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, 2013

 

☐

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. 000-51940

FSP Galleria North Corp.

(Exact name of registrant as specified in its charter)

 

Delaware	20-1641289
(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   ☐	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, 2013, 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 860, each as of February 28, 2014.

 

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.	6
	Item 4.	Mine Safety Disclosures.	6
PART II			7
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities…	7
	Item 6.	Selected Financial Data.	7
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	8
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.	15
	Item 8.	Financial Statements and Supplementary Data.	15
	Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.	15
	Item 9A.	Controls and Procedures.	16
	Item 9B.	Other information.	17
PART III			18
	Item 10.	Directors, Executive Officers and Corporate Governance	18
	Item 11.	Executive Compensation.	19
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	19
	Item 13.	Certain Relationships and Related Transactions, and Director Independence.	21
	Item 14.	Principal Accounting Fees and Services.	22
PART IV			23
	Item 15.	Exhibits, Financial Statement Schedules.	23
SIGNATURES			24

 

 

 

 

PART I

 

Item 1.     Business

 

History

 

Our company, FSP Galleria North Corp., which individually or together with its subsidiaries, we refer to as Galleria, the “Company”, “we” or “our”, is a Delaware corporation formed to purchase, own and operate a sixteen-story Class “A” office tower containing approximately 379,518 rentable square feet and its associated infrastructure located on approximately 4.8 acres of land in Dallas, Texas, which we refer to as the Property. We operate in a manner intended to qualify as a real estate investment trust, or REIT, for federal income tax purposes.

 

We were organized initially in September 2004 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 MKT: FSP). FSP Investments LLC, or FSP Investments, acted as a real estate investment firm and broker/dealer with respect to (a) the organization of the Company, (b) the acquisition of real estate by the Company and (c) the sale of preferred stock in the Company.

 

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 December 2004 and August 2005, FSP Investments completed an offering on a best efforts basis of 860 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 December 31, 2004 and August 23, 2005, the Company held 18 investor closings, at each of which shares of Preferred Stock were sold and funds were received. Funds from each individual closing were used to repay the loan from Franklin Street and associated fees as well as other expenses payable to FSP Investments. The use of proceeds received and affiliates receiving payments are set forth in the table below:

 

	Use of proceeds:
Type	Affiliate paid	Amount
Real Estate Capital Requirements:
Operating/Capital Reserve (1)		$      4,815,000
Offering and Other Costs:
Organizational, Offering and
Other Expenditures for the Company(2)	FSP Investments LLC	430,000
Selling Commissions(3)	FSP Investments LLC	6,880,000
Acquisition-Related Costs:
Purchase Price of the Property(4)	Franklin Street Properties Corp.	68,500,000
Loan Fee Paid to Franklin Street (5)(6)	Franklin Street Properties Corp.	4,945,000
Acquisition Fee(6)	FSP Investments LLC	430,000
Total Uses of Gross Offering Proceeds		$    86,000,000

 

 

(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 a first mortgage loan, which was repaid from proceeds of the offering.

(5)

The Loan Fee Paid to Franklin Street was a fee (or points) payable to Franklin Street to obtain the first mortgage loan to purchase the Property in an amount of $4,945,000. The first mortgage loan had an original principal amount equal to the purchase price of the Property and a term of two years. The first mortgage loan was prepayable 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 to FSP Investments LLC for various expenses related to the purchase of the Property, including expenses incurred for due diligence.

 

We purchased the Property for $68,500,000 on October 14, 2004. We acquired the Property through a limited partnership, FSP Galleria North Limited Partnership, of which the Company is the sole limited partner and of which FSP Galleria North LLC, a wholly-owned subsidiary of the Company, is the sole general partner. The sole business of FSP Galleria North Limited Partnership is to own and operate the Property; the sole business of each of FSP Galleria North LLC and the Company is to hold the equity interests of FSP Galleria North Limited Partnership. The purchase price of the Property was entirely financed by a loan from Franklin Street collateralized by a first mortgage, which loan was repaid from a portion of the proceeds of the sale of Preferred Stock from each investor closing until the remaining balance of $2,659,092 was repaid on August 8, 2005.

 

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 tenants of the Property. Asset, investor and property management services are provided by third parties. As of December 31, 2013, the Property was approximately 88% leased to multiple tenants, including DealerTrack Technologies, Inc., which we refer to as DealerTrack, and EmCare, Inc., which we refer to as EmCare.

 

FSP Property Management LLC or FSP Property Management, 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 requires the Company to pay FSP Property Management a monthly fee equal to one percent (1%) of the gross revenues of the Property. The asset management agreement between the Company and FSP Property Management may be terminated by either party without cause at any time, upon at least 30 days written notice.

 

FSP Investments LLC, a wholly-owned subsidiary of Franklin Street, provides investor services to the holders of the Company’s Preferred Stock. The investor services agreement between the Company and FSP Investments LLC requires the Company to pay a monthly service fee of $500 and to reimburse FSP Investments LLC for its reasonable out-of-pocket expenses. The investor services agreement may be terminated by either party with thirty days written notice or immediately upon the occurrence of certain events of default specified in the investor services agreement.

 

As of January 1, 2014, Cassidy Turley Commercial Real Estate Services, or Cassidy Turley, provides the Company with day-to-day property management services relating to the operation of the Property. Cassidy Turley is a third-party service provider that is not related to or affiliated with Franklin Street. The management agreement between the Company and Cassidy Turley requires the Company to pay Cassidy Turley a monthly fee equal to one and one-half percent (1.5%) of the net operating receipts collected in the preceding month. The management agreement between the Company and Cassidy Turley operates on a month to month basis, and may be terminated by either party without cause at any time, upon at least 30 days written notice, effective at the end of the notice period.

Investment Objectives

 

Our objectives are to (i) lease and stabilize the Property, (ii) once leased and stabilized, consider a potential sale of the Property, (iii) increase the value of the shares of our Preferred Stock as a result of appreciation in market value of the Property, and (iv) 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 our stockholders.

 

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 line of credit as described below.

 

Revolving Line of Credit

 

Given the amount of space that needed to be leased and the potential for significant tenant improvement allowances and leasing commissions, on February 1, 2012, we entered into a three-year secured promissory note for a revolving line of credit, which we refer to as the Galleria Revolver, with Franklin Street for up to $15,000,000. The Galleria Revolver matures on January 30, 2015 and the interest rate applicable to advances thereunder is the 30-day LIBOR rate plus 500 basis points (5.17% at December 31, 2013). The Galleria Revolver is secured by a mortgage on the Property and each advance thereunder requires payment of a 50 basis point draw fee. We anticipate that the Galleria Revolver will be replaced or refinanced on or before its maturity date. However, there can be no assurance that we will be able to replace or refinance the Galleria Revolver on favorable terms or at all. As of December 31, 2013, advances drawn and outstanding under the Galleria Revolver totaled $12,880,000.

 

Competition

 

The Property is located in the southern section of the Far North Dallas Submarket and, more specifically, in a micro market known as the Galleria section of the Lower Tollway portion of the Far North Dallas Submarket, which we refer to as the Galleria Area. We believe that the Galleria Area has struggled to keep existing tenants and to attract new tenants, and that the majority of larger prospective tenants have elected to relocate farther north within the larger Far North Dallas Submarket. We also believe that the reconstruction/widening of the LBJ interstate freeway and resultant fear of growing congestion have been a significant detraction to the near-term perception of the Galleria Area. However, we believe that the northern half of the Far North Dallas Submarket has recently stabilized at approximately 9% vacancy (for Class A office space) and that those tighter market conditions have had a meaningful positive impact on activities and leasing further south in the Galleria Area. Management is aggressively working with its local leasing team to lease the remaining vacant space at the Property. Management believes that the level of interest by prospective tenants at the Property has increased during the past twelve months, as evidenced by the increase in occupancy at the Property during that time. However, we may not be able to lease all of the remaining vacant space.

 

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 be more attractive to tenants. In order to secure new tenants, 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 less 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 not significant competition for the Property (as a result of lack of vacancy in competing buildings or otherwise), our competitors may decide to enter the market and build new buildings to compete with the 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 affect individual decisions of such prospective tenants.

 

Management’s strategy to lease vacant space at the Property has been to showcase the Property’s superior quality, adaptability to multiple tenant uses and immediate availability. We believe that the Property will continue to attract prospective tenants seeking quality office suites in Class A office buildings in the Galleria Area.

 

Employees

 

We had no employees as of December 31, 2013.

 

Available Information

 

We are subject to the informational requirements of the Securities Exchange Act of 1934, 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, 2013 and such other date(s) as may be specified:

			Percent
	Date of	Approx.	Leased as	Number
Property Location	Purchase	Square Feet	of 12/31/13	of Tenants	Name of Major Tenants
13737 Noel Road	10/14/04	379,518	88%	9	DealerTrack and EmCare
Dallas, TX 75240

 

Completed in 1999, the Property is a sixteen-story Class “A” office tower containing approximately 379,518 rentable square feet and its associated infrastructure located on approximately 4.8 acres of land located in Dallas, Texas. We acquired fee title to the Property through a limited partnership, all of whose equity interest is owned, directly or indirectly, by the Company on October 14, 2004. In the opinion of our management, the Property is adequately covered by insurance. As of December 31, 2013, the Property was approximately 88% leased to multiple tenants, including DealerTrack and EmCare. Below is certain information with respect to DealerTrack and EmCare and their leases.  

 

DealerTrack

 

DealerTrack is a subsidiary of DealerTrack Holdings, Inc., which we refer to as DHI. DHI provides web-based software solutions and services to enhance efficiency and profitability for all major segments of the automotive retail industry, including dealers, lenders, OEMs, third party retailers, agents and aftermarket providers.  DHI operates the largest online credit application network in the United States and Canada.  DHI’s Dealer Management System (DMS) provides dealers with easy-to-use tools and real-time data access to enhance their efficiency.  DHI’s inventory solution offerings provide vehicle inventory management and merchandising solutions to help dealers drive higher in-store and online traffic with state-of-the-art, real-time listings — designed to accelerate used-vehicle turn rates and increase dealer profits. DHI’s Sales and Finance solutions allow dealers to streamline the entire sales process as they structure deals from a single integrated platform. DHI’s Compliance offering helps dealers meet legal and regulatory requirements, and protect their assets.  DHI also offers processing solutions for the automotive industry, including digital retailing, electronic motor vehicle registration and titling applications, paper title storage, and digital document services.

 

DHI is a Delaware corporation that was formed in August 2001. DHI is organized as a holding company and conducts a substantial amount of its business through its subsidiaries, including DealerTrack AAX, Inc., DealerTrack Aftermarket Services, Inc., DealerTrack Canada, Inc., DealerTrack Digital Services, Inc., DealerTrack, Inc., DealerTrack Processing Solutions, Inc., FDI Computer Consulting, Inc., General Systems Solutions, Inc., and DealerTrack Systems, Inc.  Information about DHI can be obtained from its Annual Report on Form 10-K and other reports and filings available is on its website at www.dealertrack.com or on the SEC website at www.sec.gov. DHI’s common stock trades on the NASDAQ Global Market under the symbol “TRAK”.

 

DealerTrack Lease

 

DealerTrack leases an aggregate of approximately 133,873 square feet of space at the Property. The space consists of a portion of the second floor, all of the third floor, all of the fourth floor, all of the fifth floor, all of the sixth floor, all of the seventh and amounts to approximately 35% of the Property’s rentable area. The commencement date of the lease was August 1, 2012 and the lease expires on May 31, 2023. DealerTrack has the right to extend the term of the Lease for two additional periods of five years each at prevailing market rental rates.

Rent consists of base rental, DealerTrack’s electricity costs and DealerTrack’s share of basic operating costs and taxes above the initial base year of 2012. Base rental increases during the term of the lease and includes “free-rent” periods during lease months 1-7 and lease months 92-94.

 

EmCare

 

EmCare is a subsidiary of Envision Healthcare Holdings, Inc., which we refer to as Envision. Envision is a leading provider of physician-led, outsourced medical services in the United States with more than 20,000 affiliated clinicians. Envision markets its services on a stand-alone, multi-service and integrated basis, primarily under its EmCare and AMR brands. EmCare is a leading provider of integrated facility-based physician services, including emergency, anesthesiology, hospitalist/ inpatient care, radiology, tele-radiology and surgery. EmCare also offers physician-led care management solutions outside the hospital. AMR is a leading provider and manager of community-based medical transportation services, including emergency ‘‘911’’, non-emergency, managed transportation, fixed-wing ambulance and disaster response. Information about Envision can be obtained from the reports and filings available on its website at www.evhc.net or on the SEC website at www.sec.gov.

 

EmCare Lease

 

EmCare leases an aggregate of approximately 109,863 square feet of space at the Property. The space consists of a portion of the 12^th floor, a portion of the 13^th floor, all of the 14^th floor, all of the 15^th floor, all of the 16^th floors and amounts to approximately 29% of the Property’s rentable area. The commencement date of the lease was August 1, 2012 and the lease expires on January 31, 2024. EmCare has the right to extend the term of the lease for two additional periods of five years each or one additional period of ten years at prevailing market rental rates. EmCare has a one-time contraction right to reduce the size of its leased premises at the Property effective as of midnight on December 31, 2020 upon satisfaction of certain conditions, including delivery of written notice no later than December 31, 2019 and payment of a contraction fee. The amount of space that is subject to contraction is limited to the amount of rentable area on the lowest floor that constitutes a portion of EmCare’s leased premises at the time of election. In addition, EmCare has a right of first refusal to lease any available space on the 12^th floor. EmCare’s obligations under its lease are secured by a letter of credit, the principal amount of which is subject to reduction during the lease term. In addition, EmCare’s obligations under its lease are secured by a guaranty from EMSC.

 

Rent consists of base rental, EmCare’s electricity costs and EmCare’s share of basic operating costs and taxes above the initial base year of 2012. Base rental increases during the term of the lease and includes “free-rent” periods during lease months 13-18, months 24-32 and months 30-39.

 

Additional Operating Data

 

Additional information regarding the amount of the Property’s annual real estate taxes and insurance can be found in the Consolidated Statements of Operations in the financial statements that are included with this Annual Report on 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 28, 2014, Franklin Street was the sole holder of record of the Common Stock and there were 840 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 August 23, 2005. The last Common Stock dividend was declared on October 22, 2005 and was paid on November 16, 2005; no further dividends will be declared on the Common Stock.

 

Set forth below are the distributions made to holders of Preferred Stock in respect of each quarter from the last 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. In anticipation of the vacancy at that time and the uncertain economic environment, we reduced the amount of our dividend distributions for calendar year 2009 and suspended dividend distributions for 2010, 2011, 2012, 2013 and until the Property is fully stabilized in order to maintain a reserve that could be utilized to fund operating and/or leasing costs. We cannot guarantee the future payment of dividends or the amount of any such dividends. See Note 4 of the Notes to Consolidated Financial Statements for additional information.

 

		Distributions
		to Preferred
Quarter		Shareholders of
Ended		FSP Galleria North Corp.
March 31, 2012		-
June 30, 2012		-
September 30, 2012		-
December 31, 2012		-
March 31, 2013		-
June 30, 2013		-
September 30, 2013		-
December 31, 2013		-

 

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

 

(dollars in thousands)		2013								2012
		Preferred				%				Preferred				%
Ordinary income		$	—				0%			$	—				0%
Return of Capital			—				0%				—				0%
Total		$	—				0%			$	—				0%

 

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 consolidated financial statements and notes thereto appearing elsewhere in this report. Historical results and percentage relationships set forth in the consolidated 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, the attractiveness of the Property to prospective tenants, our ability to lease vacant space at 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, geopolitical events, and expenditures that cannot be anticipated such as utility rate and usage increases, unanticipated repairs, uncertainty about government fiscal policy, 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 Galleria North Corp., which we refer to as the Company, is a Delaware corporation formed to purchase, own and operate a sixteen-story Class A suburban office tower located in Dallas, Texas containing approximately 379,518 square feet of rentable space located on approximately 4.8 acres of land, which we refer to as the Property.  As of December 31, 2013, the Property was approximately 88% leased to multiple tenants, including DealerTrack Technologies, Inc., which we refer to as DealerTrack, and EmCare, Inc., which we refer to as EmCare.

 

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 December 2004 and August 2005, FSP Investments LLC (member FINRA and SIPC), a wholly-owned subsidiary of Franklin Street, completed the sale on a best efforts basis of 860 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 August 2005, 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 Dallas, Texas, 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

 

Economic Conditions

 

The economy in the United States is continuing to experience a period of limited economic growth, including relatively high levels of unemployment, which directly affects the demand for office space, our primary income producing asset. The broad economic conditions in the United States are affected by numerous factors, including but not limited to, inflation and employment levels, energy prices, slow economic growth and/or recessionary concerns, uncertainty about government fiscal and tax policy, changes in currency exchange rates, geopolitical events, the regulatory environment the availability of debt and interest rate fluctuations. However, we believe that unemployment rates have begun to trend lower. We also believe that the Federal Reserve Bank’s tapering program in December 2013 has been generally received as a harbinger of real improvement in the economy, which could bode well for our real estate operations. We could benefit from any further improved economic fundamentals and increasing levels of employment. We believe that the economy could be in the early stages of a cyclically-slower but prolonged broad-based upswing. However, future economic factors may negatively affect real estate values, occupancy levels and property income.

Potential Sale of the Property

 

On January 15, 2014, we sent a special communication to the holders of our Preferred Stock to inform them that our board of directors had made the decision to try to sell the Property. More specifically, we have retained CBRE, Inc. to facilitate a potential sale of the Property. We believe that recent leasing activity at the Property, together with an improving and active Dallas office building investment climate, are combining to create a potentially advantageous sales opportunity for the holders of our Preferred Stock. Of course, any sale of the Property would be subject to a number of conditions, including approval by our board of directors, review of the consent solicitation documents by the U.S. Securities and Exchange Commission and approval by a majority of the holders of our Preferred Stock.

 

Real Estate Operations

 

As of December 31, 2013, the Property was approximately 88% leased to multiple tenants, including DealerTrack and EmCare. DealerTrack leases an aggregate of approximately 133,873 square feet of space at the Property. The space consists of a portion of the second floor, all of the third floor, all of the fourth floor, all of the fifth floor, all of the sixth floor, all of the seventh floor and amounts to approximately 35% of the Property’s rentable area. The commencement date of the lease was August 1, 2012 and the lease expires on May 31, 2023. EmCare leases an aggregate of approximately 109,863 square feet of space at the Property. The space consists of a portion of the 12^th floor, a portion of the 13^th floor, all of the 14^th floor, all of the 15^th floor, all of the 16^th floor and amounts to approximately 29% of the Property’s rentable area. The commencement date of the lease was August 1, 2012 and the lease expires on January 31, 2024. Additional tenants include CRC Insurance Services (24,907 square feet), Real Foundation (17,311 square feet), Griffith Davison (10,948 square feet), U.S. Bank (10,814 square feet), Chicago Title Insurance Company (9,657 square feet), Insperity Support Services (6,149 square feet) and Murphy’s Deli (2,199 square feet).

 

The Property is located in the southern section of the Far North Dallas Submarket and, more specifically, in a micro market known as the Galleria section of the Lower Tollway portion of the Far North Dallas Submarket, which we refer to as the Galleria Area. We believe that the Galleria Area has struggled to keep existing tenants and to attract new tenants, and that the majority of larger prospective tenants have elected to relocate farther north within the larger Far North Dallas Submarket. We also believe that the reconstruction/widening of the LBJ interstate freeway and resultant fear of growing congestion have been a significant detraction to the near-term perception of the Galleria Area. However, we believe that the northern half of the Far North Dallas Submarket has recently stabilized at approximately 9% vacancy (for Class A office space) and that those tighter market conditions have had a meaningful positive impact on activities and leasing further south in the Galleria Area. Management is aggressively working with its local leasing team to lease the remaining vacant space at the Property. Management believes that the level of interest by prospective tenants at the Property has increased during the past twelve months, as evidenced by the increase in occupancy at the Property during that time. However, we may not be able to lease all of the remaining vacant space.

 

Management’s strategy to lease vacant space at the Property has been to showcase the Property’s superior quality, adaptability to multiple tenant uses and immediate availability. We believe that the Property will continue to attract prospective tenants seeking quality office suites in Class A office buildings in the Galleria Area.

 

During the three months ended December 31, 2013, we believe that vacancy rates decreased slightly and that rental rates increased slightly from the prior quarter for Class A buildings in the Lower Tollway Portion of the Far North Dallas Submarket. These trends may continue, worsen or improve in the future. At this time, we cannot predict whether the pace of leasing activity in the Lower Tollway Portion of the Far North Dallas Submarket will continue to improve and what, if any, impact it will have on our business. 

 

It is difficult for management to predict what will happen to occupancy and rents at the Property 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, geopolitical events, the regulatory environment and the risk of terrorism. In addition to the difficulty of predicting macroeconomic factors, it is difficult to predict how our local market or potential replacement tenants 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 potential replacement tenants, some of which may operate on a national level. Although we cannot predict how long it would take to lease vacant space at the Property or what the terms and conditions of any new leases would be, we would expect to sign new leases at then current market rates.

The potential for tenants to default on their leases or to seek the protection of bankruptcy laws exists. If any of our current or future 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.

 

Galleria Revolver

 

Given the amount of space that needed to be leased and the potential for significant tenant improvement allowances and leasing commissions, on February 1, 2012, we entered into a three-year secured promissory note for a revolving line of credit, which we refer to as the Galleria Revolver, with Franklin Street for up to $15,000,000. The Galleria Revolver matures on January 30, 2015 and the interest rate applicable to advances thereunder is the 30-day LIBOR rate plus 500 basis points (5.17% at December 31, 2013). The Galleria Revolver is secured by a mortgage on the Property and each advance thereunder requires payment of a 50 basis point draw fee. We anticipate that the Galleria Revolver will be replaced or refinanced on or before its maturity date. However, there can be no assurance that we will be able to replace or refinance the Galleria Revolver on favorable terms or at all. As of December 31, 2013 and 2012, advances drawn and outstanding under the Galleria Revolver totaled $12,880,000 and $5,880,000, respectively. For the years ended December 31, 2013 and 2012, draw fees of approximately $35,000 and $30,000, respectively, and interest expense of approximately $486,000 and $150,000, respectively, was paid to Franklin Street.

Critical Accounting Policies

 

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 ongoing 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. These policies affect our:

 

·

recognition of rental income and depreciation and amortization expense;

·

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

·

classification of leases.

 

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 value of an above or below-market lease is amortized over the remaining non-cancelable periods of the lease as an adjustment to rental income. 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 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

 

Comparison of the year ended December 31, 2013 to the year ended December 31, 2012.

 

Revenue

 

Total revenue increased by approximately $3.0 million to $4.2 million for the year ended December 31, 2013, as compared to $1.2 million for the year ended December 31, 2012. This increase was primarily a result of an increase in rental revenue of $2.7 million and an increase in recoverable revenue of $0.3 million due to an increase in occupancy of 30%.

 

Expenses

 

Total expenses increased by approximately $1.5 million to $5.5 million for the year ended December 31, 2013, as compared to $4.0 million for the year ended December 31, 2012. The increase was primarily due to an increase in operating expenses of $.5 million, an increase in real estate taxes and insurance of $0.1 million, an increase in depreciation and amortization of $0.6 million and an increase in interest expense of $0.3 million.

 

Liquidity and Capital Resources

 

Cash and cash equivalents decreased $0.3 million to $2.8 million at December 31, 2013 as compared to $3.1 million at December 31, 2012. The decrease was primarily attributable to $2.1 million used for operating activities and $5.2 million used for investing activities which was offset by $7.0 million provided by financing activities.

 

Management believes that the existing cash and cash equivalents as of December 31, 2013 of $2.8 million will be sufficient to meet operational needs, working capital requirements, distributions and anticipated capital expenditures for at least the next 12 months.

 

Operating Activities

 

The cash used for operating activities of $2.1 million for the year ended December 31, 2013 was primarily attributable to a net loss of approximately $1.3 million, payment of deferred leasing costs of approximately $2.4 million and uses arising from other current accounts of $0.7 million, which was offset by the add-back of $2.3 million of depreciation and amortization.

 

Investing Activities

 

Cash used for investing activities of approximately $5.2 million for the year ended December 31, 2013 was for capital expenditures.

 

Financing Activities

 

Cash provided by financing activities of $7.0 million for the year ended December 31, 2013 was primarily attributable to the proceeds from the loan payable-affiliate.

 

Sources and Uses of Funds

 

The Company’s principal demands on liquidity are cash for operations and dividends paid to equity holders. As of December 31, 2013, we had approximately $1.9 million in accrued liabilities and $12.9 million in long-term debt. In the near term, liquidity is generated by cash from operations.

 

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

 

Asset Management Agreement

 

We have in the past engaged in and currently engage in transactions with a related party, Franklin Street Properties Corp., which we refer to as 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 us on behalf of our stockholders. FSP Property Management LLC currently provides us with asset management and financial reporting services. The asset management agreement between the Company and FSP Property Management LLC requires us to pay FSP Property Management LLC a monthly fee equal to one percent (1%) of the gross revenues of the Property. The asset management agreement may be terminated by either party without cause at any time, upon at least thirty (30) days written notice, effective at the end of the notice period. For the years ended December 31, 2013 and 2012, management fees paid were $29,000 and $4,000, respectively.

 

Galleria Revolver

 

On February 1, 2012, we entered into a three-year secured promissory note for a revolving line of credit, which we refer to as the Galleria Revolver, with Franklin Street for up to $15,000,000. The Galleria Revolver matures on January 30, 2015 and the interest rate applicable to advances there under is the 30-day LIBOR rate plus 500 basis points (5.17% at December 31, 2013). The Galleria Revolver is secured by a mortgage on the Property and each advance there under requires payment of a 50 basis point draw fee. We anticipate that the Galleria Revolver will be replaced or refinanced on or before its maturity date. However, there can be no assurance that we will be able to replace or refinance the Galleria Revolver on favorable terms or at all. As of December 31, 2013and 2012 advances drawn and outstanding under the Galleria Revolver totaled $12,880,000 and $5,880,000, respectively. For the year ended December 31, 2013 and 2012, draw fees of approximately $35,000 and $30,000 and interest expense of approximately $486,000 and $150,000, respectively, were paid to Franklin Street.

 

Investor Services Agreement

 

On August 14, 2012, we entered into an Investor Services Agreement, which we refer to as the FSPI Agreement, with FSP Investments LLC for the provision of investor services to holders of our Preferred Stock. FSP Investments LLC is a wholly-owned subsidiary of Franklin Street, which is the sole holder of our one share of Common Stock that is issued and outstanding. FSP Investments LLC acted as a real estate investment firm and broker/dealer with respect to (a) our organization, (b) our acquisition of the Property and (c) the sale of our equity interests. The FSPI Agreement requires us to pay a monthly service fee of $500 for services performed under the FSPI Agreement, and to reimburse FSP Investments LLC for its reasonable out-of-pocket expenses incurred in connection with the FSPI Agreement. The FSPI Agreement may be terminated by either party with thirty days written notice or immediately upon certain events of default set forth in the FSPI Agreement. For the years ended December 31, 2013 and 2012, investor services fees paid were approximately $15,000 and $3,000, respectively.

 

Ownership of Common Stock

 

Franklin Street is the sole holder of our one share of Common Stock that is issued and outstanding. Subsequent to the completion of the private placement of our Preferred Stock in August 2005, Franklin Street has not been entitled to share in earnings or any dividend related to our Common Stock.

 

Rental Income Commitments

 

Our commercial real estate operations consist of income under non-cancelable operating leases as of December 31, 2013 and are as follows:

 

		Year Ending
(in thousands)		December 31,		Amount
		2014		$           5,920
		2015		5,304
		2016		6,977
		2017		7,160
		2018		7,292
		Thereafter		32,311
				$         64,964

 

Off Balance Sheet Arrangements

 

The Company is not party to any off balance sheet arrangements. The Company is a party to a management agreement with an unaffiliated third party management company, Cassidy Turley Commercial Real Estate Services, to provide property management services, and is party to an asset management agreement with an affiliate, FSP Property Management LLC, to provide asset management and financial reporting services, both 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 percent (1%) of the gross revenues of the Property. Moreover, the Company does not have a proposed program for the renovation, improvement or development of the real property other than normal tenant improvements or replacements of equipment in the ordinary course of ongoing operations.

 

Item 7A.     Quantitative and Qualitative Disclosures 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, 2013. 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, 2013, 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, 2013. 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 1992 Framework.

 

Based on our assessment, management concluded that, as of December 31, 2013, 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 quarter ended December 31, 2013 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 28, 2014 is set forth below. All of our directors bring to our Board a wealth of 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 65, 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 58, 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 MKT 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 66, 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 42, 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.), The George Washington University (M.A.), and has completed all requirements for an M.B.A. from Cornell University, which will be officially conferred in May of 2014. 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. Except for Jeffrey B. Carter, who became a director in December 2011, each of the above persons has been associated with us in the positions described above since our inception in 2004. 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 serves as directors of FSP 50 South Tenth Street Corp. and FSP 303 East Wacker Drive Corp., which are public reporting companies sponsored by Franklin Street. In their capacities as directors of FSP 50 South Tenth Street Corp. and FSP 303 East Wacker Drive Corp., 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 2013 all filings required to be made by its reporting persons were timely made in accordance with the requirements of the Exchange Act.

 

Corporate Governance

Board Meetings and Attendance

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 MKT 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 28, 2014 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
Edward Darman Company Limited Partnership(3)	60		6.98%
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)(3)	-		0%

 

(1)

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

(2)

Each of the Executive Officers is employed by Franklin Street Properties Corp. Franklin Street Properties Corp. owns 100% of the issued and outstanding Common Stock of the Company.

(3)

Edward Darman is the Chief Executive Officer of Edward Darman Company Limited Partnership, or the Partnership, and, in such capacity, has sole voting and dispositive power over the shares of Preferred Stock held by the Partnership. The address of the Partnership is c/o Saxon Real Estate Partners, 200 Oak Point Drive, Middleboro, Massachusetts 02346-1325.

 

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.

 

Asset Management Agreement

 

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 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 percent (1%) of the 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 30 days written notice, effective at the end of the notice period. For the years ended December 31, 2013 and 2012, management fees paid were $29,000 and $4,000, respectively.

 

Investor Services Agreement

 

On August 14, 2012, the Company entered into an Investor Services Agreement, which we refer to as the FSPI Agreement, with FSP Investments LLC for the provision of investor services to holders of the Company’s Preferred Stock. FSP Investments LLC is a wholly-owned subsidiary of Franklin Street, which is the sole holder of the Company’s one share of Common Stock that is issued and outstanding. FSP Investments LLC acted as a real estate investment firm and broker/dealer with respect to (a) the Company’s organization, (b) the Company’s acquisition of the Property and (c) the sale of the Company’s equity interests. The FSPI Agreement requires the Company to pay a monthly service fee of $500 for services performed under the FSPI Agreement, and to reimburse FSP Investments LLC for its reasonable out-of-pocket expenses incurred in connection with the FSPI Agreement. The FSPI Agreement may be terminated by either party with thirty days written notice or immediately upon certain events of default set forth in the FSPI Agreement. For the years ended December 31, 2013 and 2012, investor services fees paid were approximately $15,000 and $3,000, respectively.

 

Galleria Revolver

 

On February 1, 2012, we entered into a three-year secured promissory note for a revolving line of credit, which we refer to as the Galleria Revolver, with Franklin Street for up to $15,000,000. The Galleria Revolver matures on January 30, 2015 and the interest rate applicable to advances thereunder is the 30-day LIBOR rate plus 500 basis points (5.17% at December 31, 2013). The Galleria Revolver is secured by a mortgage on the Property and each advance thereunder requires payment of a 50 basis point draw fee. We anticipate that the Galleria Revolver will be replaced or refinanced on or before its maturity date. However, there can be no assurance that we will be able to replace or refinance the Galleria Revolver on favorable terms or at all. As of December 31, 2013 and 2012 advances drawn and outstanding under the Galleria Revolver totaled $12,880,000 and $5,880,000, respectively. For the year ended December 31, 2013 and 2012, draw fees of approximately $35,000 and $30,000 and interest expense of approximately $486,000 and $150,000, respectively, were paid to Franklin Street.

 

Ownership of Common Stock

 

Franklin Street is the sole holder of our one share of Common Stock that is issued and outstanding. Subsequent to the completion of the private placement of the Preferred Stock in August 2005, the last Common Stock dividend was declared on October 22, 2005 and was paid on November 16, 2005. Since that time, 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 MKT, where Franklin Street is listed.

Item 14.     Principal Accounting Fees and Services

 

Independent Auditor Fees and Other Matters

 

On January 10, 2014, the Company was informed by its former independent registered public accounting firm, Braver P.C. (“Braver”), that it had combined its practice (the “Transaction”) with Marcum LLP (“Marcum”) on January 10, 2014. As a result of the Transaction, Braver effectively resigned as the Company’s independent registered public accounting firm. On February 4, 2014, the Company engaged Marcum as the Company’s independent registered public accounting firm.

 

The following tables summarize the aggregate fees billed by the Company’s independent registered public accounting firm, Marcum and the former independent registered public accounting firm, Braver, 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.

 

		2013				2013				2012
Fee Category		Marcum				Braver				Braver
Audit Fees (1)		$	41,475			$	14,175			$	55,650
Audit-Related Fees (2)			—				—				—
Tax Fees (3)			5,250				—				5,250
All Other Fees (4)			—				—				—
		$	46,725			$	14,175			$	60,900

 

(1)

Audit fees consist of fees for the audit of our consolidated financial statements, the review of the interim consolidated 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 consolidated 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 in 2013 and 2012 of the total tax fees incurred.

(4)

The Company was not billed by either independent registered public accounting firm in 2013 or 2012 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 7, 2014 by the undersigned, thereunto duly authorized.

FSP GALLERIA NORTH 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 7, 2014
/s/ Barbara J. Fournier     Barbara J. Fournier	Vice President, Chief Operating Officer, Treasurer, Secretary and Director (Principal Financial Officer and Principal Accounting Officer)	March 7, 2014
/s/ Janet P. Notopoulos    Janet P. Notopoulos	Director, Vice President	March 7, 2014
/s/ Jeffrey B. Carter          Jeffrey B. Carter	Director, Vice President	March 7, 2014

 

EXHIBIT INDEX

Exhibit No.	Description
3.1	Certificate of Incorporation, incorporated herein by reference to Exhibit 3.1 to FSP Galleria North Corp.'s Registration Statement on Form 10, as amended (File No. 000-51940)
3.2	By-Laws, incorporated herein by reference to Exhibit 3.2 to FSP Galleria North Corp.'s  Registration Statement on Form 10, as amended (File No. 000-51940)
10.1	Office Lease Agreement between FSP Galleria North Limited Partnership and DealerTrack, Inc. dated effective February 16, 2012, incorporated herein by reference to Exhibit 10.1 to FSP Galleria North Corp.’s Current Report on Form 8-K filed on February 23, 2012 (File No. 000-51940), as amended by Assignment, Assumption and First Amendment to Office Lease Agreement among FSP Galleria North Limited Partnership, DealerTrack, Inc. and DealerTrack Technologies, Inc. dated effective December 31, 2012, incorporated herein by reference to Exhibit 10.2 to FSP Galleria North Corp.’s Current Report on Form 8-K filed on January 7, 2013 (File No. 000-51940), as amended by Second Amendment to Office Lease Agreement between FSP Galleria North Limited Partnership and DealerTrack Technologies, Inc., dated effective October 4, 2013, incorporated by reference to Exhibit 10.1 to FSP Galleria North Corp.’s Current Report on Form 8-K filed on October 9, 2013 (File No. 000-51940)
10.2	Office Lease Agreement between FSP Galleria North Limited Partnership and EmCare, Inc. dated effective March 15, 2012, incorporated herein by reference to Exhibit 10.1 to FSP Galleria North Corp.’s Current Report on Form 8-K, filed on March 19, 2012 (File No. 000-51940), as amended by First Amendment to Office Lease Agreement between FSP Galleria North Limited Partnership and EmCare, Inc. dated effective October 12, 2012, incorporated herein by reference to Exhibit 10.2 to FSP Galleria North Corp.’s Current Report on Form 8-K filed on October 18, 2012 (File No. 000-51940), as amended by Second Amendment to Office Lease Agreement between FSP Galleria North Limited Partnership and EmCare, Inc. dated effective December 31, 2012, incorporated herein by reference to Exhibit 10.1 to FSP Galleria North Corp.’s Current Report on Form 8-K filed on January 7, 2013 (File No. 000-51940)
10.3	Asset Management Agreement, incorporated herein by reference to Exhibit 10.5 to FSP Galleria North Corp.'s Registration Statement on Form 10, as amended (File No. 000-51940)
10.4	Investor Services Agreement dated August 14, 2012 by and between FSP Galleria North Corp. and FSP Investments LLC., incorporated herein by reference to Exhibit 10.1 to FSP Galleria North Corp.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, filed on August 14, 2012 (File No. 000-51940)
10.5	Secured Promissory Note (Revolving), dated February 1, 2012, from FSP Galleria North Limited Partnership in favor of Franklin Street Properties Corp., incorporated herein by reference to Exhibit 10.1 to FSP Galleria North Corp.’s Current Report on Form 8-K filed on February 2, 2012 (File No. 000-51940)
10.6	Deed of Trust, Assignment of Rents and Leases, Security Agreement and Fixture Filing, dated February 1, 2012, from FSP Galleria North Limited Partnership in favor of Franklin Street Properties Corp., incorporated herein by reference to Exhibit 10.2 to FSP Galleria North Corp.’s Current Report on Form 8-K filed on February 2, 2012 (File No. 000-51940)
10.7	Revolving Loan Agreement, dated February 1, 2012, by and between FSP Galleria North Limited Partnership and Franklin Street Properties Corp., incorporated herein by reference to Exhibit 10.3 to FSP Galleria North Corp.’s Current Report on Form 8-K filed on February 2, 2012 (File No. 000-51940)
21.1	Subsidiaries of the Registrant, incorporated herein by reference to Exhibit 21.1 to FSP Galleria North Corp.'s Registration Statement on Form 10, as amended (File No. 000-51940)

 

 

31.1*	Certification of FSP Galleria North Corp.'s principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of FSP Galleria North Corp.'s principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of FSP Galleria North 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 Galleria North 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 Galleria North Corp.’s Annual Report on Form 10-K for the year ended December 31, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Changes in Stockholders’ Equity; (iv) the Consolidated Statements of Cash Flows; and (v) the Notes to Consolidated Financial Statements.
*	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 Galleria North Corp.

Index to Consolidated Financial Statements

 

Table of Contents

		Page
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm – Marcum LLP		F-2
Report of Independent Registered Public Accounting Firm – Braver P.C.		F-3
Consolidated Balance Sheets as of December 31, 2013 and 2012		F-4
Consolidated Statements of Operations for the years ended December 31, 2013 and 2012		F-5
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2012 and 2013		F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2013 and 2012		F-7
Notes to Consolidated Financial Statements		F-8
Financial Statement Schedule – Schedule III		F-14

 

[LETTERHEAD OF MARCUM LLP]

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Stockholders

FSP Galleria North Corp.

Wakefield, Massachusetts

 

We have audited the accompanying consolidated balance sheet of FSP Galleria North Corp. (the “Company”) as of December 31, 2013, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the year then ended. Our audit 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 financial statement schedule based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit 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 audit 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of FSP Galleria North Corp., as of December 31, 2013, and the consolidated results of its operations and its cash flows for the year 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/ Marcum llp

Needham, Massachusetts

March 7, 2014

 

[LETTERHEAD OF BRAVER PC]

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Stockholders

FSP Galleria North Corp.

Wakefield, Massachusetts

 

 

We have audited the accompanying consolidated balance sheet of FSP Galleria North Corp. as of December 31, 2012, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the year then ended. Our audit 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 audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit 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 internal control over financial reporting. Our audit 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 audit provides 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 Galleria North Corp. as of December 31, 2012, and the results of its operations and its cash flows for the year 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 P.C.

Needham, Massachusetts

March 12, 2013

FSP Galleria North Corp.
Consolidated Balance Sheets

 

		December 31,
(in thousands, except share and par value amounts)		2013				2012
Assets:
Real estate investments, at cost:
Land		$	5,535			$	5,535
Buildings and improvements			67,982				62,430
Fixtures and equipment			229				157
			73,746				68,122
Less accumulated depreciation			14,489				12,493
Real estate investments, net			59,257				55,629
Cash and cash equivalents			2,820				3,080
Tenant rent receivable			343				41
Step rent receivable			1,292				516
Deferred leasing costs, net of accumulated       amortization of $357 and $74, respectively			4,044				1,913
Deferred financing costs, net of accumulated       amortization of $42 and $20, respectively			24				46
Prepaid expenses and other assets			12				12
Total assets		$	67,792			$	61,237
Liabilities and Stockholders’ Equity:
Liabilities:
Accounts payable and accrued expenses		$	1,815			$	1,023
Tenant security deposits			66				—
Loan payable - affiliate			12,880				5,880
Total liabilities			14,761				6,903
Commitments and Contingencies:			—				—
Stockholders’ Equity:
Preferred Stock, $.01 par value, 860 shares
authorized, issued and outstanding at
December 31, 2013 and 2012, aggregate
liquidation preference $86,000			—				—
Common Stock, $.01 par value, 1 share
authorized, issued and outstanding			—				—
Additional paid-in capital			78,956				78,956
Retained earnings and distributions in excess of earnings			(25,925	)			(24,622	)
Total Stockholders’ Equity			53,031				54,334
Total Liabilities and Stockholders’ Equity		$	67,792			$	61,237
See accompanying notes to consolidated financial statements.

 

FSP Galleria North Corp.
Consolidated Statements of Operations

 

		For the Year Ended December 31,
(in thousands, except per share and share amounts)		2013				2012
Revenues:
Rental		$	4,150			$	1,168
Total revenue			4,150				1,168
Expenses:
Rental operating expenses			1,778				1,295
Real estate taxes and insurance			842				788
Depreciation and amortization			2,291				1,708
Interest expense			543				200
Total expenses			5,454				3,991
Net loss before interest income			(1,304	)			(2,823	)
Interest income			1				1
Net loss attributable to preferred stockholders		$	(1,303	)		$	(2,822	)
Weighted average number of preferred shares outstanding,     basic and diluted			860				860
Net loss per preferred share, basic and diluted		$	(1,515	)		$	(3,281	)
See accompanying notes to consolidated financial statements.

 

FSP Galleria North Corp.

Consolidated Statements of Changes in Stockholders' Equity

For the Years Ended December 31, 2012 and 2013

 

(in thousands)		Preferred Stock				Common  Stock				Additional Paid-in Capital				Retained Earnings and Distributions in Excess of Earnings				Total Stockholders' Equity
Balance, January 1, 2012		$	—			$	—			$	78,956			$	(21,800	)		$	57,156
Net loss			—				—				—				(2,822	)			(2,822	)
Balance, December 31, 2012			—				—				78,956				(24,622	)			54,334
Net loss			—				—				—				(1,303	)			(1,303	)
Balance, December 31, 2013		$	—			$	—			$	78,956			$	(25,925	)		$	53,031
See accompanying notes to consolidated financial statements.

 

 

FSP Galleria North Corp.
Consolidated Statements of Cash Flows

 

		For the Year Ended December 31,
(in thousands)		2013				2012
Cash flows from operating activities:
Net loss		$	(1,303	)		$	(2,822	)
Adjustments to reconcile net loss to net cash               used for operating activities:
Depreciation and amortization			2,313				1,728
Changes in operating assets and liabilities:
Tenant rent receivables			(302	)			(10	)
Step rent receivable			(776	)			(512	)
Prepaid expenses and other assets			—				12
Accounts payable and accrued expenses			334				286
Tenant security deposits			66				—
Payment of deferred leasing costs			(2,414	)			(1,987	)
Net cash used for operating activities			(2,082	)			(3,305	)
Cash flows from investing activities:
Purchase of real estate assets			(5,178	)			(3,394	)
Net cash used for investing activities			(5,178	)			(3,394	)
Cash flows from financing activities:
Proceeds from loan payable - affiliate			7,000				5,880
Payment of deferred financing costs			—				(66	)
Net cash provided by financing activities			7,000				5,814
Net decrease in cash and cash equivalents			(260	)			(885	)
Cash and cash equivalents, beginning of year			3,080				3,965
Cash and cash equivalents, end of year		$	2,820			$	3,080
Supplemental disclosure of cash flow information:
Cash paid for interest		$	521			$	180
Disclosure of non-cash investing activities:
Accrued costs for purchase of real estate assets		$	496			$	38
See accompanying notes to consolidated financial statements.

 

FSP Galleria North Corp.

Notes to Consolidated Financial Statements

 

1.   Organization

 

FSP Galleria North Corp. (the “Company”) was organized on September 21, 2004 as a corporation under the laws of the State of Delaware to purchase, own and operate a sixteen-story Class “A” office tower containing approximately 379,518 rentable square feet of space located on approximately 4.8 acres of land in Dallas, Texas (the “Property”). The Company acquired the Property on October 14, 2004. Franklin Street Properties Corp. (“Franklin Street”) (NYSE MKT: FSP) holds the sole share of the Company’s common stock, $.01 par value per share (the “Common Stock”). Between December 2004 and August 2005, FSP Investments LLC (member, FINRA and SIPC), a wholly-owned subsidiary of Franklin Street, completed the sale on a best efforts basis of 860 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 Galleria North Corp. and its consolidated subsidiaries, collectively, unless the content 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 subsidiaries. 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.

 

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
	Fixtures and 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, 2013 and 2012, no impairment charges were recorded.

FSP Galleria North Corp.

Notes to Consolidated Financial Statements

 

2.   Summary of Significant Accounting Policies (continued)

 

REAL ESTATE AND DEPRECIATION (continued)

 

Depreciation expense of $2,008,000 and $1,634,000 is included in Depreciation and Amortization in the Company’s Consolidated Statements of Operations for the years ended December 31, 2013 and 2012, respectively.

 

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.

 

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, 2013 and 2012, 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,:

		2013	2012
EmCare, Inc.		49%	98%
Dealertrack		45%	0%

 

FINANCIAL INSTRUMENTS

 

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

 

STEP RENT RECEIVABLE

 

The leases provided for fixed rental increases over the life of the leases. 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 $1,292,000 and $516,000 at December 31, 2013 and 2012, respectively.

 

TENANT RENT RECEIVABLE

 

Tenant rent receivable is reported at the amount the Company expects to collect on balances outstanding at year-end. Management monitors outstanding balances and tenant relationships and concluded that any realization losses would be immaterial.

 

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 $283,000 and $74,000 for the years ended December 31, 2013 and 2012, respectively.

 

FSP Galleria North 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 the 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 December 31,
(in thousands)		2013				2012
Income from leases		$	2,802			$	390
Straight-line rent adjustment			776				512
Reimbursable expenses			572				266
Total		$	4,150			$	1,168

 

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, 2013 and 2012. Subsequent to the completion of the offering of shares of Preferred Stock, the holders of Common Stock are not entitled to share in any income nor in any related dividend.

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. During the years 2004 to 2013, the Company incurred net operating losses for income tax purposes of approximately $12,750,000, which can be carried forward until it expires between 2024 and 2033. The gross amount of net operating losses available to the Company was $12,750,000 and $10,858,000 as of December 31, 2013 and 2012, respectively.

FSP Galleria North Corp.

Notes to Consolidated Financial Statements

 

3.   Income Taxes (continued)

 

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 were 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 State of Texas 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 2010 and thereafter.

 

At December 31, 2013, the Company’s net tax basis of its real estate assets was $63,448,000.

 

The following schedule reconciles net loss to taxable loss subject to dividend requirements, which are calculated annually:

 

		Year Ended December 31,
(in thousands)		2013				2012
Net loss		$	(1,303	)		$	(2,822	)
Adjustments:    Book depreciation			2,313				1,728
Straight-line rent adjustment			(776	)			(512	)
Tax depreciation and amortization			(2,126	)			(1,779	)
Taxable loss [1]		$	(1,892	)		$	(3,385	)
[1] A tax loss is not subject to a dividend requirement.

 

4.   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, $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, 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 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 August 2005, Franklin Street, as the holder of Common Stock, was not entitled to share in any earnings nor any related dividend.

FSP Galleria North Corp.

Notes to Consolidated Financial Statements

 

5.   Related Party Transactions

 

Asset Management Agreement

 

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 percent (1%) of the 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, effective at the end of the notice period. For the years ended December 31, 2013 and 2012, management fees paid were $29,000 and $4,000, respectively.

 

Galleria Revolver

 

On February 1, 2012, the Company entered into a three-year secured promissory note for a revolving line of credit (the “Galleria Revolver”), with Franklin Street for up to $15,000,000. The Galleria Revolver matures on January 30, 2015 and the interest rate applicable to advances thereunder is the 30-day LIBOR rate plus 500 basis points (5.17% at December 31, 2013). The Galleria Revolver is secured by a mortgage on the Property and each advance thereunder requires payment of a 50 basis point draw fee. The Company anticipates that the Galleria Revolver will be replaced or refinanced on or before its maturity date. However, there can be no assurance that the Company will be able to replace or refinance the Galleria Revolver on favorable terms or at all. As of December 31, 2013 and 2012, advances drawn and outstanding under the Galleria Revolver totaled $12,880,000 and $5,880,000, respectively. For the years ended December 31, 2013 and 2012, the draw fees of approximately $35,000 and $30,000, respectively, and interest expense of approximately $486,000 and $150,000, respectively, were paid to Franklin Street.

 

Investor Services Agreement

 

On August 14, 2012, the Company entered into an Investor Services Agreement (the “FSPI Agreement”) with FSP Investments LLC for the provision of investor services to holders of the Company’s Preferred Stock. FSP Investments LLC is a wholly-owned subsidiary of Franklin Street, which is the sole holder of our one share of Common Stock that is issued and outstanding. FSP Investments LLC acted as a real estate investment firm and broker/dealer with respect to (a) the Company’s organization, (b) the Company’s acquisition of the Property and (c) the sale of the Company’s equity interests. The FSPI Agreement requires the Company to pay a monthly service fee of $500 for services performed under the FSPI Agreement, and to reimburse FSP Investments LLC for its reasonable out-of-pocket expenses incurred in connection with the FSPI Agreement. The FSPI Agreement may be terminated by either party with thirty days written notice or immediately upon certain events of default set forth in the FSPI Agreement. For the years ended December 31, 2013 and 2012, investor services fees and expenses paid were approximately $15,000 and $3,000, respectively.

 

Ownership of Common Stock

 

Franklin Street is the sole holder of our one share of Common Stock that is issued and outstanding. Subsequent to the completion of the private placement of the Preferred Stock in August 2005, Franklin Street has not been entitled to share in earnings or any dividend related to the Common Stock.

 

6.   Segment Reporting

 

The Company operates in one industry segment – real estate ownership of commercial property. As of December 31, 2013 and 2012, the Company owned and operated a sixteen-story office building in that one segment.

FSP Galleria North Corp.

Notes to Consolidated Financial Statements

 

7.   Accounts Payable and Accrued Expenses

 

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

 

		December 31,
(in thousands)		2013				2012
Accounts payable		$	12			$	1
Accrued capital expenses			496				38
Accrued property tax			757				712
Accrued professional fees			75				86
Deferred rental income			233				94
Other accrued expenses			242				92
Total		$	1,815			$	1,023

 

8.   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
		2014		$        5,920
		2015		5,304
		2016		6,977
		2017		7,160
		2018		7,292
		Thereafter		32,311
				$      64,964

 

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

 

9.   Subsequent Event

 

On January 23, 2014, the Company was advanced $600,000 under the Galleria Revolver.

 

 

SCHEDULE III

 

FSP Galleria North Corp.

Real Estate and Accumulated Depreciation

December 31, 2013

 

						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
						(dollars in thousands)
Galleria North, Dallas, Texas						$	5,535			$	58,334			$	9,877			$	5,535			$	68,211			$	73,746			$	14,489			$	59,257			5-39			2004

 

(1)   The aggregate cost for Federal Income Tax purposes is $78,688,000.

 

 

FSP Galleria North Corp.

 

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

 

		December 31,
(in thousands)		2013				2012
Real estate investments, at cost:
Balance, beginning of year		$	68,122			$	64,690
Improvements			5,552				3,344
Fixtures and equipment			84				88
Dispositions			(12	)			—
Balance, end of year		$	73,746			$	68,122
Accumulated depreciation:
Balance, beginning of year		$	12,493			$	10,859
Depreciation			2,008				1,634
Dispositions			(12	)			—
Balance, end of year		$	14,489			$	12,493