Attached files
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EX-31.2 - EX-31.2 - NNN 2003 VALUE FUND LLC | c21317exv31w2.htm |
EX-31.1 - EX-31.1 - NNN 2003 VALUE FUND LLC | c21317exv31w1.htm |
EX-32.1 - EX-32.1 - NNN 2003 VALUE FUND LLC | c21317exv32w1.htm |
EX-32.2 - EX-32.2 - NNN 2003 VALUE FUND LLC | c21317exv32w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | 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: 0-51295
NNN 2003 Value Fund, LLC
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
20-0122092 (I.R.S. Employer Identification No.) |
|
1551 N. Tustin Avenue, Suite 300, Santa Ana, California (Address of principal executive offices) |
92705 (Zip Code) |
(714) 667-8252
(Registrants telephone number, including area code)
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
o Yes þ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). o Yes þ No
As of August 12, 2011, there were 9,970 units of NNN 2003 Value Fund, LLC outstanding.
NNN 2003 VALUE FUND, LLC
(A Delaware limited liability company)
TABLE OF CONTENTS
(A Delaware limited liability company)
TABLE OF CONTENTS
Page | ||||||||
PART I FINANCIAL INFORMATION |
||||||||
2 | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
17 | ||||||||
24 | ||||||||
24 | ||||||||
PART II OTHER INFORMATION |
||||||||
25 | ||||||||
25 | ||||||||
27 | ||||||||
27 | ||||||||
27 | ||||||||
27 | ||||||||
28 | ||||||||
29 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-32.2 |
1
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. | Financial Statements. |
NNN 2003 VALUE FUND, LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2011 | December 31, 2010 | |||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Real estate investments: |
||||||||
Properties held for non-sale disposition, net |
$ | | $ | 27,218,000 | ||||
Investments in unconsolidated real estate |
12,000 | 24,000 | ||||||
12,000 | 27,242,000 | |||||||
Cash and cash equivalents |
663,000 | 2,031,000 | ||||||
Accounts receivable, net |
| 79,000 | ||||||
Restricted cash |
217,000 | 646,000 | ||||||
Intangible assets related to properties held for non-sale disposition, net |
| 1,951,000 | ||||||
Other assets related to properties held for non-sale disposition, net |
| 738,000 | ||||||
Total assets |
$ | 892,000 | $ | 32,687,000 | ||||
LIABILITIES AND EQUITY (DEFICIT) |
||||||||
Mortgage loans payable secured by properties held for non-sale disposition |
$ | | $ | 43,471,000 | ||||
Accounts payable and accrued liabilities |
104,000 | 613,000 | ||||||
Accounts payable due to related parties |
| 32,000 | ||||||
Other liabilities related to properties held for non-sale disposition, net |
| 422,000 | ||||||
Other liabilities |
217,000 | 217,000 | ||||||
Total liabilities |
321,000 | 44,755,000 | ||||||
Commitments and contingencies (Note 11) |
||||||||
Equity (deficit): |
||||||||
NNN 2003 Value Fund, LLC unit holders equity (deficit) |
571,000 | (12,068,000 | ) | |||||
Noncontrolling interest equity |
| | ||||||
Total equity (deficit) |
571,000 | (12,068,000 | ) | |||||
Total liabilities and equity (deficit) |
$ | 892,000 | $ | 32,687,000 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
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NNN 2003 VALUE FUND, LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
AND COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Interest and dividend income |
$ | | $ | 7,000 | $ | | $ | 20,000 | ||||||||
Other income |
| 11,000 | | 17,000 | ||||||||||||
General and administrative expense |
(119,000 | ) | (134,000 | ) | (175,000 | ) | (231,000 | ) | ||||||||
Equity in (losses) income of
unconsolidated real estate |
(6,000 | ) | 1,016,000 | (12,000 | ) | 609,000 | ||||||||||
(Loss) income from continuing
operations |
(125,000 | ) | 900,000 | (187,000 | ) | 415,000 | ||||||||||
Income from discontinued operations |
| 963,000 | 13,326,000 | 5,000 | ||||||||||||
Consolidated net (loss) income |
(125,000 | ) | 1,863,000 | 13,139,000 | 420,000 | |||||||||||
Loss attributable to noncontrolling
interests |
| | | (98,000 | ) | |||||||||||
Net (loss) income attributable to
NNN 2003 Value Fund, LLC |
$ | (125,000 | ) | $ | 1,863,000 | $ | 13,139,000 | $ | 518,000 | |||||||
Comprehensive (loss) income: |
||||||||||||||||
Consolidated net (loss) income |
$ | (125,000 | ) | $ | 1,863,000 | $ | 13,139,000 | $ | 420,000 | |||||||
Other comprehensive (loss) income |
| | | | ||||||||||||
Comprehensive (loss) income |
(125,000 | ) | 1,863,000 | 13,139,000 | 420,000 | |||||||||||
Comprehensive (loss) income
attributable to noncontrolling
interests |
| | | (98,000 | ) | |||||||||||
Comprehensive (loss) income
attributable to NNN 2003 Value
Fund, LLC |
$ | (125,000 | ) | $ | 1,863,000 | $ | 13,139,000 | $ | 518,000 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Table of Contents
NNN 2003 VALUE FUND, LLC
CONDENSED CONSOLIDATED STATEMENT OF EQUITY (DEFICIT)
(Unaudited)
(Unaudited)
NNN 2003 Value | ||||||||||||||||
Number | Total Equity | Fund, LLC | Noncontrolling | |||||||||||||
of Units | (Deficit) | Equity (Deficit) | Interests | |||||||||||||
Deficit Balance December 31, 2010 |
9,970 | $ | (12,068,000 | ) | $ | (12,068,000 | ) | $ | | |||||||
Distributions |
| (500,000 | ) | (500,000 | ) | | ||||||||||
Net income |
| 13,139,000 | 13,139,000 | | ||||||||||||
Equity Balance June 30, 2011 |
9,970 | $ | 571,000 | $ | 571,000 | $ | | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
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NNN 2003 VALUE FUND, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Unaudited)
Six Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Consolidated net income |
$ | 13,139,000 | $ | 420,000 | ||||
Adjustments to reconcile net income to net cash used in operating
activities: |
||||||||
Real estate related impairments |
| 5,300,000 | ||||||
Gain on extinguishment of debt |
(13,634,000 | ) | (6,667,000 | ) | ||||
Depreciation and amortization (including deferred financing
costs, deferred rent, lease inducements and above/below market
leases) |
157,000 | 1,394,000 | ||||||
Equity in losses (earnings) of unconsolidated real estate |
12,000 | (609,000 | ) | |||||
Allowance for doubtful accounts |
44,000 | 118,000 | ||||||
Change in operating assets and liabilities: |
||||||||
Accounts receivable, including accounts and loans receivable
due from related parties |
(138,000 | ) | 260,000 | |||||
Other assets |
38,000 | (317,000 | ) | |||||
Restricted cash |
(21,000 | ) | (389,000 | ) | ||||
Accounts payable and accrued liabilities, including accounts
payable to related parties |
(235,000 | ) | 384,000 | |||||
Security deposits, prepaid rent and other liabilities |
(181,000 | ) | (19,000 | ) | ||||
Net cash used in operating activities |
(819,000 | ) | (125,000 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Capital expenditures |
| (296,000 | ) | |||||
Distributions from unconsolidated real estate |
| 1,268,000 | ||||||
Proceeds from repayment of loans receivable from related parties |
| 579,000 | ||||||
Net cash provided by investing activities |
| 1,551,000 | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Restricted cash |
| 1,000 | ||||||
Borrowings on mortgage loans payable |
| 180,000 | ||||||
Distributions to unit holders |
(500,000 | ) | (2,000,000 | ) | ||||
Cash transferred to lender in connection with transfer of property |
(49,000 | ) | (213,000 | ) | ||||
Net cash used in financing activities |
(549,000 | ) | (2,032,000 | ) | ||||
NET DECREASE IN CASH AND CASH EQUIVALENTS |
(1,368,000 | ) | (606,000 | ) | ||||
CASH AND CASH EQUIVALENTS beginning of period |
2,031,000 | 2,724,000 | ||||||
CASH AND CASH EQUIVALENTS end of period |
$ | 663,000 | $ | 2,118,000 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
||||||||
Cash paid for interest |
$ | | $ | 1,850,000 | ||||
NONCASH INVESTING AND FINANCING ACTIVITIES: |
||||||||
Accrual for tenant improvements and capital expenditures |
$ | | $ | 12,000 | ||||
Transfer of real estate and other assets and liabilities in
connection with debt extinguishment |
$ | 29,788,000 | $ | 10,749,000 | ||||
Cancellation of debt and accrued interest in connection with
transfer of real estate and other assets and liabilities |
$ | 43,471,000 | $ | 17,629,000 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Table of Contents
NNN 2003 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
The use of the words we, us, or our refers to NNN 2003 Value Fund, LLC and its
subsidiaries, except where the context otherwise requires.
1. Organization and Description of Business
NNN 2003 Value Fund, LLC was formed as a Delaware limited liability company on June 19, 2003.
We were organized to acquire, own, operate and subsequently sell our ownership interests in a
number of unspecified properties believed to have higher than average potential for capital
appreciation, or value-added properties. As of December 31, 2010, we held interests in three
commercial office properties, comprised of two consolidated properties and one unconsolidated
property. Our two consolidated properties consisted of Sevens Building, located in St. Louis,
Missouri, or the Sevens Building property, and Four Resource Square, located in Charlotte, North
Carolina, or the Four Resource Square property. Our unconsolidated property consisted of an 8.5%
interest in Enterprise Technology Center, located in Scotts Valley, California, or the Enterprise
Technology Center property.
The mortgage loan for the Sevens Building property, which had an outstanding principal balance
of $21,494,000 as of December 31, 2010, matured on October 31, 2010 and was in default due to
non-payment of the outstanding principal balance upon maturity. The mortgage loan documents
included an option to extend the maturity date for an additional 12 months beyond October 31, 2010;
however, we determined that it was not in the best interest of our unit holders to attempt to
extend the maturity date due to the unfavorable terms of the extension option, including additional
cash outlays for an extension fee and partial principal prepayment, which we did not expect would
be recovered through property operations over the subsequent 12 months. Further, the estimated
value of the Sevens Building property was significantly less than the outstanding principal balance
of the mortgage loan, and we did not expect that the value of the property would exceed the
principal balance by the end of the potential extension term. On March 7, 2011, we received a
letter from the Sevens Building lender indicating that it had initiated a foreclosure action on the
Sevens Building property pursuant to our default on the mortgage loan for the Sevens Building
property. On March 25, 2011, the successor trustee appointed by the Sevens Building lender
conducted a public auction and sold the Sevens Building property to General Electric Credit
Equities, an entity affiliated with the Sevens Building lender, or the buyer, for a sale price of
$17,400,000. As a result of the sale, our 100% ownership interest in the Sevens Building property
was sold and conveyed to the buyer and a trustees deed was recorded on the Sevens Building
property in favor of the buyer. We did not receive any cash proceeds from the sale of the property.
Further, on April 29, 2011, we transferred $850,000 to the Sevens Building lender, which
represented the approximate amount of net cash generated by the property subsequent to the default
on the mortgage loan on October 31, 2010.
In addition, the mortgage loan for the Four Resource Square property, which had an outstanding
principal balance of $21,977,000 as of December 31, 2010, had an original maturity date of November
30, 2010 but was extended to January 20, 2011. The mortgage loan documents included an option to
extend the maturity date for an additional 12 months beyond November 30, 2010; however, we
determined that it was not in the best interest of our unit holders to attempt to extend the
maturity date due to the unfavorable terms of the extension option, including additional cash
outlays for an extension fee and partial principal prepayment, which we did not expect would be
recovered through property operations over the subsequent 12 months. Further, the estimated value
of the Four Resource Square property was significantly less than the outstanding principal balance
of the mortgage loan, and we did not expect that the value of the property would exceed the
principal balance by the end of the potential extension term. As such, on January 20, 2011, we sold
the Four Resource Square property to an entity affiliated with the Four Resource Square lender for
a sales price equal to the outstanding principal balance of the mortgage loan of $21,977,000. We
did not receive any cash proceeds from the sale of the property.
As of June 30, 2011, our sole remaining property interest consisted of our 8.5% interest in
the Enterprise Technology Center property. On July 15, 2011, LBUSB 2004-C4 Enterprise Way, L.P., an
entity affiliated with UBS Real Estate Investments, Inc., or the Enterprise Technology Center
lender, filed a complaint against NNN Enterprise Way, LLC and the other 31 tenant-in-common, or
TIC, owners of the Enterprise Technology Center property seeking judicial foreclosure, specific
performance for the appointment of a receiver and injunctive relief. On July 21, 2011, the court ordered the appointment of a receiver and granted injunctive
relief. As a result, on July 25, 2011, the receiver appointed by the court took possession of the
Enterprise Technology Center property and has been instructed to proceed with a private sale of the
property under the supervision of the court. In addition, on July 29, 2011, the appointed trustee
filed a notice of default and election to sell under deed of trust on behalf of the Enterprise
Technology Center lender, whereby a sale of the Enterprise Technology Center property may proceed
after 90 days of filing such notice. Subsequent to this sale, we intend to pay distributions to our
unit holders from available funds, if any, and wind up our operations, which we expect will be
completed within the next six to twelve months, at which point we will cease to be a going concern.
6
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NNN 2003 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
Grubb & Ellis Realty Investors, LLC, or Grubb & Ellis Realty Investors, or our manager,
manages us pursuant to the terms of an operating agreement, or the Operating Agreement. While we
have no employees, certain executive officers and employees of our manager provide services to us
pursuant to the Operating Agreement. Our manager engages affiliated entities, including Triple Net
Properties Realty, Inc., or Realty, to provide certain services to us. Realty serves as our
property manager pursuant to the terms of the Operating Agreement and a property management
agreement, or the Management Agreement. The Operating Agreement terminates upon our dissolution.
The unit holders may not vote to terminate our manager prior to the termination of the Operating
Agreement or our dissolution, except for cause. The Management Agreement terminates with respect to
each of our properties upon the earlier of the sale of each respective property or December 31,
2013. Realty may be terminated without cause prior to the termination of the Management Agreement
or our dissolution, subject to certain conditions, including the payment by us to Realty of a
termination fee as provided in the Management Agreement.
2. Summary of Significant Accounting Policies
The summary of significant accounting policies presented below is designed to assist in
understanding our interim unaudited condensed consolidated financial statements. Such interim
unaudited condensed consolidated financial statements and accompanying notes thereto are the
representations of our management, who are responsible for their integrity and objectivity. These
accounting policies conform to accounting principles generally accepted in the United States of
America, or GAAP, in all material respects, and have been consistently applied in preparing the
accompanying interim unaudited condensed consolidated financial statements.
Interim Financial Data
Our accompanying interim unaudited condensed consolidated financial statements have been
prepared by us in accordance with GAAP and in conjunction with the rules and regulations of the
United States Securities and Exchange Commission, or the SEC. Certain information and footnote
disclosures required for annual financial statements have been condensed or excluded pursuant to
SEC rules and regulations. Accordingly, our accompanying interim unaudited condensed consolidated
financial statements do not include all of the information and footnotes required by GAAP for
complete financial statements. Our accompanying interim unaudited condensed consolidated financial
statements reflect all adjustments, which are, in our opinion, of a normal recurring nature and
necessary for a fair presentation of our financial position, results of operations and cash flows
for the interim periods. Interim results of operations are not necessarily indicative of the
results to be expected for the full year; such results may be less favorable.
In preparing our accompanying condensed consolidated financial statements, management has
evaluated subsequent events through the financial statement issuance date. We believe that,
although the disclosures contained herein are adequate to prevent the information presented from
being misleading, our accompanying interim unaudited condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements and the notes
thereto included in our 2010 Annual Report on Form 10-K, as filed with the SEC on March 18, 2011.
Principles of Consolidation and Basis of Presentation
The accompanying interim unaudited condensed consolidated financial statements include our
accounts and those of our wholly owned subsidiaries, any majority-owned subsidiaries and any
variable interest entities, or VIEs, that we have concluded should be consolidated in accordance
with the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or
Codification, Topic 810, Consolidation. All material intercompany transactions and account balances
have been eliminated in consolidation. We account for all other unconsolidated real estate
investments using the equity method of accounting. Accordingly, our share of the earnings (losses)
of these real estate investments is included in consolidated net income (loss).
7
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NNN 2003 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
Our consolidated financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the settlement of liabilities and commitments in the
normal course of business. As a result of the planned disposal of our remaining property interest,
there is substantial doubt about our ability to continue as a going concern. The consolidated
financial statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or to the amounts and classifications of liabilities that
may be necessary if we are unable to continue as a going concern.
We have evaluated subsequent events through the date of issuance of these financial
statements.
Use of Estimates
The preparation of our interim unaudited condensed consolidated financial statements in
conformity with GAAP requires us to make estimates and judgments that affect the reported amounts
of assets and liabilities as of June 30, 2011 and December 31, 2010 and the disclosure of
contingent assets and liabilities as of the date of the interim unaudited condensed consolidated
financial statements, and the reported amounts of revenues and expenses for the three and six
months ended June 30, 2011 and 2010. Actual results could differ from those estimates, perhaps in
material adverse ways, and those estimates could be different under different assumptions or
conditions.
Real Estate Related Impairments
We assess the impairment of a real estate asset when events or changes in circumstances
indicate that its carrying amount may not be recoverable. Indicators we consider important which
could trigger an impairment review include the following:
| a significant negative industry or economic trend; | ||
| a significant underperformance relative to historical or projected future operating results; and | ||
| a significant change in the manner in which the asset is used. |
In the event that the carrying amount of a property exceeds the sum of the undiscounted cash
flows (excluding interest) that are expected to result from the use and eventual disposition of the
property, we would recognize an impairment loss to the extent the carrying amount exceeds the
estimated fair value of the property. The estimation of expected future net cash flows is
inherently uncertain and relies on subjective assumptions dependent upon current and future market
conditions and events that affect the ultimate value of the property. It requires us to make
assumptions related to future rental rates, tenant allowances, operating expenditures, property
taxes, capital improvements, occupancy levels, and the estimated proceeds generated from the future
sale of the property. The estimation of proceeds to be generated from the future sale of the
property requires us to also make estimates about capitalization rates and discount rates.
In accordance with FASB Codification Topic 360, Property, Plant and Equipment, during the
three and six months ended June 30, 2011 and 2010, we assessed the values of our consolidated
properties. We determined that no impairment charges were required related to our consolidated real
estate investments during the three and six months ended June 30, 2011; however, a $5,300,000 real
estate related impairment charge was recorded against the carrying value of one of our consolidated
properties during the three and six months ended June 30, 2010. Additionally, our unconsolidated
properties were also assessed for impairment and impairment charges of $18,000,000 were recorded
against their carrying values during the six months ended June 30, 2010. Our share of these
impairment charges was approximately $374,000, which is included in Equity in (losses) income of unconsolidated real
estate in our accompanying condensed consolidated statements of operations. Our share of the
impairment charges recorded during the six months ended June 30, 2010 was limited to the amount of
our remaining investment in the unconsolidated property. We determined that no impairment charges
were required related to our unconsolidated real estate investments during the three months ended
June 30, 2010 or during the three or six months ended June 30, 2011.
8
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NNN 2003 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
Properties Held for Non-Sale Disposition
Our properties held for non-sale disposition are stated at historical cost less accumulated
depreciation, net of real estate related impairment charges. The cost of our properties held for
non-sale disposition includes the cost of land and completed buildings and related improvements.
Expenditures that increase the service life of the property are capitalized and the cost of
maintenance and repairs is charged to expense as incurred. The cost of buildings and improvements
are depreciated on a straight-line basis over the estimated useful lives of the buildings and
improvements, ranging from six to 39 years and the shorter of the lease term or useful life,
ranging from one to six years for tenant improvements. When depreciable property is retired or
disposed of, the related costs and accumulated depreciation are removed from the accounts and any
gain or loss is reflected in income (loss) from discontinued operations in our accompanying
condensed consolidated statements of operations.
As of December 31, 2010, our properties held for non-sale disposition consisted of the Sevens
Building and Four Resource Square properties. As discussed in Note 1, Organization and Description
of Business, both of these properties were disposed of during the first quarter of 2011.
Fair Value of Financial Instruments
FASB Codification Topic 825, Financial Instruments, requires disclosure of the fair value of
financial instruments, whether or not recognized on the face of the balance sheet, for which it is
practical to estimate that value. Fair value is defined as the quoted market prices for those
instruments that are actively traded in financial markets. In cases where quoted market prices are
not available, fair values are estimated using presently available market information and judgments
about the financial instrument, such as estimates of timing and amount of expected future cash
flows. Such estimates do not reflect any premium or discount that could result from offering for
sale at one time our entire holdings of a particular financial instrument, nor do they consider the
tax impact of the realization of unrealized gains or losses. In many cases, the fair value
estimates cannot be substantiated by comparison to independent markets, nor can the disclosed value
be realized in immediate settlement of the instrument.
Financial instruments in our accompanying condensed consolidated balance sheets consist of
cash and cash equivalents, accounts and loans receivable, accounts payable and accrued expenses,
and mortgage loans payable. We consider the carrying values of cash and cash equivalents, accounts
receivable and accounts payable and accrued expenses to approximate fair value for those financial
instruments because of the short period of time between origination of the instruments and their
expected realization. The fair value of amounts due to related parties is not determinable due to
their related party nature. As of December 31, 2010, we estimated the fair value of our
consolidated mortgage loans payable to be approximately $30,250,000, compared to their carrying
values of $43,471,000. The fair value of the mortgage loans payable are estimated using borrowing
rates for debt instruments with similar terms and maturities. For non-recourse mortgage loans
payable secured by properties with estimated fair values of less than their respective loan
balances, we estimate the fair value of the mortgage loans to be equal to the estimated fair value
of the properties.
Income Taxes
We are a pass-through entity for income tax purposes and taxable income is reported by our
unit holders on their individual tax returns. Accordingly, no provision has been made for income
taxes in the accompanying condensed consolidated statements of operations except for insignificant
amounts related to state franchise and income taxes.
We follow FASB Codification Topic 740, Income Taxes, to recognize, measure, present and
disclose in our accompanying condensed consolidated financial statements uncertain tax positions
that we have taken or expect to take on a tax return. As of June 30, 2011 and December 31, 2010, we
did not have any liabilities for uncertain tax positions that we believe should be recognized in
our condensed consolidated financial statements.
9
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NNN 2003 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
Segments
FASB Codification Topic 280, Segment Reporting, establishes standards for reporting financial
and descriptive information about an enterprises reportable segments. We have determined that we
have one reportable segment, with activities related to investing in office buildings and value-add
commercial office properties. As each of our properties have similar economic characteristics,
tenants, and products and services, our properties have been aggregated into one reportable segment
for the three and six months ended June 30, 2011 and 2010.
3. Real Estate Investments Properties Held for Non-Sale Disposition
Our investments in properties held for non-sale disposition consisted of the following as of
June 30, 2011 and December 31, 2010:
June 30, 2011 | December 31, 2010 | |||||||
Buildings and tenant improvements |
$ | | $ | 26,813,000 | ||||
Land |
| 4,137,000 | ||||||
| 30,950,000 | |||||||
Less: accumulated depreciation |
| (3,732,000 | ) | |||||
$ | | $ | 27,218,000 | |||||
As of December 31, 2010, our properties held for non-sale disposition consisted of the Sevens
Building and Four Resource Square properties. As discussed in Note 1, Organization and Description
of Business, both of these properties were disposed of during the first quarter of 2011.
4. Real Estate Investments Unconsolidated Real Estate
Our investments in unconsolidated real estate consisted of the following as of June 30, 2011
and December 31, 2010:
Property | Location | June 30, 2011 | December 31, 2010 | |||||||||
Chase Tower |
Austin, TX | $ | 8,000 | $ | 6,000 | |||||||
Enterprise Technology Center |
Scotts Valley, CA | | | |||||||||
Executive Center II and III |
Dallas, TX | 4,000 | 18,000 | |||||||||
$ | 12,000 | $ | 24,000 | |||||||||
Summarized Financial Information
Summarized condensed combined financial information about our unconsolidated real estate as of
June 30, 2011 and December 31, 2010 and for the three and six months ended June 30, 2011 and 2010
is as follows:
June 30, 2011 | December 31, 2010 | |||||||
Assets (primarily real estate) |
$ | 17,331,000 | $ | 18,591,000 | ||||
Mortgage loans and other debt payable |
$ | 32,562,000 | $ | 32,562,000 | ||||
Other liabilities |
6,866,000 | 5,258,000 | ||||||
(Deficit) equity |
(22,097,000 | ) | (19,229,000 | ) | ||||
Total liabilities and (deficit) equity |
$ | 17,331,000 | $ | 18,591,000 | ||||
Our share of equity |
$ | 12,000 | $ | 24,000 | ||||
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues |
$ | 240,000 | $ | 539,000 | $ | 496,000 | $ | 2,218,000 | ||||||||
Rental and other expenses |
1,684,000 | 1,997,000 | 3,345,000 | 21,699,000 | ||||||||||||
Loss from continuing operations |
(1,444,000 | ) | (1,458,000 | ) | (2,849,000 | ) | (19,481,000 | ) | ||||||||
(Loss) income from
discontinued operations |
(30,000 | ) | 3,219,000 | (48,000 | ) | 2,741,000 | ||||||||||
Net (loss) income |
$ | (1,474,000 | ) | $ | 1,761,000 | $ | (2,897,000 | ) | $ | (16,740,000 | ) | |||||
Our equity in (losses) income
of unconsolidated real estate |
$ | (6,000 | ) | $ | 635,000 | $ | (12,000 | ) | $ | 261,000 | ||||||
10
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NNN 2003 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
Total real estate related impairment charges of $18,000,000 were recorded against land,
buildings, capital improvements and intangible assets of our unconsolidated properties during the
six months ended June 30, 2010. Our share of these real estate related impairment charges was
approximately $374,000 during the six months ended June 30, 2010, and is included in our
accompanying condensed consolidated statements of operations in the line item entitled Equity in
(losses) income of unconsolidated real estate. Since we have no commitment to fund deficit capital
accounts, the amount of losses from unconsolidated real estate that we record is limited to the
amount of our remaining investment in each respective unconsolidated property. During the six
months ended June 30, 2010, our share of the $18,000,000 real estate related impairment charge
recorded by one of our unconsolidated properties was limited to our remaining investment in that
property. No real estate related impairment charges were recorded against land, buildings, capital
improvements and intangible assets of our unconsolidated properties during the six months ended
June 30, 2010. No real estate related impairment charges were recorded against land, buildings,
capital improvements and intangible assets of our unconsolidated properties during the three months
ended June 30, 2010 or during the three or six months ended June 30, 2011.
In addition, during the three and six months ended June 30, 2010, we recorded $381,000 and
$348,000 of net reversals of the allowances previously recorded against the carrying values of our
notes receivable from the Executive Center II and III property, which were paid in full upon the
sale of the property. These allowance reversals are included in the line item entitled Equity in
(losses) income of unconsolidated real estate. The allowances were recorded during the year ended
December 31, 2009 and the three months ended March 31, 2010, and were required under FASB
Codification Topic 323, Investments Equity Method and Joint Ventures, as our share of losses
incurred by the Executive Center II and III property exceeded the amount of our equity investment.
Total mortgage loans and other debt payable of our unconsolidated properties consisted of the
following as of June 30, 2011 and December 31, 2010:
Ownership | ||||||||||||
Property | Percentage | June 30, 2011 | December 31, 2010 | |||||||||
Enterprise Technology Center |
8.5 | % | $ | 32,562,000 | $ | 32,562,000 |
As discussed below, the mortgage loan on the Enterprise Technology Center property is in
default.
Enterprise Technology Center
On April 11, 2010, the Enterprise Technology Center property was unable to pay in full the
monthly interest and principal payment due on its non-recourse mortgage loan on that date or within
five days of that date, thereby triggering an event of default under the mortgage loan documents.
On May 11, 2011, the mortgage loan for the Enterprise Technology Center property, which had an
outstanding balance of $32,562,000, matured and was not repaid. Therefore, an additional event of
default was triggered under the mortgage loan documents. Pursuant to the terms of the loan
agreement, these events of default could allow the Enterprise Technology Center lender to
immediately: (i) increase the interest rate of the loan from 6.44% per annum to the default
interest rate of 11.44% per annum; (ii) impose a late charge equal to the lesser of 5.0% of the
amount of any payment not timely paid, or the maximum amount which may be charged under applicable
law; and/or (iii) foreclose on the Enterprise Technology Center property.
On July 15, 2011, LBUSB 2004-C4 Enterprise Way, L.P., an entity affiliated with UBS Real
Estate Investments, Inc., or the Enterprise Technology Center lender, filed a complaint against NNN
Enterprise Way, LLC and the other 31 tenant-in-common, or TIC, owners of the Enterprise Technology
Center property seeking judicial foreclosure, specific performance for the appointment of a
receiver and injunctive relief. On July 21, 2011, the court ordered the appointment of a receiver
and granted injunctive relief. As a result, on July 25, 2011, the receiver appointed by the court
took possession of the Enterprise Technology Center property and has been instructed to proceed
with a private sale of the property under the supervision of the court. In addition, on July 29,
2011, the appointed trustee filed a notice of default and election to sell under deed of trust on
behalf of the Enterprise Technology Center lender, whereby a sale of the Enterprise Technology
Center property may proceed after 90 days of filing such notice.
11
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NNN 2003 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
Executive Center II and III
On May 24, 2010, we, through NNN Executive Center II and III 2003, LP, our indirect
subsidiary, along with NNN Executive Center, LLC, an entity also managed by our manager, and
sixteen unaffiliated third party entities sold Executive Center II and III, located in Dallas,
Texas, or the Executive Center II and III property, to Boxer F2, L.P., an unaffiliated third party,
for an aggregate sales price of $17,000,000. We owned a 41.1% interest in the Executive Center II
and III property. Our portion of the net cash proceeds was $541,000 after payment of the related
mortgage loan, closing costs and other transaction expenses. In connection with the sale of the
Executive II and III property, we also received approximately $787,000 as full repayment of a note
receivable and accrued interest due to us from the property. Our manager waived the disposition fee
it was entitled to receive in connection with the sale of the Executive Center II and III property,
therefore, a disposition fee was not paid to our manager. We also received distributions of excess
cash from the Executive Center II and III property totaling $80,000 during the year ended December
31, 2010.
Chase Tower
On January 25, 2010, we, along with NNN Chase Tower REO, LP, an entity managed by our manager,
NNN OF 8 Chase Tower REO, LP, an entity also managed by our manager, and CBD Chase Tower, LP (f/k/a
ERG Chase Tower, LP), an unaffiliated third party, sold Chase Tower, located in Austin, Texas, or
the Chase Tower property, to 221 West Sixth Street, LLC, an unaffiliated third party, for an
aggregate sales price of $73,850,000. We owned a 14.8% interest in the Chase Tower property. Our
portion of the net cash proceeds was $526,000 after payment of the related mortgage loan, closing
costs and other transaction expenses. Our manager waived the disposition fee it was entitled to
receive in connection with the sale of the Chase Tower property; therefore, a disposition fee was
not paid to our manager. We also received distributions of excess cash from the Chase Tower
property totaling $260,000 during the year ended December 31, 2010.
5. Intangible Assets Related to Properties Held for Non-Sale Disposition
Identified intangible assets related to our properties held for non-sale disposition consisted
of the following as of June 30, 2011 and December 31, 2010:
June 30, 2011 | December 31, 2010 | |||||||
In-place leases and
tenant relationships, net of
accumulated amortization of
$1,881,000 as of December
31, 2010 |
$ | | $ | 1,951,000 |
As of December 31, 2010, our properties held for non-sale disposition consisted of the Sevens
Building and Four Resource Square properties. As discussed in Note 1, Organization and Description
of Business, both of these properties were disposed of during the first quarter of 2011.
6. Other Assets Related to Properties Held for Non-Sale Disposition
Other assets related to our properties held for non-sale disposition consisted of the
following as of June 30, 2011 and December 31, 2010:
June 30, 2011 | December 31, 2010 | |||||||
Deferred rent receivable |
$ | | $ | 277,000 | ||||
Lease commissions, net of
accumulated amortization of
$286,000 as of December 31, 2010 |
| 321,000 | ||||||
Prepaid expenses, deposits and other |
| 140,000 | ||||||
$ | | $ | 738,000 | |||||
12
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NNN 2003 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
7. Mortgage Loans Payable Secured by Properties Held for Non-Sale Disposition
We had no mortgage loans payable outstanding on our consolidated properties as of June 30,
2011. As of December 31, 2010, we had fixed and variable rate mortgage loans payable secured by our
consolidated properties held for non-sale disposition of $43,471,000. As of December 31, 2010, the
effective interest rates on mortgage loans payable ranged from 7.25% to 10.95% per annum, and the
weighted-average effective interest rate was 9.04% per annum.
The composition of our consolidated mortgage loans payable as of December 31, 2010 was as
follows:
Total Mortgage | Weighted Average | |||||||
Loans Payable | Interest Rate | |||||||
Variable rate |
$ | 22,471,000 | 7.26 | % | ||||
Fixed rate |
21,000,000 | 10.95 | % | |||||
$ | 43,471,000 | 9.04 | % | |||||
Sevens Building Mortgage Loan
The mortgage loan for the Sevens Building property, which had an outstanding principal balance
of $21,494,000 as of December 31, 2010, matured on October 31, 2010 and was in default due to
non-payment of the outstanding principal balance upon maturity. The mortgage loan documents
included an option to extend the maturity date for an additional 12 months beyond October 31, 2010;
however, we determined that it was not in the best interest of our unit holders to attempt to
extend the maturity date due to the unfavorable terms of the extension option, including additional
cash outlays for an extension fee and partial principal prepayment, which we did not expect would
be recovered through property operations over the subsequent 12 months. Further, the estimated
value of the Sevens Building property was significantly less than the outstanding principal balance
of the mortgage loan, and we did not expect that the value of the property would exceed the
principal balance by the end of the potential extension term. As such, we had been in discussions
with the Sevens Building lender regarding our options for transferring the Sevens Building property
to the Sevens Building lender, including foreclosure, deed-in-lieu of foreclosure, or another form
of transfer. However, on March 7, 2011, we received a letter from the Sevens Building lender
indicating that it had initiated a foreclosure action on the Sevens Building property pursuant to
our default on the mortgage loan for the Sevens Building property. On March 25, 2011, the successor
trustee appointed by the Sevens Building lender conducted a public auction and sold the Sevens
Building property to General Electric Credit Equities, an entity affiliated with the Sevens
Building lender, or the buyer, for a sale price of $17,400,000. As a result of the sale, our 100%
ownership interest in the Sevens Building property was sold and conveyed to the buyer and a
trustees deed was recorded on the Sevens Building property in favor of the buyer. This mortgage
loan was cancelled upon the transfer of the property, and we recorded a gain on extinguishment of
debt of $5,591,000.
Four Resource Square Mortgage Loan
The mortgage loan for the Four Resource Square property, which had an outstanding principal
balance of $21,977,000 as of December 31, 2010, had an original maturity date of November 30, 2010
but was extended to January 20, 2011. The mortgage loan documents included an option to extend the
maturity date for an additional 12 months beyond November 30, 2010; however, we determined that it
was not in the best interest of our unit holders to attempt to extend the maturity date due to the
unfavorable terms of the extension option, including additional cash outlays for an extension fee
and partial principal prepayment, which we did not expect would be recovered through property
operations over the subsequent 12 months. Further, the estimated value of the Four Resource Square
property was significantly less than the outstanding principal balance of the mortgage loan, and we
did not expect that the value of the property would exceed the principal balance by the end of the
potential extension term. As such, on January 20, 2011, we sold the Four Resource Square property
to an entity affiliated with the Four Resource Square lender for a sales price equal to the
outstanding principal balance of the mortgage loan of $21,977,000. This mortgage loan was cancelled upon the transfer of the property, and we recorded a gain on
extinguishment of debt of $8,043,000.
13
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NNN 2003 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
8. Noncontrolling Interests
Noncontrolling interests relate to interests in the following consolidated limited liability
company and property with tenant-in-common, or TIC, ownership interests that are not wholly-owned
by us as of June 30, 2011 and December 31, 2010:
Entity | Date Acquired | Noncontrolling Interests | ||||||
NNN Enterprise Way, LLC |
05/07/2004 | 26.7 | % |
9. NNN 2003 Value Fund, LLC Unit Holders Equity
Pursuant to our Private Placement Memorandum, we offered for sale to the public a minimum of
1,000 and a maximum of 10,000 units at a price of $5,000 per unit. We relied on the exemptions from
registration provided by Rule 506 under Regulation D and Section 4(2) of the Securities Act of
1933, as amended.
There are three classes of membership interests, or units, each having different rights with
respect to distributions. As of June 30, 2011 and December 31, 2010, there were 4,000 Class A
units, 3,170 Class B units and 2,800 Class C units issued and outstanding. The rights and
obligations of all unit holders are governed by the Operating Agreement.
Cash from Operations, as defined in the Operating Agreement, is first distributed to all unit
holders pro rata until all Class A unit holders, Class B unit holders and Class C unit holders have
received a 10.0%, 9.0% and 8.0% cumulative (but not compounded) annual return on their contributed
and unrecovered capital, respectively. In the event that any distribution of Cash from Operations
is not sufficient to pay the return described above, all unit holders receive identical pro rata
distributions, except that Class C unit holders do not receive more than an 8.0% return on their
Class C units, and Class B unit holders do not receive more than a 9.0% return on their Class B
units. Excess Cash from Operations is then allocated pro rata to all unit holders on a per
outstanding unit basis and further distributed to the unit holders and our manager based on
predetermined ratios providing our manager with a share of 15.0%, 20.0% and 25.0% of the
distributions available to Class A units, Class B units and Class C units, respectively, of such
excess Cash from Operations.
Cash from Capital Transactions, as defined in the Operating Agreement, is first used to
satisfy our debt and liability obligations; then distributed pro rata to all unit holders in
accordance with their membership interests until all capital contributions are reduced to zero; and
lastly, in accordance with the distributions as outlined above in the Cash from Operations.
Since the suspension of regular, monthly cash distributions to unit holders in the fourth
quarter of 2008, we make periodic distributions to unit holders from available funds, if any.
During the six months ended June 30, 2011, distributions of $50 per unit were declared, resulting
in aggregate distributions paid of approximately $500,000 during the period. To date, Class A
units, Class B units and Class C units have received identical per-unit distributions; however,
distributions may vary among the three classes of units in the future.
10. Related Party Transactions
The Management Agreement
Our manager manages us pursuant to the terms of the Operating Agreement and the Management
Agreement. While we have no employees, certain employees of our manager provide services to us in
connection with the Operating Agreement. In addition, Realty serves as our property manager
pursuant to the terms of the Operating Agreement and the Management Agreement.
Pursuant to the Operating Agreement and the Management Agreement, Realty is entitled to
receive the payments and fees described below. Certain fees paid to Realty during the three and six
months ended June 30, 2011 and 2010 were passed through to our manager or its affiliate pursuant to an agreement between our
manager and Realty, or the Realty Agreement.
14
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NNN 2003 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
Property Management Fees
We pay Realty a monthly property management fee of up to 5.0% of the gross revenue of the
properties. For the three months ended June 30, 2011 and 2010, we incurred property management fees
to Realty of $0 and $103,000, respectively. For the six months ended June 30, 2011 and 2010, we
incurred property management fees to Realty of $47,000 and $230,000, respectively.
Real Estate Acquisition Fees
We pay Realty or its affiliate a real estate acquisition fee up to 3.0% of the gross purchase
price of a property. For the three and six months ended June 30, 2011 and 2010, we did not incur
any real estate acquisition fees.
Real Estate Disposition Fees
We pay Realty or its affiliate a real estate disposition fee up to 5.0% of the gross sales
price of a property. For the three and six months ended June 30, 2011 and 2010, we did not incur
any real estate disposition fees.
Leasing Commissions
We pay Realty a leasing commission for its services in leasing any of our properties equal to
6.0% of the value any lease entered into during the term of the Management Agreement and 3.0% with
respect to any renewals. For the three months ended June 30, 2011 and 2010, we incurred leasing
commissions to Realty of $0 and $82,000, respectively. For the six months ended June 30, 2011 and
2010, we incurred leasing commissions to Realty of $0 and $203,000, respectively.
Accounting Fees
We pay our manager accounting fees for record keeping services provided to us. Beginning
January 1, 2010, all accounting fees have been waived by our manager and, as such, we did not incur
any accounting fees or the three and six months ended June 30, 2011 and 2010.
Construction Management Fees
We pay Realty a construction management fee for its services in supervising any construction
or repair project in or about our properties equal to 5.0% of any amount up to $25,000, 4.0% of any
amount over $25,000 but less than $50,000 and 3.0% of any amount over $50,000, which is expended in
any calendar year for construction or repair projects. For the three and six months ended June 30,
2011 and 2010, we did not incur any construction management fees.
Loan Fees
We pay Realty or its affiliate a loan fee of 1.0% of the principal amount of the loan for its
services in obtaining loans for our properties during the term of the Management Agreement. For the
three and six months ended June 30, 2011 and 2010, we did not incur any loan fees.
Related Party Accounts Payable
Related party accounts payable consist primarily of amounts due related to the Management
Agreement, as discussed above, and for operating expenses incurred by us and paid by our manager or
its affiliates. As of June 30, 2011 and December 31, 2010, the amount payable by us was $0 and
$32,000, respectively, and is included in our accompanying condensed consolidated balance sheets in
the line item entitled Accounts payable due to related parties.
15
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NNN 2003 VALUE FUND, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Continued
11. Commitments and Contingencies
Litigation
Neither we nor any of our properties are presently subject to any material litigation and, to
our knowledge, no material litigation is threatened against us or any of our properties that, if
determined unfavorably to us, would have a material adverse effect on our financial condition,
results of operations or cash flows.
On July 15, 2011, LBUSB 2004-C4 Enterprise Way, L.P., an entity affiliated with the Enterprise
Technology Center lender, filed a complaint against NNN Enterprise Way, LLC and the other 31 TIC
owners of the Enterprise Technology Center property in the Superior Court of California, County of
Santa Cruz (Case No. CV 171625), seeking judicial foreclosure, specific performance for the
appointment of a receiver and injunctive relief. On July 21, 2011, the court ordered the
appointment of a receiver and granted injunctive relief. As a result, on July 25, 2011, the
receiver appointed by the court took possession of the Enterprise Technology Center property and
has been instructed to proceed with a private sale of the property under the supervision of the
court.
Environmental Matters
We follow the policy of monitoring our properties for the presence of hazardous or toxic
substances. While there can be no assurance that a material environmental liability does not exist,
we are not currently aware of any environmental liability with respect to the properties that would
have a material adverse effect on our financial condition, results of operations or cash flows.
Further, we are not aware of any environmental liability or any unasserted claim or assessment with
respect to an environmental liability that we believe would require additional disclosure or the
recording of a loss contingency.
12. Discontinued Operations
In accordance with FASB Codification Topic 360, Property, Plant and Equipment, the net income
(loss) from consolidated properties sold, as well as those classified as held for sale, are
reflected in our consolidated statements of operations as discontinued operations for all periods
presented. For the three and six months ended June 30, 2011 and 2010, discontinued operations
includes the results of the following properties:
Property | Disposition Date | |||
Tiffany Square |
May 7, 2010 | |||
Executive Center I |
June 2, 2010 | |||
Four Resource Square |
January 20, 2011 | |||
Sevens Building |
March 25, 2011 |
The following table summarizes the revenue and expense components that comprised income from
discontinued operations for the three and six months ended June 30, 2011 and 2010:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Rental revenue |
$ | | $ | 2,036,000 | $ | 964,000 | $ | 4,366,000 | ||||||||
Rental expense (including general,
administrative, depreciation and
amortization) |
| (1,623,000 | ) | (727,000 | ) | (3,569,000 | ) | |||||||||
Real estate related impairments |
| (5,300,000 | ) | | (5,300,000 | ) | ||||||||||
Interest expense |
| (817,000 | ) | (545,000 | ) | (2,159,000 | ) | |||||||||
Gains on extinguishment of debt |
| 6,667,000 | 13,634,000 | 6,667,000 | ||||||||||||
Income (loss) from discontinued operations |
| 963,000 | 13,326,000 | 5,000 | ||||||||||||
Income (loss) from discontinued
operations attributable to noncontrolling
interests |
| | | | ||||||||||||
Income (loss) from discontinued
operations attributable to NNN 2003 Value
Fund, LLC |
$ | | $ | 963,000 | $ | 13,326,000 | $ | 5,000 | ||||||||
16
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Item 2. | Managements Discussion and Analysis Financial Condition and Results of Operations. |
The use of the words we, us, or our refers to NNN 2003 Value Fund, LLC and its
subsidiaries, except where the context otherwise requires.
The following discussion should be read in conjunction with our financial statements and notes
appearing elsewhere in this Quarterly Report on Form 10-Q. Such financial statements and
information have been prepared to reflect our financial position as of June 30, 2011 and December
31, 2010, together with our results of operations and cash flows for the three and six months ended
June 30, 2011 and 2010.
Forward-Looking Statements
Historical results and trends should not be taken as indicative of future operations. Our
statements contained in this report that are not historical facts are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, or the Exchange Act. Actual results may differ
materially from those included in the forward-looking statements. We intend those forward-looking
statements to be covered by the safe-harbor provisions for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes
of complying with those safe-harbor provisions. Forward-looking statements, which are based on
certain assumptions and describe future plans, strategies and expectations of us, are generally
identifiable by use of the words believe, expect, intend, anticipate, estimate,
project, prospects, or similar expressions. Our ability to predict results or the actual effect
of future plans or strategies is inherently uncertain. Factors which could have a material adverse
effect on our operations and future prospects on a consolidated basis include, but are not limited
to: changes in economic conditions generally and the real estate market specifically; sales prices,
lease renewals and new leases; legislative/regulatory changes; availability of capital; changes in
interest rates; our ability to service our debt, competition in the real estate industry; the
supply and demand for operating properties in our current and proposed market areas; changes in
accounting principles generally accepted in the United States of America, or GAAP, policies and
guidelines applicable to us; our ongoing relationship with our manager (as defined below); and
litigation. These risks and uncertainties should be considered in evaluating forward looking
statements and undue reliance should not be placed on such statements. Additional information
concerning us and our business, including additional factors that could materially affect our
financial results, is included herein and in our other filings with the United States Securities
and Exchange Commission, or the SEC.
Overview and Background
NNN 2003 Value Fund, LLC was formed as a Delaware limited liability company on June 19, 2003.
We were organized to acquire, own, operate and subsequently sell our ownership interests in a
number of unspecified properties believed to have higher than average potential for capital
appreciation, or value-added properties. As of December 31, 2010, we held interests in three
commercial office properties, comprised of two consolidated properties and one unconsolidated
property. Our two consolidated properties consisted of Sevens Building, located in St. Louis,
Missouri, or the Sevens Building property, and Four Resource Square, located in Charlotte, North
Carolina, or the Four Resource Square property. Our unconsolidated property consisted of an 8.5%
interest in Enterprise Technology Center, located in Scotts Valley, California, or the Enterprise
Technology Center property.
The mortgage loan for the Sevens Building property, which had an outstanding principal balance
of $21,494,000 as of December 31, 2010, matured on October 31, 2010 and was in default due to
non-payment of the outstanding principal balance upon maturity. The mortgage loan documents
included an option to extend the maturity date for an additional 12 months beyond October 31, 2010;
however, we determined that it was not in the best interest of our unit holders to attempt to
extend the maturity date due to the unfavorable terms of the extension option, including additional
cash outlays for an extension fee and partial principal prepayment, which we did not expect would
be recovered through property operations over the subsequent 12 months. Further, the estimated
value of the Sevens Building property was significantly less than the outstanding principal balance
of the mortgage loan, and we did not expect that the value of the property would exceed the
principal balance by the end of the potential extension term. On March 7, 2011, we received a
letter from the Sevens Building lender indicating that it had initiated a foreclosure action on the
Sevens Building property pursuant to our default on the mortgage loan for the Sevens Building
property. On March 25, 2011, the successor trustee appointed by the Sevens Building lender
conducted a public auction and sold the Sevens Building property to General Electric Credit Equities, an entity
affiliated with the Sevens Building lender, or the buyer, for a sale price of $17,400,000. As a
result of the sale, our 100% ownership interest in the Sevens Building property was sold and
conveyed to the buyer and a trustees deed was recorded on the Sevens Building property in favor of
the buyer. We did not receive any cash proceeds from the sale of the property. Further, on April
29, 2011, we transferred $850,000 to the Sevens Building lender, which represented the approximate
amount of net cash generated by the property subsequent to the default on the mortgage loan on
October 31, 2010.
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In addition, the mortgage loan for the Four Resource Square property, which had an outstanding
principal balance of $21,977,000 as of December 31, 2010, had an original maturity date of November
30, 2010 but was extended to January 20, 2011. The mortgage loan documents included an option to
extend the maturity date for an additional 12 months beyond November 30, 2010; however, we
determined that it was not in the best interest of our unit holders to attempt to extend the
maturity date due to the unfavorable terms of the extension option, including additional cash
outlays for an extension fee and partial principal prepayment, which we did not expect would be
recovered through property operations over the subsequent 12 months. Further, the estimated value
of the Four Resource Square property was significantly less than the outstanding principal balance
of the mortgage loan, and we did not expect that the value of the property would exceed the
principal balance by the end of the potential extension term. As such, on January 20, 2011, we sold
the Four Resource Square property to an entity affiliated with the Four Resource Square lender for
a sales price equal to the outstanding principal balance of the mortgage loan of $21,977,000. We
did not receive any cash proceeds from the sale of the property.
As of June 30, 2011, our sole remaining property interest consisted of our 8.5% interest in
the Enterprise Technology Center property. On July 15, 2011, LBUSB 2004-C4 Enterprise Way, L.P., an
entity affiliated with UBS Real Estate Investments, Inc., or the Enterprise Technology Center
lender, filed a complaint against NNN Enterprise Way, LLC and the other 31 tenant-in-common, or
TIC, owners of the Enterprise Technology Center property seeking judicial foreclosure, specific
performance for the appointment of a receiver and injunctive relief. On July 21, 2011, the court
ordered the appointment of a receiver and granted injunctive relief. As a result, on July 25, 2011,
the receiver appointed by the court took possession of the Enterprise Technology Center property
and has been instructed to proceed with a private sale of the property under the supervision of the
court. In addition, on July 29, 2011, the appointed trustee filed a notice of default and election
to sell under deed of trust on behalf of the Enterprise Technology Center lender, whereby a sale of
the Enterprise Technology Center property may proceed after 90 days of filing such notice.
Subsequent to this sale, we intend to pay distributions to our unit holders from available funds,
if any, and wind up our operations, which we expect will be completed within the next six to twelve
months, at which point we will cease to be a going concern.
Grubb & Ellis Realty Investors, LLC, or Grubb & Ellis Realty Investors, or our manager,
manages us pursuant to the terms of an operating agreement, or the Operating Agreement. While we
have no employees, certain executive officers and employees of our manager provide services to us
pursuant to the Operating Agreement. Our manager engages affiliated entities, including Triple Net
Properties Realty, Inc., or Realty, to provide certain services to us. Realty serves as our
property manager pursuant to the terms of the Operating Agreement and a property management
agreement, or the Management Agreement. The Operating Agreement terminates upon our dissolution.
The unit holders may not vote to terminate our manager prior to the termination of the Operating
Agreement or our dissolution, except for cause. The Management Agreement terminates with respect to
each of our properties upon the earlier of the sale of each respective property or December 31,
2013. Realty may be terminated without cause prior to the termination of the Management Agreement
or our dissolution, subject to certain conditions, including the payment by us to Realty of a
termination fee as provided in the Management Agreement.
Business Strategy
Our primary business strategy was to acquire, own, operate and subsequently sell our ownership
interests in a number of unspecified properties believed to have higher than average potential for
capital appreciation, or value-added properties. Our principal objectives initially were to: (i)
have the potential within approximately one to five years, subject to market conditions, to realize
income on the sale of our properties; (ii) realize income through the acquisition, operation,
development and sale of our properties or our interests in our properties; and (iii) make periodic
distributions to our unit holders from cash generated from operations and capital transactions. We
currently intend to dispose of our remaining property interest, which is currently the subject of a
judicial foreclosure as discussed above, and pay distributions to our unit holders from available funds, if any. We do
not anticipate acquiring any additional real estate properties.
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Acquisitions and Dispositions
We did not acquire any consolidated properties during the three and six months ended June 30,
2011 and 2010.
On January 20, 2011, we sold the Four Resource Square property to Four Resource Square, LLC,
an entity affiliated with the Four Resource Square lender, for a sales price of $21,977,000, which
was equal to the outstanding principal balance of the loan.
On March 25, 2011, the successor trustee appointed by the Sevens Building lender conducted a
public auction and sold the Sevens Building property to General Electric Credit Equities, an entity
affiliated with the Sevens Building lender, or the buyer, for a sale price of $17,400,000. As a
result of the sale, our ownership interest in the Sevens Building property was sold and conveyed to
the buyer and a trustees deed was recorded on the Sevens Building property in favor of the buyer.
Critical Accounting Policies
The complete listing of our critical accounting policies was previously disclosed in our 2010
Annual Report on Form 10-K, as filed with the SEC on March 18, 2011, and there have been no
material changes to our Critical Accounting Policies disclosed therein.
Interim Financial Data
Our accompanying interim unaudited condensed consolidated financial statements have been
prepared by us in accordance with GAAP and in conjunction with the rules and regulations of the
SEC. Certain information and footnote disclosures required for annual financial statements have
been condensed or excluded pursuant to SEC rules and regulations. Accordingly, our accompanying
interim unaudited condensed consolidated financial statements do not include all of the information
and footnotes required by GAAP for complete financial statements. Our accompanying interim
unaudited condensed consolidated financial statements reflect all adjustments, which are, in our
opinion, of a normal recurring nature and necessary for a fair presentation of our financial
position, results of operations and cash flows for the interim periods. Interim results of
operations are not necessarily indicative of the results to be expected for the full year; such
results may be less favorable.
In preparing our accompanying condensed consolidated financial statements, management has
evaluated subsequent events through the financial statement issuance date. We believe that,
although the disclosures contained herein are adequate to prevent the information presented from
being misleading, our accompanying interim unaudited condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements and the notes
thereto included in our 2010 Annual Report on Form 10-K, as filed with the SEC on March 18, 2011.
Factors Which May Influence Results of Operations
We are not aware of any material trends or uncertainties, other than national economic
conditions affecting real estate generally, the financial impact of the downturn of the credit
markets, and the risk factors listed in Part II, Item 1A. Risk Factors of this report and those
risk factors previously disclosed in our 2010 Annual Report on Form 10-K filed with the SEC on
March 18, 2011, that may reasonably be expected to have a material impact, favorable or
unfavorable, on revenues or income from the acquisition, management and operation or disposition of
our properties.
As of June 30, 2011, our sole remaining property interest consisted of our 8.5% interest in
the Enterprise Technology Center property, which, as discussed above, we expect will be sold
pursuant to a judicial foreclosure process. Subsequent to this sale, we intend to pay distributions
to our unit holders from available funds, if any, and wind up our operations, which we expect will
be completed within the next six to twelve months, at which point we will cease to be a going
concern.
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Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002, as amended, and related laws, regulations and standards
relating to corporate governance and disclosure requirements applicable to public companies, have
increased the costs of compliance with corporate governance, reporting and disclosure practices
which are now required of us. These costs were unanticipated at the time of our formation and may
have a material impact on our results of operations. Furthermore, we expect that these costs will
increase in the future due to our continuing implementation of compliance programs mandated by
these requirements. Any increased costs may already affect our liquidity or capital resources
and/or future distribution of funds, if any, to our unit holders. As part of our compliance with
the Sarbanes-Oxley Act, we provided managements assessment of our internal control over our
financial reporting as of December 31, 2010 and continue to comply with such regulations.
In addition, these laws, rules and regulations create new legal bases for potential
administrative enforcement, civil and criminal proceedings against us in case of non-compliance,
thereby increasing the risks of liability and potential sanctions against us. We expect that our
efforts to comply with these laws and regulations will continue to involve significant, and
potentially increasing costs and, our failure to comply, could result in fees, fines, penalties or
administrative remedies against us.
Results of Operations
Our operating results were primarily comprised of income derived from our portfolio of
properties, as described below. Because our primary business strategy historically was acquiring
properties with greater than average appreciation potential, enhancing value and realizing gains
upon disposition of these properties, our operations historically have reflected significant
property acquisitions and dispositions from period to period. As a result, the comparability of our
financial data is generally very limited and varies significantly from period to period.
We have reclassified the results of all properties sold as of June 30, 2011 from (Loss)
income from continuing operations to Income from discontinued operations for all periods
presented to conform with the current year financial statement presentation.
Comparison of the Three Months Ended June 30, 2011 and 2010
Three Months Ended | ||||||||||||
June 30, | ||||||||||||
2011 | 2010 | Change | ||||||||||
Interest and dividend income |
$ | | $ | 7,000 | $ | (7,000 | ) | |||||
Other income |
| 11,000 | (11,000 | ) | ||||||||
General and administrative expense |
(119,000 | ) | (134,000 | ) | 15,000 | |||||||
Equity in (losses) income of
unconsolidated real estate |
(6,000 | ) | 1,016,000 | (1,022,000 | ) | |||||||
(Loss) income from continuing operations |
(125,000 | ) | 900,000 | (1,025,000 | ) | |||||||
Income from discontinued operations |
| 963,000 | (963,000 | ) | ||||||||
Consolidated net (loss) income |
$ | (125,000 | ) | $ | 1,863,000 | $ | (1,988,000 | ) | ||||
Interest and Dividend Income
Interest and dividend income was $0 and $7,000 during the three months ended June 30, 2011 and
2010, respectively. The decrease is due to all cash being held in non-interest bearing accounts
during the three months ended June 30, 2011.
Other Income
Other income was $0 and $11,000 during the three months ended June 30, 2011 and 2010,
respectively.
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General and Administrative Expense
General and administrative expense decreased $15,000, or 11.2%, to $119,000, during the three
months ended June 30, 2011, compared to general and administrative expense of $134,000 for the
three months ended June 30, 2010. The decrease was primarily due to lower external audit and
printing fees.
Equity in (Losses) Income of Unconsolidated Real Estate
Equity in losses of unconsolidated real estate was $6,000 during the three months ended June
30, 2011, compared to equity in income of unconsolidated real estate of $1,016,000 during the three
months ended June 30, 2010. The equity in income of unconsolidated real estate for the three months
ended June 30, 2010 was comprised of: (i) our share of the gain on sale and gains on the
forgiveness of debt and forgiveness of management fees payable to our manager, upon the sale of the
Executive Center II and III property and (ii) the reversal of an allowance against the notes and
interest receivable from the Executive Center II and III property, as the amounts were fully repaid
upon the sale of the property.
Income from Discontinued Operations
There was no income or loss from discontinued operations during the three months ended June
30, 2011, as no properties were disposed of during the period or classified as held for sale.
Income from discontinued operations was $963,000 during the three months ended June 30, 2010. The
income from discontinued operations during the three months ended June 30, 2010 resulted primarily
from the gains recognized on the extinguishment of debt in connection with the dispositions of the
Tiffany Square and Executive Center I properties of $4,144,000 and $2,523,000, respectively,
partially offset by the $5,300,000 real estate related impairment charge recorded against the
Sevens Building property.
Consolidated Net (Loss) Income
As a result of the above, consolidated net loss was $125,000 for the three months ended June
30, 2011, compared to consolidated net income of $1,863,000 for the three months ended June 30,
2010.
Comparison of the Six Months Ended June 30, 2011 and 2010
Six Months Ended | ||||||||||||
June 30, | ||||||||||||
2011 | 2010 | Change | ||||||||||
Interest and dividend income |
$ | | $ | 20,000 | $ | (20,000 | ) | |||||
Other income |
| 17,000 | (17,000 | ) | ||||||||
General and administrative expense |
(175,000 | ) | (231,000 | ) | 56,000 | |||||||
Equity in (losses) income of
unconsolidated real estate |
(12,000 | ) | 609,000 | (621,000 | ) | |||||||
(Loss) income from continuing operations |
(187,000 | ) | 415,000 | (602,000 | ) | |||||||
Income from discontinued operations |
13,326,000 | 5,000 | 13,321,000 | |||||||||
Consolidated net income |
$ | 13,139,000 | $ | 420,000 | $ | 12,719,000 | ||||||
Interest and Dividend Income
Interest and dividend income was $0 and $20,000 during the six months ended June 30, 2011 and
2010, respectively. The decrease is due to all cash being held in non-interest bearing accounts
during the six months ended June 30, 2011.
Other Income
Other income was $0 and $17,000 during the six months ended June 30, 2011 and 2010,
respectively.
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General and Administrative Expense
General and administrative expense decreased $56,000, or 24.2%, to $175,000, during the six
months ended June 30, 2011, compared to general and administrative expense of $231,000 for the six
months ended June 30, 2010. The decrease was primarily due to lower external audit and printing
fees.
Equity in (Losses) Income of Unconsolidated Real Estate
Equity in losses of unconsolidated real estate was $12,000 during the six months ended June
30, 2011, compared to equity in income of unconsolidated real estate of $609,000 during the six
months ended June 30, 2010. The equity in income of unconsolidated real estate for the six months
ended June 30, 2010 was comprised of: (i) our share of the gain on sale and gains on the
forgiveness of debt and forgiveness of management fees payable to our manager, upon the sale of the
Executive Center II and III property, (ii) the reversal of an allowance against the notes and
interest receivable from the Executive Center II and III property, as the amounts were fully repaid
upon the sale of the property, and (iii) our share of the $18,000,000 real estate related
impairment charge recorded by the Enterprise Technology Center property, which was limited to the
amount of our remaining investment in the property.
Income from Discontinued Operations
Income from discontinued operations was $13,326,000 during the six months ended June 30, 2011,
compared to income from discontinued operations of $5,000 for the six months ended June 30, 2010.
The income from discontinued operations during the six months ended June 30, 2011 resulted
primarily from the gains recognized on the extinguishment of debt in connection with the
dispositions of the Four Resource Square and Sevens Building properties of $8,043,000 and
$5,591,000, respectively. The income from discontinued operations during the six months ended June
30, 2010 resulted primarily from the gains recognized on the extinguishment of debt in connection
with the dispositions of the Tiffany Square and Executive Center I properties of $4,144,000 and
$2,523,000, respectively, which was substantially offset by the $5,300,000 real estate related
impairment charge recorded against the Sevens Building property and the operating losses incurred
by all of the disposed properties.
Consolidated Net Income
As a result of the above, consolidated net income was $13,139,000 for the six months ended
June 30, 2011, compared to $420,000 for the six months ended June 30, 2010.
Liquidity and Capital Resources
Sources of Capital and Liquidity
Our primary sources of capital historically have been derived from: (i) proceeds from the sale
of properties; (ii) our ability to obtain debt financing from third parties and related parties
including, without limitation, our manager and its affiliates; and (iii) our real estate
operations. Our sources of capital are currently extremely limited due to the fact that we do not
expect to receive any cash proceeds from the ultimate disposition of our remaining unconsolidated
property interest. Currently, our only source of capital and liquidity is our existing cash
balance, net of future cash obligations.
Our primary uses of cash historically have been: (i) the payment of principal and interest on
indebtedness; (ii) capital investments in our portfolio of properties; (iii) administrative costs;
and (iv) distributions to our unit holders. Currently, we expect our future uses of cash to
primarily be related to administrative costs and other costs required to dispose of our remaining
property interest and dissolve our entities. Any remaining cash will be distributed to unit
holders.
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Debt Financing
One of our principal liquidity needs was related to the payment of principal and interest on
outstanding indebtedness. As of June 30, 2011, we have no consolidated debt. Information related to
the outstanding mortgage loan on our unconsolidated property interest as of June 30, 2011 was as
follows:
Weighted- | ||||||||||||||||
Average | Variable | |||||||||||||||
Principal | Interest | or Fixed | ||||||||||||||
Outstanding | Maturity Date | Rate | Interest Rate | |||||||||||||
Enterprise Technology Center |
$ | 32,562,000 | 05/11/2011 | 11.44 | % | Fixed |
On April 11, 2010, the Enterprise Technology Center property was unable to pay in full the
monthly interest and principal payment due on its non-recourse mortgage loan on that date or within
five days of that date, thereby triggering an event of default under the mortgage loan documents.
On May 11, 2011, the mortgage loan for the Enterprise Technology Center property matured and was
not repaid. Therefore, an additional event of default was triggered under the mortgage loan
documents. On July 15, 2011, LBUSB 2004-C4 Enterprise Way, L.P., an entity affiliated with the
Enterprise Technology Center lender, filed a complaint against NNN Enterprise Way, LLC and the
other 31 TIC owners of the Enterprise Technology Center property seeking judicial foreclosure,
specific performance for the appointment of a receiver and injunctive relief. On July 21, 2011, the
court ordered the appointment of a receiver and granted injunctive relief. As a result, on July 25,
2011, the receiver appointed by the court took possession of the Enterprise Technology Center
property and has been instructed to proceed with a private sale of the property under the
supervision of the court. In addition, on July 29, 2011, the appointed trustee filed a notice of
default and election to sell under deed of trust on behalf of the Enterprise Technology Center
lender, whereby a sale of the Enterprise Technology Center property may proceed after 90 days of
filing such notice.
Cash Flows
Net cash used in operating activities was $819,000 for the six months ended June 30, 2011,
compared to cash used in operating activities of $125,000 for the six months ended June 30, 2010.
The increase in cash used in operating activities for the six months ended June 30, 2011 was
primarily due to an $850,000 transfer of cash to the Sevens Building lender subsequent to the
foreclosure of this property, which represented the approximate amount of net cash generated by the
property subsequent to the default on the mortgage loan on October 31, 2010.
There were no cash flows from investing activities for the six months ended June 30, 2011,
compared to cash provided by investing activities of $1,551,000 for the six months ended June 30,
2010. The cash flows from investing activities for the six months ended June 30, 2010 was primarily
due to the sales of the Chase Tower and Executive Center II and III properties, which resulted in
distributions from unconsolidated real estate of $1,268,000, and the receipt of payment on the
$579,000 loan receivable from the Executive Center II and III property.
Cash flows used in financing activities was $549,000 for the six months ended June 30, 2011,
compared to cash used in financing activities of $2,032,000 for the six months ended June 30, 2010.
The cash used in financing activities during the six months ended June 30, 2011 was primarily due
to the $500,000 distribution to our unit holders during the period. The cash used in financing
activities during the six months ended June 30, 2010 was primarily due to $2,000,000 of
distributions to our unit holders during the period.
Other Liquidity Needs
We have a restricted cash balance of $217,000 as of June 30, 2011, which represents an escrow
account that was funded from the proceeds of the sale of Southwood Tower, located in Houston,
Texas, or the Southwood Tower property, to pay a rent guaranty to the buyer for a period of five
years, which ended in December 2010. The buyer of the Southwood Tower property received payments
from this escrow account as the vacant space was leased. We are currently finalizing the allocation
of the remaining funds in the escrow account, which we expect will be completed in the second half
of 2011.
Contractual Obligations
As of June 30, 2011, we have no material contractual obligations.
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Off-Balance Sheet Arrangements
As of June 30, 2011, we had no off-balance sheet transactions nor do we currently have any
such arrangements or obligations.
Inflation
As of June 30, 2011, we have no significant exposure to inflation.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Market risk includes risks that arise from changes in interest rates, foreign currency
exchange rates, commodity prices, equity prices and other market changes that affect market
sensitive instruments. In pursuing our business plan, the primary market risk to which we were
exposed is interest rate risk. However, we currently have no significant interest rate risk, as we
have no consolidated debt.
Item 4. | Controls and Procedures. |
(a) Evaluation of Disclosure Controls and Procedures. We maintain disclosure controls and
procedures that are designed to ensure that information required to be disclosed in our reports
under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed,
summarized and reported within the time periods specified in the rules and forms, and that such
information is accumulated and communicated to us, including our managers executive vice
president, portfolio management, and chief accounting officer, as appropriate, to allow timely
decisions regarding required disclosure.
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of June 30,
2011 was conducted under the supervision and with the participation of our manager, including our
managers executive vice president, portfolio management, and chief accounting officer, of the
effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act). Based on this evaluation, our managers executive vice
president, portfolio management, and chief accounting officer concluded that our disclosure
controls and procedures, as of June 30, 2011, were effective.
(b) Changes in Internal Control Over Financial Reporting. There were no changes in our
internal control over financial reporting that occurred during the quarter ended June 30, 2011 that
have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
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PART II OTHER INFORMATION
The use of the words we, us, or our refers to NNN 2003 Value Fund, LLC and its
subsidiaries, except where the context otherwise requires.
Item 1. | Legal Proceedings. |
Neither we nor any of our properties are presently subject to any material litigation and, to
our knowledge, no material litigation is threatened against us or any of our properties that, if
determined unfavorably to us, would have a material adverse effect on our financial condition,
results of operations or cash flows.
On July 15, 2011, LBUSB 2004-C4 Enterprise Way, L.P., an entity affiliated with UBS Real
Estate Investments, Inc., or the Enterprise Technology Center lender, filed a complaint against NNN
Enterprise Way, LLC and the other 31 tenant-in-common, or TIC, owners of the Enterprise Technology
Center, located in Scotts Valley, California, or the Enterprise Technology Center property, in the
Superior Court of California, County of Santa Cruz (Case No. CV 171625), seeking judicial
foreclosure, specific performance for the appointment of a receiver and injunctive relief. On July
21, 2011, the court ordered the appointment of a receiver and granted injunctive relief. As a
result, on July 25, 2011, the receiver appointed by the court took possession of the Enterprise
Technology Center property and has been instructed to proceed with a private sale of the property
under the supervision of the court. In addition, on July 29, 2011, the appointed trustee filed a
notice of default and election to sell under deed of trust on behalf of the Enterprise Technology
Center lender, whereby a sale of the Enterprise Technology Center property may proceed after 90
days of filing such notice.
Item 1A. | Risk Factors. |
There were no material changes from risk factors previously disclosed in our 2010 Annual
Report on Form 10-K, as filed with the SEC on March 18, 2011, except as noted below.
Our sole remaining property interest is currently undergoing a judicial foreclosure process, whereby a private sale of the property is expected to be pursued by the court-appointed receiver, after which we intend to pay distributions to our unit holders from available funds, if any, and wind up our operations, which we expect will be completed within the next six to twelve months. As a result of the judicial foreclosure of our sole remaining property interest, there is substantial doubt about our ability to continue as a going concern. |
As of June 30, 2011, our sole remaining property interest consisted of our 8.5% interest in
the Enterprise Technology Center property. On April 11, 2010, the Enterprise Technology Center
property was unable to pay in full the monthly interest and principal payment due on its
non-recourse mortgage loan on that date or within five days of that date, thereby triggering an
event of default under the mortgage loan documents. On May 11, 2011, the mortgage loan for the
Enterprise Technology Center property, which had an outstanding balance of $32,562,000, matured and
was not repaid. Therefore, an additional event of default was triggered under the mortgage loan
documents. Pursuant to the terms of the loan agreement, this event of default could allow the
Enterprise Technology Center lender to immediately: (i) increase the interest rate of the loan from
6.44% per annum to the default interest rate of 11.44% per annum; (ii) impose a late charge equal
to the lesser of 5.0% of the amount of any payment not timely paid, or the maximum amount which may
be charged under applicable law; and/or (iii) foreclose on the Enterprise Technology Center
property.
On July 15, 2011, LBUSB 2004-C4 Enterprise Way, L.P., an entity affiliated with the Enterprise
Technology Center lender, filed a complaint against NNN Enterprise Way, LLC and the other 31 TIC
owners of the Enterprise Technology Center property seeking judicial foreclosure, specific
performance for the appointment of a receiver and injunctive relief. On July 21, 2011, the court
ordered the appointment of a receiver and granted injunctive relief. As a result, on July 25, 2011,
the receiver appointed by the court took possession of the Enterprise Technology Center property
and has been instructed to proceed with a private sale of the property under the supervision of the
court. In addition, on July 29, 2011, the appointed trustee filed a notice of default and election
to sell under deed of trust on behalf of the Enterprise Technology Center lender, whereby a sale of
the Enterprise Technology Center property may proceed after 90 days of filing such notice.
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We currently expect that our sole remaining property interest will be sold pursuant to the
judicial foreclosure process, after which we intend to pay distributions to our unit holders from
available funds, if any, and wind up our operations, which we expect will be completed within the
next six to twelve months. As a result of the judicial foreclosure of our sole remaining property
interest, there is substantial doubt about our ability to continue as a going concern.
We rely on the disposition of our properties to generate cash to fund our operations and pay distributions to our unit holders, however, our remaining property interest consists of an 8.5% interest in one unconsolidated property that is currently undergoing a judicial foreclosure process, which greatly limits our ability to generate cash to fund our operations and/or pay future distributions to our unit holders. |
During the quarter ended March 31, 2011, we disposed of our two remaining consolidated
properties, the Sevens Building and Four Resource Square properties. We did not receive any cash
proceeds from the dispositions of these properties.
As of June 30, 2011, our sole remaining property interest consisted of our 8.5% interest in
the Enterprise Technology Center property. As discussed above, the Enterprise Technology Center
property is currently undergoing a judicial foreclosure process, and we do not expect to receive
any cash proceeds from the disposition of the property.
As a result of the dispositions of the Sevens Building and Four Resource Square properties for
no cash proceeds, as well as the judicial foreclosure of our ownership interest in the Enterprise
Technology Center property, which is also expected to result in no cash proceeds to us, our ability
to generate cash to fund our operations and/or pay future distributions to our unit holders is
significantly limited.
Our success is dependent on the performance of our manager, which could be adversely impacted by the recent sale of its parent company, Daymark Realty Advisors, Inc., to an unrelated third party. |
On February 10, 2011, Grubb & Ellis Company announced the creation of Daymark Realty Advisors, Inc., or Daymark, a wholly
owned and separately managed subsidiary of Grubb & Ellis and parent company of NNN Realty Advisors, Inc., or NNNRA, which is the parent company of our manager. Subsequent thereto Grubb & Ellis announced
that it had retained FBR Capital Markets & Co to explore strategic alternatives with respect to Daymark and its portfolio. On August 10, 2011, Grubb & Ellis Company entered into a Stock Purchase Agreement,
or the Purchase Agreement, with IUC-SOV, LLC, an entity affiliated with Sovereign Capital Management and Infinity Real Estate. Pursuant to the Purchase Agreement, Grubb & Ellis sold to IUC-SOV, LLC all of the
shares of Daymark, whereby IUC-SOV, LLC acquired all the assets and liabilities of Daymark and its subsidiaries, subject to the terms and conditions of the Purchase Agreement. The closing of the transactions
contemplated by the Purchase Agreement were completed on August 10, 2011. Our ability to achieve our investment objectives and to conduct our operations is dependent upon the performance of our manager and its
parent company, and their respective executive officers and employees. If our manager suffers operational problems in connection with the sale of Daymark to IUC-SOV, LLC, which could affect our manager's
ability to allocate time and/or resources to our operations, our results of operations would be adversely impacted. Furthermore, the effect that the sale will have on our operations is unknown, but
could have a material adverse effect on the performance of our manager, which could cause our results of operations and financial condition to suffer.
In addition, NNNRA is a guarantor on the mortgage loans of several
TIC programs that it has sponsored. Under the guaranty agreements, NNNRA is required to maintain a specified level of minimum net worth. As of December 31, 2010, NNNRA's net worth was below the contractually specified
levels with respect to approximately 30 percent of its managed TIC programs. While this circumstance does not, in and of itself, create any direct recourse liability for NNNRA, 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 NNNRA potentially becoming liable for up to $6.0 million, in the aggregate, of certain partial-recourse guarantee
obligations of the underlying mortgage debt for certain of these TIC programs. To date, no events of default have been declared.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None.
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4. | [Removed and Reserved.] |
Item 5. | Other Information. |
None.
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Item 6. | Exhibits. |
The exhibits listed on the Exhibit Index (following the signatures section of this report) are
included, or incorporated by reference, in this quarterly report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NNN 2003 Value Fund, LLC | ||||
(Registrant) | ||||
August 12,
2011
|
/s/ Steven M. Shipp
|
|||
Date
|
Steven M. Shipp | |||
Executive Vice President, Portfolio Management | ||||
Grubb & Ellis Realty Investors, LLC, | ||||
the Manager of NNN 2003 Value Fund, LLC | ||||
(principal executive officer) | ||||
August 12, 2011
|
/s/ Paul E. Henderson
|
|||
Date
|
Paul E. Henderson | |||
Chief Accounting Officer | ||||
Grubb & Ellis Realty Investors, LLC, | ||||
the Manager of NNN 2003 Value Fund, LLC | ||||
(principal financial officer) |
29
Table of Contents
EXHIBIT INDEX
Pursuant to Item 601(a)(2) of Regulation S-K, this Exhibit index immediately precedes the
exhibits.
The following exhibits are included, or incorporated by reference, in this Quarterly Report on
Form 10-Q for the period ended June 30, 2011 (and are numbered in accordance with Item 601 of
Regulation S-K).
Exhibit | ||||
Number | Description | |||
3.1 | Articles of Organization of NNN 2003 Value Fund, LLC, dated
March 19, 2003 (included in Exhibit 3.1 to our Form 10 filed
on May 2, 2005 and incorporated herein by reference). |
|||
31.1 | * | Certification of Principal Executive Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
||
31.2 | * | Certification of Principal Financial Officer, pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
||
32.1 | ** | Certification of Principal Executive Officer, pursuant to 18
U.S.C. Section 1350, as created by Section 906 of the
Sarbanes-Oxley Act of 2002. |
||
32.2 | ** | Certification of Principal Financial Officer, pursuant to 18
U.S.C. Section 1350, as created by Section 906 of the
Sarbanes-Oxley Act of 2002. |
* | Filed herewith. | |
** | Furnished herewith. |
30