UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

☒

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

 

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________to_________

Commission File No. 000-53165

FSP 303 East Wacker Drive Corp.

(Exact name of registrant as specified in its charter)

 

Delaware	20-8061759
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
401 Edgewater Place, Wakefield, Massachusetts	01880
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (781) 557-1300

 

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

 

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

 

Preferred Stock, $.01 par value per share

 

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

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐.

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐.

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

 

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 ☐		Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)		Smaller reporting company ☒

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

 

As of June 30, 2011 the aggregate fair market value of Common Stock held by non-affiliates of the registrant was $0.

 

The number of shares of Common Stock outstanding was 1 and the number of shares of Preferred Stock outstanding was 2,210 as of February 29, 2012.

 

Documents incorporated by reference: None.

TABLE OF CONTENTS

 

 

PART I		1
Item 1.	Business.	1
Item 1A.	Risk Factors.	5
Item 1B.	Unresolved Staff Comments.	5
Item 2.	Properties.	5
Item 3.	Legal Proceedings.	8
Item 4.	Mine Safety Disclosures	8
PART II		9
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities…	9
Item 6.	Selected Financial Data.	9
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	10
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.	16
Item 8.	Financial Statements and Supplementary Data.	16
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.	16
Item 9A.	Controls and Procedures.	17
Item 9B.	Other information.	18
PART III		19
Item 10.	Directors, Executive Officers and Corporate Governance	19
Item 11.	Executive Compensation.	20
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	21
Item 13.	Certain Relationships and Related Transactions, and Director Independence.	22
Item 14.	Principal Accounting Fees and Services.	22
PART IV		24
Item 15.	Exhibits, Financial Statement Schedules.	24
SIGNATURES		25

 

 

Item 1.    Business

 

History

 

Our company, FSP 303 East Wacker Drive Corp., which individually or together with its subsidiary, we refer to as the “Company”, “we” or “our”, is a Delaware corporation formed to purchase, own and operate a twenty-eight story multi-tenant office tower containing approximately 859,187 rentable square feet of office and retail space and a 294-stall underground parking garage located in downtown Chicago, Illinois, which we refer to as the Property. The Company operates in a manner intended to qualify as a real estate investment trust, or REIT, for federal income tax purposes.

 

The Company was organized in December 2006 by FSP Investments LLC (member, FINRA and SIPC), a wholly-owned subsidiary of Franklin Street Properties Corp., which we refer to as Franklin Street (NYSE Amex: FSP). FSP Investments LLC acted as a real estate investment firm and broker/dealer with respect to (a) the organization of the Company, (b) the acquisition of the Property by the Company and (c) the sale of equity interests in the Company.

 

The Company purchased the Property from an unaffiliated third party for $167,000,000 on January 5, 2007. The purchase price, which was determined based on arm’s-length negotiations, was financed entirely by a loan from Franklin Street collateralized by a first mortgage, which we refer to as the Acquisition Mortgage Loan. The Acquisition Mortgage Loan was repaid in its entirety on December 27, 2007 from the proceeds of the sale of equity interests in the Company. Total interest and loan fees incurred on the Acquisition Mortgage Loan were approximately $13,810,000. The Company acquired the Property through FSP 303 East Wacker Drive LLC, a wholly-owned subsidiary of the Company. The sole business of FSP 303 East Wacker Drive LLC is to own and operate the Property.

 

The Company commenced operations in January 2007.

 

Franklin Street holds the sole share of the Company’s common stock, $.01 par value per share, which we refer to as the Common Stock. Between February 2007 and December 2007, FSP Investments LLC completed the sale on a best efforts basis of 2,210 shares of the Company’s preferred stock, $.01 par value per share, which we refer to as the Preferred Stock. We sold the Preferred Stock in a private placement offering to “accredited investors” within the meaning of Regulation D under the Securities Act of 1933. Between February 7, 2007 and December 27, 2007, the Company held 17 investor closings, at each of which shares of Preferred Stock were sold and funds were received. On December 27, 2007, Franklin Street purchased 965.75 shares of Preferred Stock (approximately 43.7%) of the Company for consideration totaling $82,813,000, representing $96,575,000 at the offering price net of commissions of $7,726,000 and fees of $6,036,000 that were excluded. Prior to purchasing any shares of Preferred Stock, Franklin Street agreed to vote any shares held by it on any matter presented to the holders of Preferred Stock in a manner that approximates as closely as possible the votes cast in favor of and opposed to such matter by the holders of the Preferred Stock other than Franklin Street and its affiliates. For purposes of determining how Franklin Street votes its shares of Preferred Stock, abstentions and non-votes by stockholders other than Franklin Street are not considered. Funds from each individual closing were used to repay the Acquisition Mortgage Loan and associated fees as well as other expenses payable to Franklin Street’s wholly-owned subsidiary, FSP Investments LLC. The use of proceeds from the offerings of Preferred Stock, including for payments to Franklin Street and its affiliates, is set forth in the table below:

 

Use of proceeds:
Type	Affiliate paid	Amount
Operating/Capital Reserve (1)		$      20,055,000
Organizational, Offering and
Other Expenditures for the Company(2)	FSP Investments LLC	1,200,000
City of Chicago Transfer Taxes		1,252,500
Selling Commissions(3)	FSP Investments LLC	9,954,000
Acquisition-Related Costs:
Purchase Price of the Property(4)	Franklin Street Properties Corp.	167,000,000
Loan Fee Paid to Franklin Street (5)	Franklin Street Properties Corp.	7,154,438
Acquisition Fee(6)	FSP Investments LLC	622,125
Total Uses of Gross Offering Proceeds		$    207,238,063

 

 

(1)

The Operating/Capital Reserve proceeds were retained by the Company for operating and capital uses.

(2)

Organizational, Offering and Other Expenditures were paid for various expenses, including legal, accounting, appraisal, engineering and organizational expenses allocable to the offering, incurred in connection with the organization and syndication of the Company.

(3)

Selling Commissions were paid to FSP Investments LLC, as Selling Agent.

(4)

The Purchase Price of the Property was financed by the Acquisition Mortgage Loan, which was repaid from proceeds of the offering.

(5)

The Loan Fee paid to Franklin Street was a fee (or points) in the amount of $7,154,438 payable to Franklin Street to obtain the Acquisition Mortgage Loan to purchase the Property. The Acquisition Mortgage Loan was in an original principal amount equal to the purchase price of the Property, and had a term of two years, which was pre-payable at any time without premium or penalty and carried an interest rate equal to the rate payable by Franklin Street on borrowings under its line of credit with its bank.

(6)

The Acquisition Fee was paid for various services related to the purchase of the Property.

Transactions between the Company and Franklin Street and/or its affiliates were entered into without the benefit of arm’s-length bargaining and involved conflicts of interest. Although Franklin Street has sponsored the syndication of other REITs similar to the Company and has in the past acquired some of those REITs, Franklin Street is under no obligation to acquire or to offer to acquire the Company or the outstanding shares of Preferred Stock, and any acquisition transaction would need to be approved by the Company’s stockholders and the boards of directors of Franklin Street and the Company. Please see Part “III, Item 13. Certain Relationships and Related Transactions, and Director Independence”.

 

Our Business

 

Our sole business is to own and operate the Property and we do not intend to invest in or purchase any additional properties. We derive rental revenue from income paid to us by the tenants of the Property. Asset and property management services are provided by third parties.

 

The Property was completed in 1979 and is a twenty-eight story multi-tenant office tower located in downtown Chicago, Illinois containing approximately 859,187 rentable square feet of office and retail space and a 294-stall underground parking garage.

 

The Property underwent a re-measurement of space in 2002. This re-measurement concluded that the rentable space in the Property could be increased from approximately 838,943 square feet to approximately 859,187 square feet. This Annual Report on Form 10-K makes reference to the more recently determined 859,187 square foot number in all of its general descriptions of the Property and at this time, lease statistics are based on 844,953 square feet. Management believes that the potential exists in the future to gain greater amounts of rental income from leasing this extra space and intends to do so. However, the Company also believes that any such potential gains will not come immediately as existing tenants and their respective leases are mostly based upon the previous 838,943 square foot measurement. Accordingly, principally all tenant and lease descriptions set forth in this Annual Report on Form 10-K reflect the terms and conditions of the respective lease documents, which generally are based on the 844,953 square foot measurement instead of the 859,187 square foot number.

 

The Property, formerly known as Three Illinois Center, is part of the multi-building, mixed-use development known as Illinois Center, which includes office buildings, hotels, residential buildings, and a large athletic club. The Property was preceded in construction by One and Two Illinois Center, which were developed in 1970 and 1972, respectively. The three towers share an aluminum and glass design that is characteristic of contemporary international style, distinguished by a curtain wall of bronze-finished aluminum and reflective glass. The Property is located in Chicago’s East Loop submarket on the eastern portion of the development along the southern edge of the Chicago River.

 

The office component of the Property is separated into low-rise, mid-rise and high-rise sections. The first floor, or Plaza, has three elevator banks, each containing five passenger elevators and a freight elevator which services the 27 floors of office space. An additional elevator is also provided at the Plaza level for direct access to the parking garage and Concourse. Access to the Concourse level from the Plaza level is provided by an escalator system. Access to the Plaza level from street-level is provided by entrances on the West and East sides of the Property and emergency exits on the south end.

The Property was approximately 94% leased as of December 31, 2011 to a diverse group of tenants with staggered lease expirations. Management believes that any tenant that leases 10% or more of the Property’s rentable space is material. As of December 31, 2011, 32 tenants were leasing space at the Property. The Property’s largest tenant is KPMG LLP, or KPMG, which leases 259,090 square feet (approximately 31%) of the Property’s rentable space through August 2012. Groupon, Inc., or Groupon, leases 226,041 square feet (approximately 27%) of the Property’s rentable space through July 2012. AECOM USA, Inc., or AECOM USA, leases 104,086 square feet (approximately 12%) of the Property’s rentable space through September 2014. KPMG is one of the largest accounting firms in the world. Groupon is an internet-based company that features daily bargains on local goods, services and cultural events in more than 300 markets and 35 countries. AECOM USA is a wholly-owned subsidiary of AECOM Technology Corporation, a provider of professional, technical and management support services (NYSE: ACM), which has guaranteed AECOM USA’s obligations under the lease.

 

In general, office leases at the Property are structured on a triple-net (NNN) basis with respect to expenses, so that the tenant is responsible for its respective pro-rata percentage of expenses. In general, concourse level (lower level) retail tenants have full service gross rent leases under which gross rent includes expenses.

 

FSP Property Management LLC, a wholly-owned subsidiary of Franklin Street, provides the Company with asset management and financial reporting services. The asset management agreement between the Company and FSP Property Management LLC requires the Company to pay FSP Property Management LLC a monthly fee equal to one-half of one percent (0.5%) of that month’s gross revenues of the Property. The asset management agreement between the Company and FSP Property Management LLC may be terminated by either party without cause at any time, upon at least thirty (30) days written notice.

 

Hines Interests Limited Partnership provides the Company with day-to-day property management, construction management and leasing services relating to the operation of the Property. Hines Interests Limited Partnership is a third-party service provider that is not related to or affiliated with Franklin Street. The management agreement between the Company and Hines Interests Limited Partnership requires the Company to pay Hines Interests Limited Partnership a monthly fee equal to two and one-half percent (2.5%) of the net operating receipts collected in the preceding month. The management agreement between the Company and Hines Interests Limited Partnership operates on a month-to-month basis and may be terminated for cause.

 

Investment Objectives

 

The Company's investment objectives are to (i) obtain cash available to pay dividends through rental receipts from operations of the Property, (ii) have that cash increase over time as a result of rental rate step increases in existing leases and new leasing activity in currently vacant space, (iii) have that cash potentially increase over time if rental rates increase for new leases, (iv) provide a return of capital to holders of our Preferred Stock if we obtain permanent mortgage financing or another capital event occurs, (v) provide increased equity in the Property to our holders of Preferred Stock as a result of potential appreciation in market value, and (vi) preserve and protect the capital invested by the holders of our Preferred Stock. We cannot be sure of meeting our objectives.

 

Our policy is not to make loans to other persons, not to invest in the securities of other issuers for the purpose of exercising control, not to underwrite the securities of other issuers, not to offer securities in exchange for property and not to purchase or otherwise reacquire our securities. These policies may be changed by our directors without a vote of the holders of shares of our Preferred Stock.

 

We have issued our shares of Preferred Stock in the offering described above. No additional shares of Preferred Stock are authorized by our charter, and authorization of any increase in the number of authorized shares or the creation of any new series or class of stock would require the affirmative vote of the holders of 66.67% of the outstanding shares of Preferred Stock.

 

We intend to dispose of the Property at such time that our directors determine that we have achieved our investment objectives. We do not intend to reinvest the proceeds of any such disposition. We also do not intend to list our shares of Preferred Stock on an exchange and therefore do not expect any trading market to develop in such shares.

 

We have the right to obtain a permanent mortgage loan and a line of credit as described below.

Permanent Mortgage Loan

 

On August 3, 2011, the Company entered into a mortgage note in favor of John Hancock Life Insurance Company (U.S.A.) (the “Lender”) to evidence a loan (the “Loan”) in the original principal amount of $35,000,000 that matures on September 1, 2021. The proceeds of the Loan are being held by the Lender for the Company’s benefit in a restricted reserve account or accounts to be drawn upon by the Company from time to time for tenant improvement costs and leasing commissions at the Property upon satisfaction of certain conditions. The Loan bears interest at the fixed rate of 4.83% per annum. The Company is obligated to make monthly payments of interest only for the initial 60 months of the Loan. Thereafter, the Company is obligated to make monthly payments of principal and interest for the remaining 60 months, based on a 25-year amortization schedule, until the maturity date, when all outstanding amounts become due. The Loan is secured, in part, by a mortgage, assignment of leases and rents and security agreement (the “Mortgage”) from the Company in favor of the Lender. The Mortgage constitutes a lien against the Property and has been recorded in the land records of Cook County, Illinois. Subject to customary exceptions, the Loan is nonrecourse to the Company. As of December 31, 2011, the Company had not requested that the Lender advance any of the proceeds of the Loan.  Interest expense from the Loan for the years ended December 31, 2011 and 2010 were $698,000 and $0, respectively. The documents evidencing and securing the Loan include restrictions on property liens and requires compliance with various financial covenants. Financial covenants include the requirement that we provide annual reporting. The Company was in compliance with the Loan covenants as of December 31, 2011.

 

Fees paid associated with the Loan were $304,000 and are being amortized on a straight-line basis over the term of the Loan. Amortization expense of $12,000 is included in interest expense in the Company’s Statement of Operations for the year ended December 31, 2011.

 

Revolving Line of Credit

 

Subject to any required lender approvals, the Company may, without the consent of any holder of shares of our Preferred Stock, obtain a revolving line of credit of up to $66,800,000 on commercially reasonable terms to be used for capital improvements or to pay operating expenses of the Property, if needed. As of February 29, 2012, the Company had neither sought nor obtained a revolving line of credit.

 

Competition

 

The Property is a multi-tenant office tower located in the East Loop office submarket in downtown Chicago, Illinois. The Property is competing against the other office buildings which are or may become available in the general area in which the Property is located and which may be priced at rental levels lower than those for space in the Property or which may otherwise be more attractive to tenants. In order to lease existing vacancy, the Property must be competitive, in regards to cost and amenities, with other buildings of similar use near our location. Some of our competitors may have significantly more resources than we do and may be able to offer more attractive rental rates or services. On the other hand, some of our competitors may be smaller or have lower fixed overhead costs, less cash or other resources that make them willing or able to accept lower rents in order to maintain a certain occupancy level. If, at any time, there is no existing significant competition for the Property, our competitors may decide to enter the market and build new buildings to compete with our Property. Our competition is not only with other developers, but also with property users who choose to own their building. In addition, larger market forces beyond our control, such as general economic conditions, may increase competition among landlords for quality tenants and individual decisions beyond our control. Given that the Property is a multi-tenant office tower that is leased to a diverse group of office and retail tenants with staggered lease expirations, we cannot predict which competitive factors will be relevant to prospective future tenants at this time. Management believes that the position of the Property within the East Loop office market is strong and management is optimistic that the existing vacant space will ultimately be leased to new tenants. 

 

Employees

 

We had no employees as of December 31, 2011.

 

Available Information

 

We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and, in accordance therewith, we file reports and other information with the Securities and Exchange Commission (SEC). This Annual Report on Form 10-K and other reports and other information we file can be inspected and copied at the SEC Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 on official business days during the hours of 10:00 am to 3:00 pm. Such reports, proxy and information statements, if any, and other information about issuers that file electronically with the SEC may also be obtained from the web site that the SEC maintains at http://www.sec.gov. Further information about the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

 

We will make available and voluntarily provide, free of charge upon written request at the address on the cover of this Annual Report on Form 10-K, a copy of our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC. We do not maintain a website.

 

Item 1A.    Risk Factors

 

Not applicable.

 

Item 1B.    Unresolved Staff Comments

 

Not applicable.

Item 2.    Properties

 

Set forth below is information regarding the Property as of December 31, 2011:

						Annual Rent Revenue
	Date of	Approx.	Percent	Number		For the Year Ended
Property Location	Purchase	Square Feet	Leased	of Tenants	Name of Major Tenants	December 31, 2011
303 East Wacker Drive	1/5/2007	859,187	94%	32	KPMG LLP	$8,107,000
Chicago, Illinois 60601					Groupon Inc	$4,359,000
					AECOM USA	$3,712,000

 

The average effective annual rent per leased square foot for the years ended December 31, 2011 and 2010 was $18.03 and $16.15, respectively. We believe that the increase is largely attributable to the additional space at the Property occupied by Groupon during 2011 and the fact that Groupon has a full service gross rent lease. In general, office leases at the Property are structured on a triple-net (NNN) basis with respect to expenses, so that the tenant is responsible for its respective pro-rata percentage of expenses. In general, concourse level (lower level) retail tenants have full service gross rent leases under which gross rent includes expenses.

 

We acquired the Property on January 5, 2007 through a limited liability company, all of whose equity interest is owned, directly or indirectly, by the Company. In the opinion of our management, the Property is adequately covered by insurance. The Property is currently encumbered by the Loan.

 

The Property was completed in 1979 and is a twenty-eight story multi-tenant office tower located in downtown Chicago, Illinois containing approximately 859,187 rentable square feet of office and retail space and a 294-stall underground parking garage.

 

The Property underwent a re-measurement of space in 2002. This re-measurement concluded that the rentable space in the Property could be increased to approximately 859,187 square feet. This Annual Report on Form 10-K makes reference to the more recently determined 859,187 square foot number in all of its general descriptions of the Property and at this time, lease statistics are based on 844,953 square feet. Management believes that the potential exists in the future to gain greater amounts of rental income from leasing this extra space and intends to do so. However, the Company also believes that any such potential gains will not come immediately as existing tenants and their respective leases are predominately based upon the previous 838,943 square foot measurement. Accordingly, all tenant and lease descriptions set forth in this Annual Report on Form 10-K reflect the terms and conditions of the respective lease documents, which generally are based on the 844,953 square foot measurement instead of the 859,187 square foot number.

 

The following table reflects certain information for the leases that are expiring over the next ten years:

 

														Percentage of
										Annualized				Annualized
		Number								Rents by Year				Rents by Year
		of Leases				Square Feet				of Lease				of Lease
Year		Expiring				Expiring				Expiration (1)				Expiration
2012			8				503,314				10,223,728				61.38%
2013			5				10,245				190,270				1.14%
2014			3				105,287				2,145,273				12.88%
2015			4				36,426				816,854				4.90%
2016			4				51,226				1,096,904				6.59%
2017			3				17,075				302,101				1.81%
2018			3				16,308				318,392				1.91%
2019			1				1,175				23,478				0.14%
2020			1				9,488				256,176				1.54%
2021			1				7,174				129,132				0.78%
2022			1				29,257				1,153,755				6.93%
Total			34				786,975			$	16,656,063				100.00%

 

(1)

Reflects the annualized contractual minimum rental income from non-cancelable leases at December 31, 2011.

 

Below is certain information with respect to the Property’s tenants and leases.

Tenants

 

The Property was approximately 94% leased as of December 31, 2011 to a diverse group of tenants with staggered lease expirations. Management believes that any tenant that leases 10% or more of the Property’s rentable space is material. As of December 31, 2011, 32 tenants were leasing space at the Property. The Property’s largest tenant is KPMG LLP, or KPMG, which leases 259,090 square feet (approximately 31%) of the Property’s rentable space through August 2012. Groupon, Inc., or Groupon, leases 226,041 square feet (approximately 27%) of the Property’s rentable space through July 2012. AECOM USA, Inc., or AECOM USA, leases 104,086 square feet (approximately 12%) of the Property’s rentable space through September 2014. KPMG is one of the largest accounting firms in the world. Groupon is an internet-based company that features daily bargains on local goods, services and cultural events in more than 300 markets and 35 countries. AECOM USA is a wholly-owned subsidiary of AECOM Technology Corporation, a provider of professional, technical and management support services (NYSE: ACM), which has guaranteed AECOM USA’s obligations under the lease.

 

Leases

 

In general, office leases at the Property are structured on a triple-net (NNN) basis with respect to expenses, so that the tenant is responsible for its respective pro-rata percentage of expenses. In general, concourse level (lower level) retail tenants have full service gross rent leases under which gross rent includes expenses.

 

KPMG LLP

 

KPMG is currently the largest tenant of the Property and leases eight full floors containing an aggregate of 259,090 net rentable square feet, which amount translates into approximately 31% of the building. The lease commenced in August 1997 with a fifteen-year term that expires on August 31, 2012. On February 16, 2009, KPMG notified the Company that it will be relocating to a different property location following the expiration of its lease on August 31, 2012.  Management has been planning for this vacancy since it received notice and, with approximately 6 months remaining on KPMG’s lease, will continue to aggressively work with its local leasing team to find a replacement tenant (or tenants).

 

Options

 

As long as KPMG is not in default of its lease obligations, KPMG has exclusive rights to exterior and interior signage. As long as KMPG is the largest tenant, KPMG has exclusive rights to exterior signage and naming rights of the building. KPMG also has the right to prevent the landlord from leasing space to a specific list of public accounting competitors, any schools and certain governmental agencies. KPMG has the right to lease storage space not exceeding 7,500 square feet at pre-determined rental rates. Although the original terms of the lease included options to reduce the amount of space and included early termination options, those options have expired and KPMG does not have any remaining options to terminate the lease in part or in its entirety.

 

Groupon Inc.

 

Groupon is currently the second largest tenant of the Property and leases five full floors and portions of two floors containing an aggregate of 226,041 net rentable square feet pursuant to a license agreement, which translates into approximately 27% of the building. The license commenced in November 2010, expires on July 31, 2012 and does not include renewal, expansion or other options.

 

AECOM USA, Inc.

 

AECOM USA is currently the third largest tenant of the Property and leases three full floors and portions of two floors containing an aggregate of 104,086 net rentable square feet, which amount translates into approximately 12% of the building. The lease commenced in January 1996 and expires on September 30, 2014. The lease is guaranteed by AECOM Technology Corporation.

 

Option to Renew

 

As long as AECOM USA is not in default of its lease obligations, AECOM USA has two consecutive options to extend the expiration date of the lease for five years each, for a total of ten years. In order to exercise an option, AECOM USA must give at least nine months' prior notification to the landlord, but such notice may not be given earlier than 12 months prior to expiration of the lease. The monthly base rental rate for each option will be the prevailing market rental rate, as reasonably determined by the landlord. AECOM USA has the right to renew as long as the renewal includes not less than 50% of the total space leased.

Options to Expand

 

As long as AECOM USA is not in default of its lease obligations, AECOM USA has a continuing right of first offer (“ROFO”) on certain space, including floors 4, 7, 10 and 12. The monthly base rental rate for the ROFO will be the prevailing market rental rate as reasonably determined by the landlord. The ROFO expires two years prior to the expiration of the lease.

 

Additional Operating Data

 

Additional information regarding the amount of the Property’s annual realty taxes and insurance can be found in the Statements of Operations that are included with this Form 10-K. Additional information regarding the Property’s Federal tax basis, rate, method and life claimed for purposes of depreciation can be found in the Notes to Consolidated Financial Statements that are included with this Annual Report on Form 10-K.

 

 

Item 3.    Legal Proceedings

 

There are no material legal proceedings to which the Company is a party. The Company from time to time may be involved in lawsuits including, but not limited to, lawsuits relating to the real property it owns for liability for slips and falls, damage to automobiles in the parking garage, minor theft or similar matters. The Company expects that most of these suits will be covered by insurance, subject to customary deductions. In addition, in the ordinary course of business, the Company may become involved in litigation to collect rents or other income due to it from tenants.

 

Item 4.    Mine Safety Disclosures

 

Not applicable.

PART II

 

Item 5.    Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

There is no established public trading market for the Company’s Common Stock or Preferred Stock.

 

As of February 29, 2012, Franklin Street was the sole holder of record of the Common Stock and there were 821 holders of record of the Preferred Stock. This computation is based upon the number of record holders reflected in our corporate records. The final sale of Preferred Stock occurred on December 27, 2007 and following that date no further distributions have been or will be declared on the Common Stock.

 

Set forth below are the distributions made to the holders of our Preferred Stock in respect of each quarter during the past two fiscal years. Distributions are determined based on the Company’s Board of Directors’ review of cash available for distribution and distribution requirements necessary for the Company to continue to qualify as a real estate investment trust. We cannot guarantee the future payment of dividends or the amount of any such dividends. See the Notes to Consolidated Financial Statements that are included with this Annual Report on Form 10-K for additional information. There were no dividends on Common Stock during this period.

 

		Distributions
		paid to
Quarter		Preferred
Ended		Stockholders
March 31, 2010		$	2,234,310
June 30, 2010			2,203,370
September 30, 2010			2,019,940
December 31, 2010			2,019,940
March 31, 2011		$	2,298,400
June 30, 2011			1,500,590
September 30, 2011			1,898,390
December 31, 2011			1,898,390

 

The following schedule summarizes tax components of the distributions paid for the year ended December 31:

 

(in thousands)		2011								2010
			Preferred				%				Preferred				%
Ordinary income		$	6,721				88%			$	5,172				61%
Return of Capital			875				12%				3,305				39%
Total		$	7,596				100%			$	8,477				100%

 

The Company does not have an equity compensation plan or any outstanding stock options or other securities convertible into the Company’s Common Stock.

 

Item 6.    Selected Financial Data

 

Not applicable.

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. Historical results and percentage relationships set forth in the financial statements, including trends which might appear, should not be taken as necessarily indicative of future operations. The following discussion and other parts of this Annual Report on Form 10-K may also contain forward-looking statements based on current judgments and current knowledge of management, which are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those indicated in such forward looking statements. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements. Investors are cautioned that our forward-looking statements involve risks and uncertainty, including without limitation, economic conditions in the United States and in the market where we own the Property, disruptions in the debt markets, risks of a lessening of demand for the type of real estate owned by us, changes in government regulations and regulatory uncertainty, and expenditures that cannot be anticipated such as utility rate and usage increases, unanticipated repairs, additional staffing, insurance increases and real estate tax valuation reassessments. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We may not update any of the forward-looking statements after the date this Annual Report on Form 10-K is filed to conform them to actual results or to changes in our expectations that occur after such date, other than as required by law.

 

Overview

 

FSP 303 East Wacker Drive Corp., which we refer to as the Company, is a Delaware corporation formed to purchase, own, and operate a twenty-eight story multi-tenant office tower containing approximately 859,187 rentable square feet of office and retail space and a 294-stall underground parking garage located in downtown Chicago, Illinois, which we refer to as the Property.

 

Franklin Street Properties Corp., which we refer to as Franklin Street, is the sole holder of our one share of common stock, $.01 par value per share, which we refer to as the Common Stock, that is issued and outstanding. Between February 2007 and December 2007, FSP Investments LLC (member FINRA and SIPC), a wholly-owned subsidiary of Franklin Street, completed the sale on a best efforts basis of 2,210 shares of our preferred stock, $.01 par value per share, which we refer to as the Preferred Stock. FSP Investments LLC sold the Preferred Stock in a private placement offering to “accredited investors” within the meaning of Regulation D under the Securities Act of 1933. Since the completion of the placement of the Preferred Stock in December 2007, Franklin Street has not been entitled to share in any earnings or dividend related to the Common Stock.

 

We operate in one business segment, which is real estate operations, and own a single property. Our real estate operations involve real estate rental operations, leasing services and property management services. The main factor that affects our real estate operations is the broad economic market conditions in the United States and, more specifically, the economic conditions in Chicago, Illinois, the relevant submarket. These market conditions affect the occupancy levels and the rent levels on both a national and local level. We have no influence on national or local market conditions.

 

Trends and Uncertainties

 

The economy in the United States is continuing to experience a period of limited economic growth, including high levels of unemployment, the failure and near failure of a number of financial institutions and increased credit risk premiums for a number of market participants. Economic conditions may be affected by numerous factors, including but not limited to, inflation and employment levels, energy prices, slow growth and/or recessionary concerns, changes in currency exchange rates, geopolitical events, the regulatory environment and the availability of debt and interest rate fluctuations. Current and future economic factors may negatively affect real estate values, occupancy levels and property income. At this time, we cannot predict the extent or duration of any negative impact that current or future economic factors will have on our business.

 

Real Estate Operations

 

The Property was approximately 94% leased as of December 31, 2011 to a diverse group of tenants with staggered lease expirations. Management believes that any tenant that leases 10% or more of the Property’s rentable space is material. As of December 31, 2011, 32 tenants were leasing space at the Property. The Property’s largest tenant is KPMG LLP, or KPMG, which leases 259,090 square feet (approximately 31%) of the Property’s rentable space through August 2012. Groupon, Inc., or Groupon, leases 226,041 square feet (approximately 27%) of the Property’s rentable space through July 2012. AECOM USA, Inc., or AECOM USA, leases 104,086 square feet (approximately 12%) of the Property’s rentable space through September 2014. KPMG is one of the largest accounting firms in the world. Groupon is an internet-based company that features daily bargains on local goods, services and cultural events in more than 300 markets and 35 countries. AECOM USA is a wholly-owned subsidiary of AECOM Technology Corporation, a provider of professional, technical and management support services (NYSE: ACM), which has guaranteed AECOM USA’s obligations under the lease.

We believe that the office market in Chicago has had a difficult past three years, with many of its office properties experiencing declining occupancies and rental rates. We also believe that tenant improvement and leasing costs have risen during this time; and, consequently, the amount of capital necessary to attract good tenants to sign long-term leases has climbed significantly. For the last three years we have known that the Property’s largest tenant, KPMG, currently leasing about 30% of the Property’s rentable space, will be vacating at the end of August 2012. Management has been informed that Groupon, the Property’s second largest tenant, currently leasing about 27% of the Property rentable space, plans to vacate all of its space at the end of July 2012. If that happens, the Property would be 40% or less leased by the end of August 2012. However, we believe that over the last three to six months demand for Chicago central business district office space has started to improve. More specifically, we believe that demand for larger contiguous blocks of office space from 100,000 to 600,000 square feet, from large credit-worthy tenants interested in longer-term leases, is especially strong, and that the number of Class A office towers in the Chicago central business district having that kind of space available is limited. We believe that the Property can provide those prospective tenants with that kind of space; and, as a consequence, we have seen the amount of new prospective tenant activity in the form of tours and requests for leasing proposals increase dramatically. Management has been providing feedback to a number of potential large users regarding the economics, signage and branding possibilities at the Property. In addition, we believe that we have the capital to fund the estimated tenant improvement costs and leasing commissions necessary to re-lease the expiring KPMG and Groupon space. We have been saving rental cash flow over the last few years by keeping dividend levels lower. As of December 31, 2011, our existing cash reserves totaled approximately $15,500,000. In addition, in August 2011 we secured a $35,000,000 loan from John Hancock Life Insurance Company to be used for just such re-leasing costs.

 

Management has not been this optimistic about the prospects for leasing the Property’s large upcoming vacancy in some time. If we can stabilize the Property at a high occupancy level with long-term quality rental income streams from credit-worthy tenants, we could create value for the holders of our Preferred Stock. If successful in re-leasing the large upcoming vacancy under favorable terms, the opportunity for increased dividends and/or a sale of the Property at an attractive price could be a real possibility. Of course, any sale of the Property would be subject to a number of conditions, including approval by our board of directors and a majority of the holders of our Preferred Stock.

 

It is difficult for management to predict what will happen to occupancy and rents in the future because the need for space and the price tenants are willing to pay are tied to both the local economy and to the larger trends in the national economy, such as job growth, interest rates, the availability of credit and corporate earnings, which in turn are tied to even larger macroeconomic and political factors, such as recessionary concerns, volatility in energy pricing and the risk of terrorism. In addition to the difficulty of predicting macroeconomic factors, it is difficult to predict how our local market or tenants (existing and potential) will suffer or benefit from changes in the larger economy. In addition, because the Property is in a single geographical market, these macroeconomic trends may have a different effect on the Property and on its tenants (existing and potential), some of which may operate on a national level. Although we cannot predict how long it will take to lease vacant space at the Property or what the terms and conditions of any new leases will be, we expect to sign new leases at then-current market rates which may be below the expiring rates.

 

During the three months ended December 31, 2011, we believe that vacancy rates decreased slightly and that rental rates were relatively unchanged for buildings in Chicago’s East Loop office market, where the Property is located. These trends may continue, worsen or improve in the future.

Management believes that the position of the Property within the East Loop office market is strong and management is optimistic that the existing vacant space will ultimately be leased to new tenants.  In order to further improve the Property’s position in Chicago’s office market, management has implemented a number lobby upgrades.

 

The potential for any of our tenants to default on its lease or to seek the protection of bankruptcy laws exists. If any of our tenants defaults on its lease, we may experience delays in enforcing our rights as a landlord and may incur substantial costs in protecting our investment. In addition, at any time, a tenant may seek the protection of bankruptcy laws, which could result in the rejection and termination of such tenant’s lease and thereby cause a reduction in cash available for distribution to our stockholders. Bankruptcy or a material adverse change in the financial condition of a material tenant would likely have a material adverse effect on our results of operations.

Future Tenant Improvement Costs and Leasing Commissions

 

Management believes that the Company will need to be able to quickly access cash in order to fund the potentially significant tenant improvements costs and leasing commissions that may be required to stabilize the occupancy and rent roll at the Property. In anticipation of these future costs, we believe that it is prudent to keep dividend distributions at lower levels for the balance of 2012 until we have a better idea of the Property’s actual future capital and leasing needs. We expect that distributions for 2012 will reflect the minimum that we believe is required to maintain our qualification as a REIT. We believe that such a reduction should add to our existing cash reserves that, as of December 31, 2011, totaled approximately $15,500,000.

 

In light of the amount of vacant space that needs to be leased at the Property and the potential for significant tenant improvement allowance costs and leasing commissions, on August 3, 2011, we entered into a mortgage note in favor of John Hancock Life Insurance Company (U.S.A.), which we refer to as the Lender, to evidence a loan, which we refer to as the Loan, in the original principal amount of $35,000,000 that matures on September 1, 2021. The proceeds of the Loan are being held by the Lender for our benefit in a restricted reserve account or accounts to be drawn upon by us from time to time for tenant improvement costs and leasing commissions at the Property upon satisfaction of certain conditions. The Loan bears interest at the fixed rate of 4.83% per annum. We are obligated to make monthly payments of interest only for the initial 60 months of the Loan. Thereafter, we are obligated to make monthly payments of principal and interest for the remaining 60 months, based on a 25-year amortization schedule, until the maturity date, when all outstanding amounts become due. The Loan is secured, in part, by a mortgage, assignment of leases and rents and security agreement, which we refer to as the Mortgage, from us in favor of the Lender. The Mortgage constitutes a lien against the Property and has been recorded in the land records of Cook County, Illinois. Subject to customary exceptions, the Loan is nonrecourse to the Company. As of December 31, 2011, the Company had not requested that the Lender advance any of the proceeds of the Loan. Interest expense from the Loan for the years ended December 31, 2011 and 2010 were $698,000 and $0, respectively. The documents evidencing and securing the Loan include restrictions on property liens and requires compliance with various financial covenants. Financial covenants include the requirement that we provide annual reporting. We were in compliance with the Loan covenants as of December 31, 2011.

 

 

Critical Accounting Policies and Estimates

 

We have certain critical accounting policies that are subject to judgments and estimates by our management and uncertainties of outcome that affect the application of these policies. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. On an on-going basis, we evaluate our estimates. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information. The accounting policies that we believe are most critical to the understanding of our financial position and results of operations and that require significant management estimates and judgments are discussed below.

 

Critical accounting policies are those that have the most impact on the reporting of our financial condition and results of operations and those requiring significant judgments and estimates. We believe that our judgments and estimates are consistently applied and produce financial information that fairly presents our results of operations. Our most critical accounting policies involve our investments in real property. These policies affect our:

 

•

allocation of purchase prices between various asset categories and the related impact on our recognition of rental income and depreciation and amortization expense; and

•

assessment of the carrying values and impairments of long-lived assets.

 

Allocation of Purchase Price

We have allocated the purchase price of the Property to land, buildings and improvements. Each component of the purchase price generally has a different useful life. We allocate the value of real estate acquired among land, buildings, improvements and identified intangible assets and liabilities, which may consist of the value of above market and below market leases, the value of in-place leases, and the value of tenant relationships. Purchase price allocations and the determination of the useful lives are based on management’s estimates, which were partially based upon an appraisal that we obtained from an independent real estate appraisal firm.

 

Purchase price allocated to land and building and improvements is based on management’s determination of the relative fair values of these assets assuming the Property was vacant. Management determines the fair value of the Property using methods similar to those used by independent appraisers. Purchase price allocated to above market leases is based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to in-place leases and (ii) our estimate of fair market lease rates for leases, measured over a period equal to the remaining non-cancelable term of the leases. Purchase price allocated to in-place leases and the tenant relationships is determined as the excess of (i) the purchase price paid for the Property after adjusting the existing in-place lease to market rental rates over (ii) the estimated fair value of the Property as if vacant. This aggregate value is allocated between the in-place lease value and tenant relationship based on management’s evaluation of the specific characteristics of the tenant’s lease; however, the value of tenant relationships has not been separated from in-place lease value because such value and its consequence to amortization expense is immaterial for the acquisition reflected in our financial statements. Factors considered by us in performing these analyses include (i) an estimate of carrying costs during the expected lease-up periods, including real estate taxes, insurance and other operating income and expenses, and (ii) costs to execute similar leases in current market conditions, such as leasing commissions, legal and other related costs.

 

Depreciation and Amortization

We compute depreciation expense using the straight-line method over estimated useful lives of up to 39 years for the building and improvements, and up to 15 years for personal property. The allocated cost of land is not depreciated. The capitalized above-market lease values, if any, are amortized as a reduction to rental income over the remaining non-cancelable terms of the lease. The value of above or below-market leases is amortized over the remaining non-cancelable periods of the lease. The value of in-place leases, exclusive of the value of above-market and below-market in-place leases, is also amortized over the remaining non-cancelable periods of the respective leases. If a lease is terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written off. Inappropriate allocation of acquisition costs, or incorrect estimates of useful lives, could result in depreciation and amortization expenses which do not appropriately reflect the allocation of our capital expenditures over future periods, as is required by generally accepted accounting principles.

Impairment

We periodically evaluate the Property for impairment indicators. These indicators may include declining tenant occupancy, weak or declining tenant profitability, cash flow or liquidity, our decision to dispose of an asset before the end of its estimated useful life or legislative, economic or market changes that permanently reduce the value of our investment. If indicators of impairment are present, we evaluate the carrying value of the Property by comparing it to its expected future undiscounted cash flows. If the sum of these expected future cash flows is less than the carrying value, we reduce the net carrying value of the Property to the present value of these expected future cash flows. This analysis requires us to judge whether indicators of impairment exist and to estimate likely future cash flows. If we misjudge or estimate incorrectly or if future tenant profitability, market or industry factors differ from our expectations, we may record an impairment charge which is inappropriate or fail to record a charge when we should have done so, or the amount of such charges may be inaccurate.

Lease Classification

Each time we enter into a new lease or materially modify an existing lease we evaluate whether it is appropriately classified as a capital lease or as an operating lease. The classification of a lease as capital or operating affects the carrying value of a property, as well as our recognition of rental payments as revenue. These evaluations require us to make estimates of, among other things, the remaining useful life and market value of a property, discount rates and future cash flows. Incorrect assumptions or estimates may result in misclassification of our leases.

 

Results of Operations

 

The Company acquired the Property and commenced operations on January 5, 2007. As of December 31, 2011, the Property was approximately 94% leased to a diverse group of tenants with staggered lease expirations.

 

Comparison of the year ended December 31, 2011 to the year ended December 31, 2010

 

Revenue

 

Total revenue increased $4.6 million to $23.2 million for the year ended December 31, 2011, as compared to $18.6 million for the year ended December 31, 2010. This increase was primarily due to an increase in revenue from base rents of $4.0 million and an increase in termination fees of $0.6 million.

 

Expenses

 

Total expenses increased approximately $2.8 million to $18.4 million for the year ended December 31, 2011 as compared to $15.6 million for the year ended December 31, 2010. The increase is predominantly due to an increase in real estate taxes of $1.6 million and an increase in interest expense of $0.7 million along with an increase in depreciation and amortization of $0.3 million and an increase operating expenses of $0.2 million.

 

Liquidity and Capital Resources

 

Cash and cash equivalents were $19.4 million and $19.6 million at December 31, 2011 and 2010, respectively. The $0.2 million decrease is attributable to $35.8 million used for investing activities which was offset by $8.5 million provided by operating activities and $27.1 million provided by financing activities.

 

As of December 31, 2011, we have a loan, which we refer to as the Loan, outstanding with John Hancock Life Insurance Company (U.S.A.), which we refer to as the Lender, in the original principal amount of $35,000,000 that matures on September 1, 2021. The proceeds of the Loan are being held by the Lender for our benefit in a restricted reserve account or accounts to be drawn upon by us from time to time for tenant improvement costs and leasing commissions at the Property upon satisfaction of certain conditions.

 

Management believes that the existing cash and cash anticipated to be generated internally by operations will be sufficient to meet working capital requirements, distributions and anticipated capital expenditures for at least the next 12 months.

Operating Activities

 

The cash provided by operating activities of $8.5 million for the year ended December 31, 2011 was primarily attributable to net income of approximately $4.9 million plus non-cash items of $6.4 million consisting primarily of depreciation and was offset by uses arising from other current accounts of $2.4 million and payments of deferred leasing costs of $0.4 million.

 

Investing Activities

 

The cash used for investing activities for the year ended December 31, 2011 of approximately $35.8 million was attributable to the purchase of real estate assets of $2.8 million and the purchase of restricted investment – held to maturity of $33.0 million associated with the loan payable..

 

Financing Activities

 

The cash provided by financing activities of approximately $27.1 million for the year ended December 31, 2011 was primarily attributable to proceeds from loan of $35.0 million, which is partially offset by distributions paid to stockholders of $7.6 million and deferred leasing costs of $0.3 million.

 

Sources and Uses of Funds

 

Our principal demands on liquidity are cash for operations and distributions to equity holders. As of December 31, 2011, we had approximately $7.4 million in accrued liabilities. In the near term, liquidity is generated by cash from operations.

 

Secured Debt

 

On August 3, 2011, we entered into a mortgage note in favor of John Hancock Life Insurance Company (U.S.A.), which we refer to as the Lender, to evidence a loan, which we refer to as the Loan, in the original principal amount of $35,000,000 that matures on September 1, 2021. The proceeds of the Loan are being held by the Lender for our benefit in a restricted reserve account or accounts to be drawn upon by us from time to time for tenant improvement costs and leasing commissions at the Property upon satisfaction of certain conditions. The Loan bears interest at the fixed rate of 4.83% per annum. We are obligated to make monthly payments of interest only for the initial 60 months of the Loan. Thereafter, we are obligated to make monthly payments of principal and interest for the remaining 60 months, based on a 25-year amortization schedule, until the maturity date, when all outstanding amounts become due. The Loan is secured, in part, by a mortgage, assignment of leases and rents and security agreement, which we refer to as the Mortgage, from us in favor of the Lender. The Mortgage constitutes a lien against the Property and has been recorded in the land records of Cook County, Illinois. Subject to customary exceptions, the Loan is nonrecourse to the Company. As of December 31, 2011, the Company had not requested that the Lender advance any of the proceeds of the Loan. Interest expense from the Loan for the years ended December 31, 2011 and 2010 were $698,000 and $0, respectively. The documents evidencing and securing the Loan include restrictions on property liens and requires compliance with various financial covenants. Financial covenants include the requirement that we provide annual reporting. We were in compliance with the Loan covenants as of December 31, 2011.

 

Fees paid associated with the Loan were $304,000 and are being amortized on a straight-line basis over the term of the Loan. Amortization expense of $12,000 is included in interest expense in the Company’s Statement of Operations for the year ended December 31, 2011.

 

Contingencies

 

We may be subject to various legal proceedings and claims that arise in the ordinary course of our business. Although occasional adverse decisions or settlements may occur, we believe that the final disposition of such matters will not have a material adverse effect on our financial position or results of operations.

Related Party Transactions

 

We have in the past engaged in and currently engage in transactions with a related party, Franklin Street and its subsidiaries FSP Investments LLC and FSP Property Management LLC, which we collectively refer to as FSP.  We expect to continue to have related party transactions with FSP in the form of management fees paid to FSP to manage the Company on behalf of our stockholders.  FSP Property Management LLC currently provides us with asset management and financial reporting services.  The asset management agreement between us and FSP Property Management LLC requires us to pay FSP Property Management LLC a monthly fee equal to one-half of one percent (0.5%) of the gross revenues of the Property for the corresponding month.  The asset management agreement between us and FSP Property Management LLC may be terminated by either party without cause at any time, upon at least thirty (30) days’ written notice.  For the years ended December 31, 2011 and 2010, management fees paid were $112,000 and $101,000, respectively.

 

On December 27, 2007, Franklin Street purchased 965.75 shares of the Preferred Stock (or approximately 43.7%), of the Company for consideration totaling $82,813,000.  Prior to purchasing any shares of the Preferred Stock, Franklin Street agreed to vote any shares held by it on any matter presented to the holders of the Preferred Stock in a manner that approximates as closely as possible the votes cast in favor of and opposed to such matter by the holders of the Preferred Stock other than Franklin Street and its affiliates.  For purposes of determining how Franklin Street votes its shares of the Preferred Stock, abstentions and non-votes by stockholders other than Franklin Street are not considered. Franklin Street is entitled to distributions that are declared on the Preferred Stock.

 

Franklin Street is the sole holder of the Company’s one share of Common Stock that is issued and outstanding.  Subsequent to the completion of the private placement of the Preferred Stock in December 2007, Franklin Street has not been entitled to share in any earnings or any dividend as a result of its ownership of the Common Stock of the Company.

 

Rental Income Commitments

 

Our commercial real estate operations consist of the leasing of the Property. Approximate future minimum rental income under non-cancelable operating leases as of December 31, 2011 is as follows:

 

Year Ending		Amount
December 31,		(in thousands)
2012		$	11,909
2013			5,790
2014			5,322
2015			3,225
2016			2,646
Thereafter			7,905
		$	36,797

 

Off-Balance Sheet Arrangements

 

The Company is a party to management, construction management and leasing agreements with an unaffiliated third party management company, Hines Interests Limited Partnership, to provide property management, construction management and leasing services, and is party to an asset management agreement with an affiliate, FSP Property Management LLC, to provide asset management and financial reporting services, all of which agreements may be terminated by either party without cause at any time, upon at least thirty (30) days’ written notice. The asset management agreement between the Company and FSP Property Management LLC requires the Company to pay FSP Property Management LLC a monthly fee equal to one-half of one percent (0.5%) of the gross revenues of the Property for the corresponding month.

 

Item 7A.     Quantitative and Qualitative Disclosure About Market Risk

 

Not applicable.

 

Item 8.    Financial Statements and Supplementary Data

 

The information required by this item is included elsewhere herein and incorporated herein by reference. Reference is made to the Index to Consolidated Financial Statements in Item 15 of Part IV.

Item 9.    Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 

Not applicable.

 

Item 9A.    Controls and Procedures

 

Disclosure Controls and Procedures

 

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2011. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2011, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Management’s Annual Report on Internal Control Over Financial Reporting

 

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officer and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

 

• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

 

• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

 

• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2011. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

 

Based on our assessment, management concluded that, as of December 31, 2011, the Company’s internal control over financial reporting is effective based on those criteria. This annual report is not required to include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. This report shall not be deemed to be filed for the purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section.

 

Changes in Internal Control Over Financial Reporting

 

No change in our internal control over financial reporting occurred during the year ended December 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B.    Other Information

 

Not applicable.

PART III

Item 10.    Directors, Executive Officers and Corporate Governance

Directors and Executive Officers

Information regarding the executive officers and directors of the Company as of February 29, 2012 is set forth below. The biographies of each of the directors below contain information regarding the person’s service as a director, business experience, director positions held currently or at any time during the last five years, information regarding involvement in certain legal or administrative proceedings, if applicable, and the experiences, qualifications, attributes or skills that caused our Board of Directors to determine that the person should serve as a director of the Company. In addition, all of our directors bring to our Board executive leadership experience derived from their service as executives of a public company and specifically as an executive of Franklin Street, as well as other key attributes that are important to an effective board: integrity, candor, analytical skills, the willingness to engage management and each other in a constructive and collaborative fashion. In addition, we have included information about each nominee’s specific experience, qualifications, attributes, or skills that led the Board to conclude that he or she should serve as a director of the Company, in light of our business and structure.

 

George J. Carter, age 63, is President and a director of the Company. Since 1996 he has also been President and Chief Executive Officer and a director of Franklin Street and is responsible for all aspects of the business of Franklin Street and its affiliates, with special emphasis on the evaluation, acquisition and structuring of real estate investments. From 1992 through 1996 he was President of Boston Financial Securities, Inc., or Boston Financial. Prior to joining Boston Financial, Mr. Carter was owner and developer of Gloucester Dry Dock, a commercial shipyard in Gloucester, Massachusetts. From 1979 to 1988, Mr. Carter served as Managing Director in charge of marketing at First Winthrop Corporation, a national real estate and investment banking firm headquartered in Boston, Massachusetts. Prior to that, he held a number of positions in the brokerage industry including those with Merrill Lynch & Co. and Loeb Rhodes & Co. Mr. Carter is a graduate of the University of Miami (B.S.). Mr. Carter is a FINRA General Securities Principal (Series 24) and holds a FINRA Series 7 general securities license and a FINRA Series 79, Investment Banker Registration license.

 

Barbara J. Fournier, age 56, is the Vice President, Chief Operating Officer, Treasurer and Secretary and a director of the Company. Since 1996, she has also been Chief Operating Officer, Treasurer and Secretary and a director of Franklin Street. In 2008, Ms. Fournier became an Executive Vice President of Franklin Street. Ms. Fournier has as her primary responsibility, together with George J. Carter, the management of all operating business affairs of Franklin Street and its affiliates. From 1993 through 1996, she was Director of Operations for the private placement division of Boston Financial. Prior to joining Boston Financial, Ms. Fournier served as Director of Operations for Schuparra Securities Corp. and as the Sales Administrator for Weston Financial Group. From 1979 through 1986, Ms. Fournier worked at First Winthrop Corporation in administrative and management capacities, including Office Manager, Securities Operations and Partnership Administration. Ms. Fournier attended Northeastern University and the New York Institute of Finance. Ms. Fournier is a member of the NYSE Amex Listed Company Council. Ms. Fournier participates in corporate governance-related continuing education sessions offered by the NYSE affiliate, Corporate Board Member. Ms. Fournier is a FINRA General Securities Principal (Series 24). She also holds other FINRA supervisory licenses including Series 4 and Series 53, and a FINRA Series 7 general securities license, a FINRA Series 99, Operations Professional license and a FINRA Series 79, Investment Banker Registration license.

 

Janet Prier Notopoulos, age 64, is a Vice President and a director of the Company. In addition, she is President of FSP Property Management LLC and an Executive Vice President and a director of Franklin Street and has as her primary responsibility the oversight of the management of the real estate assets of Franklin Street and its affiliates. Prior to joining Franklin Street in 1997, Ms. Notopoulos was a real estate and marketing consultant for various clients. From 1975 to 1983, she was Vice President of North Coast Properties, Inc., a Boston real estate investment company. Between 1969 and 1973, she was a real estate paralegal at Goodwin, Procter & Hoar. Ms. Notopoulos is a graduate of Wellesley College (B.A.) and the Harvard School of Business Administration (M.B.A).

 

Jeffrey B. Carter, age 40, is a Vice President and a director of the Company, and is George J. Carter's son. In addition, he is an Executive Vice President and Chief Investment Officer of Franklin Street. Prior to joining Franklin Street in 1998, Mr. Carter worked in Trust Administration for Northern Trust Bank in Miami, Florida. Mr. Carter is a graduate of Arizona State University (B.A.) and The George Washington University (M.A.). Mr. Carter holds a FINRA Series 7 general securities license and a FINRA Series 79, Investment Banker Registration license.

Each of our directors holds office from the time of his or her election until the next annual meeting and until a successor is elected and qualified, or until such director’s earlier death, resignation or removal. Each of the above persons has been associated with us in the positions described above since our inception in 2006. Each of them is an employee of Franklin Street, which is the sole owner of the Common Stock. Each of our officers serves in that capacity at the request of Franklin Street.

 

Each of our directors also serve as directors of FSP Galleria North Corp., FSP Phoenix Tower Corp. and FSP 50 South Tenth Street Corp., which are public reporting companies sponsored by Franklin Street. In their capacities as directors, each holds office from the time of his or her election until the next annual meeting and until a successor is elected and qualified, or until such director's earlier death, resignation or removal.

 

Sections 16(a) Beneficial Ownership Reporting Compliance

Based solely on its review of copies of reports filed by the directors and executive officers of the Company pursuant to Section 16(a) of the Exchange Act, the Company believes that during 2011 all filings required to be made by its reporting persons were timely made in accordance with the requirements of the Exchange Act.

Corporate Governance

Our board of directors does not have standing compensation, nominating and corporate governance or audit committees. Our officers are compensated by Franklin Street in connection with their employment by Franklin Street and serve as our executive officers at Franklin Street’s request. Our directors are officers of Franklin Street and we do not consider it necessary to establish a nominating committee or a policy for reviewing nominees recommended by stockholders. We do not have a director who qualifies as an “audit committee financial expert” under the regulations of the SEC. We have not adopted a code of business conduct or code of ethics for our executive officers because all of our officers are officers of Franklin Street and are governed by Franklin Street’s code of business conduct and ethics.

 

Item 11.    Executive Compensation

Each of the executive officers of the Company is compensated by Franklin Street in connection with his or her employment by Franklin Street and serves as an executive officer of the Company at Franklin Street’s request without compensation. Franklin Street is subject to the informational requirements of the Exchange Act, and, in accordance therewith, files reports and other information with the Securities and Exchange Commission (SEC). Franklin Street’s common stock is traded on the NYSE Amex under the symbol “FSP”.

 

Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The following tables set forth the beneficial ownership of the Company’s Common Stock and Preferred Stock as of February 29, 2012 by each holder who beneficially owns more than five percent of the Company’s Common Stock or Preferred Stock, by each director, by each of the Company’s executive officers and by all current directors and executive officers as a group. To the Company’s knowledge, no person or group, other than as set forth below, beneficially owns more than five percent of the Company’s Common Stock or Preferred Stock.

 

Common Stock	Number of Shares		Percentage of
	Beneficially		Outstanding
Name of Holder	Owned		Common Stock
Franklin Street Properties Corp. (1)	1		100%
George J. Carter(2)	-		0%
Barbara J. Fournier(2)	-		0%
Jeffrey B. Carter(2)	-		0%
Janet P. Notopoulos(2)	-		0%
All Directors and Executive Officers as a Group
(consisting of 4 persons)(2)	-		0%

 

Preferred Stock	Number of Shares		Percentage of
	Beneficially		Outstanding
Name of Holder	Owned		Preferred  Stock
Franklin Street Properties Corp. (1)	965.75		43.7%
George J. Carter(2)	-		0%
Barbara J. Fournier(2)	.50		.02%
Jeffrey B. Carter(2)	-		0%
Janet P. Notopoulos(2)	-		0%
All Directors and Executive Officers as a Group
(consisting of 4 persons)	.50		.02%

 

(1)

The address of Franklin Street Properties Corp. is 401 Edgewater Place, Wakefield, Massachusetts 01880.

(2)

Each of the executive officers is employed by FSP Investments LLC, a subsidiary of Franklin Street Properties Corp. Franklin Street Properties Corp. owns 100% of the issued and outstanding Common Stock of the Company.

 

Equity Compensation Plan Information

The Company does not have any equity compensation plans.

Item 13.    Certain Relationships and Related Transactions, and Director Independence

 

Certain Relationships and Related Transactions

 

George J. Carter, Barbara J. Fournier, Janet P. Notopoulos and Jeffrey B. Carter, each of whom is an executive officer of the Company, are executive officers of Franklin Street and, except for Jeffrey B. Carter, are directors of Franklin Street. Jeffrey B. Carter is George J. Carter’s son. None of such persons received any remuneration from the Company for their services.

 

We have in the past engaged in and currently engage in transactions with a related party, Franklin Street and its subsidiaries FSP Investments LLC and FSP Property Management LLC, which we collectively refer to as FSP.  We expect to continue to have related party transactions with FSP in the form of management fees paid to FSP to manage the Company on behalf of our stockholders.  FSP Property Management LLC currently provides us with asset management and financial reporting services.  The asset management agreement between us and FSP Property Management LLC requires us to pay FSP Property Management LLC a monthly fee equal to one-half of one percent (0.5%) of the gross revenues of the Property.  The asset management agreement between us and FSP Property Management LLC may be terminated by either party without cause at any time, upon at least thirty (30) days’ written notice.  For the years ended December 31, 2011 and 2010, management fees paid were $112,000 and $101,000, respectively.

 

On December 27, 2007, Franklin Street purchased 965.75 shares of Preferred Stock (or approximately 43.7%), for consideration totaling $82,813,000.  Prior to purchasing any shares of the Preferred Stock, Franklin Street agreed to vote any shares held by it on any matter presented to the holders of the Preferred Stock in a manner that approximates as closely as possible the votes cast in favor of and opposed to such matter by the holders of the Preferred Stock other than Franklin Street and its affiliates.  For purposes of determining how Franklin Street votes its shares of the Preferred Stock, abstentions and non-votes by stockholders other than Franklin Street are not considered. Franklin Street is entitled to distributions that are declared on the Preferred Stock.

 

Franklin Street is the sole holder of the Company’s one share of Common Stock that is issued and outstanding.  Subsequent to the completion of the private placement of the Preferred Stock in December 2007, Franklin Street has not been entitled to share in any earnings or any dividend as a result of its ownership of the Common Stock of the Company.

 

Director Independence

 

Our securities are not listed on a national securities exchange or in an inter-dealer quotation system. None of our directors qualifies as “independent” under the standards of the NYSE Amex, where Franklin Street is listed.

 

Item 14.    Principal Accounting Fees and Services

 

Independent Auditor Fees and Other Matters

The following tables summarize the aggregate fees billed by the Company’s independent registered public accounting firm, Braver PC, for audit services for each of the last two fiscal years and for other services rendered to the Company in each of the last two fiscal years.

 

Fee Category		2011				2010
Audit Fees (1)		$	64,050			$	64,050
Audit-Related Fees (2)
Tax Fees (3)			5,250				5,250
All Other Fees (4)
Total Fees		$	69,300			$	69,300

 

(1)

Audit fees consist of fees for the audit of our financial statements, the review of the interim financial statements included in our quarterly reports on Form 10-Q, and other professional services provided in connection with statutory and regulatory filings or engagements.

(2)

Audit-related fees consist of fees for assurance and related services that are reasonably related to the performance of the audit and the review of our financial statements and which are not reported under “Audit Fees”.

(3)

Tax fees consist of fees for tax compliance, tax advice and tax planning services. Tax compliance services, which relate to the preparation of tax returns, claims for refunds and tax payment-planning services, accounted for $5,250 of the total tax fees incurred in 2011 and 2010.

(4)

The Company was not billed by its independent registered public accounting firm in 2011 or 2010 for any other fees.

Pre-Approval Policy and Procedures

 

The Company has not adopted policies and procedures relating to the pre-approval of audit and non-audit services that are to be performed by the Company’s independent registered public accounting firm.

PART IV

 

Item 15.    Exhibits, Financial Statement Schedules

 

(a)

The following documents are filed as part of this report.

1.

Financial Statements: The Financial Statements listed in the accompanying Index to Consolidated Financial Statements are filed as part of this Annual Report on Form 10-K.

2.

Financial Statement Schedule: The Financial Statement Schedule listed on the accompanying Index to Consolidated Financial Statements is filed as part of this Annual Report on Form 10-K.

3.

Exhibits: The Exhibits listed in the Exhibit Index are filed as part of this Annual Report on Form 10-K.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf as of March 9, 2012 by the undersigned, thereunto duly authorized.

FSP 303 East Wacker Drive Corp.

By: /s/ George J. Carter

George J. Carter

President

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ George J. Carter         George J. Carter	President and Director (Principal Executive Officer)	March 9, 2012
/s/ Barbara J. Fournier   Barbara J. Fournier	Vice President, Chief Operating Officer, Treasurer, Secretary and Director (Principal Financial Officer and Principal Accounting Officer)	March 9, 2012
/s/ Janet P. Notopoulos Janet P. Notopoulos	Director, Vice President	March 9, 2012
/s/ Jeffrey B. Carter	Director, Vice President
Jeffrey B. Carter		March 9, 2012

EXHIBIT INDEX

 

Exhibit No.	Description
3.1	Certificate of Incorporation, incorporated herein by reference to Exhibit 3.1 to FSP 303 East Wacker Drive Corp.’s Registration Statement on Form 10, as amended (File No. 000-53165)
3.2	By-Laws, incorporated herein by reference to Exhibit 3.2 to FSP 303 East Wacker Drive Corp.’s Registration Statement on Form 10, as amended (File No. 000-53165)
10.1	Office Lease, dated August 1997, between Metropolitan Life Insurance Company and KPMG Peat Marwick LLP, as amended by that certain First Amendment, dated December 4, 1997, between Metropolitan Life Insurance Company and KPMG Peat Marwick LLP, as further amended by that certain Second Amendment to Lease, dated December 4, 1997, between Metropolitan Life Insurance Company and KPMG Peat Marwick LLP, as further amended by that certain Third Amendment to Lease, dated March 4, 2004, between 303 Wacker Realty L.L.C. and KPMG LLP, as further amended by that certain Fourth Amendment to Lease, dated January 8, 2009, between FSP 303 East Wacker Drive LLC and KPMG LLP, incorporated herein by reference to Exhibit 10.1 to FSP 303 East Wacker Drive Corp.’s Registration Statement on Form 10, as amended (File No. 000-53165)
10.2	Office Lease, dated January 1, 1996, between Metropolitan Life Insurance Company and Consoer Townsend Environdyne Engineers, Inc., as amended by that certain First Amendment to Lease, dated October 1, 1999, between 303 Wacker Realty L.L.C. and Consoer Townsend Environdyne Engineers, Inc., as further amended by that certain Second Amendment to Lease, dated January 22, 2001, between 303 Wacker Realty L.L.C. and Consoer Townsend Environdyne Engineers, Inc., as further amended by that certain Third Amendment to Lease, dated March 1, 2004, between 303 Wacker Realty L.L.C. and Consoer Townsend Environdyne Engineers, Inc., incorporated herein by reference to Exhibit 10.2 to FSP 303 East Wacker Drive Corp.’s Registration Statement on Form 10, as amended (File No. 000-53165)
10.3	Asset Management Agreement, dated January 5, 2007, between FSP 303 East Wacker Drive LLC and FSP Property Management LLC, as amended by that certain First Amendment to Asset Management Agreement, dated August 23, 2007, between FSP 303 East Wacker Drive LLC and FSP Property Management LLC, incorporated herein by reference to Exhibit 10.3 to FSP 303 East Wacker Drive Corp.’s Registration Statement on Form 10, as amended (File No. 000-53165)
10.4	Voting Agreement, dated January 1, 2007, among FSP 303 East Wacker Drive Corp., George J. Carter and Franklin Street Properties Corp., incorporated herein by reference to Exhibit 10.4 to FSP 303 East Wacker Drive Corp.’s Registration Statement on Form 10, as amended (File No. 000-53165)
10.5	License Agreement, dated November 24, 2010 by and between FSP 303 East Wacker Drive LLC and Groupon Inc., as amended by First Amendment to License Agreement dated January 7, 2011 by and between FSP 303 East Wacker Drive LLC and Groupon Inc., as further amended by Second Amendment to License Agreement dated February 15, 2011 by and between FSP 303 East Wacker Drive LLC and Groupon Inc., as further amended by Third Amendment to License Agreement dated May 23, 2011 by and between FSP 303 East Wacker Drive LLC and Groupon Inc., incorporated herein by reference to Exhibit 10.1 to FSP 303 East Wacker Drive Corp.’s Current Report on Form 8-K filed on May 25, 2011 (File No. 000-53165)
10.6	Mortgage Note dated August 3, 2011 from FSP 303 East Wacker Drive LLC in favor of John Hancock Life Insurance Company (U.S.A.), incorporated herein by reference to Exhibit 10.1 to FSP 303 East Wacker Drive Corp.’s Current Report on Form 8-K filed on August 4, 2011 (File No. 000-53165)

 

 

10.7	Tenant Improvement and Leasing Commissions Agreement dated August 3, 2011 by and between FSP 303 East Wacker Drive LLC and John Hancock Life Insurance Company (U.S.A.), incorporated herein by reference to Exhibit 10.2 to FSP 303 East Wacker Drive Corp.’s Current Report on Form 8-K filed on August 4, 2011 (File No. 000-53165)
10.8	Mortgage, Assignment of Leases and Rents and Security Agreement dated August 3, 2011 from FSP 303 East Wacker Drive LLC in favor of John Hancock Life Insurance Company (U.S.A.), incorporated herein by reference to Exhibit 10.3 to FSP 303 East Wacker Drive Corp.’s Current Report on Form 8-K filed on August 4, 2011 (File No. 000-53165)
10.9	Guaranty Agreement dated August 3, 2011 from FSP 303 East Wacker Drive LLC and FSP 303 East Wacker Drive Corp. in favor of John Hancock Life Insurance Company (U.S.A.), incorporated herein by reference to Exhibit 10.4 to FSP 303 East Wacker Drive Corp.’s Current Report on Form 8-K filed on August 4, 2011 (File No. 000-53165)
10.10	Indemnification Agreement dated August 3, 2011 from FSP 303 East Wacker Drive LLC and FSP 303 East Wacker Drive Corp. in favor of John Hancock Life Insurance Company (U.S.A.), incorporated herein by reference to Exhibit 10.5 to FSP 303 East Wacker Drive Corp.’s Current Report on Form 8-K filed on August 4, 2011 (File No. 000-53165)
21.1	Subsidiaries of FSP 303 East Wacker Drive Corp., incorporated herein by reference to Exhibit 21.1 to FSP 303 East Wacker Drive Corp.’s Registration Statement on Form 10, as amended (File No. 000-53165)
31.1*	Certification of FSP 303 East Wacker Drive Corp.'s principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of FSP 303 East Wacker Drive Corp.'s principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certification of FSP 303 East Wacker Drive Corp.'s principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*	Certification of FSP 303 East Wacker Drive Corp.'s principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101**	The following materials from FSP 303 East Wacker Drive Corp.’s Annual Report on Form 10-K for the year ended December 31, 2011, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Cash Flows; and (iv) the Notes to Consolidated Financial Statements, tagged as blocks of text.
*	Filed herewith.
**	XBRL (eXtensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these Sections.

FSP 303 East Wacker Drive Corp.

Index to Consolidated Financial Statements

 

Table of Contents

		Page
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets as of December 31, 2011 and 2010		F-3
Consolidated Statements of Operations for the years ended December 31, 2011 and 2010		F-4
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2010 and 2011		F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2011 and 2010		F-6
Notes to Consolidated Financial Statements		F-7
Financial Statement Schedule – Schedule III		F-16

 

[LETTERHEAD OF BRAVER PC]

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Stockholders

FSP 303 East Wacker Drive Corp.

Wakefield, Massachusetts

 

 

 

We have audited the accompanying consolidated balance sheets of FSP 303 East Wacker Drive Corp. as of December 31, 2011 and 2010, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the years then ended. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FSP 303 East Wacker Drive Corp. as of December 31, 2011 and 2010, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

 

 

/s/ Braver PC

Needham, Massachusetts

March 9, 2012

 

FSP 303 East Wacker Drive Corp.
Consolidated Balance Sheets

 

		December 31,
(in thousands, except share and par value amounts)		2011				2010
Assets:
Real estate investments, at cost:
Land		$	26,200			$	26,200
Buildings and improvements			135,943				133,609
Furniture and equipment			594				161
			162,737				159,970
Less accumulated depreciation			18,541				14,451
Real estate investments, net			144,196				145,519
Acquired real estate leases, net of accumulated amortization       of $6,020 and $4,837, respectively			2,230				3,435
Acquired favorable real estate leases, net of accumulated       amortization of $3,309 and $2,647, respectively			1,884				2,546
Cash and cash equivalents			19,384				19,585
Restricted cash			2,017				-
Restricted investment			32,993				-
Tenant rent and other receivables, less allowance        for doubtful accounts of $60 and $84, respectively			409				63
Step rent receivable			2,410				2,409
Deferred leasing costs, net of accumulated       amortization of $745 and $428, respectively			1,182				1,252
Deferred financing costs, net of accumulated       amortization of $12 and $0, respectively			292				-
Prepaid expenses and other assets			145				73
Total assets		$	207,142			$	174,882
Liabilities and Stockholders’ Equity:
Liabilities:
Accounts payable and accrued expenses		$	7,372			$	7,639
Tenant security deposits			589				343
Loan payable			35,000				-
Acquired unfavorable real estate leases, net of accumulated       amortization of $84 and $70, respectively			78				95
Total liabilities			43,039				8,077
Commitments and Contingencies:			-				-
Stockholders’ Equity:
Preferred Stock, $.01 par value, 2,210 shares authorized,
issued and outstanding, aggregate liquidation preference $221,000			-				-
Common Stock, $.01 par value, 1 share
authorized, issued and outstanding			-				-
Additional paid-in capital			197,162				197,162
Retained earnings and distributions in excess of earnings			(33,059	)			(30,357	)
Total Stockholders’ Equity			164,103				166,805
Total Liabilities and Stockholders’ Equity		$	207,142			$	174,882

 See accompanying notes to consolidated financial statements.

 

FSP 303 East Wacker Drive Corp.
Consolidated Statements of Operations

 

		For the Year Ended December 31,
(in thousands, except share and per share amounts)		2011				2010
Revenues:
Rental		$	23,236			$	18,597
Total revenue			23,236				18,597
Expenses:
Rental operating expenses			6,443				6,267
Real estate taxes and insurance			5,477				3,850
Depreciation and amortization			5,754				5,501
Interest expense			710				-
Total expenses			18,384				15,618
Net income before interest income			4,852				2,979
Interest income			42				53
Net income attributable to preferred stockholders		$	4,894			$	3,032
Weighted average number of preferred shares outstanding,
basic and diluted			2,210				2,210
Net income per preferred share, basic and diluted		$	2,214			$	1,372

 See accompanying notes to consolidated financial statements.

 

 

FSP 303 East Wacker Drive Corp.
Consolidated Statements of Changes in Stockholders’ Equity
For the Years Ended December 31, 2010 and 2011

 

 

(in thousands, except per share amounts)		Preferred Stock				Common  Stock				Additional Paid-in Capital				Retained Earnings and Distributions in Excess of Earnings				Total Stockholders' Equity
Balance, January 1, 2010		$	-			$	-			$	197,162			$	(24,912	)		$	172,250
Distributions - preferred stockholders
or $3,836 per preferred share			-				-				-				(8,477	)			(8,477	)
Net income			-				-				-				3,032				3,032
Balance, December 31, 2010			-				-				197,162				(30,357	)			166,805
Distributions - preferred stockholders
or $3,437 per preferred share			-				-				-				(7,596	)			(7,596	)
Net income			-				-				-				4,894				4,894
Balance, December 31, 2011		$	-			$	-			$	197,162			$	(33,059	)		$	164,103

 See accompanying notes to consolidated financial statements.

 

 

FSP 303 East Wacker Drive Corp.
Consolidated Statements of Cash Flows

 

		For the Year Ended December 31,
(in thousands)		2011				2010
Cash flows from operating activities:
Net income		$	4,894			$	3,032
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization			5,766				5,501
Amortization of favorable real estate leases			662				741
Amortization of unfavorable real estate leases			(17	)			(187	)
Increase (decrease) in bad debt reserve			(24	)			84
Changes in operating assets and liabilities:
Restricted cash			(2,017	)			-
Tenant rent receivable			(322	)			40
Step rent receivable			(1	)			(75	)
Prepaid expenses and other assets			(72	)			80
Accounts payable and accrued expenses			(236	)			(496	)
Tenant security deposits			246				(9	)
Payment of deferred leasing costs			(389	)			(624	)
Net cash provided by operating activities			8,490				8,087
Cash flows from investing activities:
Purchase of real estate assets			(2,798	)			(1,029	)
Restricted investment			(32,993	)			-
Net cash used for investing activities			(35,791	)			(1,029	)
Cash flows from financing activities:
Distributions to stockholders			(7,596	)			(8,477	)
Proceeds from loan payable			35,000				-
Deferred financing costs			(304	)			-
Net cash provided by (used for) financing activities			27,100				(8,477	)
Net decrease in cash and cash equivalents			(201	)			(1,419	)
Cash and cash equivalents, beginning of year			19,585				21,004
Cash and cash equivalents, end of year		$	19,384			$	19,585
Supplemental disclosure of cash flow information:
Cash paid for interest		$	557			$	-
Disclosure of non-cash investing activities:
Accrued costs for purchase of real estate assets		$	85			$	116

 See accompanying notes to consolidated financial statements.

 

 

FSP 303 East Wacker Drive Corp.

Notes to Consolidated Financial Statements

 

1.    Organization

 

FSP 303 East Wacker Drive Corp. (the “Company”) was organized on December 13, 2006 as a corporation under the laws of the State of Delaware to purchase, own, and operate a twenty-eight story Class “A” multi-tenant office tower containing approximately 859,187 rentable square feet of space located in downtown Chicago, Illinois (the “Property”). The Company acquired the Property and commenced operations on January 5, 2007. Franklin Street Properties Corp. (“Franklin Street”) (NYSE Amex: FSP) holds the sole share of the Company’s common stock, $.01 par value per share (the “Common Stock”). Between February 2007 and December 2007, FSP Investments LLC (member, FINRA and SIPC), a wholly-owned subsidiary of Franklin Street, completed the sale on a best efforts basis of 2,210 shares of the Company’s preferred stock, $.01 par value per share (the “Preferred Stock”). FSP Investments LLC sold the Preferred Stock in a private placement offering to “accredited investors” within the meaning of Regulation D under the Securities Act of 1933.

 

All references to the Company refer to FSP 303 East Wacker Drive Corp. and its consolidated subsidiary, collectively, unless the context otherwise requires.

 

2.    Summary of Significant Accounting Policies

 

BASIS OF PRESENTATION

 

The accompanying consolidated financial statements include all of the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

ESTIMATES AND ASSUMPTIONS

 

The Company prepares its consolidated financial statements and related notes in conformity with accounting principles generally accepted in the United States of America (“GAAP”). These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

 

REAL ESTATE AND DEPRECIATION

 

Real estate assets are stated at the lower of cost or fair value, as appropriate, less accumulated depreciation.

 

Costs related to property acquisition and improvements are capitalized. Typical capital items include new roofs, site improvements, various exterior building improvements and major interior renovations.

 

Routine replacements and ordinary maintenance and repairs that do not extend the life of the asset are expensed as incurred. Funding for repairs and maintenance items typically is provided by cash flows from operating activities.

 

Depreciation is computed using the straight-line method over the assets' estimated useful lives as follows:

 

	Category	Years
	Building - Commercial	39
	Building Improvements	15-39
	Furniture & Equipment	5-7

 

The Company reviews the Property to determine if the carrying amount will be recovered from future cash flows if certain indicators of impairment are identified at the Property. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. When indicators of impairment are present and the sum of the undiscounted future cash flows is less than the carrying value of such asset, an impairment loss is recorded equal to the difference between the asset’s current carrying value and its fair value based on discounting its estimated future cash flows. At December 31, 2011 and 2010, no impairment charges were recorded.

 

FSP 303 East Wacker Drive Corp.

Notes to Consolidated Financial Statements

 

2.    Summary of Significant Accounting Policies (continued)

REAL ESTATE AND DEPRECIATION (continued)

 

Depreciation expense of $4,090,000 and $3,852,000 is included in Depreciation and Amortization in the Company’s Consolidated Statements of Operations for the years ended December 31, 2011 and 2010, respectively.

 

ACQUIRED REAL ESTATE LEASES

 

Acquired real estate leases costs represent the estimated value of legal and leasing costs related to acquired leases that were included in the purchase price when the Company acquired the Property. The Company segregates these costs from its investment in real estate. The Company subsequently amortizes these costs on a straight-line basis over the remaining lives of the related leases. Amortization expense of $1,205,000 and $1,402,000 is included in Depreciation and Amortization in the Company’s Consolidated Statements of Operations for the years ended December 31, 2011 and 2010, respectively.

 

Acquired real estate lease costs included in the purchase price of the Property were $11,222,000. Detail of the acquired real estate leases is as follows:

 

(in thousands)		December 31,
		2011				2010
Cost		$	8,250			$	8,272
Accumulated amortization			(6,020	)			(4,837	)
Book value		$	2,230			$	3,435

 

The estimated annual amortization expense for the five years succeeding December 31, 2011 is as follows:

 

(in thousands)
2012	$            996
2013	$            581
2014	$            449
2015	$            132
2016	$              72

 

ACQUIRED FAVORABLE REAL ESTATE LEASES

 

Acquired favorable real estate leases represent the value related to the leases when the lease payments due under a tenant’s lease exceed the market rate of the lease at the date the Property was acquired. The Company reports this value separately from its investment in real estate. The Company subsequently amortizes this amount on a straight-line basis over the remaining life of the tenant’s lease. Amortization of $662,000 and $741,000 is shown as a reduction of rental income in the Company’s Consolidated Statements of Operations for the years ended December 31, 2011 and 2010, respectively.

 

The acquired favorable real estate leases included in the purchase price of the property were $8,034,000. Detail of the acquired favorable real estate leases is as follows:

 

(in thousands)		December 31,
		2011				2010
Cost		$	5,193			$	5,193
Accumulated amortization			(3,309	)			(2,647	)
Book value		$	1,884			$	2,546

 

FSP 303 East Wacker Drive Corp.

Notes to Consolidated Financial Statements

 

2.    Summary of Significant Accounting Policies (continued)

 

ACQUIRED FAVORABLE REAL ESTATE LEASES (continued)

 

The estimated annual amortization for the five years succeeding December 31, 2011 is as follows:

 

(in thousands)
2012	$            637
2013	$            587
2014	$            478
2015	$            123
2016	$              59

 

ACQUIRED UNFAVORABLE REAL ESTATE LEASES

 

Acquired unfavorable real estate leases represent the value relating to leases with rents below the market rate at the time the Property was acquired. Amortization is computed using the straight-line method over the lives of the leases assumed. Amortization of $17,000 and $187,000 is included with rental revenue in the Company’s Consolidated Statements of Operations for the years ended December 31, 2011 and 2010, respectively.

 

The acquired unfavorable real estate leases included in the purchase price of the property were $613,000. Details of the acquired unfavorable real estate leases are as follows:

 

(in thousands)		December 31,
		2011				2010
Cost		$	162			$	165
Accumulated amortization			(84	)			(70	)
Book value		$	78			$	95

 

 

The estimated annual amortization for the five years succeeding December 31, 2011 is as follows:

 

(in thousands)
2012	$              17
2013	$              17
2014	$              17
2015	$              16
2016	$              11

 

CASH AND CASH EQUIVALENTS

 

The Company considers all highly liquid debt instruments with an initial maturity of three months or less to be cash equivalents. At December 31, 2011, the Company has approximately $15,500,000 in reserves from funded reserves set aside and savings by lowering dividends, in anticipation of future capital needs of the Property. These funds typically are used for the payment of real estate assets and deferred leasing commissions; however, there is no legal restriction on their use and they may be used for any Company purpose.

 

 

FSP 303 East Wacker Drive Corp.

Notes to Consolidated Financial Statements

 

2.    Summary of Significant Accounting Policies (continued)

 

RESTRICTED CASH AND INVESTMENT

 

The Company is required under the loan payable to hold proceeds from the loan in a restricted reserve account or accounts. Restricted investment under the loan payable consists of investments in certificates of deposit and a U.S. Treasury Bill which the Company has the ability and intent to hold until their maturity. As of December 31, 2011, the Company held various certificates of deposit with an original maturity of five to seven months at a total carrying value of $18,000,000. The Company also held an investment in a U.S. Treasury Bill that matures on August 23, 2012 with the value of $14,993,000. The Company believes the aggregate fair value is approximately the same as its carrying value.

 

CONCENTRATION OF CREDIT RISKS

 

Cash, cash equivalents and short-term investments are financial instruments that potentially subject the Company to a concentration of credit risk. The Company maintains its cash balances and short-term investments principally in banks which the Company believes to be creditworthy. The Company periodically assesses the financial condition of the banks and believes that the risk of loss is minimal. Cash balances held with various financial institutions frequently exceed the insurance limit of $250,000 provided by the Federal Deposit Insurance Corporation.

 

For the years ended December 31, 2011 and 2010, rental income was derived from various tenants. As such, future receipts are dependent upon the financial strength of the lessees and their ability to perform under the lease agreements.

 

The following tenants represent greater than 10% of rental revenue as of December 31, 2011 and 2010:

 

	2011	2010
KPMG LLP	24.5%	35.1%
AECOM USA, Inc.	12.6%	17.9%
Groupon Inc	38.4%	11.5%

 

Groupon Inc and KPMG LLP leases will expire in July and August, 2012, respectively.

 

FINANCIAL INSTRUMENTS

 

The Company estimates that the carrying value of cash and cash equivalents, restricted cash, restricted investment, and loan payable approximate their fair values based on their short-term maturity and prevailing interest rates.

 

STEP RENT RECEIVABLE

 

Certain leases provide for fixed rental increases over the life of the lease. Rental revenue is recognized on the straight-line basis over the related lease term; however, billings by the Company are based on required minimum rentals in accordance with the lease agreements. Step rent receivable, which is the cumulative revenue recognized in excess of amounts billed by the Company, is $2,410,000 and $2,409,000 at December 31, 2011 and 2010, respectively.

 

TENANT RENT AND OTHER RECEIVABLES

 

Tenant rent and other receivables are reported at the amount the Company expects to collect on balances outstanding at year-end. The Company provides an allowance for doubtful accounts based on its estimate of a tenant’s ability to make future rent payments. The computation of this allowance is based in part on the tenant’s payment history and current credit status. Management monitors outstanding balances and tenant relationships and concluded that an allowance of $60,000 and $84,000 as of December 31, 2011 and 2010, respectively, is sufficient.

 

DEFERRED LEASING COSTS

 

Deferred leasing commissions represent direct and incremental external leasing costs incurred in the leasing of commercial space. These costs are capitalized and are amortized on a straight-line basis over the terms of the related lease agreements. Amortization expense was $459,000 and $247,000 for the years ended December 31, 2011 and 2010, respectively.

 

FSP 303 East Wacker Drive Corp.

Notes to Consolidated Financial Statements

 

2.    Summary of Significant Accounting Policies (continued)

 

REVENUE RECOGNITION

 

The Company has retained substantially all of the risks and benefits of ownership of the Company's commercial property and accounts for its leases as operating leases. Rental income from leases, which may include rent concession (including free rent and tenant improvement allowances) and scheduled increases in rental rates during the lease term, is recognized on a straight-line basis. The Company does not have any percentage rent arrangements with its commercial property tenants. Reimbursable costs are included in rental income in the year earned.

 

A schedule showing the components of rental revenue is shown below.

 

		Year Ended				Year Ended
		December 31,				December 31,
(in thousands)		2011				2010
Income from leases		$	14,072			$	10,073
Straight-line rent adjustment			1				32
Reimbursable expenses and parking			9,174				9,026
Termination fees			634				20
Amortization of favorable leases			(662	)			(741	)
Amortization of unfavorable leases			17				187
Total		$	23,236			$	18,597

 

INTEREST INCOME

 

Interest income is recognized when the earnings process is complete.

 

INCOME TAXES

 

The Company has elected to be taxed as a Real Estate Investment Trust (“REIT”) under the Internal Revenue Code of 1986, as amended. As a REIT, the Company generally is entitled to a tax deduction for dividends paid to its stockholders, thereby effectively subjecting the distributed net income of the Company to taxation at the stockholder level only. The Company must comply with a variety of restrictions to maintain its status as a REIT. These restrictions include the type of income it can earn, the type of assets it can hold, the number of stockholders it can have and the concentration of their ownership, and the amount of the Company’s taxable income that must be distributed annually.

 

NET INCOME PER SHARE

 

Basic net income per share of Preferred Stock is computed by dividing net income by the weighted average number of shares of Preferred Stock outstanding during the period. Diluted net income per share of Preferred Stock reflects the potential dilution that could occur if securities or other contracts to issue shares were exercised or converted into shares. There were no potential dilutive shares outstanding at December 31, 2011 and 2010. Subsequent to the completion of the offering shares of Preferred Stock, the holder of Common Stock is not entitled to share in any income nor in any related dividend.

 

FAIR VALUE MEASUREMENTS

 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There is also an established fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value. Financial assets and liabilities recorded on the Consolidated Balance Sheet at fair value are categorized based on the inputs to the valuation techniques as follows:

FSP 303 East Wacker Drive Corp.

Notes to Consolidated Financial Statements

 

2.    Summary of Significant Accounting Policies (continued)

 

FAIR VALUE MEASUREMENTS (continued)

 

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which is typically based on an entity’s own assumptions, as there is little, if any, related market activity or information. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. These inputs were considered and applied to the Company’s restricted investment, and Level 1 inputs were used to value the investment.

 

SUBSEQUENT EVENTS

 

In preparing these consolidated financial statements the Company evaluated events that occurred through the date of issuance of these financial statements for potential recognition or disclosure.

 

3.    Income Taxes

 

The Company files as a REIT under Sections 856-860 of the Internal Revenue Code of 1986, as amended. In order to qualify as a REIT, the Company is required to distribute at least 90% of its taxable income to stockholders and to meet certain asset and income tests as well as certain other requirements. The Company will generally not be liable for federal income taxes, provided it satisfies these requirements. Even as a qualified REIT, the Company is subject to certain state and local taxes on its income and property.

 

The Company adopted an accounting pronouncement related to uncertainty in income taxes effective January 1, 2007, which did not result in recording a liability, nor was any accrued interest and penalties recognized with the adoption. Accrued interest and penalties will be recorded as income tax expense, if the Company records a liability in the future. The Company’s effective tax rate was not affected by the adoption. The Company files income tax returns in the U.S. federal jurisdiction and the State of Illinois jurisdiction. The statute of limitations for the Company’s income tax returns is generally three years and as such, the Company’s returns that remain subject to examination would be primarily from 2008 and thereafter.

 

For the periods ended December 31, 2007 and 2006, the Company incurred a net operating loss for income tax purposes of approximately $5,866,000 and $10,000, respectively that can be carried forward until it expires in the year 2027 and 2026, respectively.

 

At December 31, 2011, the Company’s net tax basis of its real estate assets was $162,093,000.

FSP 303 East Wacker Drive Corp.

Notes to Consolidated Financial Statements

 

3.    Income Taxes (continued)

 

The following schedule reconciles net income to taxable income subject to dividend requirements:

 

		Year Ended				Year Ended
		December 31,				December 31,
(in thousands)		2011				2010
Net income		$	4,894			$	3,032
Adjustments:   Book depreciation and amortization			5,766				5,501
Amortization of favorable real estate leases			662				741
Deferred rent			(97	)			99
Other adjustment			(24	)			84
Tax depreciation and amortization			(4,505	)			(4,176	)
Amortization of unfavorable real estate leases			(17	)			(187	)
Straight-line rent adjustment			(53	)			(32	)
Taxable income		$	6,626			$	5,062

 

The following schedule summarizes the tax components of the distributions paid for the years ended December 31:

 

(in thousands)		2011								2010
			Preferred				%				Preferred				%
Ordinary income		$	6,721				88%			$	5,172				61%
Return of Capital			875				12%				3,305				39%
Total		$	7,596				100%			$	8,477				100%

 

4.    Loan Payable

 

On August 3, 2011, the Company entered into a mortgage note in favor of John Hancock Life Insurance Company (U.S.A.) (the “Lender”) to evidence a loan (the “Loan”) in the original principal amount of $35,000,000 that matures on September 1, 2021. The proceeds of the Loan are being held by the Lender for the Company’s benefit in a restricted reserve account or accounts to be drawn upon by the Company from time to time for tenant improvement costs and leasing commissions at the Property upon satisfaction of certain conditions. The Loan bears interest at the fixed rate of 4.83% per annum. The Company is obligated to make monthly payments of interest only for the initial 60 months of the Loan. Thereafter, the Company is obligated to make monthly payments of principal and interest for the remaining 60 months, based on a 25-year amortization schedule, until the maturity date, when all outstanding amounts become due. The Loan is secured, in part, by a mortgage, assignment of leases and rents and security agreement (the “Mortgage”) from the Company in favor of the Lender. The Mortgage constitutes a lien against the Property and has been recorded in the land records of Cook County, Illinois. Subject to customary exceptions, the Loan is nonrecourse to the Company. As of December 31, 2011, the Company had not requested that the Lender advance any of the proceeds of the Loan. Interest expense from the Loan for the years ended December 31, 2011 and 2010 were $698,000 and $0, respectively. The documents evidencing and securing the Loan include restrictions on property liens and requires compliance with various financial covenants. Financial covenants include the requirement that the Company provide annual reporting. The Company was in compliance with the Loan covenants as of December 31, 2011.

 

Fees paid associated with the Loan were $304,000 and are being amortized on a straight-line basis over the term of the Loan. Amortization expense of $12,000 is included in interest expense in the Company’s Statement of Operations for the year ended December 31, 2011.

 

FSP 303 East Wacker Drive Corp.

Notes to Consolidated Financial Statements

 

5.    Capital Stock

 

PREFERRED STOCK

 

Generally, each holder of shares of Preferred Stock is entitled to receive ratably all dividends, if any, declared by the Board of Directors out of funds legally available. The right to receive dividends is non-cumulative, and no right to dividends shall accrue by reason of the fact that no dividend has been declared in any prior year. Each holder of shares of Preferred Stock will be entitled to receive, to the extent that funds are available therefore, $100,000 per share of Preferred Stock, before any payment to the holder of Common Stock, out of distributions to stockholders upon liquidation, dissolution or the winding up of the Company; the balance of any such funds available for distribution will be distributed among the holders of shares of Preferred Stock and the holder of Common Stock, pro rata based on the number of shares held by each; provided, however, that for these purposes, one share of Common Stock will be deemed to equal one-tenth of a share of Preferred Stock.

 

In addition to certain rights to remove and replace directors with or without cause, the holders of a majority of the then outstanding shares of Preferred Stock shall have the further right to approve or disapprove a proposed sale of the Property, the merger of the Company with any other entity and amendments to the corporate charter. A vote of the holders of not less than 66.67% of the then outstanding shares of Preferred Stock is required for the issuance of any additional shares of capital stock. Holders of shares of Preferred Stock have no redemption or conversion rights.

 

COMMON STOCK

 

Franklin Street is the sole holder of the Company’s Common Stock. Franklin Street has the right to vote to elect the directors of the Company and to vote on all matters, subject to the voting rights of the Preferred Stock set forth above. Subsequent to the completion of the offering of the shares of Preferred Stock in December 2007, Franklin Street, as the holder of Common Stock, was not, and is not entitled to share in any earnings or any related dividend with respect to the Common Stock.

 

6.     Related Party Transactions

The Company has in the past engaged in and currently engages in transactions with a related party, Franklin Street and its subsidiaries, FSP Investments LLC and FSP Property Management LLC (collectively, “FSP”). The Company expects to continue to have related party transactions with FSP in the form of management fees paid to FSP to manage the Company on behalf of its stockholders. FSP Property Management LLC currently provides the Company with asset management and financial reporting services. The asset management agreement between the Company and FSP Property Management LLC requires the Company to pay FSP Property Management LLC a monthly fee equal to one-half of one percent (0.5%) of the gross revenues of the Property for the corresponding month. The asset management agreement between the Company and FSP Property Management LLC may be terminated by either party without cause at any time, upon at least thirty (30) days’ written notice. For the years ended December 31, 2011 and 2010, management fees paid were $112,000 and $101,000, respectively.

 

On December 27, 2007, Franklin Street purchased 965.75 shares of the Preferred Stock (or approximately 43.7%), of the Company for consideration totaling $82,813,000. Prior to purchasing any shares of the Preferred Stock, Franklin Street agreed to vote any shares held by it on any matter presented to the holders of the Preferred Stock in a manner that approximates as closely as possible the votes cast in favor of and opposed to such matter by the holders of the Preferred Stock other than Franklin Street and its affiliates. For purposes of determining how Franklin Street votes its shares of the Preferred Stock, abstentions and non-votes by stockholders other than Franklin Street are not considered. Franklin Street is entitled to distributions that are declared on the Preferred Stock.

 

Franklin Street is the sole holder of the Company’s one share of Common Stock that is issued and outstanding. Subsequent to the completion of the private placement of the Preferred Stock in December 2007, Franklin Street has not been entitled to share in any earnings or any dividend as a result of its ownership of the Common Stock of the Company.

FSP 303 East Wacker Drive Corp.

Notes to Consolidated Financial Statements

 

7.    Commitments and Contingencies

 

The Company, as lessor, has minimum future rentals due under non-cancelable operating leases as follows:

 

	Year Ending
(in thousands)	December 31,		Amount
	2012		$          11,909
	2013		5,790
	2014		5,322
	2015		3,225
	2016		2,646
	Thereafter		7,905
			$          36,797

 

In addition, the lessees are liable for real estate taxes and certain operating expenses of the Property pursuant to lease agreements.

 

8.    Segment Reporting

 

The Company operates in one industry segment, which is real estate ownership of commercial property. At December 31, 2011 and 2010, the Company owned and operated the Property in that one segment.

 

9.    Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses consist of the components shown below:

 

		December 31,
(in thousands)		2011				2010
Accrued property tax		$	5,108			$	4,849
Deferred rental income			889				657
Accrued capital expenditures			16				10
Accounts payable and other accrued expenses			579				1,488
Due to tenant - real estate taxes			711				529
Due to tenant - tenant improvements			69				106
Total		$	7,372			$	7,639

 

10.    Subsequent Event

 

On January 26, 2012, the Board of Directors of the Company declared a cash distribution of $859 per preferred share, payable on or about February 29, 2012 to stockholders of record on February 9, 2012.

 

SCHEDULE III

 

FSP 303 East Wacker Drive Corp.

Real Estate and Accumulated Depreciation

December 31, 2011

 

 

 

(in thousands)

		Initial Cost				Historical Costs
Description	Encumbrances	Land	Buildings Improvements and Equipment	Costs Capitalized (Disposals) Subsequent to Acquisition		Land	Buildings Improvements and Equipment	Total (1)	Accumulated Depreciation	Total Costs, Net of Accumulated Depreciation	Depreciable Life (Years)	Date of Acquisition
	(in thousands)
303 East Wacker, Chicago, Illinois	$35,000	$26,200	$128,502	$8,035		$26,200	$136,537	$162,737	$18,541	$144,196	5- 39	2007

 

(1)

The aggregate cost for Federal Income Tax purposes is $181,382.

 

 

FSP 303 East Wacker Drive Corp.

 

The following table summarizes the changes in the Company’s real estate investments and accumulated depreciation:

 

		December 31,				December 31,
(in thousands)		2011				2010
Real estate investments, at cost:
Balance, beginning of year		$	159,970			$	159,155
Improvements			2,767				815
Balance, end of year		$	162,737			$	159,970
Accumulated depreciation:
Balance, beginning of year		$	14,451			$	10,599
Depreciation			4,090				3,852
Balance, end of year		$	18,541			$	14,451