notes should such a fundamental change occur. Delisting from the NYSE may also preclude us from using certain state securities law exemptions, which could make it more difficult and expensive for us to raise capital in the future and more difficult for us to provide compensation packages sufficient to attract and retain top talent. In addition, because issuers whose securities trade on the OTC BB are not subject to the corporate governance and other standards imposed by the NYSE, and such issuers receive less news and analyst coverage, our reputation may suffer, which could result in a decrease in the trading price of our shares. The delisting of our common stock from the NYSE, therefore, could significantly disrupt the ability of investors to trade our common stock and could have a material adverse effect on us and the value and liquidity of our common stock.

 

We operate in a highly competitive business with numerous competitors, some of which may have greater financial and operational resources than we do.

 

We compete in a variety of service disciplines within the commercial real estate industry. Each of these business areas is highly competitive on a national as well as on a regional and local level. We face competition not only from other national real estate service providers, but also from global real estate service providers, boutique real estate advisory firms, consulting and appraisal firms. Depending on the product or service, we also faces competition from other real estate service providers, institutional lenders, insurance

companies, investment banking firms, investment managers and accounting firms, some of which may have greater financial resources than we do. We are also subject to competition from other large national firms and from multi-national firms that have similar service competencies to it. Although many of our competitors are local or regional firms that are substantially smaller than it, some of our competitors are substantially larger than us on a local, regional, national or international basis. In general, there can be no assurance that we will be able to continue to compete effectively with respect to any of our business lines or on an overall basis, or to maintain current fee levels or margins, or maintain or increase our market share.

 

As a service-oriented company, we depend upon the retention of senior management and key personnel, and the loss of our current personnel or our failure to hire and retain additional personnel could harm our business. Our current stock price, as well as limited number of stock available under our Omnibus Equity Plan, could materially impair our ability to hire and retain key personnel.

 

Our success is dependent upon our ability to retain our executive officers and other key employees and to attract and retain highly skilled personnel. We believe that our future success in developing our business and maintaining a competitive position will depend in large part on our ability to identify, recruit, hire, train, retain and motivate highly skilled executive, managerial, sales, marketing and customer service personnel. Competition for these personnel is intense, and we may not be able to successfully recruit, assimilate or retain sufficiently qualified personnel. We use equity incentives to attract and retain our key personnel. Our decreased stock price results in the decline in value of previously provided equity awards, which may result in an increase risk of loss of key personnel. The performance of our stock may also diminish our ability to offer attractive incentive awards to new hires. In addition, as of December 31, 2010, only 299,724 shares of common stock remained eligible for future grant under the Omnibus Equity Plan. The limited shares available for future grant under our Omnibus Equity Plan may limit our ability to retain key personnel and attract new hires. Our failure to recruit and retain necessary executive, managerial, sales, marketing and customer service personnel could harm our business and our ability to obtain new customers.

 

Failure to manage any future growth effectively may have a material adverse effect on our financial condition and results of operations.

 

Management will need to successfully manage the integration of recent acquisitions any future growth effectively. The integration and additional growth may place a significant strain upon management, administrative, operational and financial infrastructure. In addition, there can be no assurance that such acquisitions will be accretive or generate operating margins. Our ability to grow also depends upon our ability to successfully hire, train, supervise and manage additional executive officers and new employees, obtain financing for our capital needs, expand our systems effectively, allocate our human resources optimally, maintain clear lines of communication between our transactional and management functions and our finance and accounting functions, and manage the pressures on our management and administrative, operational and financial infrastructure. Additionally, managing future growth may be difficult due to the new geographic locations and our business lines. There can be no assurance that we will be able to accurately anticipate and respond to the changing demands we will face as we integrate and continues to expand our operations, and we may not be able to manage growth effectively or to achieve growth at all. Any failure to manage the integration of recent acquisitions and future growth effectively could have a material adverse effect on our business, financial condition and results of operations.

 

Risks Related to Our Transaction Services and Management Services Businesses

 

Our quarterly operating results are likely to fluctuate due to the seasonal nature of our business and may fail to meet expectations, which may cause the price of our securities to decline.

 

Historically, the majority of our revenue has been derived from the transaction services that it provides. Such services are typically subject to seasonal fluctuations. We typically experience our lowest quarterly revenue in the quarter ending March 31 of each year with higher and more consistent revenue in the quarters ending June 30 and September 30. The quarter ending December 31 has historically provided the highest quarterly level of revenue due to increased activity caused by the desire of clients to complete transactions by

calendar year-end. However, our non-variable operating expenses, which are treated as expenses when incurred during the year, are relatively constant in total dollars on a quarterly basis. As a result, since a high proportion of these operating expenses are fixed, declines in revenue could disproportionately affect our operating results in a quarter. In addition, our quarterly operating results have fluctuated in the past and will likely continue to fluctuate in the future. If our quarterly operating results fail to meet expectations, the price of our securities could fluctuate or decline significantly.

 

If the properties that we manage fail to perform, then our business and results of operations could be harmed.

 

Our success partially depends upon the performance of the properties it manages. We could be adversely affected by the nonperformance of, or the deteriorating financial condition of, certain of our clients. The revenue we generate from our property management business is generally a percentage of aggregate rent collections from the properties. The performance of these properties will depend upon the following factors, among others, many of which are partially or completely outside of our control:

 

 

These or other factors may negatively impact the properties that we manage, which could have a material adverse effect on our business and results of operations.

 

If we fail to comply with laws and regulations applicable to real estate brokerage, appraisal and mortgage transactions and other business lines, then we may incur significant financial penalties.

 

Due to the broad geographic scope of our operations and the real estate services performed, we are subject to numerous federal, state and local laws and regulations specific to the services performed. For example, the brokerage of real estate sales and leasing transactions requires us to maintain brokerage licenses in each state in which we operates. If we fail to maintain our licenses or conduct brokerage activities without a license or violate any of the regulations applicable to our licenses, then we may be required to pay fines (including treble damages in certain states) or return commissions received or have our licenses suspended or revoked. In addition, because the size and scope of real estate sales transactions have increased significantly during the past several years, both the difficulty of ensuring compliance with the numerous state licensing regimes and the possible loss resulting from non-compliance have increased. Furthermore, the laws and regulations applicable to our business, both in the United States and in foreign countries, also may change in ways that increase the costs of compliance. The failure to comply with both foreign and domestic regulations could result in significant financial penalties which could have a material adverse effect on our business and results of operations.

We may not be able to replace affiliate offices when affiliation agreements are terminated which may decrease our scope of services and geographic reach.

 

As of December 31, 2010, we operated 109 owned and affiliate offices throughout North America, of which 56 were owned and 53 were affiliates. From time to time our affiliate arrangements may be terminated pursuant to the terms of the individual affiliation agreements. In 2010, our affiliate arrangements were terminated in a number of markets and in some cases we replaced such affiliate offices with owned offices in lieu of entering into replacement affiliation arrangements. The opening of an owned office to replace an affiliate office requires us to invest capital, which in some cases may be material. In the event our affiliation relationships are terminated, we will lose our market coverage in such market if we do not enter into a replacement affiliation arrangement or open an owned office. There can be no assurance that if we lose additional affiliates we will be able to identify suitable replacement affiliates or fund the establishment of an owned office. Failure to maintain coverage in important geographic markets may negatively impact our operations, reputation, and affect or ability to attract and retain key employees and could have a material adverse effect on our business and results of operations.

 

We may have liabilities in connection with real estate brokerage and property and facilities management activities.

 

As a licensed real estate broker, we and our licensed employees and independent contractors that work for us are subject to statutory due diligence, disclosure and standard-of-care obligations. Failure to fulfill these obligations could subject us or our employees to litigation from parties who purchased, sold or leased properties that we or they brokered or managed. We could become subject to claims by participants in real estate sales, as well as building owners and companies for whom we provide management services, claiming that we did not fulfill our statutory obligations as a broker.

 

In addition, in our property and facilities management businesses, we hire and supervises third-party contractors to provide construction and engineering services for our managed properties. While our role is limited to that of a supervisor, we may be subject to claims for construction defects or other similar actions. Adverse outcomes of property and facilities management litigation could have a material adverse effect on our business, financial condition and results of operations.

 

Environmental regulations may adversely impact our business and/or cause us to incur costs for cleanup of hazardous substances or wastes or other environmental liabilities.

 

Federal, state and local laws and regulations impose various environmental zoning restrictions, use controls, and disclosure obligations which impact the management, development, use, and/or sale of real estate. Such laws and regulations tend to discourage sales and leasing activities, as well as mortgage lending availability, with respect to some properties. A decrease or delay in such transactions may adversely affect the results of operations and financial condition of our real estate brokerage business. In addition, a failure by us to disclose environmental concerns in connection with a real estate transaction may subject us to liability to a buyer or lessee of property.

 

In addition, in our role as a property manager, we could incur liability under environmental laws for the investigation or remediation of hazardous or toxic substances or wastes at properties we currently or formerly managed, or at off-site locations where wastes from such properties were disposed. Such liability can be imposed without regard for the lawfulness of the original disposal activity, or our knowledge of, or fault for, the release or contamination. Further, liability under some of these laws may be joint and several, meaning that one liable party could be held responsible for all costs related to a contaminated site. We could also be held liable for property damage or personal injury claims alleged to result from environmental contamination, or from asbestos-containing materials or lead-based paint present at the properties we manage. Insurance for such matters may not be available or sufficient.

 

Certain requirements governing the removal or encapsulation of asbestos-containing materials, as well as recently enacted local ordinances obligating property managers to inspect for and remove lead-based paint in certain buildings, could increase our costs of legal compliance and potentially subject us to violations or

claims. Although such costs have not had a material impact on our financial results or competitive position during fiscal year 2008, 2009 or 2010, the enactment of additional regulations, or more stringent enforcement of existing regulations, could cause us to incur significant costs in the future, and/or adversely impact our brokerage and management services businesses.

 

We may expand our business to include international operations so that we may be more competitive, but in doing so we could subject ourselves to social, political and economic risks of doing business in foreign countries.

 

Although we do not currently conduct significant business outside the United States, we are considering an expansion of our international operations so that we may be more competitive. Currently, our lack of international capabilities sometimes places us at a competitive disadvantage when prospective clients are seeing one real estate services provider that can service their needs both in the United States and overseas. There can be no assurances that we will be able to successfully expand our business in international markets. Current global economic conditions may restrict, limit or delay our ability to expand our business into international markets or make such expansion less economically feasible. If we expand into international markets, circumstances and developments related to international operations that could negatively affect our business or results of operations include, but are not limited to, the following factors:

 

 

Additionally, we may establish joint ventures with foreign entities for the provision of brokerage services abroad, which may involve the purchase or sale of our equity securities or the equity securities of the joint venture participant(s). In these joint ventures, we may not have the right or power to direct the management and policies of the joint venture and other participants may take action contrary to our instructions or requests and against our policies and objectives. In addition, the other participants may become bankrupt or have economic or other business interests or goals that are inconsistent with ours. If a joint venture participant acts contrary to our interest, then it could have a material adverse effect on our business and results of operations.

 

Risks Related to our Investment Management Businesses

 

The performance of our Daymark operations could adversely affect our non-traded REIT business, as it could cause harm to our reputation, cause the loss of third-party broker-dealer selling agreements and limit our ability to sign future third-party broker-dealer selling agreements.

 

In the event that Daymark is unable to overcome its current business challenges and successfully defend itself from the potential liabilities that it currently faces, such events could cause us to lose third-party broker-dealer selling agreements for investment programs, including our non-traded REIT, and limit our ability to

sign future third-party broker-dealer agreements, which could have a material adverse effect on our business, results of operations and financial condition.

 

Our revenue streams generated from our sponsored non-traded REIT are subject to limitation or cancellation.

 

Our ability to earn fees in connection with our sponsored non-traded REIT will depend on our ability to raise equity capital for the REIT and to provide asset acquisition and management services, including identifying appropriate assets for acquisition and effectively and efficiently closing transactions. If we are unable to identify suitable investment properties, or if property valuations or performance declines, our fees may be reduced, including our disposition and management fees. For our REIT, investment decisions are controlled by the Board of Directors of the REIT that is independent of us and investment decisions of the Board affect the fees we earn. In addition, failures of our programs to provide competitive investment returns could significantly impair our ability to market future programs. Our inability to spread risk among a large number of programs could cause us to be over-reliant on a limited number of programs for our revenues. In addition, the agreements under which we raise equity capital for the REIT and provide advisory and management services may generally be terminated by the REIT’s independent Board of Directors following a notice period, with or without cause. We cannot assure you that these agreements will not be terminated. The termination of these agreements could have a material adverse effect on our business, results of operations and financial condition.

 

The inability to access investors for our non-traded REIT through broker-dealers or other intermediaries could have a material adverse effect on our business.

 

Our ability to source equity for our REIT depends significantly on access to the client base of securities broker-dealers and other financial investment intermediaries that may offer competing investment products. We believe that our future success in developing our business and maintaining a competitive position will depend in large part on our ability to continue to maintain these relationships as well as finding additional securities broker-dealers to facilitate offerings by our programs or to find investors for our REIT and other investment programs. We cannot be sure that we will continue to gain access to these channels.

 

The termination of any of our broker-dealer relationships, especially given the limited number of key broker-dealers, could have a material adverse effect on our business.

 

Our REIT is sold through third-party broker-dealers who are members of our selling group. While we have established relationships with our selling group, we are required to enter into a new agreement with each member of the selling group for each new program we offer. In addition, our REIT may be removed from a selling broker-dealers approved program list at any time for any reason. We cannot assure you of the continued participation of existing members of our selling group nor can we make an assurance that our selling group will expand. While we seek to diversify and add new investment channels for our programs, a significant portion of the growth in recent years in our REIT platform have been as a result of capital raised by a relatively limited number of broker-dealers. Loss of any of these key broker-dealer relationships, or the failure to develop new relationships to cover our expanding business through new investment channels, could have a material adverse effect on our business and results of operations.

 

Misconduct by third-party selling broker-dealers or our sales force, could have a material adverse effect on our business.

 

We rely on selling broker-dealers and our sales force to properly offer our securities programs to customers in compliance with our selling agreements and with applicable regulatory requirements. While these persons are responsible for their activities as registered broker-dealers, their actions may nonetheless result in complaints or legal or regulatory action against us.

 

Our REIT is structured to provide favorable tax treatment to investors. If our REIT fails to satisfy the requirements necessary to permit this favorable tax treatment, we could be subject to claims by investors

and our reputation for structuring these transactions would be negatively affected, which would have an adverse effect on our financial condition and results of operations.

 

We structure public non-traded REITs to provide favorable tax treatment to investors. For example, qualified REITs generally are not subject to federal income tax at corporate rates, which permits REITs to make larger distributions to investors (i.e. without reduction for federal income tax imposed at the corporate level). If our REIT fails to satisfy the complex requirements for qualification and taxation as a REIT under the Internal Revenue Code, we could be subject to claims by investors as a result of additional tax they may be required to pay or because they are unable to receive the distributions they expected at the time they made their investment. In addition, any failure to satisfy applicable tax regulations in structuring our programs would negatively affect our reputation, which would in turn affect our ability to earn additional fees from new programs. Claims by investors could lead to losses and any reduction in our fees would have a material adverse effect on our revenues.

 

Regulatory uncertainties related to our broker-dealer services could harm our business.

 

The securities industry in the United States is subject to extensive regulation under both federal and state laws. Broker-dealers are subject to regulations covering all aspects of the securities business. The SEC, FINRA, and other self-regulatory organizations and state securities commissions can censure, fine, issue cease-and-desist orders to, suspend or expel a broker-dealer or any of our officers or employees. The ability to comply with applicable laws and rules is largely dependent on an internal system to ensure compliance, as well as the ability to attract and retain qualified compliance personnel. We could be subject to disciplinary or other actions in the future due to claimed noncompliance with these securities regulations, which could have a material adverse effect on our operations and profitability.

 

An increase in interest rates may negatively affect the equity value of our programs or cause us to lose potential investors to alternative investments, causing the fees we receive for transaction and management services to be reduced.

 

Although in the last few years, interest rates in the United States have generally decreased, if interest rates were to rise, our financing costs would likely rise and our net yield to investors may decline. This downward pressure on net yields to investors in our programs could compare poorly to rising yields on alternative investments. Additionally, as interest rates rise, valuations of commercial real estate properties typically decline. A decrease in both the attractiveness of our programs and the value of assets held by these programs could cause a decrease in both transaction and management services revenues, which would have an adverse effect on our results of operations.

 

Increasing competition for the acquisition of real estate may impede our ability to make future acquisitions which would reduce the fees we generate from investment programs and could adversely affect our operating results and financial condition.

 

The commercial real estate industry is highly competitive on an international, national and regional level. Our programs face competition from REITs, institutional pension plans, and other public and private real estate companies and private real estate investors for the acquisition of properties and for raising capital to create programs to make these acquisitions. Competition may prevent our programs from acquiring desirable properties or increase the price they must pay for real estate. In addition, the number of entities and the amount of funds competing for suitable investment properties may increase, resulting in increased demand and increased prices paid for these properties. If our programs pay higher prices for properties, investors may experience a lower return on investment and be less inclined to invest in our next program which may decrease our profitability. Increased competition for properties may also preclude our programs from acquiring properties that would generate the most attractive returns to investors or may reduce the number of properties our programs could acquire, which could have an adverse effect on our business.

Healthcare REIT II’s real estate investments may be concentrated in medical office buildings or other healthcare-related facilities, making it more vulnerable economically than if its investments were diversified.

 

As a REIT, Healthcare REIT II will invest primarily in real estate. Within the real estate industry, Healthcare REIT II has and will continue to acquire or selectively develop and own medical office buildings and healthcare-related facilities. Therefore, Healthcare REIT II is subject to risks inherent in concentrating investments in real estate. These risks resulting from a lack of diversification become even greater as a result of its business strategy to invest to a substantial degree in healthcare-related facilities.

 

A downturn in the commercial real estate industry generally could significantly adversely affect the value of Healthcare REIT II’s properties. A downturn in the healthcare industry could negatively affect Healthcare REIT II’s lessees’ ability to make lease payments to it and its ability to pay distributions to its stockholders. These adverse effects could be more pronounced than if Healthcare REIT II diversified its investments outside of real estate or if its portfolio did not include a substantial concentration in medical office buildings and healthcare-related facilities. Such adverse effects to Healthcare REIT II could result in an adverse effect on our business, results of operations and financial condition.

 

Risks Related to our Daymark Business

 

Declines in asset value, reductions in distributions in investment programs or loss of properties to foreclosure could adversely affect Daymark’s business, as it could cause harm to its reputation, cause the loss of management contracts and potentially expose it to legal liability.

 

The current market value of many of the properties owned through the investment programs managed by Daymark has decreased as a result of the overall decline in the economy and commercial real estate markets. In addition, there have been reductions in distributions in numerous investment programs, in many instances to a zero percent distribution rate. Many investment programs may have insufficient capitalization, and may not be able to satisfy near and mid-term operating and capital expense requirements. Significant declines in value and reductions in distributions in the investment programs managed by Daymark could adversely affect our and Daymark’s reputation and cause it to lose asset and property management contracts or cause it to waive or reduce its fees, including disposition fees. The loss of value may be significant enough to cause certain investment programs to go into foreclosure or result in a complete loss of equity for program investors. Significant losses in asset value and investor equity and reductions in distributions increase the risk of claims or legal actions by program investors. Any such legal liability could result in further damage to our and Daymark’s reputation and incurrence of legal expenses which could have a material adverse effect on our business, results of operations and financial condition.

 

Failure by Daymark’s subsidiaries, including NNNRA, to maintain minimum net worth requirements could negatively impact Daymark’s operations.

 

NNNRA and certain of its affiliates are required to maintain a specified level of minimum net worth under loan documents related to certain TIC programs that it has sponsored. As of December 31, 2010, NNNRA’s net worth was below the contractually specified level of $10 million or $15 million required with respect to approximately 30 percent of its managed TIC programs. Except as discussed below, this circumstance does not, in and of itself, create any direct recourse liability for NNNRA under the mortgage loans, failure to meet the minimum net worth on these programs could result in the imposition of an event of default under these TIC loan agreements, and may result in the termination of TIC management agreements, other loss of business, reputational damage and other negative effects that may, in the aggregate, have a material adverse effect on Daymark’s operations. As of December 31, 2010, NNNRA’s failure to maintain the minimum required net worth may result in NNNRA and Grubb & Ellis Company potentially becoming liable for up to $7.5 million and $2.0 million, respectively, in the aggregate, in loan repayment obligations pursuant to certain partial-recourse loan guarantees issued for certain of these TIC programs. There can be no assurance that NNNRA, Grubb & Ellis Company or any of its other affiliates required to maintain a specified level of minimum net worth under TIC program loan documents will be able to meet such requirements on an ongoing basis.

Failure by Daymark’s subsidiary, Grubb & Ellis Realty Investors, to maintain a minimum net worth of $500,000 will trigger an event of default under the NNN Collateralized Senior Notes of $16.3 million.

 

As of December 31, 2010, NNN Collateralized Senior Notes, LLC, an affiliate of Daymark, had $16.3 million in senior notes outstanding at a fixed interest rate of 8.75% per annum (the “NNN Senior Notes”). As described in Note 18 of Notes to Consolidated Financial Statements in Item 8 of this Report, the NNN Senior Notes mature on August 29, 2011, with two one-year options to extend the maturity date. The NNN Senior Notes are a general obligation of NNN Collateralized Senior Notes, LLC and are guaranteed by GERI. The GERI guarantee requires GERI to maintain an ongoing minimum net worth of $0.5 million. There can be no assurance that GERI will be able to maintain this level of net worth or to maintain a net worth above $0.5 million. GERI’s failure to maintain a net worth of $0.5 million would trigger a default under the NNN Senior Notes. Should such a default be triggered and the repayment of the NNN Senior Notes accelerated, NNN Collateralized Senior Notes, LLC and GERI may not be able to repay or refinance the NNN Senior Notes. Failure of NNN Collateralized Senior Notes, LLC and GERI to repay the NNN Senior Notes as they come due would likely have a materially negative impact on our ongoing business, and the Daymark operations in particular.

 

Daymark’s affiliates may have liability under certain “non-recourse carve-out” guarantees as a result of bankruptcy filings by non-affiliated tenant-in-common owners.

 

Two unaffiliated, individual investor entities, who are minority owners in two TIC programs managed by Daymark, filed for bankruptcy protection in February 2011. One of our investment management affiliates, GERI, a wholly owned indirect subsidiary of Daymark and formerly known as Triple Net Properties, LLC, executed a non-recourse carve-out guarantee in connection with the mortgage loan associated with one of these programs, and a non-recourse indemnity in connection with the mortgage loans associated with the other program. As a consequence of these bankruptcy filings, GERI may become liable under these guarantee and indemnity agreements. The principal balance of the mortgage debt for these two properties was approximately $36.0 million in the aggregate at the time of the bankruptcies. While GERI’s ultimate liability under these agreements is uncertain as a result of numerous factors, including, without limitation, the amount of the lender’s credit bids at the time of foreclosure, events in the individual bankruptcy proceedings and the ultimate disposition of those bankruptcy proceedings, the value of the underlying properties and the defenses GERI may raise under the guarantee and indemnity, such liability may be in an amount in excess of the net worth of GERI and may have a material adverse effect on GERI’s cash flows, financial position and results of operations. Further, there can be no assurance that additional investor entities will not file for bankruptcy protection under other TIC programs and trigger additional potential liability under non-recourse carve-out guarantees and indemnities.

 

Daymark’s officers and directors, in the exercise of their fiduciary duties, may make decisions that are contrary to our best interests.

 

While Daymark is our wholly owned direct subsidiary, Daymark is managed by a separate board of directors and officers. The directors and officers of Daymark and its subsidiaries owe fiduciary duties to the various stakeholders of Daymark, including us. However, in the operation of its business, there may be situations that arise whereby the officers and directors of Daymark and its affiliates, in the exercise of their fiduciary duties, take actions that may be contrary to our best interests.

 

Daymark’s revenues are depended on the performance of the portfolio it manages.

 

We derive fees for Daymark’s services based on a percentage of the price of the properties sold and for management services based on a percentage of the rental amounts of the properties in our programs. As a result, Daymark’s revenues are dependent on the overall value of the properties it manages, as well as the ability of such properties to attract and retain tenants and generate incomes. If property valuations or performance declines, Daymark’s services fees will be reduced, including the disposition fees that are collected upon sale of the properties. There can be no assurance that Daymark will maintain current levels of transaction and management service fees in the future.

Daymark’s management agreements are subject to termination.

 

The management agreements under which Daymark provides property management services to its sponsored TIC programs may generally be terminated by a single TIC investor with cause upon 30 days notice or without cause annually upon renewal. Appointment of a new property manager requires unanimous agreement of the TIC investors and, generally, the approval of the lender. We have received termination notices on approximately one-third of our managed TIC properties resulting in the termination of several property management agreements during 2010. As a result of these termination notices, it is not likely that we will be able to retain all of the management contracts for these properties. Loss of a significant number of contracts and fees could have a material adverse effect on our business, results of operations and financial condition.

 

A significant amount of Daymark’s managed programs were structured to provide favorable tax treatment to investors. If a program fails to satisfy the requirements necessary to permit this favorable tax treatment, Daymark and its affiliates could be subject to claims by investors, which would have an adverse effect on our financial condition and results of operations.

 

Daymark’s affiliates structured TIC programs to permit TIC investors to defer the recognition of gain on sale of investment or business property upon entering into a 1031 exchange. If Daymark’s affiliates failed to properly structure a TIC transaction, they could be subject to claims by investors as a result of additional tax they may be required to pay or because they are unable to receive the distributions they expected at the time they made their investment. In addition, any failure to satisfy applicable tax regulations in structuring our programs would negatively affect Daymark’s reputation. Claims by investors could lead to losses and any reduction in management fees could have a material adverse effect on our revenues.

 

Future pressures to lower, waive or credit back our fees could reduce Daymark’s revenue and profitability.

 

We have on occasion waived or credited our fees for financings, dispositions and management fees for our TIC programs to improve projected investment returns and attract and retain TIC management assignments. There has also been a trend toward lower fees in some segments of the third-party asset management business, and fees paid for the management of properties in Daymark’s TIC programs have followed these trends. In order for us to maintain our fee structure in a competitive environment, we must be able to provide clients with investment returns and service that will encourage them to be willing to pay such fees. We cannot assure you that we will be able to maintain our current fee structures. Fee reductions on existing or future new business could have a material adverse impact on our revenue and profitability.

 

We depend upon our programs’ tenants to pay rent, and their inability to pay rent may substantially reduce certain fees we receive which are based on gross rental amounts.

 

Our programs are subject to varying degrees of risk that generally arise from the ownership of real estate. For example, the income we are able to generate from management fees is derived from the gross rental income on the properties in our programs. The rental income depends upon the ability of the tenants of our programs’ properties to generate enough income to make their lease payments. Changes beyond our control may adversely affect the tenants’ ability to make lease payments or could require them to terminate their leases. Either an inability to make lease payments or a termination of one or more leases could reduce the management fees we receive. These changes include, among others, the following:

 

 

 

Due to these changes, among others, tenants and lease guarantors, if any, may be unable to make their lease payments. Defaults by tenants or the failure of any lease guarantors to fulfill their obligations, or other early termination of a lease could, depending upon the size of the leased premises and our ability as property manager to successfully find a substitute tenant, have a material adverse effect on our revenue.

 

Conflicts of interest inherent in transactions between our programs and us, and among our programs, could create liability for us that could have a material adverse effect on our results of operations and financial condition.

 

These conflicts include but are not limited to the following:

 

 

We cannot assure you that one or more of these conflicts will not result in claims by investors in our programs, which could have a material adverse effect on our results of operations and financial condition.

 

The offerings conducted to raise capital for our TIC programs were done in reliance on exemptions from the registration requirements of the Securities Act. A failure to satisfy the requirements for the appropriate exemption could provide the investors with rescission rights, which would have a material adverse effect on our business and results of operations.

 

The securities of our TIC programs were offered and sold in reliance upon a private placement offering exemption from registration under the Securities Act and applicable state securities laws. If we or our dealer-manager failed to comply with the requirements of the relevant exemption and an offering were in process, we may have to terminate the offering. If an offering was completed, the investors may have the right, if they so desired, to rescind their purchase of the securities. A rescission offer could also be required under applicable state securities laws and regulations in states where any securities were offered without registration or qualification pursuant to a private offering or other exemption. If a number of holders sought rescission at one time, the applicable program would be required to make significant payments which could adversely affect our business and as a result, the fees generated by us from such program. If one of our programs was forced to make a rescission offer, our reputation would also likely be significantly harmed. Any reduction in fees as a result of a rescission offer or a loss of reputation would have a material adverse effect on our business and results of operations.

 

The inability to identify suitable refinance options may negatively impact investment program performance and cause harm to our reputation, cause the loss of management contracts and potentially expose us to legal liability.

 

The availability of real estate financing, particularly for TIC ownership structures, has greatly diminished over the past few years as a result of the global credit crisis and overall decline in the real estate market. In

addition, reductions in asset values have made it necessary to infuse additional capital in order to refinance maturing loans. As a result, the TIC owners may not be able to refinance some or all of the loans maturing in our TIC management portfolio. In addition, TIC owners may be required to alter their ownership structure in order to recapitalize or refinance their properties and lose the ability to complete future Section 1031 tax-deferred exchanges. Failure to obtain suitable refinance options may have a negative impact on investment returns and may potentially cause investments to go into foreclosure or result in a complete loss of equity for program investors. Any such negative impact on distributions, foreclosure or loss of equity in an investment program could adversely affect Daymark’s reputation and cause us to lose asset and property management contracts. Significant losses in investor equity and reductions in distributions increase the risk of claims or legal actions by program investors. Any such legal liability could result in damage to our reputation, loss of management contracts and incurrence of legal expenses which could have a material adverse effect on our business, results of operations and financial condition.

 

Risks Related to us in General

 

Delaware law and provisions of our amended and restated certificate of incorporation and restated bylaws contain provisions that could delay, deter or prevent a change of control.

 

The anti-takeover provisions of Delaware law impose various impediments on the ability or desire of a third party to acquire control of us, even if a change of control would be beneficial to our existing shareowners, and we will be subject to these Delaware anti-takeover provisions. Additionally, our amended and restated certificate of incorporation and our restated bylaws contain provisions that might enable our management to resist a proposed takeover of us. The provisions include:

 

 

These provisions could discourage, delay or prevent us from a change of control or an acquisition at a price that our shareowners may find attractive. These provisions also may discourage proxy contests and make it more difficult for our shareowners to elect directors and take other corporate actions. The existence of these provisions could limit the price that investors might be willing to pay in the future for shares of our common stock.

 

We have the ability to issue blank check preferred stock, which could adversely affect the voting power and other rights of the holders of our common stock.

 

The Board of Directors has the right to issue “blank check” preferred stock, which may affect the voting rights of holders of common stock and could deter or delay an attempt to obtain control of us. There are currently nineteen million authorized and undesignated shares of preferred stock that could be so issued. Our Board of Directors is authorized, without any further shareowner approval, to issue one or more additional series of preferred stock in addition to the currently outstanding 12% Preferred Stock. We are authorized to fix and state the voting rights, powers, designations, preferences and relative participation or other special rights of each such series of preferred stock and any qualifications, limitations and restrictions thereon. Preferred stock typically ranks prior to the common stock with respect to dividend rights, liquidation preferences, or both, and may have full, limited, or expanded voting rights. Accordingly, issuances of preferred stock could adversely affect the voting power and other rights of the holders of common stock and could negatively affect the market price of our common stock.

We have shelf registrations on behalf of various security owners currently outstanding and may be obligated to file another shelf registration statement immediately, all of which could have a negative impact on our share price.

 

We currently have three (3) effective registrations outstanding, (i) one for an institutional purchaser of the 12% Preferred Stock, (ii) one for Kojaian Ventures, L.L.C. and Kojaian Holdings, LLC, and (iii) one for the purchasers of our Convertible Notes. These three (3) shelf registration statements represent an aggregate of 37,656,937 shares of our common stock. We will be obligated to file a fourth registration statement in the event we obtain the requisite consents in connection with out current consent solicitation under our Convertible Notes. In the event that holders of a material amount of these currently registered shares (and shares to be registered) decided to sell them at the same time or at an inopportune time, it could have a negative impact on the market price of our common stock.

 

Future sales of our common stock could adversely affect our stock price.

 

There are an aggregate of 401,928 shares of our common stock as of December 31, 2010 subject to issuance upon the exercise of outstanding options. Accordingly, these shares will be available for sale in the open market, subject to vesting restrictions, and, in the case of affiliates, certain volume limitations. The sale of shares either pursuant to the exercise of outstanding options or as after the satisfaction of vesting restriction of certain restricted stock could also cause the price of our common stock to decline.

 

The 12% Preferred Stock will rank senior to our common stock but junior to all of our liabilities and our subsidiaries’ liabilities, in the event of a bankruptcy, liquidation or winding-up.

 

In the event of bankruptcy, liquidation or winding-up, our assets will be available to pay obligations on the 12% Preferred Stock only after all of our liabilities have been paid, but prior to any payments are made with respect to our common stock. In addition, the 12% Preferred Stock effectively ranks junior to all existing and future liabilities of our subsidiaries. The rights of holders of the 12% Preferred Stock to participate in the assets of our subsidiaries upon any liquidation or reorganization of any subsidiary will rank junior to the prior claims of that subsidiary’s creditors. In the event of bankruptcy, liquidation or winding-up, there may not be sufficient assets remaining, after paying our liabilities, and our subsidiaries’ liabilities, to pay amounts due on any or all of the 12% Preferred Stock then outstanding.

 

Additionally, unlike indebtedness, where principal and interest customarily are payable on specified due dates, in the case of the 12% Preferred Stock, (1) dividends are payable only if and when declared by our Board of Directors or a duly authorized committee of the Board, and (2) as a Delaware corporation, we are restricted to making dividend payments and redemption payments only out of legally available assets. Further, the 12% Preferred Stock places no restrictions on our business or operations or on our ability to incur indebtedness or engage in any transactions except that a consent of holders representing at least a majority of the 12% Preferred Stock is required to amend our certificate of incorporation as to the terms of the 12% Preferred Stock or to issue additional 12% Preferred Stock that ranks senior to or, to the extent that 225,000 shares of the 12% Preferred Stock remain outstanding, on a parity with, the 12% Preferred Stock.

 

There may be future sales or other dilution of our equity, which may adversely affect the market price of our common stock or the 12% Preferred Stock and may negatively impact the holders’ investment.

 

We are not restricted from issuing additional common stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock or any substantially similar securities. In addition, with the applicable consent of holders of the 12% Preferred Stock, we may issue additional preferred stock that ranks senior to, or on parity with, the 12% Preferred Stock. The market price of our common stock or 12% Preferred Stock could decline as a result of sales of a large number of shares of common stock or 12% Preferred Stock or similar securities in the market or the perception that such sales could occur. For example, if we issue preferred stock in the future that has a preference over our common stock with respect to the payment of dividends or upon our liquidation, dissolution, or winding-up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of holders of our common stock or the market price of our common stock could be adversely affected.

In addition, each share of 12% Preferred Stock is convertible at the option of the holder thereof into shares of our common stock. The conversion of some or all of the 12% Preferred Stock will dilute the ownership interest of our existing common shareowners. Any sales in the public market of our common stock issuable upon such conversion could adversely affect prevailing market prices of the outstanding shares of our common stock and the 12% Preferred Stock. In addition, the existence of our 12% Preferred Stock may encourage short selling or arbitrage trading activity by market participants because the conversion of our 12% Preferred Stock could depress the price of our equity securities. As noted above, a decline in the market price of the common stock may negatively impact the market price for the 12% Preferred Stock.

 

Holders of the 12% Preferred Stock do not have identical rights as holders of common stock until they acquire the common stock, but will be subject to all changes made with respect to the our common stock.

 

Except for voting and dividend rights, holders of the 12% Preferred Stock have no rights with respect to the common stock until conversion of their 12% Preferred Stock, including rights to respond to tender offers, but investment in the 12% Preferred Stock may be negatively affected by such events. Even though the holders of the 12% Preferred Stock vote on an as-converted basis with holders of the common stock, upon conversion of the 12% Preferred Stock, holders will be entitled to exercise the rights of a holder of common stock only as to matters for which the record date occurs on or after the applicable conversion date and only to the extent permitted by law, although holders will be subject to any changes in the powers, preferences, or special rights of common stock that may occur as a result of any shareowner action taken before the applicable conversion date. Certain actions, including amendment of our certificate of incorporation, require the additional approval of a majority of holders of the common stock voting as a separate class (excluding shares of common stock issuable upon conversion of the 12% Preferred Stock).

 

We may not have the funds necessary to repurchase the 12% Preferred Stock following a fundamental change.

 

Holders of the notes have the right to require us to repurchase the 12% Preferred Stock in cash upon the occurrence of a fundamental change prior to November 15, 2019. We may not have sufficient funds to repurchase the 12% Preferred Stock at such time, and may not have the ability to arrange necessary financing on acceptable terms. In addition, our ability to purchase the 12% Preferred Stock may be limited by law or the terms of other agreements outstanding at such time. Moreover, a failure to repurchase the 12% Preferred Stock may also constitute an event of default, and result in the acceleration of the maturity of, any then existing indebtedness, under any indenture, credit agreement or other agreement outstanding at that time, which could further restrict our ability to make such payments.

 

Uninsured and underinsured losses may adversely affect operations.

 

Should a property sustain damage or an occupant sustain an injury, we may incur losses due to insurance deductibles, co-payments on insured losses or uninsured losses. In the event of a substantial property loss or personal injury, the insurance coverage may not be sufficient to pay the full damages. In the event of an uninsured loss, we could lose some or all of our capital investment, cash flow and anticipated profits related to one or more properties. Inflation, changes in building codes and ordinances, environmental considerations, and other factors also might make it not feasible to use insurance proceeds to replace a property after it has been damaged or destroyed. Under these circumstances, the insurance proceeds we receive, if any, might not be adequate to restore our economic position with respect to the property. In the event of a significant loss at one or more of the properties in our programs, the remaining insurance under the applicable policy, if any, could be insufficient to adequately insure the remaining properties. In this event, securing additional insurance, if possible, could be significantly more expensive than the current policy. A loss at any of these properties or an increase in premium as a result of a loss could decrease the income from or value of properties under management in our programs, which in turn would reduce the fees we receive from these programs. Any decrease or loss in fees could have a material adverse effect on our financial condition or results of operations.

 

We carry commercial general liability, fire and extended coverage insurance with respect to our programs’ properties. We obtain coverage that has policy specifications and insured limits that we believe are customarily

carried for similar properties. We cannot assure you, however, that particular risks that are currently insurable will continue to be insurable on an economic basis or that current levels of coverage will continue to be available. In addition, we generally do not obtain insurance against certain risks, such as floods.

 

There are risks associated with our outstanding indebtedness.

 

During the second quarter of 2010, we issued $31.5 million of senior unsecured notes due 2015 which are convertible into shares of our common stock, and we may incur additional indebtedness in the future, including the Senior Secured Credit Facility. Our ability to pay interest and repay the principal on our indebtedness is dependent upon our ability to manage our business operations. There can be no assurance that we will be able to manage any of these risks successfully. In addition, changes by any rating agency to our outlook or credit rating could negatively affect the value and liquidity of both our debt and equity securities.

 

The Convertible Notes are subject to customary events of default.

 

The indenture governing the Convertible Notes contains customary events of default, including but not limited to a default in the event of our failure to pay any indebtedness for borrowed money in excess of $1.0 million when due, other than non-recourse mortgage debt. A default would result in acceleration of our repayment obligations under the indenture, which we may not be able to meet or refinance at such time. Even if new financing were available, it may not be on commercially reasonable terms or acceptable terms. Accordingly, if we are in default of our Convertible Notes, our business, financial condition and results of operations could be materially and adversely affected.

 

We may not have the funds, or the ability to raise the funds, necessary to repurchase the Convertible Notes upon a fundamental change or to repay the Convertible Notes at maturity.

 

Holders of the Convertible Notes have the right to require us to repurchase the Convertible Notes at par, plus any accrued interest, in cash upon the occurrence of a fundamental change and at maturity of the Convertible Notes. The Convertible Notes will mature on May 1, 2015 and a fundamental change is generally deemed to have occurred:

 

 

We may not have sufficient funds to repurchase the Convertible Notes at such time, and may not have the ability to arrange necessary financing on acceptable terms. In addition, our ability to purchase the Convertible Notes may be limited by law or the terms of other agreements outstanding at such time.

 

 

None.

 

 

We lease all of our office space through non-cancelable operating leases. The terms of the leases vary depending on the size and location of the office. As of December 31, 2010, we leased over 827,000 square feet of office space in 89 locations under leases which expire at various dates through July 30, 2021. For those

leases that are not renewable, we believe that there are adequate alternatives available at acceptable rental rates to meet our needs, although there can be no assurances in this regard. Many of our offices that contain employees of the Transaction Services, Investment Management, Management Services or Daymark segments also contain employees of other segments. Our corporate headquarters are in Santa Ana, California. See Note 21 of Notes to Consolidated Financial Statements in Item 8 of this Report for additional information.

 

As of December 31, 2010, we owned a commercial office property comprising 440,000 square feet of gross leasable area in Atlanta, Georgia. As of December 31, 2010, the mortgage debt related to this property was $70.0 million.

 

 

General

 

We and our Daymark affiliate have been named as defendants in multiple lawsuits relating to certain of our investment management offerings, in particular our tenant-in-common programs. These lawsuits allege a variety of claims in connection with these offerings, including mismanagement, breach of contract, negligence, fraud, breach of fiduciary duty and violations of state and federal securities laws, among other claims. Plaintiffs in these suits seek a variety of remedies, including rescission, actual and punitive damages, injunctive relief, and attorneys’ fees and costs. In many instances, the damages being sought are unspecified and to be determined at trial. It is difficult to predict the ultimate disposition of these lawsuits and our ultimate liability with respect to such claims and lawsuits. It is also difficult to predict the cost of defending these matters and to what extent claims will be covered by our existing insurance policies. In the event of an unfavorable outcome, the amounts we may be required to pay in the discharge of liabilities or settlements could have a material adverse effect on our cash flows, financial position and results of operations.

 

Met Center 10 — One such matter relates to a tenant-in-common property know as Met Center 10, located in Austin, Texas. The Company and its subsidiaries have been involved in multiple legal proceedings relating to Met Center 10, including three actions pending in state court in Austin, Texas and an arbitration proceeding being conducted in California. The arbitration proceeding involves Grubb & Ellis Realty Investors, LLC (“GERI”), a subsidiary of Daymark, and is pending before the American Arbitration Association in Orange County, California captioned NNN Met Center 10 1, LLC, et al. v. Grubb & Ellis Realty Investors, LLC, No. 73 115 Y 00140 HLT (the “Met 10 Arbitration”). A state court action involving GERI is pending in the District Court of Travis County, Texas captioned NNN Met Center 10, LLC v. Met Center Partners-6, Ltd., et al., No. D-1-GN-08-002104 (the “Met 10 Texas Action”). Two additional state court actions involving the Company, GERI, and Grubb & Ellis Management Services, Inc. are pending in the District Court for Travis County, Texas captioned NNN Met Center 10-1, LLC v. Lexington Insurance Company, et al., No. D-1-GN-10-004495 and NNN Met Center 10, LLC v. Lexington Insurance Company, et al., No. D-1-GN-11-000848 (together, the “Met 10 Lexington Actions”).

 

In the Met 10 Arbitration, TIC investors are asserting, among other things, that GERI should bear responsibility for alleged diminution in the value of the property and their investments as a result of ground movement. The Met 10 Arbitration has been bifurcated into two phases. In the first phase, the arbitrator ruled in favor of the TIC investors, finding, among other things, that the TIC investors had properly terminated the property management agreement for cause. The second phase of the Met 10 Arbitration involves the TICs’ claims for damages. The hearing will be conducted in June 2011, and will result in the arbitrator’s determination of whether the TICs have proven any of their claims, and what damages, if any, should be awarded against GERI. GERI is vigorously defending those claims. GERI has tendered this matter to its insurance carriers for indemnity, and will vigorously pursue coverage. While the outcome of the second phase of the Met 10 Arbitration is uncertain, an adverse determination by the arbitrator could result in a material and adverse effect to us.

 

In the Met 10 Texas Action, GERI and an affiliate are pursuing claims against the developers and sellers of the property and other defendants to recover damages arising from, among other things, undisclosed ground movement.. The developers, sellers, and certain other defendants are asserting counterclaims against GERI and its affiliate. GERI and its affiliate are vigorously defending those counterclaims. The outcome of that proceeding, and the damages, if any, that GERI and its affiliate will recover are uncertain In the Met 10

Lexington Actions, the TIC investors are asserting claims against our former officers and employees in connection with the negotiation and documentation of an insurance settlement relating to the Met Center 10 property, and an alleged misallocation and/or misappropriation of the proceeds of that settlement. In addition, Lexington Insurance Company is asserting claims against NNN Met Center 10, LLC, the Company, GERI, and Grubb & Ellis Management Services, Inc. arising of the insurance settlement. We are vigorously defending those claims.

 

TIC Program Exchange Litigation — GERI is a defendant in an action filed on or about February 14, 2011 in the Superior Court of Orange County, California captioned S. Sidney Mandel, et al. v. Grubb & Ellis Realty Investors, LLC, et al, Case No. 00449598. The plaintiffs allege that, in order to induce the plaintiffs to purchase $22.3 million in tenant in common investments that GERI (formerly known as Triple Net Properties, LLC) was syndicating, GERI offered to subsequently “repurchase” those investments and provide certain “put” rights under certain terms and conditions pursuant to a letter agreement executed between GERI and the plaintiffs. The plaintiffs allege that GERI has failed to honor its purported obligations under the letter agreement and have initiated suit for breach of contract, breach of the implied covenant of good faith and fair dealing and declaratory relief as to the rights and obligations of the parties under the letter agreement. The plaintiffs are seeking damages, attorneys’ fees and costs. We intend to vigorously defend these claims and to assert all applicable defenses. At this time we are unable to predict the likelihood of an unfavorable or adverse award or outcome.

 

Britannia II Office Park — The Company and various Daymark subsidiaries are defendants in an action filed on or about July 22, 2010 in Superior Court of Alameda County, California captioned NNN Britannia Business Center II — 17, LLC, et al. v. Grubb & Ellis Inc., et al., Case No. RG10-527282. Plaintiffs allegedly invested more than $14 million for tenant in common interests in a commercial real estate project in Pleasanton, California, known as Britannia Business Center II, which ultimately was foreclosed upon. Plaintiffs claim that they were induced to invest with misrepresentations concerning the financial projections and risks for the project, and allege various mismanagement claims. Plaintiffs’ have asserted claims of negligent misrepresentation, breach of contract, breach of the implied covenant of good faith and fair dealing, breach of fiduciary duty, and violations of California Corporations Code sections 25401 and 25504. Plaintiffs seek rescission of their agreements to purchase the tenant in common interests, as well as compensatory and exemplary damages in an unspecified amount, along with costs and attorneys’ fees. We intend to vigorously defend these claims and to assert all applicable defenses. At this time we are unable to predict the likelihood of an unfavorable or adverse award or outcome.

 

Durham Office Park — The Company and various Daymark subsidiaries are defendants in an action filed on or about July 21, 2010 in North Carolina Business Court, Durham County Superior Court Division, captioned NNN Durham Office Portfolio I, LLC, et al. v. Grubb & Ellis Company, et al., Case No. 10 CVS 4392. Plaintiffs allegedly invested more than $11 million for tenant in common interests in a commercial real estate project in Durham, North Carolina. Plaintiffs claim, among other things, that information regarding the intentions of the property’s anchor tenant to remain in occupancy was withheld and misrepresented. Plaintiffs have asserted claims for breach of contract, negligence, negligent misrepresentation, breach of fiduciary duty, fraud, unfair and deceptive trade practices and conspiracy. We intend to vigorously defend these claims and to assert all applicable defenses. At this time we are unable to predict the likelihood of an unfavorable or adverse award or outcome.

 

GRUBB & ELLIS COMPANY

 

 

Market and Price Information

 

The principal market for our common stock is the NYSE. The following table sets forth the high and low sales prices of our common stock on the respective market for each quarter of the years ended December 31, 2010 and 2009.

 

 

As of March 28, 2011, there were 986 registered holders of our common stock and 69,921,581 shares of common stock outstanding. Sales of substantial amounts of common stock, including shares issued upon the exercise of warrants or options or upon the conversion of preferred stock, or the perception that such sales might occur, could adversely affect prevailing market prices for the common stock.

 

The 12% Preferred Stock are entitled to cumulative annual dividends of $12.00 per share payable quarterly on each of March 31, June 30, September 30 and December 31, commencing on December 31, 2009, when, as and if declared by the Board of Directors. Such dividends will accumulate and be paid in arrears on the basis of a 360-day year consisting of twelve 30-day months. Dividends on the 12% Preferred Stock will be paid in cash and accumulate and be cumulative from the most recent date to which dividends have been paid, or if no dividends have been paid, from and including November 6, 2009. Accumulated dividends on the 12% Preferred Stock will not bear interest. In addition, in the event of any cash distribution to holders of common stock, holders of 12% Preferred Stock will be entitled to participate in such distribution as if such holders of 12% Preferred Stock had converted their shares of 12% Preferred Stock into common stock. During the year ended December 31, 2010, the Board of Directors declared four quarterly dividend payments of $3.00 per share on our Preferred Stock, which were paid on March 31, 2010, June 30, 2010, September 30, 2010 and December 31, 2010. On March 21, 2011, the Board of Directors determined, as permitted, not to declare a dividend on our 12% Preferred Stock, for the quarter ending March 31, 2011.

 

Sales of Unregistered Securities

 

On December 10, 2010, pursuant to our 2006 Omnibus Equity Plan, we granted each of the five independent members of our Board of Directors 52,174 restricted shares of our common stock which immediately vested on the date of grant and had a fair market value of $60,000 on the date of grant.

 

On August 4, 2010, we granted an employee an aggregate of 250,000 restricted shares of our common stock which vest in equal one-third installments on each of the next three anniversaries of the date of grant and had an aggregate fair market value of $295,000 on the date of grant.

 

On December 27, 2010, we issued an aggregate of 358,424 shares of our common stock from our treasury share account related to fully vested phantom stock awards.

 

The issuance of restricted shares in the transactions described above were exempt from the registration requirements of Section 5 of the Securities Act pursuant to Section 4(2) of the Securities Act, as amended, as such transaction did not involve a public offering by us.

Equity Compensation Plan Information

 

The following table provides information on our equity compensation plans as of December 31, 2010.

 

 

 

 

Issuer Purchases of Equity Securities

 

A summary of our quarterly purchases of Grubb & Ellis Company common stock during the year ended December 31, 2010 is as follows:

 

 

 

 

Grubb & Ellis Stock Performance

 

This section entitled, “Grubb & Ellis Stock Performance” is not to be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C or to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically request that such information be treated as soliciting material or specifically incorporate it by reference into any filing under the Securities Act or the Exchange Act.

 

The graph below compares the cumulative 66-month total return of holders of our common stock with the cumulative total returns of the S&P 500 index, and a customized peer group of three companies that includes: CB Richard Ellis Group Inc, Grubb & Ellis Company and Jones Lang LaSalle Inc. The graph tracks the performance of a $100 investment in our common stock, in the peer group, and the index (with the reinvestment of all dividends) from June 30, 2005 to December 31, 2010.

COMPARISON OF 66 MONTH CUMULATIVE TOTAL RETURN*
Among Grubb & Ellis Company, the S&P 500 Index
and a Peer Group

 

 

*$100 invested on 6/30/05 in stock or index, including reinvestment of dividends. Fiscal year ending December 31.

 

Copyright^© 2011 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.

 

 

The stock price performance included in this graph is not necessarily indicative of future stock price performance.

 

The following tables set forth the selected historical consolidated financial data for us and our subsidiaries, as of and for the years ended, December 31, 2010, 2009, 2008, 2007 and 2006. The selected historical consolidated financial data set forth below as of and for the years ended December 31, 2010 and 2009 and the selected consolidated operating and cash flow data for the year ended December 31, 2008 has been derived from the audited financial statements included in Item 8 of this Report. The selected consolidated financial data set forth below as of December 31, 2008, 2007 and 2006 and for the years ended December 31, 2007 and 2006, has been derived from audited consolidated financial statements not included in this Report as adjusted for reclassifications required by the Property, Plant and Equipment Topic for discontinued operations. Historical results are not necessarily indicative of the results that may be expected for any future period. The selected historical consolidated financial data set forth below should be read in conjunction with Item 7 and the consolidated financial statements.

 

 

 

 

 

Non-GAAP Financial Measures

 

EBITDA and Adjusted EBITDA are non-GAAP measures of performance. EBITDA provides an indicator of economic performance that is unaffected by debt structure, changes in interest rates, changes in effective tax rates or the accounting effects of capital expenditures and acquisitions because EBITDA excludes net interest expense, interest income, income taxes, depreciation, amortization, discontinued operations and impairments related to goodwill and intangible assets.

 

We use Adjusted EBITDA as an internal management measure for evaluating performance and as a significant component when measuring performance under employee incentive programs. Management considers Adjusted EBITDA an important supplemental measure of our performance and believes that it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry, some of which present Adjusted EBITDA when reporting their results. Management also believes that Adjusted EBITDA is a useful tool for measuring our ability to meet our future capital expenditures and working capital requirements.

 

EBITDA and Adjusted EBITDA are not a substitute for GAAP net income or cash flow from operating, investing or financing activities and do not provide a measure of our ability to fund future cash requirements. Other companies may calculate EBITDA and Adjusted EBITDA differently than we have and, therefore, EBITDA and Adjusted EBITDA have material limitations as a comparative performance measure. The

following table reconciles EBITDA and Adjusted EBITDA with the net loss attributable to Grubb & Ellis Company for the years ended December 31, 2010, 2009 and 2008.

 

 

 

Note Regarding Forward-Looking Statements

 

This Annual Report contains statements that are forward-looking and as such are not historical facts. Rather, these statements constitute projections, forecasts or forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You should not place undue reliance on these statements. Forward-looking statements include information concerning our liquidity and possible or assumed future results of operations, including descriptions of our business strategies. These statements often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” “seek,” “will,” “may” or similar expressions. These statements are based on certain assumptions that we have made in light of our experience in the industry as well as our perceptions of the historical trends, current conditions, expected future developments and other factors we believe are appropriate under these circumstances.

 

All such forward-looking statements speak only as of the date of this Annual Report. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

 

As you read this Annual Report, you should understand that these statements are no guarantees of performance or results. They involve risks, uncertainties and assumptions. You should understand the risks and uncertainties discussed in “Item 1A — Risk Factors” and elsewhere in this Annual Report, could affect our

actual financial results and could cause actual results to differ materially from those expressed in the forward-looking statements. Some important factors include, but are not limited to:

 

 

Overview and Background

 

We report our revenue by four operating business segments in accordance with the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280, Segment Reporting, (“Segment Reporting Topic”). The four business segments are as follows: (1) Management Services, which includes property management, corporate facilities management, project management, client accounting, business services and engineering services for corporate occupier and real estate investor clients (2) Transaction Services, which comprises our real estate brokerage valuation and appraisal operations; (3) Investment Management, which encompasses acquisition, financing, disposition and asset management services for our investment programs and dealer-manager services by our securities broker-dealer, which facilitates capital raising transactions for our REIT and other investment programs; and (4) Daymark, which

includes our legacy TIC business. Additional information on these business segments can be found in Note 26 of Notes to Consolidated Financial Statements in Item 8 of this Report.

 

Critical Accounting Policies

 

Our consolidated financial statements have been prepared in accordance with GAAP. Certain accounting policies are considered to be critical accounting policies, as they require management to make assumptions about matters that are highly uncertain at the time the estimate is made and changes in the accounting estimate are reasonably likely to occur from period to period. We believe that the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

 

Revenue Recognition

 

Management Services

 

Management fees are recognized at the time the related services have been performed by us, unless future contingencies exist. In addition, in regard to management and facility service contracts, the owner of the property will typically reimburse us for certain expenses that are incurred on behalf of the owner, which are comprised primarily of on-site employee salaries and related benefit costs. The amounts which are to be reimbursed per the terms of the services contract are recognized as revenue by us in the same period as the related expenses are incurred. In certain instances, we subcontract our property management services to independent property managers, in which case we pass a portion of their property management fee on to the subcontractor, and we retain the balance. Accordingly, we record these fees net of the amounts paid to our subcontractors.

 

Transaction Services

 

Real estate sales commissions are recognized when earned which is typically the close of escrow. Receipt of payment occurs at the point at which all our services have been performed, and title to real property has passed from seller to buyer, if applicable. Real estate leasing commissions are recognized upon execution of appropriate lease and commission agreements and receipt of full or partial payment, and, when payable upon certain events such as tenant occupancy or rent commencement, upon occurrence of such events. All other commissions and fees are recognized at the time the related services have been performed and delivered by us to the client, unless future contingencies exist.

 

Investment Management

 

We earn fees associated with our transactions by structuring, negotiating and closing acquisitions of real estate properties for our REIT. Such fees include acquisition fees for locating and acquiring the property on behalf of our REIT. We account for acquisition fees in accordance with the requirements of the ASC Topic 970, Real Estate — General Topic, (“Real Estate — General Topic”) and ASC Topic 976, Real Estate — Retail Land (“Real Estate — Retail Land Topic”). In general, we record the acquisition fees upon the close of sale to the buyer if the buyer is independent of the seller, collection of the sales price, including the acquisition fees, is reasonably assured, and we are not responsible for supporting operations of the property. We earn disposition fees for disposing of the property on behalf of the REIT. We recognize the disposition fee when the sale of the property closes.

 

We earn asset and property management fees primarily for managing the operations of real estate properties owned by the REITs we sponsor. Such fees are based on pre-established formulas and contractual arrangements and are earned as such services are performed. We are entitled to receive reimbursement for expenses associated with managing the properties; these expenses include salaries for property managers and other personnel providing services to the property. We are also entitled to leasing commissions when a new tenant is secured and upon tenant renewals. Leasing commissions are recognized upon execution of leases.

Through our dealer-manager, we facilitate capital raising transactions for our sponsored programs. Our wholesale dealer-manager services are comprised of raising capital for our programs through our selling broker-dealer relationships. Most of the commissions, fees and allowances earned for our dealer-manager services are passed on to the selling broker-dealers as commissions and to cover offering expenses, and we retain the balance. Accordingly, we record these fees net of the amounts paid to our selling broker-dealer relationships.

 

Investment Management — Daymark

 

We earn transaction fees associated with structuring, negotiating and closing acquisitions of real estate properties for third-party investors in our TIC and other investment programs. Such fees include acquisition fees for locating and acquiring the property on behalf of our various TIC investors and sponsored real estate funds. We account for acquisition and loan fees in accordance with the requirements of the Real Estate — General Topic and Real Estate — Retail Land Topic. In general, we record the acquisition and loan fees upon the close of sale to the buyer if the buyer is independent of the seller, collection of the sales price, including the acquisition fees and loan fees, is reasonably assured, and we are not responsible for supporting operations of the property. Organizational marketing expense allowance (“OMEA”) fees are earned and recognized from gross proceeds of equity raised in connection with TIC offerings and are used to pay formation costs, as well as organizational and marketing costs. When we do not meet the criteria for revenue recognition under the Real Estate — General Topic and the Real Estate — Retail Land Topic, revenue is deferred until revenue can be reasonably estimated or until we defer revenue up to our maximum exposure to loss. We earn disposition fees for disposing of the property on behalf of the investment fund or TIC program. We recognize the disposition fee when the sale of the property closes. In certain circumstances, we are entitled to loan advisory fees for arranging financing related to properties under management.

 

We earn asset and property management fees primarily for managing the operations of real estate properties owned by the real estate programs and TIC programs we sponsor. Such fees are based on pre-established formulas and contractual arrangements and are earned as such services are performed. We are entitled to receive reimbursement for expenses associated with managing the properties; these expenses include salaries for property managers and other personnel providing services to the property. We are also entitled to leasing commissions when a new tenant is secured and upon tenant renewals. Leasing commissions are recognized upon execution of leases.

 

Through our dealer-manager, we facilitate capital raising transactions for our sponsored programs. Our wholesale dealer-manager services are comprised of raising capital for our programs through our selling broker-dealer relationships. Most of the commissions, fees and allowances earned for our dealer-manager services are passed on to the selling broker-dealers as commissions and to cover offering expenses, and we retain the balance. Accordingly, we record these fees net of the amounts paid to our selling broker-dealer relationships.

 

Basis of Presentation and Principles of Consolidation

 

Pursuant to the requirements of ASC Topic 810, Consolidation, (“Consolidation Topic”) that existed prior to January 1, 2010, we consolidated VIEs if we determined if we were the primary beneficiary of the VIE. We were deemed to be the primary beneficiary of the VIE if we were to absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns or both. However, under the requirements that exist subsequent to January 1, 2010, we are deemed to be the primary beneficiary of the VIE if we have a variable interest in the VIE that provides us with a controlling financial interest. Our variable interest provides us with a controlling financial interest if we have both (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and (ii) the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. There is subjectivity around the determination of power and which activities of the VIE most significantly impact the entity’s economic performance. As reconsideration events occur, we will reconsider our determination of whether an entity is a VIE and who the primary beneficiary is to determine if there is a change in the original determinations and will report such changes on a quarterly

basis. In addition, we will continuously evaluate our VIEs primary beneficiary as facts and circumstances change to determine if such changes warrant a change in an enterprise’s status as primary beneficiary of our VIEs.

 

Litigation

 

We routinely assess the likelihood of any adverse judgments or outcomes related to legal matters, as well as ranges of probable losses. A determination of the amount of the reserves required, if any, for these contingencies is made after analysis of each known issue and an analysis of historical experience. Therefore, we have recorded reserves related to certain legal matters for which we believe it is probable that a loss will be incurred and the range of such loss can be estimated. With respect to other matters, we have concluded that a loss is only reasonably possible or remote, or is not estimable and, therefore, no liability is recorded. Assessing the likely outcome of pending litigation, including the amount of potential loss, if any, is highly subjective. Our judgments regarding likelihood of loss and our estimates of probable loss amounts may differ from actual results due to difficulties in predicting the outcome of jury trials, arbitration hearings, settlement discussions and related activity, sufficiency and/or applicability of insurance coverage and various other uncertainties. Due to the number of claims which are periodically asserted against us, and the magnitude of damages sought in those claims, actual losses in the future could significantly exceed our current estimates.

 

Impairment of Long-Lived Assets

 

In accordance with the requirements of the Property, Plant and Equipment Topic, long-lived assets are periodically evaluated for potential impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. In the event that periodic assessments reflect that the carrying amount of the asset exceeds the sum of the undiscounted cash flows (excluding interest) that are expected to result from the use and eventual disposition of the asset, we would recognize an impairment loss to the extent the carrying amount exceeded the fair value of the property. We estimate the fair value using available market information or other industry valuation techniques such as present value calculations. This valuation review resulted in the recognition of an impairment charge of approximately $0.7 million, $21.6 million and $87.6 million against the carrying value of the properties and real estate investments during the years ended December 31, 2010, 2009 and 2008, respectively.

 

We recognize goodwill and other non-amortizing intangible assets in accordance with the requirements of ASC Topic 350, Intangibles — Goodwill and Other, (“Goodwill and Other Topic”). Under this Topic, goodwill is recorded at our carrying value and is tested for impairment at least annually or more frequently if impairment indicators exist at a level of reporting referred to as a reporting unit. We recognize goodwill in accordance with the Goodwill and Other Topic and test the carrying value for impairment during the fourth quarter of each year. The goodwill impairment analysis is a two-step process. The first step used to identify potential impairment involves comparing each reporting unit’s estimated fair value to our carrying value, including goodwill. To estimate the fair value of our reporting units, we used a discounted cash flow model and market comparable data. Significant judgment is required by us in developing the assumptions for the discounted cash flow model. These assumptions include cash flow projections utilizing revenue growth rates, profit margin percentages, discount rates, market/economic conditions, etc. If the estimated fair value of a reporting unit exceeds our carrying value, goodwill is considered to not be impaired. If the carrying value exceeds estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment. The second step of the process involves the calculation of an implied fair value of goodwill for each reporting unit for which step one indicated a potential impairment may exist. The implied fair value of goodwill is determined by measuring the excess of the estimated fair value of the reporting unit as calculated in step one, over the estimated fair values of the individual assets, liabilities and identified intangibles. During the fourth quarter of 2008, we identified the uncertainty surrounding the global economy and the volatility of our market capitalization as goodwill impairment indicators. Our goodwill impairment analysis resulted in the recognition of an impairment charge of approximately $172.7 million during the year ended December 31, 2008. We also analyzed our trade name for impairment pursuant to the requirements of the Goodwill and Other Topic and determined that the trade name was not impaired as of

December 31, 2010, 2009 and 2008. Accordingly, no impairment charges were recorded related to the trade name during the years ended December 31, 2010, 2009 and 2008. In addition to testing goodwill and our trade name for impairment, we tested the intangible contract rights for impairment during the fourth quarter of 2010, 2009 and 2008. The intangible contract rights represent the legal right to future disposition fees of a portfolio of real estate properties under contract. As a result of the current economic environment, a portion of these disposition fees may not be recoverable. Based on our analysis for the current and projected property values, condition of the properties and status of mortgage loans payable, we determined that there are certain properties for which receipt of disposition fees was improbable. As a result, we recorded an impairment charge of approximately $2.6 million, $0.7 million and $8.6 million related to the impaired intangible contract rights as of December 31, 2010, 2009 and 2008, respectively.

 

Recently Issued Accounting Pronouncements

 

For a discussion of recently issued accounting pronouncements, see Note 2, Summary of Significant Accounting Policies — Recently Issued Accounting Pronouncements, to the Consolidated Financial Statements that are a part of this Annual Report on Form 10-K.

 

RESULTS OF OPERATIONS

 

Overview

 

We reported revenue of $575.5 million for the year ended December 31, 2010, compared with revenue of $527.9 million for the same period of 2009. The increase was primarily the result of increases in Transaction Services revenue of $62.8 million, partially offset by decreases in Investment Management and Investment Management — Daymark revenue of $9.0 million and $4.8 million, respectively. The increase in revenue as compared to the prior year period can be attributed to increased sales and leasing transactions from Transaction Services. The decrease in our Investment Management and Investment Management — Daymark revenues resulted from a reduction of our assets under management by approximately 12.1% from $5.8 billion as of December 31, 2009 to $5.1 billion as of December 31, 2010 and lower broker-dealer revenue resulting from lower equity raised.

 

The net loss attributable to Grubb & Ellis Company for the year ended December 31, 2010 was $66.8 million and included non-cash charges of $12.7 million for depreciation and amortization, a $9.4 million charge for bad debt, $9.1 million of share-based compensation, $7.1 million for amortization of signing bonuses, $2.8 million for intangible asset impairment and $0.9 million for real estate related impairments. In addition, the year end results included approximately $5.9 million of severance and other charges. After payment of preferred stock dividends of $11.6 million, the net loss attributable to Grubb & Ellis Company common shareowners for the year ended December 31, 2010 was $78.4 million, or $1.21 per diluted share.

 

In the fourth quarter of 2010, we added a fourth reporting segment following the creation of Daymark Realty Advisors to manage our tenant-in-common (“TIC”) programs. The four business segments are as follows: (1) Management Services, which includes property management, corporate facilities management, project management, client accounting, business services and engineering services for corporate occupier and real estate investor clients (2) Transaction Services, which comprises our real estate brokerage operations; (3) Investment Management, which encompasses acquisition, financing, disposition and asset management services for our investment programs and dealer-manager services by our securities broker-dealer, which facilitates capital raising transactions for our REIT, and other investment programs; and (4) Daymark, which includes our legacy TIC business. As of December 31, 2010, Daymark managed TIC programs as well as certain other legacy investment programs which includes over 8,700 residential units and 33.3 million square feet of commercial office space. Additional information on these business segments can be found in Note 26 of Notes to Consolidated Financial Statements in Item 8 of this Report.

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

 

The following summarizes comparative results of operations for the periods indicated.

 

Revenue

 

Management Services Revenue

 

Management Services revenue decreased $0.3 million, or 0.1%, to $274.6 million for the year ended December 31, 2010, compared to $274.9 million for the same period in 2009 due to a shift in the mix of business during 2010, which had a negative impact on revenue in the second half of the year, despite continuing to grow square feet under management. As of December 31, 2010, we managed approximately 255.1 million square feet of commercial real estate and multi-family property, including 35.1 million square feet of our Investment Management and Daymark portfolios compared to 240.7 million square feet of property as of December 31, 2009.

 

Transaction Services Revenue

 

Transaction Services revenue increased $62.8 million, or 36.2%, to $236.2 million for the year ended December 31, 2010, compared to $173.4 million for the same period in 2009 due to increased sales and leasing transaction volume and values as a result of the recovering real estate market. Leasing activity represented approximately 68% of the total sales and leasing revenue in 2010, while sales accounted for 32% of total sales and leasing revenue. In 2009, the revenue breakdown was 80% leasing and 20% sales. As of December 31, 2010, Grubb & Ellis had 1,006 brokers, up from 824 as of December 31, 2009.

 

Investment Management Revenue

 

Investment Management revenue decreased $9.0 million, or 29.8%, to $21.3 million for the year ended December 31, 2010, compared to $30.4 million for the same period in 2009. Investment Management revenue reflects revenue generated through the fee structure of our non-traded REIT programs and for the year ended December 31, 2010, includes acquisition fees of $9.4 million, broker dealer revenue of $3.1 million, management fees of $5.5 million and a $3.0 million settlement fee earned as a result of a settlement reached with our first sponsored healthcare REIT in October 2010. Key drivers of this business are the dollar value of equity raised, the amount of transactions that are generated in the investment product platforms and the amount of assets under management.

 

Broker dealer revenue decreased $5.8 million, or 65.2%, to $3.1 million for the year ended December 31, 2010, compared to $8.9 for the same period in 2009 as a result of a decrease in equity raised during the year ended December 31, 2010. In total, $160.9 million in equity was raised for our non-traded REIT programs for the year ended December 31, 2010, compared with $536.9 million in the same period in 2009. The decrease in equity raised by our public non-traded REITs is a result of the termination of the dealer-manager agreement of our first sponsored healthcare REIT in August 2009 and the start-up of our new Healthcare REIT II program which commenced sales on September 21, 2009.

 

Acquisition fees decreased $1.8 million, or 15.9%, to $9.4 million for the year ended December 31, 2010, compared to $11.3 million for the same period in 2009. Management fees decreased $3.3 million, or 37.5%, to $5.5 million for the year ended December 31, 2010, compared to $8.8 million for the same period in 2009, which primarily reflects the termination of management services for our first sponsored healthcare REIT in September 2009.

 

Investment Management — Daymark Revenue

 

Investment Management — Daymark revenue decreased $4.8 million, or 18.0%, to $21.9 million for the year ended December 31, 2010, compared to $26.7 million for the same period in 2009. Investment Management — Daymark revenue primarily reflects revenue generated through property and asset management of Daymark’s portfolio for the year ended December 31, 2010. Key drivers of this business are the amount of TIC assets under management and the financing, leasing and disposition transaction volume generated in the portfolio.

 

Acquisition and loan fees increased $1.7 million, or 130.8%, to $3.0 million for the year ended December 31, 2010, compared to $1.3 million for the same period in 2009. The year-over-year decrease in

acquisition and loan fees was primarily attributed to an increase in deferred revenue recognized of $1.8 million primarily as a result of our termination as master lessee on five multifamily properties during the third and fourth quarters of 2010. As a result of the termination of the master leases, we no longer have significant continuing involvement with these properties and, accordingly, recognized fees that were previously deferred related to these properties.

 

Management fees decreased approximately $4.3 million, or 20.5%, to $16.7 million for the year ended December 31, 2010 compared to $21.0 million for the same period in 2009, which primarily reflects lower average fees on TIC programs and the decline in assets under management.

 

Rental Revenue

 

Rental revenue includes pass-through revenue for the master lease accommodations related to our TIC programs. Rental revenue also includes revenue from one property held for investment. During 2010, we reduced the number of master lease programs from seven to two and as a result this revenue is expected to decline in future periods.

 

Operating Expense Overview

 

Operating expenses increased $12.7 million, or 2.0%, to $646.0 million for the year ended December 31, 2010, compared to $633.3 million for the same period in 2009. This increase primarily reflects increases in variable compensation costs of $44.6 million offset by a decrease in provision for doubtful accounts of $15.4 million, a decrease in interest expense of $4.6 million and a decrease in real estate related impairments of $14.4 million. We realized approximately $15.1 million in cost savings during the year ended December 31, 2010 as a result of management’s cost saving efforts which were offset by costs incurred to support growth initiatives and incremental costs incurred in operating the business.

 

Compensation Costs

 

Compensation costs increased approximately $44.6 million, or 9.4%, to $519.7 million for the year ended December 31, 2010, compared to approximately $475.1 million for the same period in 2009 due to increases in transaction commissions and related costs paid to our brokerage professionals of $45.6 million as a result of increased sales and leasing activity offset by decreases in reimbursable salaries, wages and benefits of $2.0 million. Other compensation costs decreased $2.5 million as a result of management’s cost saving efforts

partially offset by costs incurred to support growth initiatives. The following table summarizes compensation costs by segment for the periods indicated.

 

 

General and Administrative

 

General and administrative expense increased approximately $1.2 million, or 1.7%, to $75.6 million for the year ended December 31, 2010, compared to $74.4 million for the same period in 2009 due to an increase of $6.0 million related to Daymark legal and related costs increases related to our growth initiatives partially offset by decreases related to management’s cost saving efforts.

 

General and administrative expense was 13.1% of total revenue for the year ended December 31, 2010, compared with 14.1% for the same period in 2009.

 

Provision for Doubtful Accounts

 

Provision for doubtful accounts decreased approximately $15.4 million, or 62.2%, to $9.4 million for the year ended December 31, 2010, compared to $24.8 million for the same period in 2009 primarily due to a decrease in the provision for reserves on related party receivables and advances to sponsored investment programs. The decrease in the provision for doubtful accounts in the current year reflects the stabilization of the real estate market. Significant reserves were recorded in the prior year as a result of the deterioration in the real estate market.

 

Depreciation and Amortization

 

Depreciation and amortization expense increased approximately $0.9 million, or 8.0%, to $12.6 million for the year ended December 31, 2010, compared to approximately $11.7 million for the same period in 2009.

Included in depreciation and amortization expense for the years ended December 31, 2010 and 2009 was $3.8 million and $3.2 million, respectively, for amortization of identified intangible assets.

 

Rental Expense

 

Rental expense includes pass-through expenses for master lease accommodations related to our TIC programs. Rental expense also includes expense from one property held for investment. During 2010, we reduced the number of master lease programs from seven to two and as a result this revenue is expected to decline in future periods.

 

Interest Expense

 

Interest expense decreased approximately $4.6 million, or 35.3%, to $8.5 million for the year ended December 31, 2010, compared to $13.1 million for the same period in 2009. The decrease in interest expense is primarily due to the repayment in full of our line of credit in November 2009, partially offset by interest expense related to our Convertible Notes issued in May 2010.

 

Real Estate Related Impairments

 

We recognized impairment charges of approximately $0.9 million during the year ended December 31, 2010 which includes $2.2 million related to certain unconsolidated real estate investments and funding commitments for obligations related to certain of our sponsored real estate programs, $0.8 million related to a contingent liability associated with a recourse guarantee on the mortgage debt related to one of our TIC programs, $1.6 million related to the write down of our note receivable from Apartment Trust of America, Inc. (formerly Grubb & Ellis Apartment REIT, Inc) to fair market value offset by reversals of $0.5 million related to the release of our obligation under a recourse guarantee on the mortgage debt related to one of our TIC programs and $3.2 million related to the release of certain obligations providing a TIC investor with certain repurchase rights with respect to their investment.

 

We recognized impairment charges of approximately $15.3 million during the year ended December 31, 2009, which includes $10.3 million related to certain unconsolidated real estate investments and funding commitments for obligations related to certain of our sponsored real estate programs and $5.0 million related to one property held for investment as of December 31, 2010. In addition, we recognized impairment charges of approximately $8.7 million during the year ended December 31, 2009 related to one property sold during the year ended December 31, 2010 and two properties sold and two properties effectively abandoned under the accounting standards during the year ended December 31, 2009, for which the net income (loss) of the properties are classified as discontinued operations. See Discontinued Operations discussion below.

 

Intangible Assets Impairment

 

We analyzed our trade name for impairment pursuant to the requirements of the Intangibles — Goodwill and Other Topic and determined that the trade name was not impaired as of December 31, 2010 and 2009. Accordingly, no impairment charge was recorded related to the trade name during the years ended December 31, 2010 and 2009. In addition to testing goodwill and our trade name for impairment, we tested the intangible contract rights for impairment during years ended December 31, 2010 and 2009. The intangible contract rights represent the legal right to future disposition fees of a portfolio of real estate properties under contract. As a result of the current economic environment, a portion of these disposition fees may not be recoverable. Based on management’s analysis for the current and projected property values, condition of the properties and status of mortgage loans payable associated with these contract rights, we determined that there are certain properties for which receipt of disposition fees was improbable. As a result, we recorded an impairment charge of approximately $2.8 and $0.7 million, respectively, related to the impaired intangible contract rights during the years ended December 31, 2010 and 2009, respectively.

 

Equity in Losses of Unconsolidated Real Estate

 

Equity in losses includes $1.4 million and $1.1 million for the years ended December 31, 2010 and 2009, respectively, related to our investment in five joint ventures and certain LLCs and other LLCs that are consolidated pursuant to the requirements of the Consolidation Topic. Equity in losses are recorded based on the pro rata ownership interest in the underlying unconsolidated properties.

Gain on Extinguishment of Debt

 

Gain on extinguishment of debt includes a $21.9 million gain on forgiveness of debt related to the repayment of the Credit Facility at a discounted amount and termination of the Credit Facility on November 6, 2009. No gains or losses on extinguishment of debt were realized in 2010.

 

Other Income

 

Other income of $0.7 million and $0.4 million for the year ended December 31, 2010 and 2009, respectively, includes investment income related to Alesco of $0.2 million and $0.6 million for the year ended December 31, 2010 and 2009, respectively. In addition, other income for the year ended December 31, 2010 includes a $0.5 million gain on remeasurement of our previously held 40% interest in a regional commercial real estate services company as a result of the acquisition of the remaining 60% interest in July 2010.

 

Discontinued Operations

 

In accordance with the requirements of ASC Topic 360, Property, Plant, and Equipment, (“Property, Plant, and Equipment Topic”), for the year ended December 31, 2010, discontinued operations includes net income of $1.1 million which includes a $1.3 million gain on sale, net of taxes, related to the sale of the Avallon property on December 30, 2010 and a $0.2 million loss from discontinued operations, net of taxes. Net income of $2.2 million for the year ended December 31, 2009 includes a $7.4 million gain on sale, net of taxes, related to the sale of the Danbury Property on June 3, 2009 and the deconsolidation of the Abrams and Shafer properties during the fourth quarter of 2009 and a $5.2 million loss from discontinued operations, net of taxes, which includes $8.7 million of real estate related impairments.

 

Income Tax

 

We recognized a tax benefit from continuing operations of approximately $0.1 million for the year ended December 31, 2010, compared to a tax benefit of $1.0 million for the same period in 2009. In 2010 and 2009, the reported effective income tax rates were 0.11% and 1.20%, respectively. The 2009 effective income tax rate reflects the adoption of the requirements of the amended Consolidation Topic. The 2010 and 2009 effective tax rates include the effect of valuation allowances recorded against deferred tax assets to reflect our assessment that it is more likely than not that all of the deferred tax assets will not be realized. Our deferred tax assets are primarily attributable to net operating losses, put option guarantees and other liabilities, real estate impairments, bad debt reserves, and share-based compensation. (See Note 25 of the Notes to Consolidated Financial Statements in Item 8 of this Report for additional information.)

 

Net Loss Attributable to Noncontrolling Interests

 

Net loss attributable to noncontrolling interests increased by $1.3 million, or 77.7%, to $3.0 million during the year ended December 31, 2010, compared to net loss attributable to noncontrolling interests of $1.7 million for the same period in 2009. The increase in net loss attributable to noncontrolling interests includes $1.5 million related to the consolidation of six VIEs during the year ended December 31, 2010 pursuant to an amendment to the requirements of the Consolidation Topic.

 

Net Loss Attributable to Grubb & Ellis Company

 

As a result of the above items, we recognized a net loss of $66.8 million for the year ended December 31, 2010, compared to a net loss of $78.8 million for the same period in 2009.

 

Net Loss Attributable to Grubb & Ellis Company Common Shareowners

 

We paid $11.6 million in preferred stock dividends during the year ended December 31, 2010 resulting in a net loss attributable to our common shareowners of $78.4 million, or $1.21 per diluted share, for the year ended December 31, 2010, compared to a net loss attributable to our common shareowners of $80.6 million, or $1.27 per diluted share, for the same period in 2009.

 

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

 

The following summarizes comparative results of operations for the periods indicated.

 

 

Revenue

 

Management Services Revenue

 

Management Services revenue increased $21.2 million, or 8.4% to $274.9 million for the year ended December 31, 2009, compared to approximately $253.7 million for the same period in 2008 due to an increase in the square feet under management. As of December 31, 2009, we managed approximately 240.7 million square feet of commercial real estate and multi-family property, including 24.3 million square feet of our Investment Management and Daymark portfolios compared to 231.0 million square feet of property as of December 31, 2008.

 

Transaction Services Revenue

 

Transaction Services revenue decreased $66.9 million or 27.8% to $173.4 million for the year ended December 31, 2009, compared to approximately $240.3 million for the same period in 2008 due to reduced sales and leasing transaction volume and values as a result of the declining real estate market. Leasing activity represented approximately 80% of the total Transaction Services revenue in 2009, while sales accounted for 20% of total revenue. In 2008, the revenue breakdown was 77% leasing and 23% sales. As of December 31, 2009, we had 824 brokers, up from 805 as of December 31, 2008.

 

Investment Management Revenue

 

Investment Management revenue decreased $20.6 million or 40.4% to $30.4 million for the year ended December 31, 2009, compared to $51.0 million for the same period in 2008. Investment Management revenue reflects revenue generated through the fee structure of our non-traded REIT programs which includes acquisition fees of $11.3 million, broker dealer revenue of $8.9 million and management fees of $8.8 million. Key drivers of this business are the dollar value of equity raised, the amount of transactions that are generated in the investment product platforms and the amount of assets under management.

 

Broker dealer revenue decreased $6.2 million, or 41.1%, to $8.9 million for the year ended December 31, 2009, compared to $15.1 for the same period in 2008 as a result of a decrease in equity raised during the year ended December 31, 2009. In total, $536.9 million in equity was raised for our non-traded REIT programs for the year ended December 31, 2009, compared with $592.7 million in the same period in 2008. The decrease in equity raised by our public non-traded REITs is a result of the termination of the dealer-manager agreement of our first sponsored healthcare REIT in August 2009 and the start-up of our new Healthcare REIT II program which commenced sales on September 21, 2009.

 

Acquisition fees decreased $8.1 million, or 41.8%, to $11.3 million for the year ended December 31, 2009, compared to $19.4 million for the same period in 2008. Management fees decreased $3.4 million or 27.9% to $8.8 million for the year ended December 31, 2009, compared to $12.2 million for the same period in 2008, which primarily reflects the termination of management services for our first sponsored healthcare REIT in September 2009.

 

Investment Management — Daymark Revenue

 

Investment Management — Daymark revenue decreased $23.9 million, or 47.2%, to $26.7 million for the year ended December 31, 2009, compared to $50.6 million for the same period in 2008. Investment Management — Daymark revenue reflects revenue generated through the fee structure of our TIC investment products which includes acquisition and loan fees of $1.3 million and management fees of $21.0 million for the year ended December 31, 2009. Key drivers of this business were the dollar value of equity raised, the amount of transactions that are generated in the investment product platforms and the amount of assets under management.

 

In total, $15.5 million in equity was raised for our TIC programs for the year ended December 31, 2009, compared with $176.9 million in the same period in 2008. The decrease in TIC equity raised for the year ended December 31, 2009 reflects the decline in market conditions.

 

Acquisition and loan fees decreased $12.4 million, or 90.5%, to $1.3 million for the year ended December 31, 2009, compared to $13.7 million for the same period in 2008. Management fees decreased

$2.9 million, or 12.1%, to $21.0 million for the year ended December 31, 2009 compared to $23.9 million for the same period in 2008, which primarily reflects lower average fees on TIC programs.

 

Rental Revenue

 

Rental revenue includes pass-through revenue for the master lease accommodations related to our TIC programs. Rental revenue also includes revenue from one property held for investment.

 

Operating Expense Overview

 

Operating expenses decreased $263.0 million, or 29.3%, to $633.3 million for the year ended December 31, 2009, compared to $896.3 million for the same period in 2008. This decrease reflects decreases in compensation costs from lower commissions paid and synergies created as a result of the Merger of $37.2 million and decreases of merger related costs of $14.7 million and general and administrative expense of $16.0 million offset by an increase in provision for doubtful accounts of $4.9 million. We recognized real estate impairments of $15.3 million during the year ended December 31, 2009, a decrease of $20.3 million over the same period in 2008. In addition, we recognized goodwill and intangible asset impairment of $0.7 million during the year ended December 31, 2009, a decrease of $180.5 million over the same period last year as we wrote off all of our goodwill during the year ended December 31, 2008. Partially offsetting the overall decrease was an increase in interest expense of $2.1 million for the year ended December 31, 2009 primarily related to our line of credit.

 

Compensation Costs

 

Compensation costs decreased approximately $37.2 million, or 7.3%, to $475.1 million for the year ended December 31, 2009, compared to approximately $512.3 million for the same period in 2008 due to a decrease in transaction commissions and related costs of $42.9 million as a result of a decrease in sales and leasing activity and a decrease in other compensation costs of $11.9 million related to a reduction in headcount and decreases in salaries partially offset by an increase in reimbursable salaries, wages and benefits of $18.6 million as a result of the growth in square feet under management. The following table summarizes compensation costs by segment for the periods indicated.

 

 

General and Administrative

 

General and administrative expense decreased approximately $16.0 million, or 17.7%, to $74.4 million for the year ended December 31, 2009, compared to $90.4 million for the same period in 2008 due to a decrease of $9.1 million related to an estimate of probable loss recorded during the year ended December 31, 2008 related to recourse guarantees of debt of properties under management and various decreases related to management’s cost saving efforts.

 

General and administrative expense was 14.1% of total revenue for the year ended December 31, 2009, compared with 14.6% for the same period in 2008.

 

Provision for Doubtful Accounts

 

Provision for doubtful accounts increased approximately $4.9 million, or 24.8%, to $24.8 million for the year ended December 31, 2009, compared to $19.8 million for the same period in 2008 primarily due to an increase in reserves on related party receivables and advances to sponsored investment programs.

 

Depreciation and Amortization

 

Depreciation and amortization expense decreased approximately $1.6 million, or 11.9%, to $11.7 million for the year ended December 31, 2009, compared to approximately $13.3 million for the same period in 2008. The decrease is primarily due to one property we held for investment as of December 31, 2010. This property was previously held for sale through June 30, 2009. In accordance with the provisions of Property, Plant, and Equipment Topic, management determined that the carrying value of the property, before the property was classified as held for investment (adjusted for any depreciation and amortization expense and impairment losses that would have been recognized had the asset been continuously classified as held for investment) was greater than the carrying value net of selling costs, of the property at the date of the subsequent decision not to sell. Therefore, we made no additional adjustments to the carrying value of the asset as of December 31, 2009 and no depreciation expense was recorded during the period the property was held for sale. Included in depreciation and amortization expense for the years ended December 31, 2009 and 2008 was $3.2 million and $3.5 million, respectively, for amortization of identified intangible assets.

 

Rental Expense

 

Rental expense includes pass-through expenses for master lease accommodations related to our TIC programs. Rental expense also includes expense from one property held for investment.

 

Interest Expense

 

Interest expense increased approximately $2.1 million, or 19.3%, to $13.1 million for the year ended December 31, 2009, compared to $11.0 million for the same period in 2008. The increase in interest expense includes increases related to the Credit Facility due to additional borrowings in 2009, an increase in the interest rate to LIBOR plus 800 basis points from LIBOR plus 300 basis points as a result of the 3^rd amendment to the Credit Facility and the write off of loan fees related to the Credit Facility.

 

Merger Related Costs

 

Merger related costs include transaction costs related to the Merger, facilities and systems consolidation costs and employment-related costs. We incurred $14.7 million of Merger related transaction costs during the year ended December 31, 2008 as a result of completing the Merger transaction on December 7, 2007.

 

Real Estate Related Impairments

 

We recognized impairment charges of approximately $15.3 million during the year ended December 31, 2009, which includes $10.3 million related to certain unconsolidated real estate investments and funding commitments for obligations related to certain of our sponsored real estate programs and $5.0 million related to one property held for investment as of December 31, 2010. We recognized an impairment charge of

approximately $35.6 million during the year ended December 31, 2008, which includes $18.0 million related to certain unconsolidated real estate investments and $17.6 million related to one property held for investment. In addition, we recognized impairment charges of approximately $8.7 million and $54.7 million during the year ended December 31, 2009 and 2008, respectively, related to one property sold during the year ended December 31, 2010 and two properties sold and two properties effectively abandoned under the accounting standards during the year ended December 31, 2009, for which the net income (loss) of the properties are classified as discontinued operations. See Discontinued Operations discussion below.

 

Goodwill and Intangible Assets Impairment

 

We recognized a goodwill and intangible assets impairment charge of approximately $181.3 million during the year ended December 31, 2008. The total impairment charge of $181.3 million is comprised of $172.7 million related to goodwill impairment and $8.6 million related to the impairment of intangible contract rights. During the fourth quarter of 2008, we identified the uncertainty surrounding the global economy and the volatility of our market capitalization as goodwill impairment indicators. Our goodwill impairment analysis resulted in the recognition of an impairment charge of approximately $172.7 million during the year ended December 31, 2008. We also analyzed our trade name for impairment pursuant to the requirements of the Intangibles — Goodwill and Other Topic and determined that the trade name was not impaired as of December 31, 2009 and 2008. Accordingly, no impairment charge was recorded related to the trade name during the years ended December 31, 2009 and 2008. In addition to testing goodwill and our trade name for impairment, we tested the intangible contract rights for impairment during the fourth quarter of 2008 and during the year ended December 31, 2009. The intangible contract rights represent the legal right to future disposition fees of a portfolio of real estate properties under contract. As a result of the current economic environment, a portion of these disposition fees may not be recoverable. Based on management’s analysis for the current and projected property values, condition of the properties and status of mortgage loans payable associated with these contract rights, we determined that there are certain properties for which receipt of disposition fees was improbable. As a result, we recorded an impairment charge of approximately $0.7 million and $8.6 million related to the impaired intangible contract rights during the years ended December 31, 2009 and 2008, respectively.

 

Equity in Losses of Unconsolidated Real Estate

 

Equity in losses includes $1.1 million and $13.3 million for the years ended December 31, 2009 and 2008, respectively. Equity in losses of $1.1 million and $7.5 million were recorded during the years ended December 31, 2009 and 2008, respectively, related to our investment in five joint ventures and seven LLCs that are consolidated pursuant to the requirements of the Consolidation Topic. Equity in losses are recorded based on the pro rata ownership interest in the underlying unconsolidated properties. In addition, equity in losses for the year ended December 31, 2008 includes a $5.8 million write off of our investment in GERA in the first quarter of 2008, which includes $4.5 million related to stock and warrant purchases and $1.3 million related to operating advances and third party costs.

 

Gain on Extinguishment of Debt

 

Gain on extinguishment of debt includes a $21.9 million gain on forgiveness of debt related to the repayment of the Credit Facility in full at a discounted amount and termination of the Credit Facility on November 6, 2009.

 

Other Income (Expense)

 

Other income of $0.4 million for the year ended December 31, 2009 includes investment income related to Alesco. Other expense of $6.5 million for the year ended December 31, 2008, includes $4.6 million of investment losses related to Alesco and a $1.8 million loss on sale of marketable equity securities.

Discontinued Operations

 

In accordance with the requirements of the Property, Plant and Equipment Topic, discontinued operations includes the net income (loss) of one property that was sold during the year ended December 31, 2010 and two properties that were sold and two properties that were effectively abandoned under the accounting standards during the year ended December 31, 2009. The net income of $2.2 million for the year ended December 31, 2009 includes a $7.4 million gain on sale, net of taxes, related to the sale of the Danbury Property on June 3, 2009 and the deconsolidation of the Abrams and Shafer properties during the fourth quarter of 2009 and a $5.2 million loss from discontinued operations, net of taxes, which includes $8.7 million of real estate related impairments. The net loss of $38.5 million for the year ended December 31, 2008 includes a $0.4 million gain on sale, net of taxes, and a $38.9 million loss from discontinued operations, net of taxes, which includes $54.7 million of real estate related impairments.

 

Income Tax

 

We recognized a tax benefit from continuing operations of approximately $1.0 million for the year ended December 31, 2009, compared to a tax provision of $8.6 million for the same period in 2008. In 2009 and 2008, the reported effective income tax rates were 1.20% and (3.01%), respectively. The 2009 effective income tax rate reflects the adoption of the requirements of the amended Consolidation Topic. The 2009 and 2008 effective tax rates include the effect of valuation allowances recorded against deferred tax assets to reflect our assessment that it is more likely than not that some portion of the deferred tax assets will not be realized. Our deferred tax assets are primarily attributable to impairments of various real estate holdings, net operating losses and share-based compensation. (See Note 25 of the Notes to Consolidated Financial Statements in Item 8 of this Report for additional information.)

 

Net Loss Attributable to Noncontrolling Interests

 

Net loss attributable to noncontrolling interests decreased by $10.1 million, or 85.8%, to $1.7 million during the year ended December 31, 2009, compared to net loss attributable to noncontrolling interests of $11.7 million for the same period in 2008. Net loss attributable to noncontrolling interests includes $3.7 million and $8.6 million in real estate related impairments recorded at the underlying properties during the years ended December 31, 2009 and 2008, respectively.

 

Net Loss Attributable to Grubb & Ellis Company

 

As a result of the above items, we recognized a net loss of $78.8 million for the year ended December 31, 2009, compared to a net loss of $330.9 million for the same period in 2008.

 

Net Loss Attributable to Grubb & Ellis Company Common Shareowners

 

We paid $1.8 million in preferred stock dividends during the year ended December 31, 2009 resulting in a net loss attributable to our common shareowners of $80.6 million, or $1.27 per diluted share, for the year ended December 31, 2009, compared to a net loss attributable to our common shareowners of $330.9 million, or $5.21 per diluted share, for the same period in 2008.

 

Liquidity and Capital Resources

 

Our accompanying financial statements have been prepared assuming that we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve month period following the date of these financial statements.

 

On March 21, 2011, the Company announced that it had engaged an external advisor to explore strategic alternatives, including the potential sale or merger of the Company. In conjunction with the announcement, the board of directors also determined, as permitted, not to declare the March 31, 2011 quarterly dividend to holders of its 12% Cumulative Participating Perpetual Convertible Preferred Stock.

The Company had been seeking additional financing to address liquidity needs resulting from operating losses relating to the seasonal nature of the real estate services businesses, investments made in growth initiatives and increased legal expenses related to its Daymark subsidiary. As more fully discussed in Note 28 of Notes to Consolidated Financial Statements in Item 8 of this Report, on March 30, 2011 the Company entered into a commitment letter with respect to an $18.0 million senior secured term loan facility. The commitment letter contains customary conditions to closing. If the Company is not successful in meeting such conditions to closing and is unable to obtain funding under the proposed credit facility or an alternative funding facility, it could create substantial doubt about the Company’s ability to continue as a going concern for the twelve month period following the date of these financial statements. Management believes that with the completion of the $18.0 million senior secured term loan facility, they will have sufficient liquidity to operate in the normal course through at least December 31, 2011.

 

Current Sources of Capital and Liquidity

 

We believe that we will have sufficient capital resources to satisfy our liquidity needs over the next twelve-month period. We expect to meet our short-term liquidity needs, which may include losses from operations, principal repayments of mortgage debt in connection with recourse guarantee obligations, potential litigation losses, payment of fixed charges, investments in various real estate investor programs and capital expenditures, through cash on hand and proceeds from the potential issuance of equity securities, debt offerings and the potential sale of other assets.

 

In February 2011, we sold the note receivable we held from Apartment Trust of America, Inc. (formerly Grubb & Ellis Apartment REIT, Inc.) to a third party for $6.1 million in net proceeds.

 

Long-Term Liquidity Needs

 

We expect to meet our long-term liquidity needs, which may include losses from operations, principal repayments of debt obligations, payment of fixed charges, investments in various real estate investor programs and capital expenditures, through current and retained cash flow earnings, the sale of real estate property and proceeds from the potential issuance of debt or equity securities and the potential sale of other assets. We may seek to obtain new secured or unsecured lines of credit in the future, although we can provide no assurance that we will find financing on favorable terms or at all.

 

Factors That May Influence Future Sources of Capital and Liquidity

 

As further described under “Commitments, Contingencies and Other Contractual Obligations” below, we are involved in multiple legal proceedings and have certain contingent liabilities arising from guarantees and other contractual obligations. While the ultimate outcome and potential liabilities related to these commitments and contingencies is uncertain, adverse determinations and outcomes in these matters could result in material and adverse effects on the liquidity and assets of us or our subsidiaries. For additional discussion of factors that may affect our liquidity and capital resources, please see Item 1A Risk Factors.

 

Cash Flow

 

Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

 

Net cash used in operating activities improved by $30.1 million to $21.7 million for the year ended December 31, 2010, compared to net cash used in operating activities of $51.8 million for the same period in 2009. Net cash used in operating activities included a decrease in net loss of $10.8 million adjusted for increases in non-cash reconciling items totaling $8.8 million, resulting in a net increase of $19.6 million. In addition, there was an increase of $10.5 million due to positive working capital consisting of accounts payable and accrued expenses, accounts receivable from related parties and other liabilities.

 

Net cash provided by investing activities was $38.0 million and $86.6 million for the years ended December 31, 2010 and 2009, respectively. For the years ended December 31, 2010 and 2009, net cash

provided by investing activities related primarily to proceeds from the sale of a properties $38.5 million and $93.5 million, respectively.

 

Net cash used in financing activities was $24.5 million and $28.7 million for the years ended December 31, 2010 and 2009, respectively. For the year ended December 31, 2010, net cash used in financing activities related primarily to repayment of mortgage notes, notes payable and capital lease obligations of $37.9 million, payment of preferred dividends of $11.6 million and distributions to noncontrolling interests of $4.9 million offset by net cash proceeds of $29.9 million from the issuance of convertible notes. For the year ended December 31, 2009, net cash used in financing activities related primarily to repayment of advances on the line of credit of $56.3 million and repayment of notes payable and capital lease obligations of $79.4 million offset by advances on the line of credit of $15.2 million, proceeds from the issuance of senior notes of $5.0 million and proceeds from the issuance of preferred stock of $85.1 million.

 

Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

 

Net cash used in operating activities increased $18.2 million to $51.8 million for the year ended December 31, 2009, compared to net cash used in operating activities of $33.6 million for the same period in 2008. Net cash used in operating activities included a decrease in net loss of $262.1 million adjusted for decreases in non-cash reconciling items, the most significant of which included $180.5 million in goodwill impairment, $66.4 million in real estate related impairments, $11.0 million in depreciation and amortization, $0.9 million as a result of amortizing the identified intangible contract rights associated with the acquisition of Realty, partially offset by a $4.9 million increase in deferred taxes. Also contributing to this increase in net cash used in operating activities were net changes in other operating assets and liabilities of $36.3 million.

 

Net cash provided by (used in) investing activities was $86.6 million and ($76.3) million for the years ended December 31, 2009 and 2008, respectively. For the year ended December 31, 2009, net cash provided by investing activities related primarily to proceeds from the sale of properties of $93.5 million. For the year ended December 31, 2008, net cash used in investing activities related primarily to the acquisition of properties of $122.2 million and investments in unconsolidated entities of $29.2 million offset by proceeds from repayment of advances to related parties net of advances to related parties of $6.9 million and proceeds from collection of real estate deposits and pre-acquisition costs net of payment of real estate deposits and pre-acquisition costs of $59.1 million.

 

Net cash (used in) provided by financing activities was ($28.7) million and $93.6 million for the years ended December 31, 2009 and 2008, respectively. For the year ended December 31, 2009, net cash used in financing activities related primarily to repayment of advances on the line of credit of $56.3 million and repayment of notes payable and capital lease obligations of $79.4 million offset by advances on the line of credit of $15.2 million, proceeds from the issuance of senior notes of $5.0 million and proceeds from the issuance of preferred stock of $85.1 million. For the year ended December 31, 2008, net cash provided by financing activities related primarily to advances on the line of credit of $55.0 million and borrowings on notes payable and capital lease obligations of $103.3 million offset by repayments of notes payable and capital lease obligations of $56.4 million.

 

Borrowings

 

Convertible Notes Offering — During the second quarter of 2010, we completed the offering (“Offering”) of $31.5 million unsecured convertible notes (“Convertible Notes”) to qualified institutional buyers pursuant to Section 144A of the Securities Act of 1933, as amended. The Convertible Notes pay interest at a rate of 7.95% per year payable semiannually in arrears on May 1 and November 1 of each year, beginning November 1, 2010. The Convertible Notes mature on May 1, 2015. The Convertible Notes are convertible into common stock at an initial conversion price of approximately $2.24 per share, or a 17.5% premium above the closing price of our common stock on May 3, 2010. The conversion rate is subject to adjustment in certain circumstances. We may not redeem the Convertible Notes prior to May 6, 2013. On or after May 6, 2013 and prior to the maturity date, we may redeem for cash all or part of the Convertible Notes at 100% of the

principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest, including any additional interest, up to but excluding the redemption date.

 

NNN Senior Notes — From August 1, 2006 to January 2007, NNN Collateralized Senior Notes, LLC (the “NNN Senior Notes Program”), a wholly owned subsidiary of Daymark, issued $16.3 million of notes which mature on August 29, 2011 and bear interest at a rate of 8.75% per annum. Interest on the notes is payable monthly in arrears on the first day of each month, commencing on the first day of the month occurring after issuance. The notes mature five years from the date of first issuance of any of such notes, with two one-year options to extend the maturity date of the notes at the Senior Notes Program’s option. The interest rate will increase to 9.25% per annum during any extension. The Senior Notes Program has the right to redeem the notes, in whole or in part, at: (1) 102.0% of their principal amount plus accrued interest any time after January 1, 2008; (2) 101.0% of their principal amount plus accrued interest any time after July 1, 2008; and (3) par value after January 1, 2009. The notes are the NNN Senior Notes Program’s senior obligations, ranking pari passu in right of payment with all other senior debt incurred and ranking senior to any subordinated debt it may incur. The notes are effectively subordinated to all present or future debt secured by real or personal property to the extent of the value of the collateral securing such debt. The notes are secured by a pledge of the NNN Senior Notes Program’s membership interest in NNN Series A Holdings, LLC, which is the Senior Notes Program’s wholly owned subsidiary for the sole purpose of making the investments. Each note is guaranteed by Grubb & Ellis Realty Investors, LLC (“GERI”). The guarantee is secured by a pledge of GERI membership interest in the NNN Senior Notes Program. The guarantee requires GERI to maintain at all times during the term the notes are outstanding a net worth of at least $0.5 million. As of December 31, 2010, GERI met the net worth requirement. Pursuant to the terms of the indenture underlying the NNN Senior Notes, we anticipate exercising our one year extension option prior to the maturity of the NNN Senior Notes in August 2011.

 

Mortgage Note — As of December 31, 2010, we had a $70.0 million mortgage loan payable to a financial institution collateralized by real estate held for investment. The note has a fixed interest rate of 6.29% per annum, matures in February 2017 and is non-recourse up to $60.0 million with a $10.0 million recourse guarantee. As of December 31, 2010, the note requires monthly interest-only payments.

 

Commitments, Contingencies and Other Contractual Obligations

 

Contractual Obligations

 

We lease office space throughout the country through non-cancelable operating leases, which expire at various dates through July 30, 2021.

The following table summarizes contractual obligations as of December 31, 2010 and the effect that such obligations are expected to have on our liquidity and cash flow in future periods. This table does not reflect any available extension options.