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EXCEL - IDEA: XBRL DOCUMENT - WELLS MID-HORIZON VALUE-ADDED FUND I LLCFinancial_Report.xls
EX-31.1 - SECTION 302 CERTIFICATION OF PEO - WELLS MID-HORIZON VALUE-ADDED FUND I LLCwellsvaf2011630_ex311.htm
EX-31.2 - SECTION 302 CERTIFICATION OF PFO - WELLS MID-HORIZON VALUE-ADDED FUND I LLCwellsvaf2011630_ex312.htm
EX-32.1 - SECTION 906 CERTIFICATION OF PEO AND PFO - WELLS MID-HORIZON VALUE-ADDED FUND I LLCwellsvaf2011630_ex321.htm

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________ 
FORM 10-Q
__________________________________ 
(Mark One)
 
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended June 30, 2011 or
 
 
o
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from _____________ to _____________

Commission file number 000-53626
__________________________________ 
WELLS MID-HORIZON VALUE-ADDED FUND I, LLC
(Exact name of registrant as specified in its charter)
__________________________________ 

Georgia
 
20-3192853
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
 
6200 The Corners Pkwy.
Norcross, Georgia
 
30092-3365
(Address of principal executive offices)
 
(Zip Code)
 
 
Registrant’s telephone number, including area code
 
(770) 449-7800
N/A
(Former name, former address, and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x    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 file,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o (Do not check if a smaller reporting company)
Smaller reporting company
x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
As of July 31, 2011, there were 51,854 shares of investor member interests outstanding.


 
 
 
 
 


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-Q of Wells Mid-Horizon Value-Added Fund I, LLC (“Wells VAF I,” “we,” “our,” or “us”) other than historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934. Such statements include, in particular, statements about our plans, strategies, and prospects and are subject to certain risks and uncertainties, as well as known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Specifically, we consider, among others, statements concerning future operating results and cash flows, our ability to meet future obligations, and the amount and timing of any future distributions to investor members to be forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this report is filed with the Securities and Exchange Commission (“SEC”). We make no representations or warranties (express or implied) about the accuracy of any such forward-looking statements contained in this Form 10-Q, and we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Any such forward-looking statements are subject to unknown risks, uncertainties, and other factors and are based on a number of assumptions involving judgments with respect to, among other things, future economic, competitive, and market conditions, all of which are difficult or impossible to predict accurately. To the extent that our assumptions differ from actual results, our ability to meet such forward-looking statements, including our ability to generate positive cash flow from operations, provide distributions to members, and maintain the value of our real estate properties, may be significantly hindered.
The following are some of the risks and uncertainties, although not all risks and uncertainties, that could cause our actual results to differ materially from those presented in our forward-looking statements:
We have utilized debt financing from third parties to fund re-leasing costs, capital expenditures, and operating costs of the portfolio. Thus, our cash from operations will be needed to make debt service payments and, as a result, cash available for engaging in value-enhancing strategies will be reduced. Our current loan with NXT Capital is secured by all of our properties. If we are unable to make any payments under the loan or are found to be in default under the terms of the loan, the lender could foreclose on the properties. Any such default or foreclosure would have a material adverse effect on our financial condition and results of operations. In addition, provisions under the loan require that net proceeds from the sale of certain properties be applied against the outstanding balance of the respective loan up to a disclosed release price prior to funding any capital requirements, operating needs of the portfolio, or distributions to investors.
The current economic conditions and their impact on office market conditions may require that we hold individual assets longer than originally projected in order to achieve the best disposition pricing for our investor members.
Real estate investments are subject to general downturns in the economy as well as downturns in specific geographic areas. We cannot predict what the occupancy level will be in a particular building or that any tenant will remain solvent. We depend on tenants for our revenue and, accordingly, our revenue is dependent upon the success and economic viability of our current and future tenants.
The management and other key personnel of our manager, whose services are essential to Wells VAF I, will face a conflict in allocating their time and other resources between Wells VAF I and the other Wells real estate programs and activities in which they are involved. Failure of our manager to devote sufficient time or resources to our operations could result in reduced returns to our members.
We will pay certain prescribed fees to our manager and its affiliates regardless of the quality of services provided.


Page 2


WELLS MID-HORIZON VALUE-ADDED FUND I, LLC
TABLE OF CONTENTS
 
 
  
 
 
Page No.
 
 
 
 
 
 
PART I.
  
 
 
 
 
 
 
 
 
 
  
Item 1.
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
  
Item 2.
 
 
 
 
 
 
 
 
  
Item 3.
 
 
 
 
 
 
 
 
  
Item 4.
 
 
 
 
 
 
 
PART II.
  
 
 
 
 
 
 
 
 
 
  
Item 1.
 
 
 
 
 
 
 
 
  
Item 1A.
 
 
 
 
 
 
 
 
  
Item 2.
 
 
 
 
 
 
 
 
  
Item 3.
 
 
 
 
 
 
 
 
  
Item 4.
 
 
 
 
 
 
 
 
  
Item 5.
 
 
 
 
 
 
 
 
  
Item 6.
 


Page 3


PART I.
FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
The information presented in Wells VAF I’s accompanying balance sheets and consolidated statements of operations, members’ capital, and cash flows reflects all adjustments that are, in management’s opinion, necessary for a fair and consistent presentation of the aforementioned financial statements. The accompanying financial statements should be read in conjunction with the notes to Wells VAF I’s financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this report on Form 10-Q and in Wells VAF I’s Annual Report on Form 10-K for the year ended December 31, 2010. Wells VAF I’s results of operations for the three months and six months ended June 30, 2011 are not necessarily indicative of the operating results expected for the full year.


Page 4


WELLS MID-HORIZON VALUE-ADDED FUND I, LLC
BALANCE SHEETS

 
 
(Unaudited)
 
 
 
June 30,
2011
 
December 31,
2010
Assets:
 
 
 
Real estate, at cost:
 
 
 
Land
$
7,281,349

 
$
7,281,349

Building and improvements, less accumulated depreciation of $4,790,813 and
    $3,893,450 as of June 30, 2011 and December 31, 2010, respectively
40,265,215

 
41,128,978

Intangible lease assets, less accumulated amortization of $1,790,389 and
    $1,559,448 as of June 30, 2011 and December 31, 2010, respectively
1,501,964

 
1,732,905

Construction in progress
175,340

 
34,275

Total real estate assets
49,223,868

 
50,177,507

 
 
 
 
Cash and cash equivalents
3,160,572

 
2,153,542

Tenant receivables, net of allowance for doubtful accounts of $0 and
    $1,425 as of June 30, 2011 and December 31, 2010, respectively
2,054,152

 
1,617,390

Other assets
2,538,822

 
4,495,122

Deferred financing costs, less accumulated amortization of $206,859 and
    $0 as of June 30, 2011 and December 31, 2010, respectively
1,035,078

 
1,233,958

Intangible lease origination costs, less accumulated amortization of $1,527,116 and
    $1,331,183 as of June 30, 2011 and December 31, 2010, respectively
1,092,193

 
1,288,126

Deferred leasing costs, less accumulated amortization of $416,619 and
    $253,111 as of June 30, 2011 and December 31, 2010, respectively
2,124,554

 
2,276,235

Total assets
$
61,229,239

 
$
63,241,880

 
 
 
 
Liabilities:
 
 
 
Note payable
$
19,237,786

 
$
19,000,000

Accounts payable, accrued expenses and accrued capital expenditures
864,795

 
1,167,300

Due to affiliates
40,883

 
58,744

Deferred income
377,088

 
550,644

Intangible lease liabilities, less accumulated amortization of $215,489 and
    $189,056 as of June 30, 2011 and December 31, 2010, respectively
170,983

 
197,416

Total liabilities
20,691,535

 
20,974,104

 
 
 
 
Commitments and Contingencies

 

 
 
 
 
Members' Capital:
 
 
 
Member Shares, $1,000 par value; 150,000 shares authorized;
51,854 shares issued and outstanding
40,537,704

 
42,267,776

Total liabilities and members’ capital
$
61,229,239

 
$
63,241,880

See accompanying notes.

Page 5


WELLS MID-HORIZON VALUE-ADDED FUND I, LLC
STATEMENTS OF OPERATIONS
 
 
(Unaudited)
 
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2011
 
2010
 
2011
 
2010
Revenues:
 
 
 
 
 
 
 
Rental income
$
1,144,026

 
$
1,078,977

 
$
2,306,077

 
$
2,133,592

Tenant reimbursements
498,520

 
279,579

 
859,326

 
353,950

Total revenues
1,642,546

 
1,358,556

 
3,165,403

 
2,487,542

Expenses:
 
 
 
 
 
 
 
Property operating costs
950,621

 
824,978

 
1,908,737

 
1,318,675

Asset and property management fees:
 
 
 
 
 
 
 
Related-party
124,145

 
98,116

 
248,408

 
193,232

Other
13,684

 
16,013

 
28,563

 
31,063

Depreciation
451,810

 
368,586

 
897,363

 
691,156

Amortization
270,549

 
358,671

 
528,890

 
938,153

General and administrative expenses
162,555

 
194,953

 
378,870

 
413,969

Total expenses
1,973,364

 
1,861,317

 
3,990,831

 
3,586,248

Real Estate Operating Loss
(330,818
)
 
(502,761
)
 
(825,428
)
 
(1,098,706
)
 
 
 
 
 
 
 
 
Other Income (Expense):
 
 
 
 
 
 
 
Interest and other income

 
35

 

 
54

Interest expense
(455,460
)
 
(545,935
)
 
(904,644
)
 
(955,940
)
Total Other Income (Expense)
(455,460
)
 
(545,900
)
 
(904,644
)
 
(955,886
)
Loss from Continuing Operations
(786,278
)
 
(1,048,661
)
 
(1,730,072
)
 
(2,054,592
)
 
 
 
 
 
 
 
 
Operating Income from Discontinued Operations

 
207,795

 

 
423,728

Net Loss
$
(786,278
)
 
$
(840,866
)
 
$
(1,730,072
)
 
$
(1,630,864
)
 
 
 
 
 
 
 
 
Net Loss per Weighted-Average Share of Investor Members' Interests
 
 
 
 
 
 
 
Loss from continuing operations
$
(15.16
)
 
$
(20.22
)
 
$
(33.36
)
 
$
(39.62
)
Income from discontinued operations

 
4.01

 

 
8.17

Net loss per weighted-average share of members’ interests
$
(15.16
)
 
$
(16.21
)
 
$
(33.36
)
 
$
(31.45
)
 
 
 
 
 
 
 
 
Weighted-Average Shares of Investor Members' Interests Outstanding
51,854

 
51,854

 
51,854

 
51,854

See accompanying notes.

Page 6


WELLS MID-HORIZON VALUE-ADDED FUND I, LLC
STATEMENTS OF MEMBERS’ CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 2010
AND THE SIX MONTHS ENDED JUNE 30, 2011 (UNAUDITED)
 
 
Sponsoring
Member
 
Investor  Members’
Interests
 
Total
Members’
Capital
 
Shares    
 
Amount    
 
Members’ Capital as of December 31, 2009
$
959,727

 
51,854

 
$
37,888,317

 
$
38,848,044

 
 
 
 
 
 
 
 
Net income

 

 
3,419,732

 
3,419,732

Members’ Capital as of December 31, 2010
959,727

 
51,854

 
41,308,049

 
42,267,776

 
 
 
 
 
 
 
 
Net loss

 

 
(1,730,072
)
 
(1,730,072
)
Members’ Capital as of June 30, 2011
$
959,727

 
51,854

 
$
39,577,977

 
$
40,537,704

See accompanying notes.

Page 7


WELLS MID-HORIZON VALUE-ADDED FUND I, LLC
STATEMENTS OF CASH FLOWS
 
 
(Unaudited)
 
Six Months Ended
 
June 30,
 
2011
 
2010
Cash Flows from Operating Activities:
 
 
 
Net loss
$
(1,730,072
)
 
(1,630,864
)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
 
 
 
Depreciation
897,363

 
780,640

Amortization of deferred financing costs
206,859

 
155,311

Other amortization
563,949

 
1,029,363

Changes in assets and liabilities:
 
 
 
Increase in tenant receivables
(436,762
)
 
(818,212
)
Decrease (increase) in other assets
1,524,926

 
(1,310,261
)
Increase (decrease) in accounts payable and accrued expenses
119,323

 
(199,598
)
Increase in due to affiliates
5,365

 
152,584

Decrease in deferred income
(173,556
)
 
(213,190
)
Net cash provided by (used in) operating activities
977,395

 
(2,054,227
)
 
 
 
 
Cash Flows from Investing Activities:
 
 
 
Investment in real estate

 
(160,555
)
Investment in real estate related deposits

 
(4,297,216
)
Payment of deferred leasing costs

 
(97,340
)
Due from other assets for investing activities
(57,831
)
 

Net cash used in investing activities
(57,831
)
 
(4,555,111
)
 
 
 
 
Cash Flows from Financing Activities:
 
 
 
Deferred financing costs paid
(150,320
)
 
(507,445
)
Proceeds from note payable
237,786

 
8,150,000

Repayments of note payable

 
(1,442,312
)
Net cash provided by financing activities
87,466

 
6,200,243

Net Increase (Decrease) in Cash and Cash Equivalents
1,007,030

 
(409,095
)
 
 
 
 
Cash and Cash Equivalents, beginning of period
2,153,542

 
2,843,397

Cash and Cash Equivalents, end of period
$
3,160,572

 
2,434,302

 
 
 
 
Supplemental Disclosure of Noncash Investing and Financing Activities:
 
 
 
Investment in real estate funded with deposit accounts included in other assets
$
372,372

 
$
1,944,135

Payment of deferred leasing costs funded with deposit accounts included in other assets
$
59,002

 
$
620,732

Accrued capital expenditures
$
11,400

 
$
489,139

Accrued deferred financing costs
$
2,378

 
$

Accrued deferred leasing costs
$
7,431

 
$
65,963

See accompanying notes.

Page 8


WELLS MID-HORIZON VALUE-ADDED FUND I, LLC
CONDENSED NOTES TO FINANCIAL STATEMENTS
JUNE 30, 2011 (unaudited)

1.
ORGANIZATION AND BUSINESS
Wells Mid-Horizon Value-Added Fund I, LLC (“Wells VAF I”) was organized as a Georgia limited liability company on July 15, 2005 for the purpose of acquiring, developing, owning, operating, and improving or otherwise enhancing income-producing commercial properties, and liquidating such investments over a period of three to five years following acquisition. The term of Wells VAF I shall continue until the earlier of December 31, 2020, or the filing of a Certificate of Termination.

Wells Management Company, Inc. (“Wells Management”) is the sponsoring member of Wells VAF I and has the exclusive authority to conduct the day-to-day and overall direction and supervision of the business and affairs of Wells VAF I pursuant to an operating agreement. Wells Management has contributed $1,000,000 to Wells VAF I for a subordinated interest therein. Wells Investment Management Company, LLC (“WIM”), a wholly owned subsidiary of Wells Management, has been appointed by Wells Management to serve as the manager of Wells VAF I. In addition, Wells VAF I and WIM have entered into an agreement (the “Advisory Agreement”), under which WIM will perform certain key functions on behalf of Wells VAF I, including, but not limited to, the investment of capital proceeds and management of day-to-day operations.

On September 15, 2005, Wells VAF I commenced an offering of up to 150,000 shares of investor member interests under a private placement to qualified purchasers who meet the definition of “accredited investors,” as provided in Regulation D of the Securities Act of 1933, as amended. Wells VAF I commenced active operations upon receiving and accepting subscriptions for 10,000 shares of investor member interests on June 22, 2006. Its offering terminated on September 15, 2008, at which time Wells VAF I had sold approximately 51,854 shares of investor member interests resulting in gross offering proceeds of approximately $51,854,000. After deductions for payments of acquisition fees of approximately $1,037,000; selling commissions, discounts, and dealer-manager fees of approximately $2,852,000; and other offering expenses of approximately $259,000; Wells VAF I received net offering proceeds of approximately $47,706,000. As of December 31, 2010, all equity proceeds raised from the sale of investor member interests had been utilized to fund property acquisitions and capital expenditures. No public market exists for the shares of investor member interests and none is expected to develop.

Wells VAF I's investment policy includes, but is not limited to, acquiring properties with opportunities for value enhancement related to leasing or re-leasing available space, renovating or redeveloping properties, entering into leases with sub-investment-grade tenants at above market rates, and/or benefiting from favorable market conditions. Wells VAF I does not expect to make any additional investments in the future and its current focus is on enhancing the value of its current portfolio.

During the periods presented, Wells VAF I owned direct interests in the following properties:
 
% Leased as of
  
June 30, 2011
1. Nathan Lane Building
A five-story office building located in Plymouth, Minnesota
 
45%
 
2. Park Lane Building (Sold September 22, 2010)
A five-story office building and an eight-acre parcel of land containing a parking
lot located in Pittsburgh, Pennsylvania
 
 
3. Commerce Street Building
A four-story office building and two floors of a parking deck located in Nashville,
Tennessee
 
76%
 
4. Parkway at Oak Hill Buildings
Two separate two-story office buildings located in Austin, Texas
 
79%
 


Page 9


2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements of Wells VAF I have been prepared in accordance with the rules and regulations of the SEC, including the instructions to Form 10-Q and Article 10 of Regulation S-X, and in accordance with such rules and regulations, do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. In the opinion of WIM, Wells VAF I’s manager, the statements for the unaudited interim periods presented include all adjustments that are of a normal and recurring nature and necessary to fairly and consistently present the results for these periods. Results for interim periods are not necessarily indicative of full-year results. For further information, refer to the financial statements and footnotes included in Wells VAF I’s Annual Report on Form 10-K for the year ended December 31, 2010.
Fair Value Measurements
Wells VAF I estimates the fair value of its assets and liabilities (where currently required under GAAP) consistent with the provisions of the accounting standard for fair value measurements and disclosures, which became effective for financial assets and liabilities on January 1, 2008 and for nonfinancial and nonrecurring assets and liabilities on January 1, 2009. Under this standard, fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date. While various techniques and assumptions can be used to estimate fair value depending on the nature of the asset or liability, accounting standard for fair value measurements and disclosures provides the following fair value technique parameters and hierarchy, depending upon availability:

Level 1 - Assets or liabilities for which the identical term is traded on an active exchange, such as publicly traded instruments or futures contracts.

Level 2 - Assets and liabilities valued based on observable market data for similar instruments.

Level 3 - Assets or liabilities for which significant valuation assumptions are not readily observable in the market. Such assets or liabilities are valued based on the best available data, some of which may be internally developed. Significant assumptions may include risk premiums that a market participant would consider.

As of June 30, 2011 and December 31, 2010, the carrying value of the NXT Loan (see Note 3 where defined) approximated its fair value. In connection with negotiating the terms of the NXT Loan executed on December 17, 2010, Wells VAF I ensured that the contractual terms of this facility were consistent with those currently offered for similar facilities with similar collateral bases. See Note 3 regarding specific terms of the NXT Loan.

Other Assets
Other assets are comprised of (i) certain escrow accounts restricted by the lender to fund property operating costs, tenant improvement projects, and future real estate taxes and (ii) prepaid taxes, prepaid insurance, and nontenant receivables.  Prepaid expenses and other assets will be expensed as incurred. Management assesses the collectability of other assets on an ongoing basis and provides for allowances as such balances, or portions thereof, become uncollectible. No such allowances have been recorded as of June 30, 2011 and December 31, 2010.

Income Taxes
Wells VAF I is not subject to federal or state income taxes; therefore, none have been provided for in the accompanying financial statements. The members are required to include their respective shares of profits and losses in their individual income tax returns, regardless of whether any cash distributions were made during the respective period.
Allocation of Profits and Losses
Wells VAF I allocates profits or losses for each allocation period to the investor members in proportion to their respective percentage interests in an amount not to create a deficit capital balance.
Distribution of Net Cash Flow
Net cash flow, as defined in the operating agreement, is distributed to the members in the order and priority that follows:
First, to pay the following returns on capital:
First, to the investor members up to a 10% per annum compounded return on their capital contributions during the

Page 10


offering period;
Second, to the investor members in proportion to their percentage interests, as defined, until each investor member receives a 10% per annum compounded return on their capital contributions for the period following the offering period;
Third, to Wells Management up to a 10% per annum compounded return on its capital contribution;
Second, to the investor members in proportion to their percentage interests until each investor member has received $1,000 per share;
Third, to Wells Management until it has received its capital contribution; and
Fourth,
To Wells Management in the amount of 20% of all distributable proceeds, less any disposition fees previously paid to Wells Management, of which Wells Management has agreed to pay up to 50% of any such amount received to broker/dealers who participated in its private placement offering; and
The remainder to the investor members in accordance with their percentage interests.
Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (the “FASB”) clarified previously issued GAAP and issued new requirements related to Accounting Standards Codification Topic Fair Value Measurements and Disclosures (“ASU 2010-6”). The clarification component includes disclosures about inputs and valuation techniques used in determining fair value, and providing fair value measurement information for each class of assets and liabilities. The new requirements relate to disclosures of transfers between the levels in the fair value hierarchy, as well as the individual components in the rollforward of the lowest level (Level 3) in the fair value hierarchy. This change in GAAP became effective for Wells VAF I beginning January 1, 2010, except for the provision concerning the rollforward of activity of the Level 3 fair value measurement, which became effective for Wells VAF I on January 1, 2011. The adoption of ASU 2010-6 has not had a material impact on Wells VAF I's financial statements or disclosures.

In May 2011, the FASB issued Accounting Standards Update 2011-04, Fair Value Measurement Topic Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU 2011-04”). ASU 2011-04 converges the converges the GAAP and International Financial Reporting Standards definition of “fair value”, the requirements for measuring amounts at fair value, and disclosures about these measurements. The update does not require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices outside of financial reporting. The adoption of ASU 2011-04 is effective for Wells VAF I on December 15, 2011. Wells VAF I expects that the adoption of ASU 2011-04 will not have a material impact on its financial statements or disclosures.

In June 2011, the FASB issued Accounting Standards Update 2011-05, Comprehensive Income Topic Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 gives an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The adoption of ASU 2011-05 is effective for Wells VAF I on December 15, 2012. Wells VAF I expects that the adoption of ASU 2011-05 will not have a material impact on its financial statements or disclosures.

3.
NOTE PAYABLE
On December 17, 2010, Wells VAF I entered an agreement with NXT Capital, LLC (“NXT Capital”) for a loan in the amount of up to $30 million (the “NXT Loan”). As of June 30, 2011, the outstanding balance on the NXT Loan was approximately $19.2 million. The NXT Loan, which matures on December 16, 2013, bears interest at a variable rate equal to one-month London Interbank Offered Rate (“LIBOR”) plus a margin of 3.75%. The interest rate has a floor of 7.25%. The NXT Loan is secured by the Nathan Lane Building, the Commerce Street Building, and the Parkway at Oak Hill Buildings. Except as permitted with respect to a partial release, Wells VAF I may prepay the NXT Loan in full, but not in part, provided an exit fee equal to 1% of the outstanding loan amount and a minimum interest recovery amount are paid. At closing, $19 million was funded by NXT Capital, $10 million remained available for costs and expenses incurred in connection with certain future tenant improvements and leasing commissions approved by NXT Capital, and $1 million was reserved by NXT Capital for the payment of monthly interest on the loan (the “Interest Reserve”). The NXT Loan requires monthly interest-only payments from Wells VAF I's net cash flow. To the extent net cash flow is insufficient to fully cover the payment of accrued interest, funds remaining in the Interest Reserve will be disbursed to pay such difference. If no funds remain in the Interest Reserve, any amounts in excess of net cash flow must be funded with

Page 11


Wells VAF I's own funds. During the six months ended June 30, 2011, Wells VAF I received loan proceeds of approximately $238,000 from the Interest Reserve.

Wells VAF I paid cash for interest expense on its notes payable of approximately $352,000 and $457,000 during the three months ended June 30, 2011 and 2010, respectively, and approximately $698,000 and $737,000 during the six months ended June 30, 2011 and 2010, respectively. During the periods presented, Wells VAF I did not capitalize any interest expense related to the NXT Loan.

4.
MEMBERS’ EQUITY
Sponsoring Member Interest
On September 27, 2005, Wells VAF I received a $1,000,000 contribution from Wells Management. During the start-up period, proceeds from this contribution were held as working capital and used primarily to fund initial operating costs. Following the start-up period, the residual proceeds were distributed to investor members. Wells Management has a subordinated interest to investor members in earnings allocations and distributions from Wells VAF I.
Investor Member Interests
Wells VAF I commenced active operations upon receiving and accepting subscriptions for 10,000 shares of investor member interests on June 22, 2006. The offering was terminated on September 15, 2008, at which time Wells VAF I had sold approximately 51,854 shares of investor member interests. Investor members have a priority interest over the sponsoring member in earnings allocations and distributions from Wells VAF I.

5.
RELATED-PARTY TRANSACTIONS
Advisory Agreement
On September 15, 2005, Wells VAF I entered into the Advisory Agreement with WIM. Pursuant to the Advisory Agreement, WIM is entitled to specified fees for certain services, including, but not limited to, the investment of offering proceeds in real estate projects, sales of properties, and management of day-to-day operations. The one-year term of the Advisory Agreement ends September 14, 2011 and may be renewed for an unlimited number of successive one-year periods upon the mutual consent of the parties. Wells VAF I may terminate the Advisory Agreement upon 60 days’ written notice without cause or penalty. If Wells VAF I terminates the Advisory Agreement, Wells VAF I will pay WIM all unpaid reimbursements of expenses and all earned but unpaid fees. The negotiations of the Advisory Agreement were not at arm’s length, and Wells VAF I will pay certain prescribed fees to WIM and its affiliates regardless of the quality of its services.
Under the terms of the Advisory Agreement, Wells VAF I incurs the following fees and reimbursements payable to WIM:
Monthly asset management fees equal to one-twelfth of 0.75% of the gross value of Wells VAF I's real estate assets, as determined and approved in good faith and consistent with applicable fiduciary duties by the investment committee of Wells VAF I. Any portion of the asset management fee may be deferred upon WIM's request and paid in a subsequent month or year.
Reimbursement for all costs and expenses WIM incurs in fulfilling its duties as the asset portfolio manager. These costs and expenses may include wages and salaries and other employee-related expenses of WIM's employees engaged in management, administration, operations, and marketing functions. Employee-related expenses include taxes, insurance, and benefits relating to such employees, and legal, travel, and other out-of-pocket expenses that are directly related to the services they provide. WIM allocates its reimbursable costs of providing these services among Wells VAF I and the various affiliated public real estate investment programs based on time spent on each entity by individual personnel.
For any property sold by Wells VAF I, a disposition fee equal to 0.25% of the sales price, if WIM provides a substantial amount of services in connection with the sale.
Property Management Agreements
On February 20, 2010, Wells VAF I executed an initial management agreement with Wells Real Estate Services, LLC (“WRES”) to manage the operations of the Parkway at Oak Hill Buildings. On May 14, 2010, the initial management agreement was terminated and replaced with a revised management agreement (the “Parkway Management Agreement”), which was effective retroactive to February 20, 2010. Pursuant to the Parkway Management Agreement, WRES is entitled to a monthly management fee equal to the greater of (i) $1,500 per month or (ii) 2.5% of gross monthly income actually collected from the property for the preceding month. In addition, WRES is entitled to reimbursement for all costs and expenses WRES incurs in fulfilling its duties as the

Page 12


property manager up to approximately $151,000 per year. These costs and expenses may include wages and salaries and other employee-related expenses of WRES employees engaged in management, administration, operations, and marketing functions. Further, WRES is entitled to reimbursement for construction management services rendered for projects on behalf of Wells VAF I equal to 5% for construction costs up to $150,000 and 3% for any construction costs over $150,000 on a per construction project basis. The Parkway Management Agreement has a one-year term, unless terminated pursuant to the terms of the agreement, and is automatically extended for successive one-year terms. Wells VAF I may terminate the Parkway Management Agreement upon 30 days' written notice prior to the expiration of the initial or subsequent extended term.

On November 1, 2010, Wells VAF I entered into a management agreement with WRES to manage the operations of the Commerce Street Building, which was previously managed by a third-party vendor (the “Commerce Management Agreement”). Pursuant to the Commerce Management Agreement, WRES is entitled to a monthly management fee equal to the greater of (i) $2,000 per month or (ii) 2.5% of gross monthly income actually collected from the property for the preceding month. In addition, WRES is entitled to reimbursement for all costs and expenses WRES incurs in fulfilling its duties as the property manager. These costs and expenses may include wages and salaries and other employee-related expenses of WRES employees engaged in management, administration, operations, and marketing functions. Further, WRES is entitled to reimbursement for construction management services rendered for projects on behalf of Wells VAF I equal to 4% for construction costs up to $500,000, 3% for construction costs over $500,000 but less than $1,500,000, and 2% for construction costs greater than $1,500,000 on a per construction project basis. For tenant improvement projects managed by a tenant, WRES is entitled to a construction management fee for supervision of the project equal to 1% of construction costs. The Commerce Management Agreement has a one-year term, unless terminated pursuant to the terms of the agreement, and is automatically extended for successive one-year terms. Wells VAF I may terminate the Commerce Management Agreement upon 30 days' written notice prior to the expiration of the initial or subsequent extended term.

Related-Party Costs
Pursuant to the terms of the agreements described above, Wells VAF I incurred the following related-party costs for the three months and six months ended June 30, 2011 and 2010, portions of which are included in income from discontinued operations in the accompanying statements of operations:

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2011
 
2010
 
2011
 
2010
Asset management fees(1)
$
106,781

 
$
125,643

 
$
213,563

 
$
251,287

Administrative reimbursements(1)
101,635

 
106,215

 
194,426

 
190,563

Property management fees(1)
17,364

 
4,929

 
34,845

 
6,857

Construction management fees(2)

 
11,438

 
441

 
11,438

Total
$
225,780

 
$
248,225

 
$
443,275

 
$
460,145


(1) 
Asset management fees, administrative reimbursements, and property management fees are expensed as incurred.
(2) 
Construction management fees are capitalized to real estate assets as incurred.
Due to Affiliates
As of June 30, 2011 and December 31, 2010, due to affiliates was comprised of the following items:
 
 
June 30,
2011
 
December 31,
2010
Administrative reimbursements and bill-backs
$
34,749

 
$
24,140

Property management fees
6,134

 
11,378

Construction management fees

 
23,226

 
$
40,883

 
$
58,744


WIM’s affiliates pay for certain expenses of Wells VAF I directly and invoice Wells VAF I for reimbursement thereof on a quarterly basis. Amounts for these reimbursements are included in the aforementioned administrative reimbursements.

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6.    ECONOMIC DEPENDENCY
Wells VAF I has engaged WIM, WRES, and Wells Management to provide certain services essential to Wells VAF I, including asset management services, supervision of the management of properties, asset acquisition and disposition services, as well as other administrative responsibilities for Wells VAF I, including accounting services, investor member communications, and investor relations. As a result of these relationships, Wells VAF I is dependent upon WIM, WRES, and Wells Management.

WIM, WRES, Wells Management, and Wells Investment Securities, Inc. ("WIS") are owned and controlled by Wells Real Estate Funds, Inc. (“WREF”). Accordingly, Wells VAF I focuses on the financial condition of WREF when assessing the financial condition of WIM, WRES and Wells Management. In the event that WREF were to become unable to meet its obligations as they become due, Wells VAF I might be required to find alternative service providers.

Future net income generated by WREF is largely dependent upon the amount of fees earned by affiliates of WIM, WRES, WIS, and Wells Management based on, among other things, the level of investor proceeds raised from the sale of common stock for certain WREF-sponsored programs and the volume of future acquisitions and dispositions of real estate assets by WREF-sponsored programs, as well as distribution income earned from equity interests in another REIT previously sponsored by Wells Capital. As of June 30, 2011, Wells VAF I has no reason to believe that WREF does not have access to adequate liquidity and capital resources, including cash flow generated from operations, cash on hand, other investments, and borrowing capacity, necessary to meet its current and future obligations as they become due.

Wells VAF I is also dependent upon the ability of its current tenants to pay their contractual base rent amounts as they become due. The inability of a tenant to pay future rental amounts would have a negative impact on Wells VAF I’s results of operations. Wells VAF I is not aware of any reason why its current tenants will not be able to pay their contractual rental amounts as they become due in all material respects. Situations preventing Wells VAF I’s tenants from paying contractual rents could result in a material adverse impact on its results of operations.
7.    DISCONTINUED OPERATIONS
In accordance with GAAP, Wells VAF I has classified the results of operations related to the Park Lane Building, which was sold on September 22, 2010, as discontinued operations in the accompanying statements of operations. The details comprising income from discontinued operations are presented below:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2011
 
2010
 
2011
 
2010
Revenues:
 
 
 
 
 
 
 
Rental income
$

 
$
343,171

 
$

 
$
686,281

Tenant reimbursements

 
248,907

 

 
597,980

Interest and other income

 
68

 

 
78

Total revenues

 
592,146

 

 
1,284,339

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
Property operating costs

 
255,952

 

 
595,785

Asset and property management fees:
 
 
 
 
 
 

Related-party

 
32,456

 

 
64,912

Other

 
11,881

 

 
27,240

Depreciation

 
44,742

 

 
89,484

Amortization

 
33,780

 

 
67,344

General and administrative expenses

 
5,540

 

 
15,846

Total expenses

 
384,351

 

 
860,611

Operating Income from Discontinued Operations
$

 
$
207,795

 
$

 
$
423,728



Page 14


8.    COMMITMENTS AND CONTINGENCIES
Wells VAF I is not subject to any material litigation nor to management’s knowledge is any material litigation currently threatened against Wells VAF I.
Certain lease agreements include provisions that, at the option of the tenant, may obligate Wells VAF I to expend capital to expand an existing property or provide other expenditures for the benefit of the tenant, including the following:
Building
Tenant
Tenant Allowance
Obligation as of
June 30, 2011
Parkway at Oak Hill Buildings
Wells Fargo Bank, N.A.
$0.4 million
 
Commerce Street Building
Tennessee Information Consortium, LLC
$0.3 million
(1) 

(1) 
In July 2011, Wells VAF I entered into a lease agreement with Tennessee Information Consortium, LLC at the Commerce Street Building, which includes a contingent tenant allowance obligation of approximately $0.3 million.

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the accompanying financial statements and notes thereto. See also “Cautionary Note Regarding Forward-Looking Statements” preceding Part I, as well as the notes to our financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations provided in our Annual Report on Form 10-K for the year ended December 31, 2010.

Overview

We were formed on July 15, 2005 for the purpose of acquiring, developing, owning, operating, and improving or otherwise enhancing income-producing commercial properties. Our investment strategy includes, but is not limited to, acquiring properties with opportunities for value enhancement related to leasing or re-leasing available space, renovating or redeveloping properties, entering into leases with sub-investment-grade tenants at above-market rates and/or benefiting from favorable market conditions. We are externally advised and managed by WIM. In June 2006, we commenced active operations upon receiving the minimum proceeds in our private placement offering of investor member interests, which offering raised approximately $51,854,000 in gross proceeds prior to its termination in September 2008. We do not expect to make any additional investments in the future, and our current focus is on enhancing the value of our current portfolio. While we believe that we can complete our leasing efforts and sell the assets in the portfolio within our projected fund life of four to eight years after commencement of our private placement offering, we do acknowledge that the current economic conditions and their impact on office market conditions may require that we hold individual assets longer than originally projected in order to achieve the best disposition pricing for our investor members. As of July 31, 2011, we owned interests in three properties.
Portfolio Overview
Summary information relating to our properties is presented below:
The Nathan Lane Building is a five-story office building located in Plymouth, Minnesota, that was acquired in September 2006 and is currently approximately 45% leased to two tenants, Brocade Communication Systems, Inc. ("Brocade") and Stanley Convergent Security Systems, Inc ("Stanley").
The Park Lane Building is a five-story office building with an eight-acre parcel of land containing a parking lot located in Pittsburgh, Pennsylvania, that was acquired in January 2007 and was sold on September 22, 2010. It was 100% leased to a single tenant at the time of its disposition.
The Commerce Street Building is a four-story office building and top two floors of a parking deck located in Nashville, Tennessee, that was acquired in December 2007 and is approximately 85% leased to two tenants following the execution of a 60-month lease with Tennessee Information Consortium, LLC for approximately 9% of the property on July 1, 2011. The major lease to Country Music Television, Inc. extends through May 2013. Our fee simple interest in the Commerce Street Building is subject to a reciprocal easement lease through December 31, 2083.
The Parkway at Oak Hill Buildings are two separate two-story office buildings located in Austin, Texas, that were acquired vacant in October 2008 and are currently approximately 75% leased to six tenants following the termination of the Solomon Group, Inc. lease for approximately 4% of the property effective on July 31, 2011.


Page 15


Liquidity and Capital Resources
Overview
During the period from September 2005 through September 2008, we raised funds through the sale of shares of investor member interests under our private placement offering, and we used substantially all offering proceeds, net of offering costs, and other expenses, to acquire real properties and to fund certain re-leasing costs and capital improvements. We expect that our primary source of future cash flows will be cash generated from the operations of our properties, proceeds from third-party borrowings, and net proceeds from the sale of our properties.

Our operating strategy entails funding expenditures related to the recurring operations of the properties with operating cash flows, assessing the amount of operating cash flows and proceeds from third-party borrowings that will be required to fund future re-leasing costs and other capital improvements, and distributing residual operating cash flows to our investor members. We continue to carefully monitor market conditions and their impact on our earnings, our cash flows, and future distributions to investor members.

NXT Loan

We are party to an agreement with NXT Capital for a loan in the amount of up to $30 million, referred to as the NXT Loan. As of June 30, 2011, the outstanding balance on the NXT Loan was $19.2 million. The NXT Loan, which matures on December 16, 2013, with an option to extend the maturity date for two additional 12-month terms provided that certain conditions are met, bears interest at a variable rate equal to one-month LIBOR plus a margin of 3.75%. The interest rate has a floor of 7.25%. The NXT Loan is secured by the Nathan Lane Building, the Commerce Street Building, and the Parkway at Oak Hill Buildings. At closing, $19 million was funded by NXT Capital, $10 million remained available for costs and expenses incurred in connection with certain future tenant improvements and leasing commissions approved by NXT Capital, and $1 million was reserved by NXT Capital for the payment of monthly interest on the loan (the “Interest Reserve”). The NXT Loan requires monthly interest-only payments from our net cash flow. To the extent net cash flow is insufficient to fully cover the payment of accrued interest, funds remaining in the Interest Reserve will be disbursed to pay such difference. If no funds remain in the Interest Reserve, any amounts in excess of net cash flow must be funded with our own funds. Except as permitted with respect to a partial release, we may prepay the NXT Loan in full, but not in part, provided an exit fee equal to 1% of the outstanding loan amount and a minimum interest recovery amount are paid.

Short-Term Liquidity and Capital Resources

During the six months ended June 30, 2011, we generated net operating cash flows of approximately $1.0 million. Operating cash inflows reflect receipts of rental payments, tenant reimbursements, and fundings from certain escrow accounts included within other assets, less payments for property operating costs, interest expense, asset and property management fees, and general and administrative expenses. In order to make additional cash resources available to fund future capital expenditures and re-leasing costs for our properties, we continued to withhold distributions to our investor members for the six months ended June 30, 2011.
During the six months ended June 30, 2011, we invested approximately $489,000 in real estate and deferred leasing costs from a reserve account restricted by NXT Capital to fund property operating costs and tenant improvement projects at our properties.

During the six months ended June 30, 2011, we obtained proceeds from the Interest Reserve portion of the NXT Loan of approximately $238,000 and used such proceeds to fund a portion of the debt service on the NXT Loan. We anticipate funding future capital expenditures and re-leasing costs with the additional availability on the NXT Loan and, in the event of a property disposition, from net proceeds from the sale of properties unless restricted by the terms of our existing borrowing arrangement.

We expect to utilize the residual cash balance on hand as of June 30, 2011 of approximately $3.2 million and the remaining availability on the NXT Loan to satisfy current liabilities and to fund anticipated re-leasing costs and capital expenditures.

Long-Term Liquidity and Capital Resources

Our offering of investor member interests terminated on September 15, 2008. Substantially all equity proceeds raised from the sale of investor member interests were used to fund property acquisitions. As such, we expect that our primary sources of capital over the long term will include proceeds from net cash flows from operations, third-party borrowings, and net proceeds received from the sale of properties. We expect that our primary uses of capital will be for tenant and capital improvements, re-leasing costs, operating expenses, including interest expense on any outstanding indebtedness, and repayment of outstanding borrowings.


Page 16


In determining how and when to allocate cash resources, we initially consider the source of the cash. We expect that substantially all future net operating cash flows will be used for reserves for certain capital expenditures such as re-leasing costs and capital improvements and repayment of outstanding third-party borrowings. To the extent our properties continue to remain partially vacant, increased property operating expenses and asset and property management fees may reduce our cash flow from operating activities. We expect that substantially all future third-party borrowings will be used to fund certain re-leasing costs and capital expenditures for our existing properties.

Contractual Commitments and Contingencies
We are contractually committed to repay the NXT Loan in full, along with any accrued and unpaid interest by December 16, 2013. As of June 30, 2011, we owed $19.2 million on the NXT Loan.

In addition, we are contractually obligated to pay certain lobby and reciprocal easement rental expenses at the Commerce Street Building through December 31, 2083. As of June 30, 2011, the annualized lobby and reciprocal easement lease obligations were approximately $154,000. Further, we are contractually obligated to pay certain retail lease rental expenses at the Commerce Street Building through June 30, 2012. As of June 30, 2011, the annualized retail lease obligation was approximately $50,000. CMT, the sole tenant of the Commerce Street Building, currently reimburses Wells VAF I for a portion of these rental expense obligations.

Results of Operations
Comparison of the three months ended June 30, 2010 versus the three months ended June 30, 2011
Continuing Operations
Rental income increased slightly from $1,078,977 for the three months ended June 30, 2010 to $1,144,026 for the three months ended June 30, 2011, due to an increase in occupancy at the Parkway at Oak Hill Buildings, partially offset by the reduction in square footage leased by Brocade at the Nathan Lane Building, effective in May 2010. Absent future leasing activity, we expect future rental income to remain at a relatively similar level, as compared to the second quarter of 2011.
Tenant reimbursements increased from $279,579 for the three months ended June 30, 2010 to $498,520 for the three months ended June 30, 2011, primarily as a result of (i) an increase in occupancy at the Parkway at Oak Hill Buildings and (ii) Brocade and Stanley beginning to reimburse their pro rata share of property operating costs at the Nathan Lane Building effective May 1, 2010, due to a change in the lease and management structure at the Nathan Lane Building. Prior to May 1, 2010, Brocade self-managed the Nathan Lane Building and paid the majority of the property operating costs directly in exchange for a reduced rental rate. Absent future leasing activity, we expect future tenant reimbursements to remain at a relatively similar level, as compared to the second quarter of 2011.
Property operating costs increased from $824,978 for the three months ended June 30, 2010 to $950,621 for the three months ended June 30, 2011, primarily as a result of (i) the change in the lease and management structure at the Nathan Lane Building described above and (ii) an increase in occupancy at the Parkway at Oak Hill Buildings. Absent future leasing activity, we expect future property operating costs to remain at a relatively similar level, as compared to the second quarter of 2011.
Asset and property management fees increased from $114,129 for the three months ended June 30, 2010 to $137,829 for the three months ended June 30, 2011, primarily due to an increase in the gross value of our remaining real estate assets in connection with the 2010 year end valuation. The asset management fees are incurred as a percentage of our gross asset value (Please refer to Note 5 - “Related-Party Transactions” for additional details). We anticipate asset and property management fees to remain at a relatively similar level in the future, as compared to the second quarter of 2011.
Depreciation expense increased from $368,586 for the three months ended June 30, 2010 to $451,810 for the three months ended June 30, 2011, primarily as a result of tenant improvements completed in connection with (i) recent leases executed at the Parkway at Oak Hill Buildings and (ii) the Brocade lease at the Nathan Lane Building. We expect an additional increase in the future, as compared to the second quarter of 2011, as a result of the anticipated completion of the remaining tenant improvement projects at the Parkway at Oak Hill Buildings.
Amortization expense decreased from $358,671 for the three months ended June 30, 2010 to $270,549 for the three months ended June 30, 2011, primarily as a result of recognizing less amortization of intangible lease assets and intangible lease origination costs in the second quarter of 2011 following the May 2010 expiration of the lease in place at the time of the acquisition of the Nathan Lane Building. Absent future leasing activity, we expect future amortization expense to remain at a relatively similar level, as compared to the second quarter of 2011.


Page 17


General and administrative expenses decreased from $194,953 for the three months ended June 30, 2010 to $162,555 for the three months ended June 30, 2011, primarily due to (i) a decrease in legal fees incurred in 2010 in connection with third-party financing activity and (ii) a decrease in the overhead administrative costs allocated to Wells VAF I during the second quarter of 2011. We expect future general and administrative expenses to remain at a relatively similar level, as compared to the second quarter of 2011.
Interest expense decreased from $545,935 for the three months ended June 30, 2010 to $455,460 for the three months ended June 30, 2011, primarily as a result of (i) a decrease in our weighted-average outstanding notes payable balance, partially offset by (ii) an increase in our weighted-average borrowing rate, and (iii) an increase in the amortization of loan costs incurred in connection with the NXT Loan. Future interest expense will depend largely upon the timing of utilizing the remaining availability on the NXT Loan to fund anticipated tenant improvements and re-leasing costs in connection with future leases at our remaining assets.
Discontinued Operations
In accordance with GAAP, we have classified the results of operations related to the Park Lane Building as discontinued operations for all periods presented. Income from discontinued operations decreased from $207,795 for the three months ended June 30, 2010 to $0 for the three months ended June 30, 2011, as a result of the sale of the Park Lane Building in September 2010.
Comparison of the six months ended June 30, 2010 versus the six months ended June 30, 2011
Continuing Operations
Rental income increased slightly from $2,133,592 for the six months ended June 30, 2010 to $2,306,077 for the six months ended June 30, 2011, due to an increase in occupancy at the Parkway at Oak Hill Buildings, partially offset by the reduction in square footage leased by Brocade at the Nathan Lane Building, effective in May 2010. Absent future leasing activity, we expect future rental income to remain at a relatively similar level, as compared to the six months ended June 30, 2011.
Tenant reimbursements increased from $353,950 for the six months ended June 30, 2010 to $859,326 for the six months ended June 30, 2011, primarily as a result of (i) an increase in occupancy at the Parkway at Oak Hill Buildings and (ii) Brocade and Stanley beginning to reimburse their pro rata share of property operating costs at the Nathan Lane Building effective May 1, 2010, due to a change in the lease and management structure at the Nathan Lane Building. Prior to May 1, 2010, Brocade self-managed the Nathan Lane Building and paid the majority of the property operating costs directly in exchange for a reduced rental rate. Absent future leasing activity, we expect future tenant reimbursements to remain at a relatively similar level, as compared to the six months ended June 30, 2011.
Property operating costs increased from $1,318,675 for the six months ended June 30, 2010 to $1,908,737 for the six months ended June 30, 2011, primarily as a result of (i) the change in the lease and management structure at the Nathan Lane Building described above and (ii) an increase in occupancy at the Parkway at Oak Hill Buildings. Absent future leasing activity, we expect future property operating costs to remain at a relatively similar level, as compared to the six months ended June 30, 2011.
Asset and property management fees increased from $224,295 for the six months ended June 30, 2010 to $276,971 for the six months ended June 30, 2011, primarily due to an increase in the gross value of our remaining real estate assets in connection with the 2010 year end valuation. The asset management fees are incurred as a percentage of our gross asset value (Please refer to Note 5 - “Related-Party Transactions” for additional details). We anticipate asset and property management fees to remain at a relatively similar level in the future, as compared to the six months ended June 30, 2011.
Depreciation expense increased from $691,156 for the six months ended June 30, 2010 to $897,363 for the six months ended June 30, 2011, primarily as a result of tenant improvements completed in connection with (i) recent leases executed at the Parkway at Oak Hill Buildings and (ii) the Brocade lease at the Nathan Lane Building. We expect an additional increase in the future, as compared to the second quarter of 2011, as a result of the anticipated completion of the remaining tenant improvement projects at the Parkway at Oak Hill Buildings.
Amortization expense decreased from $938,153 for the six months ended June 30, 2010 to $528,890 for the six months ended June 30, 2011, primarily as a result of recognizing less amortization of intangible lease assets and intangible lease origination costs in 2011 following the May 2010 expiration of the lease in place at the time of the acquisition of the Nathan Lane Building. Absent future leasing activity, we expect future amortization expense to remain at a relatively similar level, as compared to the six months ended June 30, 2011.



Page 18


General and administrative expenses decreased from $413,969 for the six months ended June 30, 2010 to $378,870 for the six months ended June 30, 2011, primarily due to (i) a decrease in legal fees incurred in 2010 in connection with third-party financing activity and (ii) a decrease in the overhead administrative costs allocated to Wells VAF I during 2011. We expect future general and administrative expense to remain at a relatively similar level, as compared to the six months ended June 30, 2011.
Interest expense decreased from $955,940 for the six months ended June 30, 2010 to $904,644 for the six months ended June 30, 2011, primarily as a result of (i) a decrease in our weighted-average outstanding notes payable balance, partially offset by (ii) an increase in our weighted-average borrowing rate, and (iii) an increase in the amortization of loan costs incurred in connection with the NXT Loan. Future interest expense will depend largely upon the timing of utilizing the remaining availability on the NXT Loan to fund anticipated tenant improvements and re-leasing costs in connection with future leases at our remaining assets.
Discontinued Operations
In accordance with GAAP, we have classified the results of operations related to the Park Lane Building as discontinued operations for all periods presented. Income from discontinued operations decreased from $423,728 for the six months ended June 30, 2010 to $0 for the six months ended June 30, 2011, as a result of the sale of the Park Lane Building in September 2010.
Inflation
We are exposed to inflation risk, as income from long-term leases is the primary source of our cash flows from operations. There are provisions in the majority of our tenant leases that would protect us from the impact of inflation. These provisions include rent steps, reimbursement billings for operating expense pass-through charges, real estate tax and insurance reimbursements on a per-square-foot basis, or in some cases, annual reimbursement of operating expenses above a certain per-square-foot allowance. However, due to the long-term nature of our leases, the leases may not readjust their reimbursement rates frequently enough to cover inflation.

Application of Critical Accounting Policies
Our accounting policies have been established to conform with GAAP. The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If management’s judgment or interpretation of the facts and circumstances relating to various transactions are different, it is possible that different accounting policies would be applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses.
Below is a discussion of the accounting policies used by Wells VAF I, which are considered critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.

Real Estate Assets
Investment in Real Estate Assets
We are required to make subjective assessments as to the useful lives of our depreciable assets. We consider the period of future benefit of the asset to determine the appropriate useful lives. These assessments have a direct impact on net loss. The estimated useful lives of our assets by class are as follows:
 
Buildings
40 years
Building improvements
5-25 years
Site improvements
15 years
Tenant improvements
Shorter of lease term or economic life
Intangible lease assets
Lease term
 
Evaluating the Recoverability of Real Estate Assets
We continually monitor events and changes in circumstances that could indicate that the carrying amounts of the real estate assets and related intangible assets which Wells VAF I owns may not be recoverable. When indicators of potential impairment are present which suggest that the carrying amounts of real estate assets and related intangible assets may not be recoverable, we assess the recoverability of the real estate assets and related intangible assets by determining whether the respective carrying values will be

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recovered through the estimated undiscounted future operating cash flows expected from the use of the assets and their eventual disposition for assets held for use, or with the estimated fair values, less costs to sell, for assets held for sale. In the event that such expected undiscounted future cash flows for assets held for use or the estimated fair values, less costs to sell, for assets held for sale do not exceed the carrying values, we adjust the carrying value of real estate assets and related intangible assets (liabilities) to the estimated fair values, pursuant to the provisions of the property, plant, and equipment accounting standard for the impairment or disposal of long-lived assets, and recognize an impairment loss. Estimated fair values are determined based on the following information, dependent upon availability: (i) recently quoted market price(s) for the subject property, or highly comparable properties, under sufficiently active and normal market conditions, or (ii) the present value of future cash flows, including estimated residual value. We have determined that there has been no impairment in the carrying value of our real estate assets and related intangible assets to date; however, certain of our assets may be carried at an amount more than could be realized in a current disposition transaction.
Projections of expected future operating cash flows require that we estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, the number of months it takes to re-lease the property, and the number of years the property is held for investment, among other factors. The subjectivity of assumptions used in the future cash flow analysis, including discount rates, could result in an incorrect assessment of the property’s ultimate fair value and could result in the misstatement of the carrying value of our real estate and related intangible assets and net loss.
Allocation of Purchase Price of Acquired Assets
Upon the acquisition of real properties, we allocated the purchase price of properties to the acquired tangible assets, consisting of land and building, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases and the value of in-place leases, based in each case on our estimate of their fair values. As further described below, in-place leases with Wells VAF I as the lessor may have values related to: direct costs associated with obtaining a new tenant, opportunity costs associated with lost rentals that are avoided by acquiring an in-place lease, tenant relationships, and effective contractual rental rates that are above or below market rates:
Direct costs associated with obtaining a new tenant, including commissions, tenant improvements, and other direct costs, are estimated based on our consideration of current market costs to execute a similar lease. Such direct costs are included in intangible lease origination costs in the accompanying balance sheets and are amortized to expense over the remaining terms of the respective leases.
The value of opportunity costs associated with lost rentals avoided by acquiring an in-place lease is calculated based on the contractual amounts to be paid pursuant to the in-place leases over a market absorption period for a similar lease. Such opportunity costs are included in intangible lease assets in the accompanying balance sheets and are amortized to expense over the remaining terms of the respective leases.
The value of tenant relationships is calculated based on expected renewal of a lease or the likelihood of obtaining a particular tenant for other locations. Values associated with tenant relationships are included in intangible lease assets in the accompanying balance sheets and are amortized to expense over the remaining terms of the respective leases.
The value of effective rental rates of in-place leases that are above or below the market rates of comparable leases is calculated based on the present value (using a discount rate that reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be received pursuant to the in-place leases and (ii) our estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining terms of the leases. The capitalized above-market and below-market lease values are recorded as intangible lease assets or liabilities and amortized as an adjustment to rental income over the remaining terms of the respective leases.
As of June 30, 2011 and December 31, 2010, Wells VAF I had the following gross intangible in-place lease assets and liabilities:
 
 
 
Intangible Lease Assets
 
Intangible
Lease
Origination
Costs
 
Intangible
Below-Market
In-Place
Lease Liabilities
 
 
Above-Market
In-Place
Lease Assets
 
Absorption
Period Costs
 
June 30, 2011
 
$
357,971

 
$
2,934,382

 
$
2,619,309

 
$
386,472

December 31, 2010
 
$
357,971

 
$
2,934,382

 
$
2,619,309

 
$
386,472

During the three months ended June 30, 2011 and 2010, Wells VAF I recognized the following amortization of acquired intangible lease assets and liabilities:
 

Page 20


 
Intangible Lease Assets
 
Intangible
Lease
Origination
Costs
 
Intangible
Below-Market
In-Place
Lease Liabilities
For the three months ended June 30:
Above-Market
In-Place
Lease Assets
 
Absorption
Period Costs
 
2011
$
9,258

 
$
106,213

 
$
97,967

 
$
13,216

2010
$
13,613

 
$
188,064

 
$
137,615

 
$
20,370


During the six months ended June 30, 2011 and 2010, Wells VAF I recognized the following amortization of acquired intangible lease assets and liabilities:
 
Intangible Lease Assets
 
Intangible
Lease
Origination
Costs
 
Intangible
Below-Market
In-Place
Lease Liabilities
For the six months ended June 30:
Above-Market
In-Place
Lease Assets
 
Absorption
Period Costs
 
2011
$
18,516

 
$
212,425

 
$
195,933

 
$
26,433

2010
$
35,938

 
$
539,832

 
$
354,529

 
$
55,048




The remaining net intangible assets and liabilities balances as of June 30, 2011 will be amortized as follows: 

 
 
Intangible Lease Assets
 
Intangible
Lease
Origination
Costs
 
Intangible
Below-Market
In-Place
Lease Liabilities
For the year ending December 31,
 
Above-Market
In-Place
Lease Assets
 
Absorption
Period Costs
 
2011
 
$
18,516

 
$
212,423

 
$
195,931

 
$
26,433

2012
 
37,032

 
424,848

 
391,864

 
52,866

2013
 
37,032

 
269,233

 
229,612

 
35,573

2014
 
37,032

 
158,067

 
113,705

 
23,218

2015
 
37,032

 
158,067

 
113,705

 
23,218

Thereafter
 
15,426

 
97,256

 
47,376

 
9,675

 
 
$
182,070

 
$
1,319,894

 
$
1,092,193

 
$
170,983

Weighted-Average Amortization Period
 
5 years

 
4 years

 
3 years

 
4 years

 
Evaluating the Recoverability of Intangible Assets and Liabilities
The values of intangible lease assets and liabilities are determined based on assumptions made at the time of acquisition and have defined useful lives, which correspond with the lease terms.  There may be instances in which intangible lease assets and liabilities become impaired and we are required to expense the remaining asset or liability immediately or over a shorter period of time. Lease restructurings, including but not limited to lease terminations and lease extensions, may impact the value and useful life of in-place leases. In-place leases that are terminated, partially terminated, or modified will be evaluated for impairment if the original in-place lease terms have been modified. In situations where the discounted cash flows of the modified in-place lease stream are less than the discounted cash flows of the original in-place lease stream, we reduce the carrying value of the intangible lease assets to reflect the modified lease terms and recognize an impairment loss. For in-place lease extensions  that are executed  more than one year prior to the original in-place lease expiration date, the useful life of the in-place lease will be extended over the new lease term with the exception of those in-place lease components, such as lease commissions and tenant allowances, which have been renegotiated for the extended term.  Renegotiated in-place lease components, such as lease commissions and tenant allowances, will be amortized over the shorter of the useful life of the asset or the new lease term. We have determined that there has been no impairment in the carrying value of our intangible lease assets and liabilities to date.

Related-Party Transactions and Agreements
Transactions and Agreements

We have entered into agreements with WIM, Wells Management, and WRES whereby we pay certain fees and expense reimbursements to WIM, Wells Management, and WRES for asset management fees; property management fees; administrative

Page 21


services relating to accounting, portfolio management, and other general and administrative, and incur the related expenses. See Note 5 to our financial statements included in this report for a description of these fees and reimbursements and amounts incurred.

Assertion of Legal Action Against Related-Parties
On March 12, 2007, a stockholder of Piedmont REIT filed a putative class action and derivative complaint, presently styled In re Wells Real Estate Investment Trust, Inc. Securities Litigation, in the United States District Court for the District of Maryland against, among others, Piedmont REIT; Leo F. Wells, III; Wells Capital, Inc. (“Wells Capital”); Wells Management, our sponsoring member; certain affiliates of WREF; the directors of Piedmont REIT; and certain individuals who formerly served as officers or directors of Piedmont REIT prior to the closing of the internalization transaction on April 16, 2007.
The complaint alleged, among other things, violations of the federal proxy rules and breaches of fiduciary duty arising from the Piedmont REIT internalization transaction and the related proxy statement filed with the SEC on February 26, 2007, as amended. The complaint sought, among other things, unspecified monetary damages and nullification of the Piedmont REIT internalization transaction.
On June 27, 2007, the plaintiff filed an amended complaint, which attempted to assert class action claims on behalf of those persons who received and were entitled to vote on the Piedmont REIT proxy statement filed with the SEC on February 26, 2007, and derivative claims on behalf of Piedmont REIT.
On March 31, 2008, the Court granted in part the defendants’ motion to dismiss the amended complaint. The Court dismissed five of the seven counts of the amended complaint in their entirety. The Court dismissed the remaining two counts with the exception of allegations regarding the failure to disclose in the Piedmont REIT proxy statement details of certain expressions of interest in acquiring Piedmont REIT. On April 21, 2008, the plaintiff filed a second amended complaint, which alleges violations of the federal proxy rules based upon allegations that the proxy statement to obtain approval for the Piedmont REIT internalization transaction omitted details of certain expressions of interest in acquiring Piedmont REIT. The second amended complaint seeks, among other things, unspecified monetary damages, to nullify and rescind the internalization transaction, and to cancel and rescind any stock issued to the defendants as consideration for the internalization transaction. On May 12, 2008, the defendants answered and raised certain defenses to the second amended complaint.
On June 23, 2008, the plaintiff filed a motion for class certification. On September 16, 2009, the Court granted the plaintiff’s motion for class certification. On September 20, 2009, the defendants filed a petition for permission to appeal immediately the Court’s order granting the motion for class certification with the Eleventh Circuit Court of Appeals. The petition for permission to appeal was denied on October 30, 2009. On April 13, 2009, the plaintiff moved for leave to amend the second amended complaint to add additional defendants. The Court denied the plaintiff’s motion for leave to amend on June 23, 2009.
On December 4, 2009, the parties filed motions for summary judgment. On August 2, 2010, the Court entered an order denying the defendants’ motion for summary judgment and granting, in part, the plaintiff’s motion for partial summary judgment. The Court ruled that the question of whether certain expressions of interest in acquiring Piedmont REIT constituted “material” information required to be disclosed in the proxy statement to obtain approval for the Piedmont REIT internalization transaction raises questions of fact that must be determined at trial. A trial date has not been set.
Mr. Wells, Wells Capital, and Wells Management believe that the allegations contained in the complaint are without merit and intend to vigorously defend this action. Any financial loss incurred by Wells Capital, Wells Management, or their affiliates could hinder their ability to successfully manage Wells VAF I’s operations and portfolio of investments.

Commitments and Contingencies
Wells VAF I is not subject to any material litigation nor to management’s knowledge is any material litigation currently threatened against Wells VAF I. We are subject to certain commitments and contingencies with regard to certain transactions. Refer to Note 8 of our accompanying financial statements for further explanation.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Wells VAF I has omitted a discussion of quantitative and qualitative disclosures about market risk because, as a smaller reporting company, it is not required to provide such information.


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ITEM 4.    CONTROLS AND PROCEDURES
Management's Conclusions Regarding the Effectiveness of Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of management of WIM, our manager, including the Principal Executive Officer and the Principal Financial Officer of WIM, of the effectiveness of the design and operation of Wells VAF I’s disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 as of the end of the quarterly period covered by this report. Based upon that evaluation, the Principal Executive Officer and the Principal Financial Officer of WIM concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report in providing a reasonable level of assurance that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in applicable SEC rules and forms, including providing a reasonable level of assurance that information required to be disclosed by us in such reports is accumulated and communicated to our management, including the Principal Executive Officer and the Principal Financial Officer of WIM, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There have been no significant changes in our internal control over financial reporting during the quarter ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II.
OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS
From time to time, we are party to legal proceedings, which arise in the ordinary course of our business. We are not currently involved in any legal proceedings of which the outcome is reasonably likely to have a material adverse effect on our results of operations or financial condition, nor are we aware of any such legal proceedings contemplated by governmental authorities.

ITEM 1A.
RISK FACTORS
Wells VAF I has omitted a discussion of risk factors because as a smaller reporting company, it is not required to provide such information.

ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a)
We did not sell any equity securities that were not registered under the Securities Act of 1933, as amended, during the quarter ended June 30, 2011.
(b)
Not applicable.
(c)
We did not redeem any securities during the quarter ended June 30, 2011.

ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
(a)
There have been no defaults with respect to any of our indebtedness.
(b)
Not applicable.

ITEM 4.
(REMOVED AND RESERVED)
 
ITEM 5.
OTHER INFORMATION
(a)
During the quarter ended June 30, 2011, there was no information required to be disclosed in a report on Form 8-K which was not disclosed in a report on Form 8-K.
(b)
Not applicable.

ITEM 6.
EXHIBITS
The Exhibits to this report are set forth on the Exhibit Index to Second Quarter Form 10-Q attached hereto.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
WELLS MID-HORIZON VALUE-ADDED FUND I, LLC
(Registrant)
 
 
 
 
By:
WELLS INVESTMENT MANAGEMENT COMPANY, LLC
(Manager)
 
 
 
August 11, 2011
 
/s/ DOUGLAS P. WILLIAMS
 
 
Douglas P. Williams
Principal Financial Officer
of Wells Investment Management Company, LLC

Page 24


EXHIBIT INDEX
TO SECOND QUARTER FORM 10-Q
OF
WELLS MID-HORIZON VALUE-ADDED FUND I, LLC
 
Exhibit
No.
 
 
Description of Document
 
 
3.1

 
 
 
Amended and Restated Articles of Organization, dated as of September 1, 2005, incorporated by reference to Exhibit 3.1 to the Form 10 filed April 15, 2009
 
 
 
 
 
4.1

 
 
 
Operating Agreement among Wells Management Company, Inc., Wells Investment Management Company, LLC, and the Several Investor Members, dated as of September 1, 2005, and subsequently amended, incorporated by reference to Exhibit 4.1 to the Form 10 filed April 15, 2009
 
 
 
 
 
31.1*

 
 
 
Certification of the Principal Executive Officer of the manager of Wells Mid-Horizon Value-Added Fund I, LLC, pursuant to Securities Exchange Act Rules 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
31.2*

 
 
 
Certification of the Principal Executive Officer of the manager of Wells Mid-Horizon Value-Added Fund I, LLC, pursuant to Securities Exchange Act Rules 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
32.1*

 
 
 
Certification of the Principal Executive Officer and Principal Financial Officer of the manager of Wells Mid-Horizon Value-Added Fund I, LLC, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
 
 
101.INS**

 
 
 
XBRL Instance Document.
 
 
 
 
 
101.SCH**

 
 
 
XBRL Taxonomy Extension Schema.
 
 
 
 
 
101.CAL**

 
 
 
XBRL Taxonomy Extension Calculation Linkbase.
 
 
 
 
 
101.DEF**

 
 
 
XBRL Taxonomy Extension Definition Linkbase.
 
 
 
 
 
101.LAB**

 
 
 
XBRL Taxonomy Extension Label Linkbase.
 
 
 
 
 
101.PRE**

 
 
 
XBRL Taxonomy Extension Presentation Linkbase.
 
 
 
 
 
 
*
Filed herewith.
 
**
Furnished with this Form 10-Q



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