WELLS MID-HORIZON VALUE-ADDED FUND I LLC - FORM 10-K - March 28, 2014

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EX-31.2 - EXHIBIT 31.2 - WELLS MID-HORIZON VALUE-ADDED FUND I LLCwellsvafq42013_ex312.htm
EX-31.1 - EXHIBIT 31.1 - WELLS MID-HORIZON VALUE-ADDED FUND I LLCwellsvafq42013_ex311.htm
EX-32.1 - EXHIBIT 32.1 - WELLS MID-HORIZON VALUE-ADDED FUND I LLCwellsvafq42013_ex321.htm
EXCEL - IDEA: XBRL DOCUMENT - WELLS MID-HORIZON VALUE-ADDED FUND I LLCFinancial_Report.xls

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________ 
FORM 10-K
__________________________________ 
(Mark One)
 
x
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the fiscal year ended December 31, 2013 or
 
 
o
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from _____________ to _____________
Commission file number 000-53626
WELLS MID-HORIZON VALUE-ADDED FUND I, LLC
(Exact name of registrant as specified in its charter)
__________________________________ 

Georgia
 
20-3192853
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
 
 
6200 The Corners Pkwy.
Norcross, Georgia
 
30092-3365
(Address of principal executive offices)
 
(Zip Code)
 
 
 
Registrant’s telephone number, including area code
 
(770) 449-7800
 
 
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of each class
 
Name of each exchange on which registered
None
 
None

Securities registered pursuant to section 12(g) of the Act:
Shares of Investor Member Interests
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  o    No  x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes  o    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x    No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated file," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
While there is no established market for the registrant’s shares of investor member interests, the registrant conducted a private placement offering of its shares of investor member interests that commenced on September 15, 2005 and terminated on September 15, 2008. Shares in its offering were sold at $1,000 per investor member interest, with discounts available for certain categories of purchasers. The number of shares of investor member interests held by non-affiliates as of June 30, 2013 was approximately 51,745.
As of February 28, 2014, there were 51,854 shares of investor member interests outstanding.
 
 
 
 
 



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


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PART I
ITEM 1.
BUSINESS.
General
Wells VAF I was organized as a Georgia limited liability company on July 15, 2005, for the purpose of acquiring, developing, owning, operating, and improving or otherwise enhancing income-producing commercial properties, and liquidating such investments over a period of three to five years following acquisition. As a result of the current economic conditions and their impact on office market conditions, we have determined to hold individual assets longer than originally projected in order to achieve better disposition pricing for our investor members.  We intend to continue to focus on positioning our remaining property for sale. We will evaluate offers to sell our remaining property on an as-is basis. We can provide no guarantees, however, when our portfolio will be liquidated as our manager, in its discretion, may hold our remaining asset longer in order to achieve better returns for our investor members. The term of Wells VAF I shall continue until the earlier of December 31, 2020, or the filing of a Certificate of Termination upon the dissolution and completion of the liquidation of Wells VAF I.

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

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

Our investment policy included acquiring properties with opportunities for value enhancement related to leasing or re-leasing available space, renovating or redeveloping properties, entering into leases with sub-investment-grade tenants at above-market rates, and/or benefiting from favorable market conditions. As of February 28, 2014, we owned one office building encompassing approximately 184,000 square feet, and we do not anticipate acquiring any additional properties. See Item 2, "Properties" for a more detailed description of our portfolio.

Wells VAF I is not a mutual fund and does not intend to register under the Investment Company Act of 1940.
Investment Objectives and General
We invested primarily in commercial office real estate properties, principally Class-A type assets in primary and secondary markets in the United States, that provided opportunities for value enhancement through development, operations, re-leasing, property improvements, or other means. Class-A type assets are characterized by excellent location and access, high-quality construction materials and condition, and professional management. They are competitive with new buildings and attract high-quality tenants. We invested in properties located across the United States in Plymouth, Minnesota; Pittsburgh, Pennsylvania; Nashville, Tennessee; and Austin, Texas. We have since disposed of our properties located in Pittsburgh, Pennsylvania; Nashville, Tennessee; and Austin, Texas.
Wells VAF I is designed to provide investors with an opportunity to earn attractive risk-adjusted returns from equity real estate investments in the United States through a medium-term investment product. Because of its structure and its medium-term investment objective, Wells VAF I is considered to be a "value-added investment" program. Value-added investment programs occupy a middle tier in the risk/return continuum of real estate investment funds. At one end of the spectrum are long-term core income funds, which concentrate on providing a stable income return to investors, with the goal of providing modest appreciation in property value at the end of the fund's holding period. At the other end of the spectrum are opportunistic funds that seek to

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provide substantially all of their return in the form of short-term gain realized from high-risk, highly leveraged strategies. Value-added investment funds, such as Wells VAF I, fall in the middle of that risk/return spectrum, by seeking both stable income for modest levels of current distributions and gains from property sales that are attributable to capital appreciation at the time of disposition, as part of the overall return target.

Wells VAF I seeks to operate, improve, and otherwise enhance and dispose of its properties at a profit, within three to five years after completion of each acquisition, in a manner that achieves greater appreciation in value upon such dispositions and superior total returns to investors, than programs with a primary focus on current distributions of income. We believe that we can complete our leasing efforts, sell the remaining asset in the portfolio and begin liquidating our portfolio. The current economic conditions and their impact on office market conditions have resulted in a decrease in leasing activity and volume, an increase in rental concessions, and a decline in effective rental rates, which has affected our ability to lease vacancy in our property. In addition, disruptions and dislocations in the credit markets have negatively impacted transaction activity and made property dispositions within the near-term less attractive. These conditions have required that we hold individual assets longer than the three- to five-year period originally projected in order to achieve better disposition pricing for our investor members. The timing of the disposition of the remaining property will depend on prevailing economic conditions, including when a stabilization of the credit markets occurs, as well as the recovery of the real estate markets in the geographic location of our remaining property. Wells VAF I's investment objectives are:

•
to increase the value of our property through property-level value-enhancing strategies;
•
to preserve, protect, and return investors' capital contributions;
•
to return to investors excess operating income in the form of cash distributions on their shares; and
•
to realize capital appreciation for investors upon the orderly disposition of our properties and distribution of any cash gains to members.

Financing Objectives

Wells VAF I has employed leverage in a strategic manner to augment our net offering proceeds and net cash flows from operations, which permitted us to acquire a larger and more diversified portfolio of properties. In the aggregate, we may borrow up to 75% of the value of any particular property purchased by us, so long as the aggregate amount of such borrowings does not exceed 50% of the aggregate asset value of properties in our portfolio on a stabilized basis.

Employees

Wells VAF I has no direct employees. The employees of Wells Management, the sole member of WIM, perform substantially all of the services related to our asset management, accounting, investor relations, and other administrative activities. See Item 13, "Certain Relationships and Related Transactions," for a summary of the fees paid to the manager and its affiliates during the years ended December 31, 2013 and 2012.

Insurance

Wells Management carries property insurance and liability insurance with respect to the property we own. In the opinion of management, our property is adequately insured.

Competition

Leasing of real estate is highly competitive in the current market, and we may experience competition for high-quality tenants from owners and managers of competing projects. As a result, we may have to provide rent concessions, incur charges for tenant improvements, or offer other inducements to enable us to timely lease vacant space, all of which may have an adverse impact on our results of operations. At the time we elect to dispose of our remaining property, we may be in competition with sellers of similar properties to locate suitable purchasers.

Operational Dependency

We have engaged WIM and Wells Management to provide certain services essential to us, including asset management services, supervision of the management of properties, asset acquisition and disposition services, as well as other administrative

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responsibilities, including accounting services, investor member communications, and investor relations. As a result of these relationships, we are dependent upon WIM and Wells Management.

WIM and Wells Management are owned and controlled by Wells Real Estate Funds, Inc. ("WREF"). The operations of Wells Capital, WIM, Wells Management, and their affiliates represent substantially all of the business of WREF. Accordingly, we focus on the financial condition of WREF when assessing the financial condition of WIM and Wells Management. In the event that WREF were to become unable to meet its obligations as they become due, we might be required to find alternative service providers. WREF is winding down its operations and, as a result, its workforce and available capital have been significantly reduced. Accordingly, we may not be able to rely on our General Partners to allocate sufficient time and resources to our operations, which may adversely affect our ability to operate our business and continue our operations in the same manner as in the past. As of December 31, 2013, we have no reason to believe that WREF does not have access to adequate liquidity and capital resources, including cash on hand, other investments, and borrowing capacity, necessary to meet its current and future obligations as they become due.

Economic Dependency

We are also dependent upon the ability of our current tenants to pay their contractual base rent amounts as they become due. The inability of a tenant to pay future rental amounts would have a negative impact on our results of operations. We are not aware of any reason why our current tenants will not be able to pay their contractual rental amounts as they become due in all material respects. Situations preventing our tenants from paying contractual rents could result in a material adverse impact on our results of operations.

Environmental
As an owner of real estate, we are subject to various environmental laws of federal, state, and local governments. Compliance with existing laws has not had a material adverse effect on our financial condition or results of operations, and management does not believe it will have such an impact in the future. However, we cannot predict the impact of unforeseen environmental contingencies or new or changed laws or regulations on properties we currently own.

Website Address

Access to copies of each of our filings with the SEC is available, free of charge, from our website at http://www.wellsref.com or through a link to the SEC website, http://www.sec.gov. These filings are available promptly after we file with, or furnish them to, the SEC.

ITEM 1A.
RISK FACTORS
We have omitted a discussion of risk factors because, as a smaller reporting company, we are not required to provide such information.
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
Not applicable.

ITEM 2.
PROPERTIES.
Overview
During the periods presented, we owned direct interests in the following properties:
 
 
Leased % as of December 31,
Properties
 
2013
 
2012
1. Nathan Lane Building
A five-story office building located in Plymouth, Minnesota
 
45%
 
45%
3. Commerce Street Building (Sold August 1, 2013)
A four-story office building and two floors of a parking deck located in Nashville, Tennessee
 
—
 
85%
4. Parkway at Oak Hill Buildings (Sold May 9, 2012)
Two separate two-story office buildings located in Austin, Texas
 
—
 
—

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Lease Expirations
As of December 31, 2013, the lease expirations scheduled during the following 10 years and thereafter for our remaining property, assuming no exercise of renewal options or termination rights, are summarized below:




Year of
Lease
Expiration
 


Number
of
Leases
Expiring
 



Square
Feet
Expiring
 


Annualized
Gross Base
Rent in Year
of Expiration
 

Percentage
of Total
Square
Feet
Expiring
 
Percentage
of Total
Annualized
Gross Base
Rent in Year
of Expiration
2016(1)
 
1
 
37,427

 
$
523,978

 
45.5
%
 
40.2
%
2017(2)
 
1
 
44,846

 
778,956

 
54.5
%
 
59.8
%
 
 
2
 
82,273

 
$
1,302,934

 
100.0
%
 
100.0
%
(1)
Nathan Lane Building: Stanley Convergent Security Solutions, Inc. lease
(2)
Nathan Lane Building: Brocade Communications Systems, Inc. lease

Property Descriptions
The properties that we owned during the periods presented are further described below:

Nathan Lane Building
The Nathan Lane Building is a five-story office building containing approximately 184,000 rentable square feet located in Plymouth, Minnesota. The Nathan Lane Building was acquired on September 20, 2006. As of December 31, 2013, the Nathan Lane Building was 45% leased under lease agreements with Brocade Communications Systems, Inc. ("Brocade") (approximately 24%) and Stanley Convergent Security Solutions, Inc. ("Stanley") (approximately 21%). The original Brocade net lease for approximately 148,000 rentable square feet commenced on October 8, 1999, and expired on April 30, 2010. On October 20, 2009, we entered into a new lease agreement with Brocade, effective as of May 1, 2010, which (i) reduced Brocade's square footage from approximately 81% of the building to approximately 24% of the building; (ii) extended the lease term from April 30, 2010 to July 31, 2017; and (iii) provided for a three-month rental abatement period. Pursuant to the new lease agreement, Brocade no longer manages the Nathan Lane Building, and its annual base rent has increased from an average of approximately $10.12 per square foot to an average of approximately $14.20 per square foot. In addition to annual base rent, Brocade is also required to reimburse us for its pro rata share of all operating expenses and real estate taxes effective May 1, 2010. Brocade's annual base rent increases by approximately 3% annually effective May 1, 2011. Brocade has the right to extend the lease term for two additional five-year periods at the then fair market rental rate. As of December 31, 2013, the annual base rent payable under the current Brocade lease was approximately $692,000. The annualized rent payable in 2017 under the current Brocade lease will be approximately $779,000.

Stanley occupies approximately 37,400 rentable square feet of the Nathan Lane Building. The Stanley lease commenced on May 12, 2006, and expires on May 31, 2016. Effective May 1, 2010, Stanley began to reimburse for its pro rata share of the operating expenses and real estate taxes. Stanley has the right, at its option, to extend the initial term of its lease for two additional five-year periods. As of December 31, 2013, the annual base rent payable under the Stanley lease was approximately $524,000 and will remain the same through the expiration of the lease. The annualized base rent amounts for Brocade and Stanley are exclusive of rental abatement periods.

Commerce Street Building

The Commerce Street Building is a four-story office building containing a total of approximately 118,000 square feet, of which we owned approximately 115,000 rentable square feet, and two floors of a parking deck located in Nashville, Tennessee. The Commerce Street Building was acquired on December 14, 2007, and was approximately 85% leased to two tenants at the time of disposition. On August 1, 2013, we sold the Commerce Street Building to an unrelated third party for a gross sales price of $11,200,000, exclusive of closing costs and a credit of approximately $602,000 for an outstanding tenant improvement obligation. As a result of the sale, we recognized a gain of approximately $268,000 and received net sale proceeds of approximately $10,844,000. In the third quarter of 2012, we recorded an impairment loss on the Commerce Street Building of approximately $1,588,000 to reduce the carrying value of the property to its estimated fair value based on the present value of future cash flows.


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Parkway at Oak Hill Buildings

The Parkway at Oak Hill Buildings consist of two separate two-story office buildings containing a combined total of approximately 146,000 rentable square feet and a three-story parking garage located in Austin, Texas. The Parkway at Oak Hill Buildings were acquired vacant on October 15, 2008, and were approximately 94% leased to seven tenants at the time of disposition. On May 9, 2012, we sold the Parkway at Oak Hill Buildings to Rorasa, Inc., an unaffiliated third party, for a gross sale price of $31.3 million. The disposition resulted in net sale proceeds of approximately $30.5 million and a gain on sale of approximately $5.6 million. In accordance with the terms of our loan agreement with NXT Capital, LLC (the "NXT Loan"), approximately $19.2 million of the net proceeds from the sale of the Parkway at Oak Hill Buildings was applied against the outstanding balance of the NXT Loan.

ITEM 3.
LEGAL PROCEEDINGS
We are from time to time a party to legal proceedings that arise in the ordinary course of our business. We are not currently involved in any litigation for which the outcome would, in management's judgment based on information currently available, have a material adverse effect on our results of operations or financial condition, nor is management aware of any such litigation threatened against us during the year ended December 31, 2013.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.

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PART II
ITEM 5.
MARKET FOR WELLS VAF I'S INVESTOR MEMBER INTERESTS, RELATED SECURITY HOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.
Summary

As of February 28, 2014, 51,854 shares of investor member interests, held by a total of 607 investor members, were outstanding. Capital contributions are equal to $1,000 per share of investor member interest. A public trading market has not been established for our shares of investor member interests, nor is such a market anticipated to develop in the future. The operating agreement provides WIM with the right to prohibit transfers of shares under certain circumstances.

Share Valuation

We are required to report the estimated value of the investor member interests annually to our members following the property valuation process set forth in the Advisory Agreement. In accordance with our Advisory Agreement, each year one-third of the properties are appraised by an independent appraiser, and the remaining two-thirds are appraised by personnel of WIM or its affiliates and reviewed by an independent appraiser. For purposes of the 2013 valuation, an independent appraisal was completed by Integra Realty Resources, Inc. on the Nathan Lane Building. The final appraisal was utilized to determine the value of the assets under management for purposes of computing the appropriate amount of the annual asset management fee. The aggregate value of the assets under management discussed above, along with other assets and liabilities, were used to calculate the estimated value of the investor member interests. The estimated share valuations are intended to be an estimate of the distributions that would be made to investor members, assuming an orderly liquidation of our assets.

Utilizing the methodology described above and based upon market conditions existing in early December 2013, WIM's board of directors estimated the share valuation as of December 31, 2013, to be approximately $555 per share, dependent upon each investor member's time of purchase in relation to our offering period. Individual member share values may vary from the average share value disclosed as a result of the complexities of the net cash flow distribution calculation described in detail below. These estimates should not be viewed as an accurate reflection of the price at which investor members might be able to sell their shares, or the fair market value of Wells VAF I's remaining property, nor do they necessarily represent the amount of net proceeds the members would receive if Wells VAF I's remaining property was sold and the proceeds were distributed in a liquidation. There is no established public trading market for our investor member shares, and it is not anticipated that a public trading market for the shares will ever develop. The valuations performed by us are estimates only and is based on a number of assumptions that may not be accurate or complete and may or may not be applicable to any specific investor member shares. In addition, the property value is subject to change and could decline in the future.

Distribution of Net Cash Flow

We may not make significant regular distributions from cash flow from operations, and we have the discretion to not distribute cash flow generated as net proceeds of nonliquidating sales of our properties, if WIM determines that it is in the best interest of Wells VAF I and its members to use such net proceeds to enhance the value of our portfolio. Our principal investment strategy is to operate and/or develop, improve, and dispose of properties in a manner that enhances their appreciation in value for realization upon property sales over the mid-term. Accordingly, a significant portion of any cash flow from operations may be deployed by us in value-enhancing strategies for our portfolio of properties, and some portion of nonliquidating net sale proceeds may also be deployed for such purposes.
Net cash flow, as defined in the operating agreement, is distributed to the members in the order and priority that follows:

•
First, to pay the following returns on capital:
•
First, to the investor members up to a 10% per annum compounded return on their capital contributions during the offering period;
•
Second, to the investor members in proportion to their percentage interests, as defined, until each investor member receives a 10% per annum compounded return on their capital contributions for the period following the offering period;
•
Third, to Wells Management up to a 10% per annum compounded return on its capital;

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•
Second, to the investor members in proportion to their percentage interests until each investor member has received $1,000 per share;
•
Third, to Wells Management until it has received its capital contributions;
•
Fourth,
•
To Wells Management in the amount of 20% of all distributable proceeds, less any disposition fees previously paid to Wells Management, of which Wells Management has agreed to pay up to 50% of any such amount received to broker/dealers who participated in its private placement offering; and
•
The remainder to the investor members in accordance with their percentage interests.
During the years ended December 31, 2013 and 2012, we paid distributions of $5.0 million and $7.0 million, respectively, to investor members. No cash distributions were paid to Wells Management during the years ended December 31, 2013 and 2012.
Redemption of Shares of Investor Member Interests

We did not redeem any securities during the quarter ended December 31, 2013.

Unregistered Issuance of Securities

During 2013, we did not sell any equity securities that were not registered under the Securities Act.
ITEM 6.
SELECTED FINANCIAL DATA.
We have omitted presentation of selected financial data because, as a smaller reporting company, we are not required to provide such information.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our accompanying financial statements and notes thereto. See also "Cautionary Note Regarding Forward-Looking Statements" preceding Part I of this report.
Overview
We were formed on July 15, 2005 for the purpose of acquiring, developing, owning, operating, and improving or otherwise enhancing income-producing commercial properties. Our investment strategy includes, but is not limited to, acquiring properties with opportunities for value enhancement related to leasing or re-leasing available space, renovating or redeveloping properties, entering into leases with sub-investment-grade tenants at above-market rates and/or benefiting from favorable market conditions. We are externally advised and managed by WIM. In June 2006, we commenced active operations upon receiving the minimum proceeds in our private placement offering of investor member interests, which offering raised approximately $51,854,000 in gross proceeds prior to its termination in September 2008. We do not expect to make any additional investments in the future, and our current focus is on positioning our remaining property for sale. We intend to continue to focus on positioning our remaining property for sale; however, we will evaluate offers to sell our remaining property on an as-is basis. The current economic conditions and their impact on office market conditions have required that we extend our projected fund life into 2014 in order to potentially achieve better disposition pricing for our investor members. As of February 28, 2014, we owned interests in one remaining property.
Portfolio Overview
Summary information relating to our properties is presented below:
•
The Nathan Lane Building is a five-story office building located in Plymouth, Minnesota, that was acquired in September 2006 and is currently approximately 45% leased to two tenants, Brocade and Stanley. We are marketing the vacant space in this building for lease.
•
The Commerce Street Building is a four-story office building and the top two floors of a parking deck located in Nashville, Tennessee, that was acquired in December 2007 and sold on August 1, 2013 for a gross sales price of $11,200,000, exclusive of closing costs and a credit of approximately $602,000 for an outstanding tenant improvement obligation. The disposition resulted in net sale proceeds of approximately $10,844,000 and a gain of approximately $268,000. In the third quarter of 2012, we recorded an impairment loss on the Commerce Street Building of approximately $1,588,000 to reduce

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the carrying value of the property to its estimated fair value based on the present value of future cash flows. The Commerce Street Building was approximately 85% leased to two tenants at the time of its disposition.
•
The Parkway at Oak Hill Buildings are two separate two-story office buildings located in Austin, Texas, that were acquired vacant in October 2008 and sold to an unrelated third-party on May 9, 2012 for a gross sales price of $31.3 million, exclusive of adjustments and closing costs. The disposition resulted in net sale proceeds of approximately $30.5 million, of which $19.2 million was used to repay the outstanding balance on the NXT loan, and a gain of approximately $5.6 million. These buildings were 94% leased to seven tenants at the time of their disposition.
During the year ended December 31, 2013 and 2012, we distributed $5.0 million and $7.0 million to investor members in connection with the dispositions of the Commerce Street Building and the Parkway at Oak Hill Building, respectively.
General Economic Conditions and Real Estate Market Commentary
Management reviews a number of economic forecasts and market commentaries in order to evaluate general economic conditions and to formulate a view of the current environment's effect on the real estate markets in which we operate.

As measured by the U.S real gross domestic product (“real GDP”), the U.S. economy increased by 1.9% in 2013, according to estimates,  compared to an increase of 2.8% in 2012. The growth of the U.S. economy in 2013 primarily reflected positive contributions from personal consumption expenditures, exports, residential fixed investment, nonresidential fixed investment, and private inventory investment that were partly offset by a negative contribution from federal government spending. While there are still challenges, management believes the U.S. economic indicators across the board, including employment, output and housing, point to sustained growth and continued recovery at a moderate pace. Given the improving economic data observed at the end of 2013, we are cautiously optimistic that 2014 will deliver a real GDP growth number above 2% and that job growth will accelerate.

Real estate market fundamentals underlying the U.S. office markets mirrored the overall U.S. economy, displaying signs of broader, more consistent growth and modest improvements in the major indicators in 2013. Net absorption was 15.6 million square feet in the fourth quarter and 51.6 million square feet for the year, which is a slight increase as compared to the 50.1 million square feet of net absorption in 2012. More than 80% of metropolitan areas experienced occupancy gains in both 2012 and 2013. As a result of the additional space absorbed, vacancy levels declined to 12.1% in the fourth quarter of 2013, an improvement from a 12.7% vacancy rate at the end of 2012, with 48 out of 82 metropolitan areas (59%) showing declines in vacancy rates. Although vacancy is currently lower than its recessionary peak, it remains slightly higher than its historical average. With vacancy declining in the majority of areas of the country, rental rates are beginning to trend upward and, despite a recent trend towards office space efficiency, demand for office space exceeded new supply for the second straight year. Approximately 82% of markets displayed higher rent in the fourth quarter of 2013 compared to the fourth quarter of 2012 with average quoted rental rates of the total office market seeing an increase from $23.12 per square foot to $23.69 per square foot over this period. Similar to 2012, of the total net absorption in 2013, almost two-thirds occurred in Class A office space, which is above its 35% share of the office market, indicating a continued trend to quality assets by tenants. Economic prospects throughout the country have improved with more industries and more markets participating in the recovery, something not seen from 2010 through 2012. Early 2014 economic indicators are suggesting another year of at least modest growth.

The upward trend in transaction volume continued for office properties in 2013. The fourth quarter of 2013 marked the best fourth quarter performance for the office sector since the 2007 peak year with sales volume for office transactions of approximately $44.0 billion. U.S. office transaction volumes increased 45% in the fourth quarter of 2013 and 36% for the full year in 2013 as compared to the same respective periods in 2012. As the economic recovery extends across assets and markets, competition remained strong in secondary markets, while high-end deals continued to contribute  significantly to stronger primary market activity during the fourth quarter of 2013. Office transaction volumes continued to grow in secondary markets, which contributed approximately 40% of the investment sales activity for the year. As we enter 2014, we expect the investment sales momentum seen in 2013 to continue, with estimated growth in office investment sales volume to exceed 20% for the year.

Job growth was positive in 2013, with the unemployment rate declining from 7.9% at the beginning of the year to 6.7% at the end of the year. Essential to the commercial real estate sector, office-using employment continues to improve with the U.S. creating 721,000 office-using jobs in 2013, up from 696,000 in 2012 and 570,000 in 2011. We expect these trends will continue in 2014; however, diversified and non-niche markets will likely be responsible for an increasing share of job growth as they recover from the economic downturn. This projected job growth combined with a lack of new supply coming into the market in 2014-2015 should continue to produce strong office net absorption and declining office vacancy rates and push leverage in landlords’ favor until additional supply, in the form of new construction, is delivered across markets in the mid-2015 to early-2016 time frame. This will likely result in continued increases in rental rents and declines in landlord concessions offered to tenants. Although tech-heavy and energy-rich markets such as Seattle-Bellevue, San Francisco, Silicon Valley, Houston and Dallas, continue to lead the

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overall markets with the most aggressive upward rent trends due to high demand and decreasing availability, landlord confidence has begun to spread across other markets as well. Through 2014, once-lagging markets like Atlanta, Philadelphia, Los Angeles, Chicago and other heavily diversified tenant markets are likely to see rents grow at a faster pace due to an economic recovery that finally appears firm.

Impact of Economic Conditions on our Portfolio

While some of the market conditions noted above may indicate expected changes in rental rates, the extent to which our portfolio may be affected is dependent upon the market conditions in the geographic area of our remaining property.

Less diversified real estate funds that own few properties, similar to Wells VAF I, and those funds with current vacancies or near- term tenant rollover, similar to Wells VAF I, may face a challenging leasing environment. As of December 31, 2013, the Nathan Lane Building is currently approximately 55% vacant. The property may be required to offer lower rental rates and higher concession packages to potential tenants. Our investment strategy, which includes either renewing an existing tenant's lease or re-leasing the property prior to marketing it for sale, remains intact. However, our leasing efforts will be impacted by the economic conditions noted above. We intend to continue to focus on positioning our remaining property for sale and dispose of the remaining assets in our portfolio this year. We can provide no guarantees, however, that our portfolio will be liquidated by December 2014 as our manager, in its discretion, may hold our remaining asset longer in order to achieve better returns for our investor members.

Liquidity and Capital Resources
Overview
We expect that our primary source of future cash flows will be cash generated from the operations of our remaining property and net proceeds from the sale of our remaining property.
Our operating strategy entails funding expenditures related to the recurring operations of the remaining property with operating cash flows, assessing the amount of operating cash flows and cash on hand that will be required to fund future re-leasing costs and other capital improvements, and distributing residual operating cash flows to our investor members. We continue to carefully monitor market conditions and their impact on our earnings, our cash flows, and future distributions to investor members.
During 2013 and 2012, we were party to an agreement with NXT Capital for a loan, referred to as the NXT Loan. The NXT Loan was scheduled to mature in December 2013. On October 10, 2013, we terminated the NXT Loan. Our most significant risks and challenges include (i) re-leasing vacant space and space that may become vacant upon the expiration of our current leases at our remaining property in order to achieve better disposition pricing for our investor members and (ii) funding our portfolio level general and administrative expenses from the operating cash flow of our remaining property.
Short-Term Liquidity and Capital Resources
During the year ended December 31, 2013, we generated net operating cash flows of approximately $0.7 million. Operating cash inflows reflect receipts of rental payments and tenant reimbursements, less payments for property operating costs, asset and property management fees, and general and administrative expenses.
During the year ended December 31, 2013, we invested approximately $1.1 million in real estate by utilizing cash on hand primarily to fund tenant improvements and capital expenditures at the 330 Commerce Building, prior to its disposition. During the year ended December 31, 2013, we received net sale proceeds of approximately $10.8 million from the disposition of the Commerce Street Building. We utilized these proceeds to distribute $5.0 million to our investor members.
We expect to utilize the residual cash balance on hand as of December 31, 2013 of approximately $12.0 million to satisfy current liabilities and to fund anticipated re-leasing costs and capital expenditures at the Nathan Lane Building. Future distributions paid to our investor members will be largely dependent on the amount of cash generated from our operating activities, our expectations of future cash flows, net proceeds from the sale of our remaining property, and our determination of near-term cash needs for capital improvements and tenant re-leasing costs.
Long-Term Liquidity and Capital Resources
We expect that our primary sources of capital over the long term will include proceeds from net cash flows from operations and net proceeds received from the sale of our remaining property. We expect that our primary uses of capital will be for capital improvements, re-leasing costs, and operating expenses.

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In determining how and when to allocate cash resources, we initially consider the source of the cash. We expect that substantially all future net operating cash flows will be used for reserves for certain capital expenditures such as re-leasing costs and capital improvements. To the extent the Nathan Lane Building continues to remain partially vacant, property operating expenses and asset and property management fees may continue to reduce our cash flow from operating activities.
Results of Operations
Comparison of the year ended December 31, 2012 versus the year ended December 31, 2013
Rental income and tenant reimbursements remained relatively stable at $1,181,188 and $1,055,365, respectively, for the year ended December 31, 2012 and $1,185,575 and $1,048,766, respectively, for the year ended December 31, 2013. Absent any leasing activity, we expect future rental income and tenant reimbursements to remain at a relatively similar level as compared to the year ended December 31, 2013.
Property operating costs increased from $1,626,689 for the year ended December 31, 2012 to $1,684,481 for the year ended December 31, 2013, primarily due to an increase in real estate taxes assessed on the Nathan Lane Building. Absent any leasing activity, we expect future property operating costs to remain at a similar level, as compared to the year ended December 31, 2013.
Asset and property management fees decreased from $229,288 for the year ended December 31, 2012 to $190,759 for the year ended December 31, 2013, primarily due to a slight decrease in the gross value of the Nathan Lane Building in connection with the 2012 year-end valuation. Asset management fees are incurred as a percentage of our gross asset value. We expect future asset and property management fees to remain at a similar level, as compared to the year ended December 31, 2013.
Depreciation expense increased from $455,631 for the year ended December 31, 2012 to $480,083 for the year ended December 31, 2013, primarily due to tenant improvements completed in 2013 at the Nathan Lane Building. Absent leasing activity, we expect future depreciation expense to remain at a similar level, as compared to the year ended December 31, 2013.
Amortization expense remained the same at $318,708 for the years ended December 31, 2012 and 2013. Absent leasing activity, we expect future amortization expense to remain at a similar level.

General and administrative expenses decreased from $594,275 for the year ended December 31, 2012 to $493,432 for the year ended December 31, 2013, primarily due to a decrease in administrative reimbursements and administrative costs related to reporting and regulatory requirements. We anticipate that future general and administrative expenses will vary primarily based on future changes in our reporting and regulatory requirements.
Interest expense decreased from $921,562 for the year ended December 31, 2012 to $414,031 for the year ended December 31, 2013, primarily due to the full repayment of the NXT Loan balance in the second quarter of 2012. We continued to incur non-cash interest expense in 2013 related to the amortization of deferred financing costs associated with NXT Loan. We expect interest expense to decrease, as compared to the year ended December 31, 2013, in connection with the termination of the NXT Loan in the fourth quarter of 2013.
Our income from discontinued operations decreased from $4,119,734 for the year ended December 31, 2012 to $313,091 for the year ended December 31, 2013, as a result of (i) recognizing a gain of approximately $5,634,000 on the sale of the Parkway at Oak Hill Buildings in the second quarter of 2012, partially offset by (ii) recognizing an impairment loss of approximately $1,588,000 on the Commerce Street Building in the third quarter of 2012, and (iii) recognizing a gain of approximately $268,000 on the sale of the Commerce Street Building in the third quarter of 2013.
Our net income of $2,210,134 for the year ended December 31, 2012 decreased to a net loss of $(1,034,062) for the year ended December 31, 2013, as a result of (i) recognizing a gain of approximately $5,634,000 on the sale of the Parkway at Oak Hill Buildings in the second quarter of 2012, partially offset by (ii) recognizing an impairment loss of approximately $1,588,000 on the Commerce Street Building in the third quarter of 2012, (iii) a reduction in interest expense of approximately $508,000 due to the full repayment of the NXT Loan balance in the second quarter of 2012, and (iv) recognizing a gain of approximately $268,000 on the sale of the Commerce Street Building in the third quarter of 2013.
Inflation
We are exposed to inflation risk, as income from long-term leases is the primary source of our cash flows from operations. There are provisions in the majority of our tenant leases that would protect us from the impact of inflation. These provisions include rent steps, reimbursement billings for operating expense pass-through charges, real estate tax and insurance reimbursements on a per-square-foot basis, or in some cases, annual reimbursement of operating expenses above a certain per-square-foot allowance. However, due to the long-term nature of our leases, the leases may not readjust their reimbursement rates frequently enough to cover inflation.

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Application of Critical Accounting Policies
Our accounting policies have been established to conform with U.S. generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. These judgments affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. If management's judgment or interpretation of the facts and circumstances relating to various transactions is different, it is possible that different accounting policies would be applied, thus resulting in a different presentation of the financial statements. Additionally, other companies may utilize different estimates that may impact comparability of our results of operations to those of companies in similar businesses.
Below is a discussion of our accounting policies, which are considered critical in that they may require complex judgment in their application or require estimates about matters that are inherently uncertain.
Investment in Real Estate Assets
Real estate assets are stated at cost, less accumulated depreciation and amortization. Amounts capitalized to real estate assets consist of the cost of acquisition or construction, and any tenant improvements or major improvements and betterments, which extend the useful life of the related asset. Upon receiving notification of a tenant's intention to terminate a lease, undepreciated tenant improvements and intangible lease assets are written off to lease termination expense. All repairs and maintenance are expensed as incurred. We are required to make subjective assessments as to the useful lives of our depreciable assets. We consider the period of future benefit of the asset to determine the appropriate useful lives. These assessments have a direct impact on net income (loss). The estimated useful lives of our assets by class are as follows:
Buildings
40 years
Building improvements
5-25 years
Site improvements
15 years
Tenant improvements
Shorter of lease term or economic life
Intangible lease assets
Lease term
Evaluating the Recoverability of Real Estate Assets
We continually monitor events and changes in circumstances that could indicate that the carrying amounts of the real estate assets and related intangible assets which Wells VAF I owns may not be recoverable. When indicators of potential impairment are present which suggest that the carrying amounts of real estate assets and related intangible assets may not be recoverable, we assess the recoverability of the real estate assets and related intangible assets by determining whether the respective carrying values will be recovered through the estimated undiscounted future cash flows expected from the use of the assets and their eventual disposition for assets held for use, or with the estimated fair values, less costs to sell, for assets held for sale. In the event that such expected undiscounted future cash flows for assets held for use or the estimated fair values, less costs to sell, for assets held for sale do not exceed the carrying values, we adjust the carrying value of real estate assets to the estimated fair values, pursuant to the provisions of the property, plant, and equipment accounting standard for the impairment or disposal of long-lived assets, and recognize an impairment loss. Estimated fair values are determined based on the following information, dependent upon availability: (i) recently quoted market price(s) for the subject property, or highly comparable properties, under sufficiently active and normal market conditions, or (ii) the present value of future cash flows, including estimated residual value.
In the third quarter of 2012, we recorded an impairment loss on the Commerce Street Building of approximately $1,588,000 to reduce the carrying value of the property to its estimated fair value based on the present value of future cash flows due to management's strategy in shortening the estimated holding period of this asset in the third quarter of 2012.
Projections of expected future operating cash flows require that we estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, the number of months it takes to re-lease the property, and the number of years the property is held for investment, among other factors. The subjectivity of assumptions used in the future cash flow analysis, including discount rates, could result in an incorrect assessment of the property's ultimate fair value and could result in the misstatement of the carrying value of our real estate and related intangible assets and net income (loss).
Evaluating the Recoverability of Intangible Assets and Liabilities
The values of intangible lease assets and liabilities are determined based on assumptions made at the time of acquisition and have defined useful lives, which correspond with the lease terms. There may be instances in which intangible lease assets and liabilities

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become impaired and we are required to expense the remaining asset or liability immediately or over a shorter period of time. Lease restructurings, including but not limited to lease terminations and lease extensions, may impact the value and useful life of in-place leases. In-place leases that are terminated, partially terminated, or modified will be evaluated for impairment if the original in-place lease terms have been modified. In situations where the discounted cash flows of the modified in- place lease stream are less than the discounted cash flows of the original in-place lease stream, we reduce the carrying value of the intangible lease assets to reflect the modified lease terms and recognize an impairment loss. For in-place lease extensions  that are executed  more than one year prior to the original in-place lease expiration date, the useful life of the in-place lease will be extended over the new lease term with the exception of those in-place lease components, such as lease commissions and tenant allowances, which have been renegotiated for the extended term. Renegotiated in-place lease components, such as lease commissions and tenant allowances, will be amortized over the shorter of the useful life of the asset or the new lease term. We have determined that there has been no impairment in the carrying value of our intangible lease assets and liabilities to date.
Related-Party Transactions and Agreements
Transactions and Agreements
During the periods presented, we were party to agreements with WIM, Wells Management, and WRES whereby we paid certain fees and expense reimbursements to WIM, Wells Management, and WRES for asset management fees; property management fees; administrative services relating to accounting, portfolio management, and other general and administrative, and we incurred the related expenses.We terminated our property management agreements with WRES and Wells Management on February 28, 2013 and March 31, 2013, respectively. See Note 5 to our financial statements included in this report for a description of these fees and reimbursements and amounts incurred.
Commitments and Contingencies
We are subject to certain commitments and contingencies with regard to certain transactions. Refer to Note 5 and Note 9 to our financial statements included in this report for further explanation. Examples of such commitments and contingencies include:
•
the Advisory Agreement; and
•
property management agreements.
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We have omitted a discussion of quantitative and qualitative disclosures about market risk because, as a smaller reporting company, we are not required to provide such information.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Our financial statements and supplementary data are detailed under Item 15(a) and filed as part of this report on the pages indicated.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
There were no disagreements with our independent registered public accounting firm, Frazier & Deeter, LLC, during the years ended December 31, 2013 and 2012.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation, under the supervision and with the participation of management of WIM, our manager, including the Principal Executive Officer and the Principal Financial Officer of WIM, of the effectiveness of the design and operation of Wells VAF I's disclosure controls and procedures as defined in Rule 13a-15(e) of the Exchange Act as of December 31, 2013. Based upon that evaluation, which was completed as of the end of the period covered by this Form 10-K, the Principal Executive Officer and the Principal Financial Officer of WIM concluded that our disclosure controls and procedures were effective as of December 31, 2013, in providing a reasonable level of assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in applicable SEC rules and forms, including providing a reasonable level of assurance that information required to be disclosed by us in such reports is accumulated and communicated to our management, including the Principal Executive Officer and the Principal Financial Officer of WIM, as appropriate, to allow timely decisions regarding required disclosure.

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Management Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, as a process designed by, or under the supervision of, the Principal Executive Officer and Principal Financial Officer and effected by our 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 GAAP and includes those policies and procedures that:
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and disposition of our assets;
•
provide reasonable assurance that the transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of management and/or members of the Financial Oversight Committee; and
•
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements. 
Because of the inherent limitations of internal control over financial reporting, including the possibility of human error and the circumvention or overriding of controls, material misstatements may not be prevented or detected on a timely basis. In addition, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with policies or procedures may deteriorate. Accordingly, even internal controls determined to be effective can provide only reasonable assurance that the information required to be disclosed in reports filed under the Exchange Act is recorded, processed, summarized, and represented within the time periods required.
Our management has assessed the effectiveness of our internal control over financial reporting at December 31, 2013. To make this assessment, we used the criteria for effective internal control over financial reporting described in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our management believes that our system of internal control over financial reporting met those criteria, and therefore our management has concluded that we maintained effective internal control over financial reporting as of December 31, 2013.
This report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management's report in this report.

Changes in Internal Control Over Financial Reporting
There have been no significant changes in our internal control over financial reporting during the quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
OTHER INFORMATION.

During the quarter ended December 31, 2013, there was no information required to be disclosed in a report on Form 8-K which was not disclosed in a report on Form 8-K.


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PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
WIM
We have no officers or directors and operate under the direction of the board of directors of WIM, our manager (the "Board of Directors"). WIM was formed in August 2005 to bring together the comprehensive real estate services experience and expertise of key personnel within WREF whose services are important to the successful management and conduct of our operations to achieve our objectives as a value-added investment program. The executive offices of WIM are located at 6200 The Corners Parkway, Norcross, Georgia 30092. Pursuant to its appointment by Wells Management to serve as the manager, WIM organizes and deploys personnel to perform all of the property selection, acquisition, asset management, disposition, and other functions required by Wells VAF I. WIM is a wholly owned subsidiary of Wells Management, our sponsoring member.
Directors and Executive Officers of Manager
The Board of Directors is responsible for the management and control of our affairs. Individuals on the Board of Directors have been designated to serve as the Principal Executive Officer and Principal Financial Officer of WIM and consequently serve that role for us through their position with WIM. The Board of Directors functions as the investment committee (the "Investment Committee") for us, and makes all final decisions about property acquisitions and dispositions. The Investment Committee provides financial, investment, business, and other advice and assistance with respect to existing and prospective investments, including the evaluation of the proposed terms of any investment opportunity in light of our purpose and investment objectives. In addition, the Board of Directors provides ongoing supervision and direction for portfolio management and asset management. Investor members may not directly affect the composition of the Board of Directors; however, pursuant to the operating agreement, investor members may elect to remove WIM as the manager upon the affirmative vote of investor members holding greater than two-thirds of the outstanding shares of investor member interests.
Section 16(a) Beneficial Ownership Reporting Compliance     
Under U.S. securities laws, directors, executive officers, and any persons beneficially owning more than 10% of our investor member shares are required to report their initial ownership of the investor member shares and most changes in that ownership to the SEC. The SEC has designated specific due dates for these reports, and we are required to identify in our annual report on Form 10-K those persons who did not file these reports when due. Based solely on our review of copies of the reports filed with the SEC and written representations of our directors and executive officers, we believe all persons subject to these reporting requirements filed the reports on a timely basis in 2013.
Financial Oversight Committee
Wells VAF I does not have an audit committee. Accordingly, Wells Management, our sponsoring member, has established a Financial Oversight Committee consisting of Randy A. Simmons, as the Principal Financial Officer; Parker Hudson, as the Senior Vice President; and Kerianne Maloney as Senior Vice President. The Financial Oversight Committee serves the equivalent function of an audit committee for, among others, the following purposes: appointment, compensation, review and oversight of the work of our independent registered public accounting firm, and establishing and enforcing the code of ethics. However, since neither Wells VAF I nor WIM has an audit committee and the Financial Oversight Committee is not independent of Wells VAF I or WIM, we do not have an "audit committee financial expert."
Code of Ethics
We do not have any officers; however, Wells Management, our sponsoring member, has adopted a code of ethics applicable to its principal executive officer and principal financial officer with respect to Wells VAF I. The code of ethics is contained in the Business Standards/Code of Conduct/General Policies established by WREF. You may obtain a copy of this code of ethics, without charge, upon request by calling our Client Services Department at 800-557-4830, option 2.

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ITEM 11.
EXECUTIVE COMPENSATION.
We do not directly employ officers or directors and, accordingly, no compensation has been awarded to, earned by, or paid directly by us to any individuals. We do, however, reimburse the salaries of certain employees of entities affiliated with WIM based on an allocation of their time spent managing our affairs. The reimbursements were not for the salary of our principal executive officer, Leo Wells, III, and the remaining amounts allocated to us for WIM's remaining officers and directors were less than the required reporting threshold of $100,000. Due to our current management structure and our lack of any direct employees, officers, or directors, no discussion and analysis of our compensation nor tabular information concerning salaries, bonuses, and other types of compensation to our executive officers or directors has been included in this Annual Report on Form 10-K.
See Item 13, "Certain Relationships and Related Transactions," for a description of the fees we incurred payable to WIM and its affiliates during the year ended December 31, 2013.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
(a)
No investor member beneficially owns more than 5% of our outstanding investor member shares.
(b)
We have no officers or directors. The directors and officers of WIM are responsible for our day-to-day operations and overall management functions. As of February 28, 2014, WIM's management did not own any of our outstanding investor member shares.
(c)
No arrangements exist which would, upon operation, result in a change in control of Wells VAF I.

ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Our Relationship with Wells Management, WIM, and Wells Investment Securities, Inc.
WIM is wholly owned by our sponsor, Wells Management, as its sole member. Wells Management is a wholly owned subsidiary of WREF, which is owned 100% by Leo F. Wells, III. Under our operating agreement, Wells Management has the exclusive authority to conduct the day-to-day and overall direction and supervision of our business and affairs. Pursuant to its authority, Wells Management appointed WIM to serve as our manager. During our private placement offering, WIS, which is indirectly owned 100% by Mr. Wells, served as our dealer-manager. We have entered into agreements with WIM and Wells Management, as discussed below, pursuant to which we pay our affiliates certain fees for services relating to the investment and management of our assets.
Sponsoring Member Interest
On September 27, 2005, we received a $1,000,000 contribution from Wells Management for a subordinated interest therein. During the start-up period, proceeds from this contribution were held as working capital and used primarily to fund initial operating costs. Following the start-up period, the residual proceeds were distributed to investor members. Wells Management's interest is subordinated to investor members in earnings allocations and distributions from Wells VAF I. See "Distribution of Net Cash Flow" under Item 5, "Market for Wells VAF I's Investor Member Interests and Related Security Holder Matters" for a discussion of the distributions Wells Management receives in connection with its subordinated interest.
Advisory Agreement  
On September 15, 2005, Wells VAF I entered into the Advisory Agreement with WIM. Pursuant to the Advisory Agreement, WIM is entitled to specified fees for certain services, including, but not limited to, the investment of offering proceeds in real estate projects, sales of properties, and management of day-to-day operations. The Advisory Agreement has a one-year term and is subject to an unlimited number of successive one-year renewals upon the consent of the parties. Effective September 15, 2013, the Advisory Agreement was renewed for a one-year term through September 14, 2014 upon terms identical to those in effect through September 14, 2013. Wells VAF I may terminate the Advisory Agreement upon 60 days' written notice without cause or penalty. If Wells VAF I terminates the Advisory Agreement, Wells VAF I will pay WIM all unpaid reimbursements of expenses and all earned but unpaid fees. The negotiations of the Advisory Agreement were not at arm's length, and Wells VAF I will pay certain prescribed fees to WIM and its affiliates regardless of the quality of its services.



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Under the terms of the Advisory Agreement, we incur the following fees and reimbursements payable to WIM:
•
Monthly asset management fees equal to one-twelfth of 0.75% of the gross value of Wells VAF I's real estate assets, as determined and approved in good faith and consistent with applicable fiduciary duties by the investment committee of Wells VAF I. Any portion of the asset management fee may be deferred upon WIM's request and paid in a subsequent month or year.
•
Reimbursement for all costs and expenses that WIM incurs in fulfilling its duties as the asset portfolio manager. These costs and expenses may include wages and salaries and other employee-related expenses of WIM's employees engaged in management, administration, operations, and marketing functions. Employee-related expenses include taxes, insurance, and benefits relating to such employees, and legal, travel, and other out-of-pocket expenses that are directly related to the services they provide. WIM allocates its reimbursable costs of providing these services among Wells VAF I and various other affiliated public real estate investment programs based on time spent on each entity by individual personnel.
•
For any property sold by Wells VAF I, a disposition fee equal to 0.25% of the sales price, if WIM provides a substantial amount of services in connection with the sale.
Property Management Agreement
On February 20, 2010, we executed an initial management agreement with Wells Real Estate Services, LLC ("WRES") to manage the operations of the Parkway at Oak Hill Buildings. On May 14, 2010, the initial management agreement was terminated and replaced with a revised management agreement (the "Parkway Management Agreement"), which was effective retroactive to February 20, 2010. Upon the disposition of the Parkway at Oak Hill Buildings in May 2012, this agreement was terminated. Pursuant to the Parkway Management Agreement, WRES was entitled to a monthly management fee equal to the greater of (i) $1,500 per month or (ii) 2.5% of gross monthly income actually collected from the property for the preceding month. In addition, WRES was entitled to reimbursement for all costs and expenses WRES incurred in fulfilling its duties as the property manager. These costs and expenses could have included wages and salaries and other employee-related expenses of WRES employees engaged in management, administration, operations, and marketing functions. Further, WRES was entitled to reimbursement for construction management services rendered for projects on behalf of Wells VAF I equal to 5% for construction costs up to $150,000 and 3% for any construction costs over $150,000 on a per construction project basis.
From November 1, 2010 to February 28, 2013, we were party to a management agreement with WRES under which WRES managed the operations of the Commerce Street Building (the "Commerce Management Agreement"). Pursuant to the Commerce Management Agreement, WRES was entitled to a monthly management fee equal to the greater of (i) $2,000 per month or (ii) 2.5% of gross monthly income actually collected from the property for the preceding month. In addition, WRES was entitled to reimbursement for all costs and expenses WRES incurred in fulfilling its duties as the property manager. These costs and expenses may have included wages, salaries, and other employee-related expenses of WRES employees engaged in management, administration, operations, and marketing functions. Further, WRES was entitled to reimbursement for construction management services rendered for projects on behalf of Wells VAF I equal to 4% for construction costs up to $500,000, 3% for construction costs over $500,000 but less than $1,500,000, and 2% for construction costs greater than $1,500,000 on a per construction project basis. For tenant improvement projects managed by a tenant, WRES was entitled to a construction management fee for supervision of the project equal to 1% of construction costs. On February 28, 2013, we terminated the Commerce Management Agreement with WRES. Effective March 1, 2013, we entered into a one-month management agreement with Wells Management (the "Revised Commerce Management Agreement") to manage the operations of the Commerce Street Building upon terms identical to those in the original Commerce Management Agreement with WRES. Effective March 31, 2013, we terminated the Revised Commerce Management Agreement with Wells Management and entered into an agreement with a third-party provider.
Related-Party Costs
Pursuant to the terms of the agreements described above, we incurred the following related-party costs for the years ended December 31, 2013 and 2012:
 
2013
 
2012
Administrative reimbursements(1)
$
279,127

 
$
468,937

Asset management fees(1)
187,250

 
340,175

Disposition fee(1)
28,000

 
78,250

Property management fees(1)
9,803

 
87,579

Total
$
504,180

 
$
974,941

(1) 
Administrative reimbursements, asset management fees, disposition fees, and property management fees are expensed as incurred.

18

ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
Preapproval Policies and Procedures
The Financial Oversight Committee preapproves all auditing and permissible nonauditing services provided by our independent registered public accountants. The approval may be given as part of the Financial Oversight Committee's approval of the scope of the engagement of our independent registered public accountants or on an individual basis. The preapproval of certain audit-related services and certain nonauditing services not exceeding enumerated dollar limits may be delegated to one or more of the Financial Oversight Committee's members, but the member to whom such authority is delegated shall report any preapproval decisions to the full Financial Oversight Committee. Our independent registered public accountants may not be retained to perform the nonauditing services specified in Section 10A(g) of the Exchange Act.
Fees Paid to the Independent Registered Public Accountants
Frazier & Deeter, LLC serves as our independent registered public accountants and has provided audit services since August 19, 2008. All such fees are recognized in the period to which the services relate. The aggregate fees billed to Wells VAF I for professional accounting services by Frazier & Deeter, LLC, including the audit of Wells VAF I's annual financial statements for the fiscal years ended December 31, 2013 and 2012, are set forth in the table below.
 
Frazier & Deeter, LLC
 
2013
 
2012
Audit Fees
$
52,000

 
$
52,000

Audit-Related Fees
—

 
—

Tax Fees
—

 
—

Other Fees
—

 
—

     Total
$
52,000

 
$
52,000


For purposes of the preceding table, the professional fees are classified as follows:
•
Audit Fees - These are fees for professional services performed for the audit of our annual financial statements and review of financial statements included in our Form 10-Q filings, services that are normally provided by independent registered public accountants in connection with statutory and regulatory filings or engagements, and services that generally independent registered public accountants reasonably can provide, such as statutory audits, attest services, consents, and assistance with and review of documents filed with the SEC.
•
Audit-Related Fees - These are fees for assurance and related services that traditionally are performed by independent registered public accountants, such as due diligence related to acquisitions and dispositions, internal control reviews, attestation services that are not required by statute or regulation, and consultation concerning financial accounting and reporting standards.
•
Tax Fees - These are fees for all professional services performed by professional staff in our independent registered public accountant's tax division, except those services related to the audit of our financial statements. These include fees for tax compliance, tax planning, and tax advice. Tax compliance involves preparation of any federal, state, or local tax returns. Tax planning and tax advice encompass a diverse range of services, including assistance with tax audits and appeals, tax advice related to acquisitions and dispositions of assets, and requests for rulings or technical advice from taxing authorities.
•
Other Fees - These are fees for other permissible work performed that do not meet the above-described categories, including assistance with internal audit plans and risk assessments.
During the fiscal years ended December 31, 2013 and 2012, 100% of the services performed by Frazier & Deeter, LLC described above under the caption "Audit Fees" were approved in advance by a member of the Financial Oversight Committee. In addition, fees were incurred for tax services performed by an accounting firm separate from our independent registered public accountants in each year presented.

19

PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) 1.    A list of the financial statements contained herein is set forth on page F-1 hereof.
(a) 2.    Not applicable.
(a) 3.    The Exhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Index attached hereto.
(b)     See (a) 3 above.
(c)    See (a) 2 above.

20

SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
WELLS MID-HORIZON VALUE-ADDED FUND I, LLC
(Registrant)
 
 
 
 
By:
WELLS INVESTMENT MANAGEMENT COMPANY, LLC
(Manager)
 
 
 
March 28, 2014
 
/s/ Leo F. Wells, III
 
 
Leo F. Wells, III
Principal Executive Officer, Director, and Chairman of the Board of Wells Investment Management Company, LLC
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacity as and on the date indicated.
March 28, 2014
/s/ Leo F. Wells, III
 
Leo F. Wells, III
Principal Executive Officer, Director, and Chairman of the Board of Wells Investment Management Company, LLC
 
 
March 28, 2014
/s/ Randy A. Simmons
 
Randy A. Simmons
 
Principal Financial Officer, Principal Accounting Officer, Director, Senior Vice President, Secretary, and Treasurer of Wells Investment Management Company, LLC
 
 
March 28, 2014
/s/ Parker Hudson
 
Parker Hudson
 
Director of Wells Investment Management Company, LLC



21

EXHIBIT INDEX TO
2013 FORM 10-K OF
WELLS MID-HORIZON VALUE-ADDED FUND I, LLC

 
Exhibit
No.
 
 
Description of Document
 
 
3.1

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

 
 
 
Operating Agreement among Wells Management Company, Inc., Wells Investment Management Company, LLC, and the Several Investor Members, dated as of September 1, 2005, and subsequently amended, incorporated by reference to Exhibit 4.1 to the Form 10 filed April 15, 2009
 
 
 
 
 
10.1

 
 
 
Purchase and Sale Agreement by and between Wells VAF - 330 Commerce Street, LLC and Commerce Street Nashville Partnership dated as of May 29, 2013, incorporated by reference to Exhibit 10.1 to the Form 10-Q filed August 13, 2013
 
 
 
 
 
10.2

 
 
 
First Amendment to the Purchase and Sale Agreement by and between Wells VAF - 330 Commerce Street, LLC and Commerce Street Nashville Partnership dated as of June 21, 2013, incorporated by reference to Exhibit 10.2 to the Form 10-Q filed August 13, 2013
 
 
 
 
 
31.1*

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

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

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

 
 
 
XBRL Instance Document.
 
 
 
 
 
101.SCH*

 
 
 
XBRL Taxonomy Extension Schema.
 
 
 
 
 
101.CAL*

 
 
 
XBRL Taxonomy Extension Calculation Linkbase.
 
 
 
 
 
101.DEF*

 
 
 
XBRL Taxonomy Extension Definition Linkbase.
 
 
 
 
 
101.LAB*

 
 
 
XBRL Taxonomy Extension Label Linkbase.
 
 
 
 
 
101.PRE*

 
 
 
XBRL Taxonomy Extension Presentation Linkbase.
 
 
 
 
 
 
*
Filed herewith.
 
 
 




22


WELLS MID-HORIZON VALUE-ADDED FUND I, LLC
TABLE OF CONTENTS
FINANCIAL STATEMENTS 


F- 1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Members
Wells Mid-Horizon Value-Added Fund I, LLC

We have audited the accompanying balance sheets of Wells Mid-Horizon Value-Added Fund I, LLC (the "Company") as of December 31, 2013 and 2012, and the related statements of operations, members' capital, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Wells Mid-Horizon Value-Added Fund I, LLC as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

                                        
/s/ Frazier & Deeter, LLC
Atlanta, Georgia
March 28, 2014    



F- 2

WELLS MID-HORIZON VALUE-ADDED FUND I, LLC
BALANCE SHEETS
 
December 31, 2013
 
December 31, 2012
Assets:
 
 
 
Real estate, at cost:
 
 
 
Land
$
3,780,435

 
$
3,780,435

Building and improvements, less accumulated depreciation of $2,797,176 and
    $3,987,525 as of December 31, 2013 and December 31, 2012, respectively
11,242,771

 
20,654,102

Intangible lease assets, less accumulated amortization of $1,331,490 and
    $2,483,210 as of December 31, 2013 and December 31, 2012, respectively
502,883

 
809,143

Construction in progress
—

 
33,280

Total real estate assets
15,526,089

 
25,276,960

 
 
 
 
Cash and cash equivalents
12,048,872

 
6,586,461

Tenant receivables
346,732

 
592,114

Other assets
58,747

 
473,575

Deferred financing costs, less accumulated amortization of $0 and
    $827,906 as of December 31, 2013 and December 31, 2012, respectively
—

 
414,031

Intangible lease origination costs, less accumulated amortization of $824,362 and
    $2,114,913 as of December 31, 2013 and December 31, 2012, respectively
274,787

 
504,396

Deferred leasing costs, less accumulated amortization of $481,457 and
    $402,870 as of December 31, 2013 and December 31, 2012, respectively
434,235

 
1,405,874

Total assets
$
28,689,462

 
$
35,253,411

 
 
 
 
Liabilities:
 
 
 
Accounts payable, accrued expenses and accrued capital expenditures
$
127,467

 
$
586,673

Due to affiliates
22,022

 
34,071

Deferred income
185,881

 
208,941

Intangible lease liabilities, less accumulated amortization of $168,331 and
    $294,789 as of December 31, 2013 and December 31, 2012, respectively
56,111

 
91,683

Total liabilities
391,481

 
921,368

 
 
 
 
Commitments and Contingencies

 

 
 
 
 
Members' Capital:
 
 
 
Member Shares, $1,000 par value; 150,000 shares authorized;
51,854 shares issued and outstanding
28,297,981

 
34,332,043

Total liabilities and members' capital
$
28,689,462

 
$
35,253,411

See accompanying notes.

F- 3

WELLS MID-HORIZON VALUE-ADDED FUND I, LLC
STATEMENTS OF OPERATIONS
 
 
Years ended December 31,
 
2013
 
2012
Revenues:
 
 
 
Rental income
$
1,185,575

 
$
1,181,188

Tenant reimbursements
1,048,766

 
1,055,365

Total revenues
2,234,341

 
2,236,553

Expenses:
 
 
 
Property operating costs
1,684,481

 
1,626,689

Asset and property management fees:
 
 
 
Related-party
131,250

 
169,300

Other
59,509

 
59,988

Depreciation
480,083

 
455,631

Amortization
318,708

 
318,708

General and administrative expenses
493,432

 
594,275

Total expenses
3,167,463

 
3,224,591

Real Estate Operating Loss
(933,122
)
 
(988,038
)
 
 
 
 
Other Expense:
 
 
 
Interest expense
(414,031
)
 
(921,562
)
Total Other Expense
(414,031
)
 
(921,562
)
Loss from Continuing Operations
(1,347,153
)
 
(1,909,600
)
 
 
 
 
Discontinued Operations:
 
 
 
Operating income
45,324

 
73,949

Impairment loss
—

 
(1,588,316
)
Gain from disposition
267,767

 
5,634,101

Income from Discontinued Operations
313,091

 
4,119,734

Net Income (Loss)
$
(1,034,062
)
 
$
2,210,134

 
 
 
 
Net Income (Loss) per Weighted-Average Share of Investor Members' Interests
 
 
 
Loss from continuing operations
$
(25.98
)
 
$
(36.82
)
Income from discontinued operations
6.04

 
79.45

Net income (loss) per weighted-average share of investor members' interests
$
(19.94
)
 
$
42.63

 
 
 
 
Weighted-Average Shares of Investor Members' Interests Outstanding
51,854

 
51,854

See accompanying notes.

F- 4

WELLS MID-HORIZON VALUE-ADDED FUND I, LLC
STATEMENTS OF MEMBERS' CAPITAL
FOR THE YEARS ENDED
DECEMBER 31, 2013 AND 2012
 
 
Sponsoring
Member
 
Investor  Members'
Interests
 
Total
Members'
Capital
 
Shares    
 
Amount    
 
Members' Capital as of December 31, 2011
$
959,727

 
51,854

 
$
38,162,182

 
$
39,121,909

 
 
 
 
 
 
 
 
Net income
—

 
—

 
2,210,134

 
2,210,134

Distributions
—

 
—

 
(7,000,000
)
 
(7,000,000
)
Members' Capital as of December 31, 2012
959,727

 
51,854

 
33,372,316

 
34,332,043

 
 
 
 
 
 
 
 
Net loss
—

 
—

 
(1,034,062
)
 
(1,034,062
)
Distributions
—

 
—

 
(5,000,000
)
 
(5,000,000
)
Members' Capital as of December 31, 2013
$
959,727

 
51,854

 
$
27,338,254

 
$
28,297,981

See accompanying notes.



F- 5

WELLS MID-HORIZON VALUE-ADDED FUND I, LLC
STATEMENTS OF CASH FLOWS
 
 
Years ended December 31,
 
2013
 
2012
Cash Flows from Operating Activities:
 
 
 
Net income (loss)
$
(1,034,062
)
 
$
2,210,134

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Gain from disposition
(267,767
)
 
(5,634,101
)
Depreciation
682,104

 
1,211,855

Amortization of deferred financing costs
414,031

 
414,032

Other amortization
656,624

 
1,033,444

Impairment loss
—

 
1,588,316

Changes in assets and liabilities:
 
 
 
Decrease in tenant receivables
187,620

 
4,819

Decrease in other assets
414,828

 
1,214,526

Decrease in accounts payable and accrued expenses
(290,581
)
 
(768,350
)
Decrease in due to affiliates
(12,049
)
 
(5,153
)
Decrease in deferred income
(23,060
)
 
(282,765
)
Net cash provided by operating activities
727,688

 
986,757

 
 
 
 
Cash Flows from Investing Activities:
 
 
 
Net proceeds from sale of real estate
10,843,518

 
30,456,527

Investment in real estate
(1,108,795
)
 
(644,155
)
Payment of deferred leasing costs
—

 
(745,900
)
Net cash provided by investing activities
9,734,723

 
29,066,472

 
 
 
 
Cash Flows from Financing Activities:
 
 
 
Deferred financing costs paid
—

 
(192,378
)
Repayment of note payable
—

 
(19,237,786
)
Distributions paid to members
(5,000,000
)
 
(7,000,000
)
Net cash used in financing activities
(5,000,000
)
 
(26,430,164
)
Net Increase in Cash and Cash Equivalents
5,462,411

 
3,623,065

 
 
 
 
Cash and Cash Equivalents, beginning of year
6,586,461

 
2,963,396

Cash and Cash Equivalents, end of year
$
12,048,872

 
$
6,586,461

 
 
 
 
Supplemental Disclosure of Noncash Investing and Financing Activities:
 
 
 
Accrued capital expenditures
$
—

 
$
168,625

See accompanying notes.

F- 6

WELLS MID-HORIZON VALUE-ADDED FUND I, LLC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2013 AND 2012
1.
ORGANIZATION AND BUSINESS
Wells Mid-Horizon Value-Added Fund I, LLC ("Wells VAF I") was organized as a Georgia limited liability company on July 15, 2005 for the purpose of acquiring, developing, owning, operating, and improving or otherwise enhancing income-producing commercial properties, and liquidating such investments over a fund life of four to eight years. The term of Wells VAF I shall continue until the earlier of December 31, 2020, or the filing of a Certificate of Termination upon the dissolution and completion of the liquidation of Wells VAF I.
Wells Management Company, Inc. ("Wells Management") is the sponsoring member of Wells VAF I and has the exclusive authority to conduct the day-to-day and overall direction and supervision of the business and affairs of Wells VAF I pursuant to an operating agreement. Wells Management has contributed $1,000,000 to Wells VAF I for a subordinated interest therein. Wells Investment Management Company, LLC ("WIM"), a wholly owned subsidiary of Wells Management, has been appointed by Wells Management to serve as the manager of Wells VAF I. In addition, Wells VAF I and WIM have entered into an agreement (the "Advisory Agreement"), under which WIM will perform certain key functions on behalf of Wells VAF I, including, but not limited to, the investment of capital proceeds and management of day-to-day operations.
On September 15, 2005, Wells VAF I commenced an offering of up to 150,000 shares of investor member interests under a private placement to qualified purchasers who meet the definition of "accredited investors," as provided in Regulation D of the Securities Act of 1933, as amended (the "Securities Act"). Wells VAF I commenced active operations upon receiving and accepting subscriptions for 10,000 shares of investor member interests on June 22, 2006. Its offering terminated on September 15, 2008, at which time Wells VAF I had sold 51,854 shares of investor member interests resulting in gross offering proceeds of approximately $51,854,000. After deductions for payments of acquisition fees of approximately $1,037,000; selling commissions, discounts, and dealer-manager fees of approximately $2,852,000; and other offering expenses of approximately $259,000; Wells VAF I received net offering proceeds of approximately $47,706,000. As of October 31, 2008, all equity proceeds raised from the sale of investor member interests had been utilized to fund property acquisitions and capital expenditures. No public market exists for the shares of investor member interests and none is expected to develop.
Wells VAF I's investment policy includes, but is not limited to, acquiring properties with opportunities for value enhancement related to leasing or re-leasing available space, renovating or redeveloping properties, entering into leases with sub-investment-grade tenants at above market rates, and/or benefiting from favorable market conditions. Wells VAF I does not expect to make any additional investments in the future and its current focus is on enhancing the value and positioning the remaining property for sale.
During the periods presented, Wells VAF I owned direct interests in the following properties:
 
% Leased as of
% Leased as of
  
December 31, 2013
December 31, 2012
1. Nathan Lane Building
A five-story office building located in Plymouth, Minnesota
 
45%
45%
2. Commerce Street Building(1)
A four-story office building and two floors of a parking deck located in Nashville,
Tennessee
 
—
85
3. Parkway at Oak Hill Buildings(2)
Two separate two-story office buildings located in Austin, Texas
 
—
—
(1) This building was sold in August 2013.
(2)These buildings were sold in May 2012.

2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Wells VAF I's financial statements are prepared in accordance with U.S. generally accepted accounting principles ("GAAP").



F- 7

Use of Estimates
The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect reported amounts of assets, liabilities, revenues, and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. Actual results could differ from those estimates.
Fair Value Measurements
Wells VAF I estimates the fair value of its assets and liabilities (where currently required under GAAP) consistent with the provisions of the accounting standard for fair value measurements and disclosures. Under this standard, fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date. While various techniques and assumptions can be used to estimate fair value depending on the nature of the asset or liability, the accounting standard for fair value measurements and disclosures provides the following fair value technique parameters and hierarchy, depending upon availability:
Level 1 - Assets or liabilities for which the identical term is traded on an active exchange, such as publicly traded instruments or futures contracts.
Level 2 - Assets and liabilities valued based on observable market data for similar instruments.
Level 3 - Assets or liabilities for which significant valuation assumptions are not readily observable in the market. Such assets or liabilities are valued based on the best available data, some of which may be internally developed. Significant assumptions may include risk premiums that a market participant would require.
Real Estate Assets
Investment in Real Estate Assets
Real estate assets are stated at cost, less accumulated depreciation and amortization. Amounts capitalized to real estate assets consist of the cost of acquisition or construction, application of acquisition fees incurred, and any tenant improvements or major improvements and betterments, which extend the useful life of the related asset. Upon receiving notification of a tenant's intention to terminate a lease, undepreciated tenant improvements and intangible lease assets are written off to lease termination expense. All repairs and maintenance are expensed as incurred. Wells VAF I is required to make subjective assessments as to the useful lives of our depreciable assets. Wells VAF I considers the period of future benefit of the asset to determine the appropriate useful lives. These assessments have a direct impact on net income (loss). The estimated useful lives of our assets by class are as follows:
Buildings
40 years
Building improvements
5-25 years
Site improvements
15 years
Tenant improvements
Shorter of lease term or economic life
Intangible lease assets
Lease term
Evaluating the Recoverability of Real Estate Assets
Management continually monitors events and changes in circumstances that could indicate that the carrying amounts of the real estate assets and related intangible assets that Wells VAF I owns may not be recoverable. When indicators of potential impairment are present which suggest that the carrying amounts of real estate assets and related intangible assets may not be recoverable, management assesses the recoverability of the real estate assets and related intangible assets by determining whether the respective carrying values will be recovered through the estimated undiscounted future operating cash flows expected from the use of the assets and their eventual disposition for assets held for use, or with the estimated fair values, less costs to sell, for assets held for sale. In the event that such expected undiscounted future cash flows for assets held for use or the estimated fair values, less costs to sell, for assets held for sale, do not exceed the carrying values, management adjusts the carrying value of real estate assets and related intangible assets (liabilities) to the estimated fair values, pursuant to the provisions of the property, plant, and equipment accounting standard for the impairment or disposal of long-lived assets, and recognize an impairment loss. Estimated fair values are determined based on the following information, dependent upon availability: (i) recently quoted market price(s) for the subject property, or highly comparable properties, under sufficiently active and normal market conditions, or (ii) the present value of future cash flows, including estimated residual value. We have determined that there have been no additional impairments in the carrying value of our real estate assets and related intangible assets during 2013 (see below for historical impairment); however, certain of our assets may be carried at an amount more than could be realized in a current disposition transaction.

F- 8

In the third quarter of 2012, Wells VAF I recorded an impairment loss on the Commerce Street Building of approximately $1,588,000 to reduce the carrying value of the property to its estimated fair value based on the present value of future cash flows due to management's strategy in shortening the estimated holding period of this asset during the third quarter of 2012.
The fair value measurement used in this evaluation of nonfinancial assets is considered to be a Level 3 valuation within the fair value hierarchy outlined above, as there are significant unobservable inputs. Examples of inputs that Wells VAF I utilized in its fair value calculation includes estimated holding periods, discount rates, market capitalization rates, and expected lease rental rates. The table below represents the detail of the adjustment recognized during the year ended December 31, 2012, calculated using a discounted cash flow model and a discount rate of 9.0%, which is considered a significant Level 3 input.
Property
Net Book Value as of September 30, 2012
Impairment Loss Recognized
Fair Value as of September 30, 2012
Commerce Street Building
$
11,144,756

$
1,588,316

$
9,556,440


Projections of expected future operating cash flows require that management estimate future market rental income amounts subsequent to the expiration of current lease agreements, property operating expenses, the number of months it takes to re-lease the property, and the number of years the property is held for investment, among other factors. The subjectivity of assumptions used in the future cash flow analysis, including discount rates, could result in an incorrect assessment of the property's ultimate fair value and could result in the misstatement of the carrying value of Wells VAF I's real estate and related intangible assets and net income (loss).
Evaluating the Recoverability of Intangible Assets and Liabilities
The values of intangible lease assets and liabilities are determined based on assumptions made at the time of acquisition and have defined useful lives, which correspond with the lease terms.  There may be instances in which intangible lease assets and liabilities become impaired, and Wells VAF I is required to write off the remaining asset or liability immediately or over a shorter period of time. Lease restructurings, including but not limited to lease terminations and lease extensions, may impact the value and useful life of in-place leases. In-place leases that are terminated, partially terminated, or modified will be evaluated for impairment if the original in-place lease terms have been modified. In situations where the discounted cash flows of the modified in-place lease stream are less than the discounted cash flows of the original in-place lease stream, Wells VAF I reduces the carrying value of the intangible lease assets to reflect the modified lease terms and recognize an impairment loss. For in-place lease extensions  that are executed  more than one year prior to the original in-place lease expiration date, the useful life of the in-place lease will be extended over the new lease term with the exception of those in-place lease components, such as lease commissions and tenant allowances, which have been renegotiated for the extended term. Renegotiated in-place lease components, such as lease commissions and tenant allowances, will be amortized over the shorter of the useful life of the asset or the new lease term.
As of December 31, 2013 and 2012, Wells VAF I had the following gross intangible in-place lease assets and liabilities:
 
 
As of December 31, 2013
 
 
Intangible Lease Assets
 
Intangible
Lease
Origination
Costs
 
Intangible
Below-Market
In-Place
Lease Liabilities
 
 
Above-Market
In-Place
Lease Assets
 
Absorption
Period
Costs
 
Gross
 
$
357,971

 
$
1,476,402

 
$
1,099,149

 
$
224,442

Accumulated Amortization
 
(268,478
)
 
(1,063,012
)
 
(824,362
)
 
(168,331
)
Net
 
$
89,493

 
$
413,390

 
$
274,787

 
$
56,111


 
 
As of December 31, 2012
 
 
Intangible Lease Assets
 
Intangible
Lease
Origination
Costs
 
Intangible
Below-Market
In-Place
Lease Liabilities
 
 
Above-Market
In-Place
Lease Assets
 
Absorption
Period
Costs
 
Gross
 
$
357,971

 
$
2,934,382

 
$
2,619,309

 
$
386,472

Accumulated Amortization
 
(231,449
)
 
(2,251,761
)
 
(2,114,913
)
 
(294,789
)
Net
 
$
126,522

 
$
682,621

 
$
504,396

 
$
91,683


F- 9

During the years ended December 31, 2013 and 2012, Wells VAF I recognized the following amortization of acquired intangible lease assets and liabilities: 
 
 
Intangible Lease Assets
 
Intangible
Lease
Origination
Costs
 
Intangible
Below-Market
In-Place
Lease Liabilities
For the year ended December 31:
 
Above-Market
In-Place
Lease Assets
 
Absorption
Period 
Costs
 
2013
 
$
37,032

 
$
269,228

 
$
229,609

 
$
35,572

2012
 
$
37,032

 
$
424,850

 
$
391,865

 
$
52,866

The remaining net intangible assets and liabilities balances as of December 31, 2013 will be amortized as follows: 
 
 
Intangible Lease Assets
 
Intangible
Lease
Origination
Costs
 
Intangible
Below-Market
In-Place
Lease Liabilities
For the year ending December 31,
 
Above-Market
In-Place
Lease Assets
 
Absorption
Period
Costs
 
2014
 
$
37,032

 
$
158,067

 
$
113,705

 
$
23,218

2015
 
37,032

 
158,067

 
113,705

 
23,218

2016
 
15,429

 
81,558

 
47,377

 
9,675

2017
 
—

 
15,698

 
—

 
—

 
 
$
89,493

 
$
413,390

 
$
274,787

 
$
56,111

Weighted-Average Amortization Period
 
2 years
 
3 years
 
2 years
 
2 years

Cash and Cash Equivalents
Wells VAF I considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents may include cash and short-term investments. Short-term investments are stated at cost, which approximates fair value and may consist of investments in money market accounts. There were no restrictions on the use of Wells VAF I's cash balances as of December 31, 2013 and 2012.
Tenant Receivables
Tenant receivables are comprised of rental and reimbursement billings due from tenants and the cumulative amount of future adjustments necessary to present rental income using the straight-line method. Upon receiving notification of a tenant's intention to terminate a lease, unamortized straight-line rent receivables are written off to lease termination expense. Tenant receivables are recorded at the original amount earned, less an allowance for any doubtful accounts, which approximates fair value. Management assesses the collectability of tenant receivables on an ongoing basis and provides for allowances as such balances, or portions thereof, become uncollectible. No such allowances have been recorded as of December 31, 2013 and 2012.
Other Assets
Other assets are comprised of (i) certain escrow accounts restricted by the lender to fund future real estate taxes and (ii) prepaid taxes, prepaid insurance, and nontenant receivables. Prepaid expenses and other assets will be expensed as incurred. Management assesses the collectability of other assets on an ongoing basis and provides for allowances as such balances, or portions thereof, become uncollectible. No such allowances have been recorded as of December 31, 2013 and 2012.
Deferred Financing Costs
Deferred financing costs are comprised of costs incurred in connection with securing financing from third-party lenders and are capitalized and amortized over the term of the related financing arrangements. Wells VAF I recognized amortization of deferred financing costs for each of the years ended December 31, 2013 and 2012 of approximately $414,000, which is included in interest expense in the accompanying statements of operations.



F- 10

Deferred Leasing Costs
Deferred lease costs may include (i) costs incurred to procure leases, which are capitalized and recognized as amortization expense on a straight-line basis over the terms of the lease, and (ii) common area maintenance costs that are recoverable from tenants under the terms of the existing leases; such costs are capitalized and recognized as operating expenses over the shorter of the lease term or the recovery period provided for in the lease. The remaining unamortized balance of deferred leasing costs will be amortized over a weighted-average period of approximately four years. Upon receiving notification of a tenant's intention to terminate a lease, unamortized deferred leasing costs are written off to lease termination expense.
Revenue Recognition

Wells VAF I's leases typically include renewal options, escalation provisions, and provisions requiring tenants to reimburse Wells VAF I for a pro rata share of operating costs incurred. All of the Wells VAF I's leases are classified as operating leases, and the related rental income, including scheduled rental rate increases (other than scheduled increases based on the Consumer Price Index) is generally recognized using the straight-line method over the terms of the respective leases. Tenant reimbursements are recognized as revenue in the period that the related property operating costs are incurred and are billed to the tenants pursuant to the terms of the underlying leases. Rental income and tenant reimbursements collected in advance are recorded as deferred income in the accompanying balance sheets. Lease termination income is recognized when the tenant loses the right to lease the space and Wells VAF I has satisfied all obligations under the related lease or lease termination agreement.
Income Taxes
Wells VAF I is not subject to federal or state income taxes; therefore, none have been provided for in the accompanying financial statements. The members are required to include their respective shares of profits and losses in their individual income tax returns, regardless of whether any cash distributions were made during the respective period.
Allocation of Profits and Losses
Wells VAF I allocates profits or losses for each allocation period to the investor members in proportion to their respective percentage interests in an amount not to create a deficit capital balance.
Distribution of Net Cash Flow
Net cash flow, as defined in the operating agreement, is distributed to the members in the order and priority that follows:
•
First, to pay the following returns on capital:
•
First, to the investor members up to a 10% per annum compounded return on their capital contributions during the offering period;
•
Second, to the investor members in proportion to their percentage interests, as defined, until each investor member receives a 10% per annum compounded return on their capital contributions for the period following the offering period;
•
Third, to Wells Management up to a 10% per annum compounded return on its capital contribution;
•
Second, to the investor members in proportion to their percentage interests until each investor member has received $1,000 per share;
•
Third, to Wells Management until it has received its capital contribution; and
•
Fourth,
•
To Wells Management in the amount of 20% of all distributable proceeds, less any disposition fees previously paid to Wells Management, of which Wells Management has agreed to pay up to 50% of any such amount received to broker/dealers who participated in its private placement offering; and
•
The remainder to the investor members in accordance with their percentage interests.
During the years ended December 31, 2013 and 2012, Wells VAF I paid distributions of $5.0 million and $7.0 million, respectively, to investor members. No cash distributions were paid to Wells Management during the years ended December 31, 2013 and 2012.
Operating Segments
Wells VAF I operates in a single reporting segment, and the presentation of Wells VAF I's financial condition and performance is consistent with the way in which Wells VAF I's operations are managed.

F- 11

Recent Accounting Pronouncements
In April 2013, the FASB issued Accounting Standards Update 2013-07, Presentation of Financial Statements Topic Liquidation Basis of Accounting ("ASU 2013-07"). ASU 2013-07 requires an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent. Liquidation is considered imminent when the likelihood is remote that the organization will return from liquidation and either: (a) a plan for liquidation is approved by the person or persons with the authority to make such a plan effective and the likelihood is remote that the execution of the plan will be blocked by other parties; or (b) a plan for liquidation is being imposed by other forces. ASU 2013-07 will be effective for Wells VAF I beginning on January 1, 2014. Wells VAF I expects that the adoption of ASU 2013-07 will not have a material impact on its financial statements or disclosures.

3.
NOTE PAYABLE
On December 17, 2010, Wells VAF I entered into an agreement with NXT Capital, LLC ("NXT Capital") for a loan in the amount of up to $30 million (the "NXT Loan"). The NXT Loan was scheduled to mature on December 16, 2013. On October 10, 2013, Wells VAF I terminated the NXT Loan.
Wells VAF I paid cash for interest expense on its note payable of approximately $0 and $508,000 during the years ended December 31, 2013 and 2012, respectively. During the periods presented, Wells VAF I did not capitalize any interest expense related to the NXT Loan.
4.
MEMBERS' EQUITY
Sponsoring Member Interest
On September 27, 2005, Wells VAF I received a $1,000,000 contribution from Wells Management. During the start-up period, proceeds from this contribution were held as working capital and used primarily to fund initial operating costs. Following the start-up period, the residual proceeds were distributed to investor members. Wells Management has a subordinated interest to that of the investor members in earnings allocations and distributions from Wells VAF I.
Investor Member Interests
Wells VAF I commenced active operations upon receiving and accepting subscriptions for 10,000 shares of investor member interests on June 22, 2006. The offering was terminated on September 15, 2008, at which time Wells VAF I had sold approximately 51,854 shares of investor member interests. Investor members have a priority interest over that of the sponsoring member in earnings allocations and distributions from Wells VAF I.
5.
RELATED-PARTY TRANSACTIONS
Advisory Agreement
On September 15, 2005, Wells VAF I entered into the Advisory Agreement with WIM. Pursuant to the Advisory Agreement, WIM is entitled to specified fees for certain services, including, but not limited to, the investment of offering proceeds in real estate projects, sales of properties, and management of day-to-day operations. The Advisory Agreement has a one-year term and is subject to an unlimited number of successive one-year renewals upon the consent of the parties. Effective September 15, 2013, the Advisory Agreement was renewed for a one-year term through September 14, 2014 upon terms identical to those in effect through September 14, 2013. Wells VAF I may terminate the Advisory Agreement upon 60 days' written notice without cause or penalty. If Wells VAF I terminates the Advisory Agreement, Wells VAF I will pay WIM all unpaid reimbursements of expenses and all earned but unpaid fees. The negotiations of the Advisory Agreement were not at arm's length, and Wells VAF I will pay certain prescribed fees to WIM and its affiliates regardless of the quality of its services.
Under the terms of the Advisory Agreement, Wells VAF I incurs the following fees and reimbursements payable to WIM:
•
Monthly asset management fees equal to one-twelfth of 0.75% of the gross value of Wells VAF I's real estate assets, as determined and approved in good faith and consistent with applicable fiduciary duties by the investment committee of Wells VAF I. Any portion of the asset management fee may be deferred upon WIM's request and paid in a subsequent month or year.
•
Reimbursement for all costs and expenses that WIM incurs in fulfilling its duties as the asset portfolio manager. These costs and expenses may include wages and salaries and other employee-related expenses of WIM's employees engaged in management, administration, operations, and marketing functions. Employee-related expenses include taxes, insurance, and benefits relating to such employees, and legal, travel, and other out-of-pocket expenses that are directly related to

F- 12

the services they provide. WIM allocates its reimbursable costs of providing these services among Wells VAF I and various other affiliated public real estate investment programs based on time spent on each entity by individual personnel.
•
For any property sold by Wells VAF I, a disposition fee equal to 0.25% of the sales price, if WIM provides a substantial amount of services in connection with the sale.
Property Management Agreement
On February 20, 2010, we executed an initial management agreement with Wells Real Estate Services, LLC ("WRES") to manage the operations of the Parkway at Oak Hill Buildings. On May 14, 2010, the initial management agreement was terminated and replaced with a revised management agreement (the "Parkway Management Agreement"), which was effective retroactive to February 20, 2010. Upon the disposition of the Parkway at Oak Hill Buildings in May 2012, this agreement was terminated. Pursuant to the Parkway Management Agreement, WRES was entitled to a monthly management fee equal to the greater of (i) $1,500 per month or (ii) 2.5% of gross monthly income actually collected from the property for the preceding month. In addition, WRES was entitled to reimbursement for all costs and expenses WRES incurred in fulfilling its duties as the property manager. These costs and expenses could have included wages and salaries and other employee-related expenses of WRES employees engaged in management, administration, operations, and marketing functions. Further, WRES was entitled to reimbursement for construction management services rendered for projects on behalf of Wells VAF I equal to 5% for construction costs up to $150,000 and 3% for any construction costs over $150,000 on a per construction project basis.
From November 1, 2010 to February 28, 2013, Wells VAF I was party to a management agreement with WRES under which WRES managed the operations of the Commerce Street Building (the "Commerce Management Agreement"). Pursuant to the Commerce Management Agreement, WRES was entitled to a monthly management fee equal to the greater of (i) $2,000 per month or (ii) 2.5% of gross monthly income actually collected from the property for the preceding month. In addition, WRES was entitled to reimbursement for all costs and expenses WRES incurs in fulfilling its duties as the property manager. These costs and expenses may include wages, salaries, and other employee-related expenses of WRES employees engaged in management, administration, operations, and marketing functions. Further, WRES was entitled to reimbursement for construction management services rendered for projects on behalf of Wells VAF I equal to 4% for construction costs up to $500,000, 3% for construction costs over $500,000 but less than $1,500,000, and 2% for construction costs greater than $1,500,000 on a per construction project basis. For tenant improvement projects managed by a tenant, WRES was entitled to a construction management fee for supervision of the project equal to 1% of construction costs. On February 28, 2013, Wells VAF I terminated the Commerce Management Agreement with WRES. Effective March 1, 2013, Wells VAF I entered into a one-month management agreement with Wells Management (the "Revised Commerce Management Agreement") to manage the operations of the Commerce Street Building upon terms identical to those in the original Commerce Management Agreement with WRES. Effective March 31, 2013, Wells VAF I terminated the Revised Commerce Management Agreement with Wells Management and entered into an agreement with a third-party provider.
Related-Party Costs
Pursuant to the terms of the agreements described above, Wells VAF I incurred the following related-party costs for the years ended December 31, 2013 and 2012, portions of which are included in income from discontinued operations in the accompanying statements of operations:
 
2013
 
2012
Administrative reimbursements(1)
$
279,127

 
$
468,937

Asset management fees(1)
187,250

 
340,175

Disposition fee(1)
28,000

 
78,250

Property management fees(1)
9,803

 
87,579

Total
$
504,180

 
$
974,941

(1) 
Administrative reimbursements, asset management fees, disposition fees, and property management fees are expensed as incurred.

F- 13

Due to Affiliates
As of December 31, 2013 and 2012, due to affiliates was comprised of the following items:
 
December 31,
2013
 
December 31,
2012
Administrative reimbursements and bill-backs
$
22,022

 
$
29,442

Property management fees
—

 
4,629

 
$
22,022

 
$
34,071

WIM's affiliates pay for certain expenses of Wells VAF I directly and invoice Wells VAF I for reimbursement thereof on a quarterly basis. Amounts for these reimbursements are included in the aforementioned administrative reimbursements.
Conflicts of Interest
As of December 31, 2013, WIM had no direct employees. WIM has contracted with Wells Capital and Wells Management to perform many of its obligations under the Advisory Agreement. Management and other key personnel of our manager, whose services are essential to Wells VAF I, will face a conflict in allocating their time and other resources between Wells VAF I and the other Wells real estate programs and activities in which they are involved. Failure of our manager to devote sufficient time or resources to our operations could result in reduced returns to our members.
Operational Dependency
Wells VAF I has engaged WIM and Wells Management to provide certain services essential to Wells VAF I, including asset management services, supervision of the management of properties, asset acquisition and disposition services, as well as other administrative responsibilities for Wells VAF I, including accounting services, investor member communications, and investor relations. As a result of these relationships, Wells VAF I's operations are dependent upon WIM and Wells Management.
WIM and Wells Management are owned and controlled by Wells Real Estate Funds ("WREF"). The operations of Wells Capital, WIM, Wells Management and their affiliates represent substantially all of the business of WREF. Accordingly, Wells VAF I focuses on the financial condition of WREF when assessing the financial condition of WIM and Wells Management. In the event that WREF were to become unable to meet its obligations as they become due, Wells VAF I might be required to find alternative service providers. As of December 31, 2013, Wells VAF I has no reason to believe that WREF does not have access to adequate liquidity and capital resources, including cash on hand, other investments, and borrowing capacity, necessary to meet its current and future obligations as they become due.

F- 14

6.        DISCONTINUED OPERATIONS
In accordance with GAAP, Wells VAF I has classified the results of operations related to the Parkway at Oak Hill Buildings, which were sold on May 9, 2012, and the Commerce Street Building, which was sold on August 1, 2013, as discontinued operations in the accompanying statements of operations. The Parkway at Oak Hill Buildings were sold for a gross sales price of $31.3 million, exclusive of adjustments and closing costs, and generated net sale proceeds of approximately $30.5 million. The Commerce Street Building was sold for a gross sales price of $11.2 million, exclusive of closing costs and a credit of approximately $0.6 million for an outstanding tenant improvement obligation, and generated net sale proceeds of approximately $10.8 million. The details comprising income from discontinued operations are presented below:
 
Years ended December 31,
 
2013
 
2012
Revenues:
 
 
 
Rental income
$
1,106,417

 
$
2,714,391

Tenant reimbursements
92,689

 
887,641

Total revenues
1,199,106

 
3,602,032

 
 
 
 
Expenses:
 
 
 
Property operating costs
587,967

 
1,680,308

Asset and property management fees:
 
 
 
Related-party
65,803

 
258,454

Other
9,842

 
—

Depreciation
202,021

 
756,224

Amortization
245,664

 
635,919

General and administrative expenses
42,485

 
197,178

Total expenses
1,153,782

 
3,528,083

Operating Income
45,324

 
73,949

Impairment loss
—

 
(1,588,316
)
Gain from disposition
267,767

 
5,634,101

Income from Discontinued Operations
$
313,091

 
$
4,119,734


7.
RENTAL INCOME
The future contractual rental income due to Wells VAF I under noncancelable operating leases as of December 31, 2013, is presented below:
Year ending December 31:
 
2014
$
1,229,794

2015
1,251,104

2016
967,292

2017
446,837

 
$
3,895,027

Brocade Communications Systems, Inc., and Stanley Convergent Security Solutions, Inc. comprised approximately 31%, and 23%, respectively, of the contractual rental income for the year ended December 31, 2013 and Brocade Communications Systems, Inc., and Stanley Convergent Security Solutions, Inc. will comprise approximately 67% and 33%, respectively, of future contractual rental income.
8.
ECONOMIC DEPENDENCY
Wells VAF I is dependent upon the ability of its current tenants to pay their contractual base rent amounts as they become due. The inability of a tenant to pay future rental amounts would have a negative impact on Wells VAF I's results of operations. Wells VAF I is not aware of any reason why its current tenants will not be able to pay their contractual rental amounts as they become

F- 15

due in all material respects. Situations preventing Wells VAF I's tenants from paying contractual rents could result in a material adverse impact on its results of operations.
9.
COMMITMENTS AND CONTINGENCIES
Wells VAF I is not subject to any material litigation nor to management's knowledge is any material litigation currently threatened against Wells VAF I.

F- 16

WELLS MID-HORIZON VALUE-ADDED FUND I LLC Reports