UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

☒

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

For the fiscal year ended December 31, 2016

 

☐

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

For the transition period from                   to

Commission File No. 000-53165

FSP 303 East Wacker Drive Corp.

(Exact name of registrant as specified in its charter)

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

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

 

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

 

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

 

Preferred Stock, $.01 par value per share

 

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

 

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

 

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

 

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

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

	Large accelerated filer ☐	Accelerated filer ☐
	Non-accelerated filer  ☐	Smaller reporting company ☑

  

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

 

As of June 30, 2016 the aggregate fair market value of Common Stock held by non-affiliates of the registrant was $0.

 

The number of shares of Common Stock outstanding was 1 and the number of shares of Preferred Stock outstanding was 2,210 as of February 28, 2017.

 

Documents incorporated by reference: None.

TABLE OF CONTENTS

 

PART I			1
	Item 1.	Business.	1
	Item 1A.	Risk Factors.	5
	Item 1B.	Unresolved Staff Comments	5
	Item 2.	Properties.	6
	Item 3.	Legal Proceedings.	8
	Item 4.	Mine Safety Disclosures	8
PART II			9
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	9
	Item 6.	Selected Financial Data.	9
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	10
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.	18
	Item 8.	Financial Statements and Supplementary Data.	18
	Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.	18
	Item 9A.	Controls and Procedures.	18
	Item 9B.	Other information.	19
PART III			20
	Item 10.	Directors, Executive Officers and Corporate Governance	20
	Item 11.	Executive Compensation.	21
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	22
	Item 13.	Certain Relationships and Related Transactions, and Director Independence.	23
	Item 14.	Principal Accounting Fees and Services.	24
PART IV			25
	Item 15.	Exhibits, Financial Statement Schedules.	25
	Item 16.	Form 10-K Summary.	25
SIGNATURES			26

 

 

 

Item 1.      Business

 

History

 

Our company, FSP 303 East Wacker Drive Corp., which individually or together with FSP 303 East Wacker Drive LLC, its subsidiary, we refer to as the “Company”, “we” or “our”, is a Delaware corporation formed to purchase, own and operate a twenty-eight story Class”A” multi-tenant office tower containing approximately 860,000 rentable square feet of office and retail space and a 294-stall underground parking garage located in downtown Chicago, Illinois, which we refer to as the Property. The Company operates in a manner intended to qualify as a real estate investment trust, or REIT, for federal income tax purposes.

 

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

 

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

 

The Company commenced operations in January 2007.

 

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

 

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

 

(1)

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

(2)

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

(3)

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

(4)

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

(5)

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

(6)

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

 

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

 

Our Business

 

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

 

The Property was completed in 1979 and is a twenty-eight story multi-tenant office tower located in downtown Chicago, Illinois containing approximately 860,000 rentable square feet of office and retail space and a 294-stall underground parking garage.

 

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

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

 

The Property was approximately 73.5% leased as of December 31, 2016 to a diverse group of tenants with staggered lease expirations. We believe that any tenant that leases 10% or more of the Property’s rentable space is material. As of December 31, 2016, 43 tenants were leasing space at the Property, with the largest being Maximus, Inc. at approximately 82,865 square feet, or approximately 9.6% of the Property’s rentable space, until September 30, 2017 for approximately 52,281 square feet and until November 16, 2017 for approximately 30,584 square feet.

 

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

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

 

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

 

Hines Interests Limited Partnership provides the Company with day-to-day property management, construction management and leasing services relating to the operation of the Property. Hines Interests Limited Partnership is a third-party service provider that is not related to or affiliated with Franklin Street. The management agreement between the Company and Hines Interests Limited Partnership requires the Company to pay Hines Interests Limited Partnership a monthly fee equal to one and three-quarters percent (1.75%) of the net operating receipts collected in the preceding month. The monthly fee is adjusted to one and nine-tenths percent (1.90%) of the net operating receipts collected in the preceding month if the Property is above eighty percent (80%) leased. The management agreement between the Company and Hines Interests Limited Partnership operates on a month-to-month basis and may be terminated for cause.

 

Investment Objectives

 

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

 

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

 

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

 

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

Permanent Mortgage Loan

 

On August 3, 2011, we entered into a mortgage note in favor of John Hancock Life Insurance Company (U.S.A.) (the “Lender”) to evidence a loan in the original principal amount of $35,000,000 that matures on September 1, 2021 (the “Loan”). The proceeds of the Loan are being held by the Lender for the Company’s benefit in a restricted reserve account or accounts to be drawn upon by the Company from time to time for tenant improvement costs and leasing commissions at the Property upon satisfaction of certain conditions. The Loan bears interest at the fixed rate of 4.83% per annum. We were obligated to make monthly payments of interest only for the initial 60 months of the Loan. Thereafter, we are obligated to make monthly payments of principal and interest for the remaining 60 months, based on a 25-year amortization schedule, until the maturity date, when all outstanding amounts become due. Commencing on October 1, 2016, the Loan became payable in monthly payments of principal and interest in the amount of $201,155. We may prepay the Loan with a prepayment premium, as defined in the Loan agreement. The Loan is secured, in part, by a mortgage, assignment of leases and rents and security agreement (the “Mortgage”) from the Company in favor of the Lender. The Mortgage constitutes a lien against the Property and has been recorded in the land records of Cook County, Illinois. Subject to customary exceptions, the Loan is nonrecourse to the Company. As of December 31, 2016, we had drawn an aggregate of $28,506,000 from the restricted reserve account(s). Interest expense paid on the Loan for the years ended December 31, 2016 and 2015 was $1,690,000 and $1,691,000, respectively. The documents evidencing and securing the Loan include restrictions on property liens and require compliance with various non-financial covenants, which include the requirement that we provide annual reports to the Lender. We were in compliance with the Loan covenants as of December 31, 2016 and December 31, 2015.

 

As of December 31, 2016, scheduled principal payments under the Loan for the next five years are as follows:

 

(in thousands)
2017		$	749
2018			786
2019			824
2020			865
2021			31,595

 

Fees paid associated with the Loan were $304,000 and are being amortized on the straight-line basis over the term of the Loan. Amortization expense for each of the years ended December 31, 2016 and 2015 is $30,000 and is included in interest expense in the Company’s Consolidated Statements of Operations.

 

Competition

 

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

Employees

 

We had no employees as of December 31, 2016.

 

Available Information

 

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

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

 

Item 1A.       Risk Factors

 

Not applicable.

Item 1B.       Unresolved Staff Comments

 

Not applicable.

Item 2.       Properties

 

Set forth below is information regarding the Property as of December 31, 2016:

						Annual Rent Revenue from Major Tenants
	Date of	Approx.	Percent	Number	Name of Major	For the Year Ended
Property Location	Purchase	Square Feet	Leased	of Tenants	Tenants(1)	December 31, 2016
303 East Wacker Drive Chicago, Illinois 60601	1/5/2007	860,000	73.5%	43	Maximus, Tribune Media, AECOM, and Hewlett- Packard	$6,011,000

(1)       As of December 31, 2016, no tenant leased 10% or more of the Property’s rentable space. Major tenants listed are the top four tenants based on the leased square feet.

 

The average effective annual rent per leased square foot for the years ended December 31, 2016 and 2015 was $18.82 and $19.75, respectively.

 

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

 

The Property was completed in 1979 and is a twenty-eight story multi-tenant office tower located in downtown Chicago, Illinois containing approximately 860,000 rentable square feet of office and retail space and a 294-stall underground parking garage.

 

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

 

 

																Percentage of
												Annualized				Annualized
				Number								Rents by Year				Rents by Year
				of Leases				Square Feet				of Lease				of Lease
Year				Expiring				Expiring				Expiration				Expiration
	2017				9				111,423			$	2,565,463				27.32	%
	2018				3				38,562				721,547				7.68	%
	2019				7				40,713				605,004				6.44	%
	2020				5				14,650				351,657				3.74	%
	2021				6				53,981				1,011,305				10.77	%
	2022				6				79,695				1,861,511				19.82	%
	2023				—				—				—				0.00	%
	2024				4				144,714				1,783,712				19.00	%
	2025				—				—				—				0.00	%
	2026				4				24,847				490,067				5.22	%
	Total				44				508,585			$	9,390,266				100.00	%

 

(1)

Reflects the annualized contractual minimum rental income from non-cancelable leases at December 31, 2016.

 

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

Tenants

 

The Property was approximately 73.5% leased as of December 31, 2016 to a diverse group of tenants with staggered lease expirations. We believe that any tenant that leases 10% or more of the Property’s rentable space is material. As of December 31, 2016, 43 tenants were leasing space at the Property, with the largest being Maximus, Inc. at approximately 82,865 square feet, or approximately 9.6% of the Property’s rentable space, until September 30, 2017 for approximately 52,281 square feet and until November 16, 2017 for approximately 30,584 square feet.

Leases

 

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

 

Additional Operating Data

 

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

Item 3.       Legal Proceedings

 

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

 

Item 4.       Mine Safety Disclosures

 

Not applicable.

PART II

 

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

 

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

 

As of February 28, 2017, Franklin Street was the sole holder of record of the Common Stock and there were 851 holders of record of the Preferred Stock. This computation is based upon the number of record holders reflected in our corporate records. The final sale of Preferred Stock occurred on December 27, 2007 and following that date no further distributions or dividends have been or will be declared on the Common Stock.

 

Set forth below are the distributions made to the holders of our Preferred Stock in respect of each quarter during the past two fiscal years. Distributions are determined based on the Company’s Board of Directors’ review of cash available for distribution and distribution requirements necessary for the Company to continue to qualify as a real estate investment trust. We cannot guarantee the future payment of dividends or the amount of any such dividends. See the Notes to Consolidated Financial Statements that are included with this Annual Report on Form 10-K for additional information.

 

The Company’s board of directors declared and paid cash distributions as follows:

 

 

Quarter Paid		Distributions Per Preferred Share				Total Distributions
First quarter of 2016		$	—			$	—
Second quarter of 2016		$	316			$	698,360
Third quarter of 2016		$	316			$	698,360
Fourth quarter of 2016		$	316			$	698,360
First quarter of 2015		$	—			$	—
Second quarter of 2015		$	—			$	—
Third quarter of 2015		$	—			$	—
Fourth quarter of 2015		$	—			$	—

 

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

 

Item 6.       Selected Financial Data

 

Not applicable.

 

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

 

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

 

Overview

 

FSP 303 East Wacker Drive Corp., which we refer to as the Company, is a Delaware corporation formed to purchase, own, and operate a twenty-eight story Class “A” multi-tenant office tower containing approximately 860,000 rentable square feet of office and retail space and a 294-stall underground parking garage located in downtown Chicago, Illinois, which we refer to as the Property.

 

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

 

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

 

Trends and Uncertainties

 

Economic Conditions

 

The economy in the United States is continuing to experience a period of slow economic growth, with continued declining unemployment from recent levels, which directly affects the demand for office space, our primary income producing asset.  The broad economic market conditions in the United States are affected by numerous factors, including but not limited to, inflation and employment levels, energy prices, the pace of economic growth and/or recessionary concerns, uncertainty about government fiscal and tax policy, changes in currency exchange rates, geopolitical events, the regulatory environment, the availability of credit and interest rates.   In addition, the Federal Reserve Bank has indicated that it anticipates raising interest rates in 2017.  We could benefit from any further improved economic fundamentals and increasing levels of employment.  We believe that the economy is in a cyclically-slower but prolonged broad-based upswing.  However, future economic factors may negatively affect real estate values, occupancy levels and property income.

 

Real Estate Operations

The Property was approximately 73.5% leased as of December 31, 2016 to a diverse group of tenants with staggered lease expirations, compared to approximately 64% leased as of December 31, 2015. We believe that any tenant that leases 10% or more of the Property’s rentable space is material. As of December 31, 2016, 43 tenants were leasing space at the Property, with the largest being Maximus, Inc. at approximately 82,865 square feet, or approximately 9.6% of the Property’s rentable space, until September 30, 2017 for approximately 52,281 square feet and until November 16, 2017 for approximately 30,584 square feet.

 

During the three months ended December 31, 2016, we signed a new lease with Tribune Media for approximately 60,592 square feet. In addition, during calendar year 2015, we added a number of new amenities to the Property and believe that they have been very well received by both existing tenants and prospective tenants. The new amenities are intended to boost leasing activity at the Property from a much wider range of small and mid-sized companies. The new amenities include a conference center, Wi-Fi lounge and management office on the second floor (adjacent to the fitness center) and are now available to occupants of the Property. We believe that these types of amenities are very popular with prospective tenants and increasingly critical for office buildings to attract the significant number of technology companies seeking flexible and modern working spaces in an urban environment. In addition, we finished supervising the construction of the lobby improvements for Bake for Me, a café and bakery food service, which provides breakfast, coffee and lunch options for occupants in the main lobby from early morning to mid-afternoon.

 

We believe that the downtown Chicago office market, which we refer to as the Central Business District, has witnessed significant net absorption during the past few years, which has reduced the overall Chicago vacancy rate. Although overall conditions are not quite as good for office buildings in the East Loop submarket of Chicago, the Property’s specific submarket within the Central Business District, there has been meaningful net absorption in the East Loop as well.

 

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

 

During the three months ended December 31, 2016, we believe that vacancy rates decreased slightly and that rental rates decreased slightly for buildings in Chicago’s East Loop office submarket. Our goal continues to be to lease the existing vacant space at the Property to new or existing tenants.

 

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

 

Dividends, Future Tenant Improvement Costs and Leasing Commissions

 

On January 24, 2017, our Board of Directors declared a dividend in the amount of $330 per share of Preferred Stock, in light of results of operations of the Property for the three months ended December 31, 2016. Although we currently expect a similar level of dividend distributions in future periods until occupancy levels at the Property more fully recover, the level of dividend payments in future periods may vary and will depend on the Property’s actual operating results and future capital and leasing needs. We cannot guarantee the future payment of dividends or the amount of any such dividends.

Management believes that the Company will need to be able to quickly access cash in order to fund the potentially significant tenant improvements costs and leasing commissions that may be required to stabilize the occupancy and rent roll at the Property. In light of the amount of vacant space that needs to be leased at the Property and the potential for significant tenant improvement allowance costs and leasing commissions, on August 3, 2011, we entered into a mortgage note in favor of John Hancock Life Insurance Company (U.S.A.), which we refer to as the Lender, to evidence a loan, in the original principal amount of $35,000,000 that matures on September 1, 2021, which we refer to as the Loan. The remaining proceeds of the Loan are being held by the Lender for our benefit in a restricted reserve account or accounts to be drawn upon by us from time to time for tenant improvement costs and leasing commissions at the Property upon satisfaction of certain conditions.

 

The Loan bears interest at the fixed rate of 4.83% per annum. We were obligated to make monthly payments of interest only for the initial 60 months of the Loan. Thereafter, we are obligated to make monthly payments of principal and interest for the remaining 60 months, based on a 25-year amortization schedule, until the maturity date, when all outstanding amounts become due. Commencing on October 1, 2016, the Loan became payable in monthly payments of principal and interest in the amount of $201,155. We may prepay the Loan with a prepayment premium, as defined in the Loan agreement. The Loan is secured, in part, by a mortgage, assignment of leases and rents and security agreement (the “Mortgage”) from the Company in favor of the Lender. The Mortgage constitutes a lien against the Property and has been recorded in the land records of Cook County, Illinois. Subject to customary exceptions, the Loan is nonrecourse to the Company. As of December 31, 2016, we had drawn an aggregate of $28,506,000 from the restricted reserve account(s). Interest expense paid on the Loan for the years ended December 31, 2016 and 2015 was $1,690,000 and $1,691,000, respectively. The documents evidencing and securing the Loan include restrictions on property liens and require compliance with various non-financial covenants, which include the requirement that we provide annual reports to the Lender. We were in compliance with the Loan covenants as of December 31, 2016 and December 31, 2015.

 

As of December 31, 2016, scheduled principal payments under the Loan for the next five years are as follows:

 

(in thousands)
2017			$	749
2018				786
2019				824
2020				865
2021				31,595

 

Potential Sale of the Property

 

In July 2016, our Board of Directors made the decision to try to sell the Property. After soliciting interest and input from commercial real estate brokers familiar with the Property and the local market, we retained Holliday Fenoglio Fowler, L.P., a commercial real estate broker, to facilitate a potential sale of the Property. Despite an aggressive marketing campaign that included several offers, we did not achieve buyer interest at pricing levels that our Board of Directors were prepared to recommend to the holders of the Preferred Stock. Our objective, as always, is to maximize shareholder value by trying to get the best overall rate of return for the holders of the Preferred Stock considering both current dividend distribution levels and the proceeds of the sale of the Property, all in the context of current market conditions. Accordingly, we have directed Holliday Fenoglio Fowler, L.P. to cease marketing of the Property and we intend to continue to own and operate the Property. We believe that current leasing conditions are favorable and are hopeful that we can stabilize the Property at a higher occupancy level during the next twelve months. If successful and if market conditions warrant doing so at that time, our Board of Directors intends to attempt another sale of the Property. As a result, we are very focused on leasing the Property’s remaining existing vacancy.

 

Any sale of the Property would be subject to a number of conditions, including a successful marketing of the Property and approval of the sale by our Board of Directors and a majority of the holders of the Preferred Stock. At this time, we are not able to predict when or if the satisfaction of any of these conditions will occur and as a result there can be no assurance that we will be able to sell the Property on acceptable terms or within any particular time frame.

 

Critical Accounting Policies and Estimates

 

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

 

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

 

·

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

·

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

·

classification of leases.

 

Allocation of Purchase Price

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

 

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

 

Depreciation and Amortization

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

 

Impairment

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

 

Lease Classification

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

 

Results of Operations

 

The Company acquired the Property and commenced operations on January 5, 2007. As of December 31, 2016, the Property was approximately 73.5% leased to a diverse group of tenants with staggered lease expirations.

 

Comparison of the year ended December 31, 2016 to the year ended December 31, 2015

 

Revenue

 

Total revenue increased $2.3 million to $17.9 million for the year ended December 31, 2016, as compared to $15.6 million for the year ended December 31, 2015. This increase was primarily due to an increase in overall rental revenue as a result of increased occupancy.

 

Expenses

 

Total expenses increased $0.5 million to $19.2 million for the year ended December 31, 2016, as compared to $18.7 million for the year ended December 31, 2015. The increase was primarily due to a $1.0 million increase in real estate taxes and insurance and a $0.2 million increase in rental operating expenses, which was offset in part by the $0.7 million decrease in depreciation and amortization.

 

Liquidity and Capital Resources

 

Cash and cash equivalents were $25.3 million and $23.8 million at December 31, 2016 and 2015, respectively.

 

Management believes that the existing cash and cash equivalents as of December 31, 2016 of $25.3 million and cash anticipated to be generated internally by operations will be sufficient to meet working capital requirements, distributions and anticipated capital expenditures for at least the next 12 months following the filing date.

 

Operating Activities

 

Cash provided by operating activities of $5.0 million for the year ended December 31, 2016 was primarily attributable to non-cash items of $6.6 million, consisting primarily of depreciation and amortization, and uses arising from other current accounts of $1.4 million, partially offset by a net loss of approximately $1.3 million and payments of deferred leasing costs of $1.7 million.

Investing Activities

 

Cash used for investing activities for the year ended December 31, 2016 of approximately $1.2 million was attributable to the purchase of restricted investments of $11.0 million and the purchase of real estate assets of $7.2 million, partially offset by the redemption of restricted investments of $17.0 million.

 

Financing Activities

 

Cash used for financing activities for the year ended December 31, 2016 of approximately $2.3 million was attributable to the distributions to stockholders of approximately $2.1 million and principal payments on loan payable of approximately $0.2 million.

 

Sources and Uses of Funds

 

Our principal demands on liquidity are cash for operations, interest on debt payments, and distributions to equity holders. As of December 31, 2016, we had approximately $5.9 million in accrued liabilities. In the near term, liquidity is generated by cash from operations.

 

Secured Debt

 

On August 3, 2011, we entered into a mortgage note in favor of the Lender to evidence the Loan. The proceeds of the Loan are being held by the Lender for the Company’s benefit in a restricted reserve account or accounts to be drawn upon by the Company from time to time for tenant improvement costs and leasing commissions at the Property upon satisfaction of certain conditions. The Loan bears interest at the fixed rate of 4.83% per annum. We were obligated to make monthly payments of interest only for the initial 60 months of the Loan. Thereafter, we are obligated to make monthly payments of principal and interest for the remaining 60 months, based on a 25-year amortization schedule, until the maturity date, when all outstanding amounts become due. Commencing on October 1, 2016, the Loan became payable in monthly payments of principal and interest in the amount of $201,155. We may prepay the Loan with a prepayment premium, as defined in the Loan agreement. The Loan is secured, in part, by the Mortgage from the Company in favor of the Lender. The Mortgage constitutes a lien against the Property and has been recorded in the land records of Cook County, Illinois. Subject to customary exceptions, the Loan is nonrecourse to the Company. As of December 31, 2016, we had drawn an aggregate of $28,506,000 from the restricted reserve account(s). Interest expense paid on the Loan for the years ended December 31, 2016 and 2015 was $1,690,000 and $1,691,000, respectively.

 

As of December 31, 2016, scheduled principal payments under the Loan for the next five years are as follows:

 

(in thousands)
2017			$	749
2018				786
2019				824
2020				865
2021				31,595

 

The Loan agreement includes restrictions on property liens and requires compliance with various non-financial covenants, which include the requirement that we provide annual reporting. We were in compliance with the Loan covenants as of December 31, 2016 and 2015.

 

Contingencies

 

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

 

Related Party Transactions

 

Asset Management Agreement

 

We have in the past engaged in and currently engage in transactions with a related party, Franklin Street, and its wholly-owned subsidiaries, FSP Investments LLC and FSP Property Management LLC, which we collectively refer to as FSP. We expect to continue to have related party transactions with FSP in the form of management fees paid to FSP to manage the Company on behalf of its stockholders. FSP Property Management LLC currently provides the Company with asset management and financial reporting services. The asset management agreement between the Company and FSP Property Management LLC requires the Company to pay FSP Property Management LLC a monthly fee equal to one-half of one percent (.5%) of the gross revenues of the Property. The asset management agreement between the Company and FSP Property Management LLC may be terminated by either party without cause at any time, upon at least thirty (30) days’ written notice. For the years ended December 31, 2016 and 2015, management fees paid were approximately $87,000 and $78,000, respectively.

 

Investor Services Agreement

 

On August 14, 2012, the Company entered into an Investor Services Agreement (the “FSPI Agreement”) with FSP Investments LLC for the provision of investor services to holders of Preferred Stock. FSP Investments LLC is a wholly-owned subsidiary of Franklin Street, which is the sole holder of the one share of Common Stock that is issued and outstanding. FSP Investments LLC acted as a real estate investment firm and broker/dealer with respect to (a) the Company’s organization, (b) the Company’s acquisition of the Property and (c) the sale of the Company’s equity interests. The FSPI Agreement requires the Company to pay a monthly service fee of $500 for services performed under the FSPI Agreement, and to reimburse FSP Investments LLC for its reasonable out-of-pocket expenses incurred in connection with the FSPI Agreement. The FSPI Agreement may be terminated by either party with thirty days written notice or immediately upon certain events of default set forth in the FSPI Agreement. For the years ended December 31, 2016 and 2015, investor services fees and expenses paid were approximately $16,000 and $14,000, respectively.

 

Ownership of Preferred Stock and Common Stock

 

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

 

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

 

Rental Income Commitments

 

Our commercial real estate operations consist of the leasing of the Property. Approximate future minimum rental income under non-cancelable operating leases as of December 31, 2016 is as follows:

 

Year Ending			Amount
December 31,			(in thousands)
2017			$	10,846
2018				8,620
2019				8,065
2020				7,829
2021				7,144
Thereafter				17,857
			$	60,361

 

Off-Balance Sheet Arrangements

 

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

Item 7A.       Quantitative and Qualitative Disclosure About Market Risk

 

Not applicable.

 

Item 8.       Financial Statements and Supplementary Data

 

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

 

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

 

Not applicable.

 

Item 9A.       Controls and Procedures

 

Disclosure Controls and Procedures

 

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2016. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2016, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Management’s Annual Report on Internal Control Over Financial Reporting

 

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

 

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

 

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

 

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

 

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

 

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2016. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework, 2013 Framework.

 

Based on our assessment, management concluded that, as of December 31, 2016, the Company’s internal control over financial reporting is effective based on those criteria. This annual report is not required to include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. This report shall not be deemed to be filed for the purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section.

 

Changes in Internal Control Over Financial Reporting

 

No change in our internal control over financial reporting occurred during the quarter ended December 31, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B.       Other Information

 

Not applicable.

PART III

Item 10.       Directors, Executive Officers and Corporate Governance

Directors and Executive Officers

Information regarding the executive officers and directors of the Company as of February 28, 2017 is set forth below. The biographies of each of the directors below contain information regarding the person’s service as a director, business experience, public company director positions held currently or at any time during the last five years, information regarding involvement in certain legal or administrative proceedings, if applicable, all of our directors bring to our Board executive leadership experience derived from their service as executives of a public company and specifically as an executive of Franklin Street, as well as other key attributes that are important to an effective board: integrity, candor, analytical skills, the willingness to engage management and each other in a constructive and collaborative fashion.

 

George J. Carter, age 68, is Chief Executive Officer and a director of the Company. Since 2002 he has also been Chief Executive Officer and a director of Franklin Street and is responsible for all aspects of the business of Franklin Street and its affiliates, with special emphasis on the evaluation, acquisition and structuring of real estate investments. Mr. Carter also served as President of Franklin Street Properties from 2002 to May 2016. From 1992 through 1996 he was President of Boston Financial Securities, Inc., or Boston Financial. Prior to joining Boston Financial, Mr. Carter was owner and developer of Gloucester Dry Dock, a commercial shipyard in Gloucester, Massachusetts. From 1979 to 1988, Mr. Carter served as Managing Director in charge of marketing at First Winthrop Corporation, a national real estate and investment banking firm headquartered in Boston, Massachusetts. Prior to that, he held a number of positions in the brokerage industry including those with Merrill Lynch & Co. and Loeb Rhodes & Co. Mr. Carter is a graduate of the University of Miami (B.S.). Mr. Carter’s son, Jeffrey B. Carter, serves as President, Chief Investment Officer and a director of the Company, and Mr. Carter’s other son, Scott H. Carter, serves as Executive Vice President, General Counsel and Secretary of the Company.

 

Jeffrey B. Carter, age 45, is President, Chief Investment Officer and a director of the Company. In addition, he is President and Chief Investment Officer of Franklin Street. Prior to joining Franklin Street in 1998, Mr. Carter worked in Trust Administration for Northern Trust Bank in Miami, Florida. Mr. Carter is a graduate of Arizona State University (B.A.), The George Washington University (M.A.), and Cornell University (M.B.A.). Mr. Carter’s father, George J. Carter, serves as Chief Executive Officer and a director of the Company and Mr. Carter’s brother, Scott H. Carter, serves as Executive Vice President, General Counsel and Secretary of the Company.

 

John G. Demeritt, age 56, is Executive Vice President, Chief Financial Officer, Treasurer and a director of the Company. In addition, he is Executive Vice President, Chief Financial Officer and Treasurer of Franklin Street, which he joined in September 2004. Prior to September 2004, Mr. Demeritt was a Manager with Caturano & Company, an independent accounting firm (which later merged with McGladrey) where he focused on Sarbanes Oxley compliance.  Previously, from March 2002 to March 2004 he provided consulting services to public and private companies where he focused on SEC filings, evaluation of business processes and acquisition integration.  During 2001 and 2002 he was Vice President of Financial Planning & Analysis at Cabot Industrial Trust, a publicly traded real estate investment trust, which was acquired by CalWest in December 2001.  From October 1995 to December 2000 he was Controller and Officer of The Meditrust Companies, a publicly traded real estate investment trust (formerly known as the The La Quinta Companies, which was then acquired by the Blackstone Group), where he was involved with a number of merger and financing transactions.  Prior to that, from 1986 to 1995 he had financial and accounting responsibilities at three other public companies, and was previously associated with Laventhol & Horwath, an independent accounting firm from 1983 to 1986.  Mr. Demeritt is a Certified Public Accountant and holds a Bachelor of Science degree from Babson College.

 

John F. Donahue, age 50, is Executive Vice President and a director of the Company. In addition, he is Executive Vice President of Franklin Street and President of FSP Property Management LLC. Mr. Donahue joined Franklin Street in August 2001 as Vice President of FSP Property Management LLC.  From 2001 to May 2016, Mr. Donahue was responsible for the management of certain of the real estate assets of Franklin Street and its affiliates.  From 1992 to 2001, Mr. Donahue worked in the pension fund advisory business for GE Capital and AEW Capital Management with oversight of office, research and development, industrial and land investments. From 1989 to 1992, Mr. Donahue worked for Krupp Realty in various accounting and finance roles. Mr. Donahue holds a Bachelor of Science in Business Administration from Bryant College. 

Scott H. Carter, age 45, is Executive Vice President, General Counsel and Secretary of the Company. In addition, Mr. Carter is Executive Vice President, General Counsel and Secretary of Franklin Street. Prior to joining Franklin Street in October 2005, Mr. Carter was associated with the law firm of Nixon Peabody LLP, which he originally joined in 1999.  At Nixon Peabody LLP, Mr. Carter concentrated his practice on the areas of real estate syndication, acquisitions and finance.  Mr. Carter received a Bachelor of Business Administration (B.B.A.) degree in Finance and Marketing and a Juris Doctor (J.D.) degree from the University of Miami.  Mr. Carter is admitted to practice law in the Commonwealth of Massachusetts.  Mr. Carter’s father, George J. Carter, serves as Chief Executive Officer and a director of the Company and Mr. Carter’s brother, Jeffrey B. Carter, serves as President, Chief Investment Officer and a director of the Company.

 

Eriel Anchondo, age 39, is Executive Vice President and Chief Operating Officer of the Company. In addition he is Executive Vice President and Chief Operating Officer of Franklin Street. Prior to joining Franklin Street in January 2015, from July 2014 to December 2014, Mr. Anchondo provided consulting services to the retail banking division of ISBAN, which is part of the Technology and Operations division of the Santander Group of financial institutions.  From May 2007 to July 2013, Mr. Anchondo was employed by Mercer, a global consulting leader in talent, health, retirement, and investments, as an Employee Education Manager across all lines of Mercer’s business. From May 2005 to May 2007, Mr. Anchondo was a Communications Consultant at New York Life Investment Management. From December 2002 to May 2005, Mr. Anchondo worked in the Preferred Client Services Group at Putnam Investments. Mr. Anchondo is a graduate of Boston University (B.A.) and Cornell University (M.B.A.).   

 

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

 

Sections 16(a) Beneficial Ownership Reporting Compliance

Based solely on its review of copies of reports filed by the directors and executive officers of the Company and holders of more than 10% of Preferred Stock pursuant to Section 16(a) of the Exchange Act, the Company believes that during 2016 all filings required to be made by its reporting persons under Section 16(a) were timely made in accordance with the requirements of the Exchange Act.

Corporate Governance

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

 

Item 11.       Executive Compensation

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

 

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

 

The following tables set forth the beneficial ownership of the Company’s Common Stock and Preferred Stock as of February 28, 2017 by each holder who beneficially owns more than five percent of the Company’s Common Stock or Preferred Stock, by each director, by each of the Company’s executive officers and by all current directors and executive officers as a group. To the Company’s knowledge, no person or group, other than as set forth below, beneficially owns more than five percent of the Company’s Common Stock or Preferred Stock.

 

Common Stock		Number of Shares				Percentage of
		Beneficially				Outstanding
Name of Holder		Owned				Common Stock
Franklin Street Properties Corp. (1)			1				100	%
George J. Carter (2)			—				0	%
Jeffrey B. Carter (2)			—				0	%
John G. Demeritt (2)			—				0	%
John F. Donahue (2)			—				0	%
Scott H. Carter (2)			—				0	%
Eriel Anchondo (2)			—				0	%
All Directors and Executive Officers as a Group
(consisting of 6 persons) (2)			—				0	%

 

Preferred Stock		Number of Shares				Percentage of
		Beneficially				Outstanding
Name of Holder		Owned				Preferred Stock
Franklin Street Properties Corp. (1)			965.75				43.7	%
Edward Darman Company Limited Partnership (3)			120.00				5.43	%
George J. Carter (2)			—				0	%
Jeffrey B. Carter (2)			—				0	%
John G. Demeritt (2)			—				0	%
John F. Donahue (2)			—				0	%
Scott H. Carter (2)			—				0	%
Eriel Anchondo (2)			—				0	%
All Directors and Executive Officers as a Group
(consisting of 6 persons) (2)			—				0	%

 

(1)

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

(2)

Each of the executive officers is employed by Franklin Street Properties Corp.

(3)

The address of Edward Darman Company Limited Partnership is 25 Recreation Park Drive, Suite 204, Hingham, Massachusetts 02043.

 

Equity Compensation Plan Information

The Company does not have any equity compensation plans.

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

 

Certain Relationships and Related Transactions

 

George J. Carter, Jeffrey B. Carter, John G. Demeritt, John F. Donahue, Scott H. Carter and Eriel Anchondo, each of whom is an executive officer of the Company, are executive officers of Franklin Street, and George J. Carter is a director of Franklin Street. Jeffrey B. Carter and Scott H. Carter are brothers and are George J. Carter’s sons. In addition, Janet P. Notopoulos, a former executive officer of the Company, served as an executive officer and director of Franklin Street. None of such persons received any remuneration from the Company for their services.

 

Asset Management Agreement

 

The Company has in the past engaged in and currently engages in transactions with a related party, Franklin Street, and its wholly-owned subsidiaries, FSP Investments LLC and FSP Property Management LLC (collectively “FSP”). The Company expects to continue to have related party transactions with FSP in the form of management fees paid to FSP to manage the Company on behalf of its stockholders. FSP Property Management LLC currently provides the Company with asset management and financial reporting services. The asset management agreement between the Company and FSP Property Management LLC requires the Company to pay FSP Property Management LLC a monthly fee equal to one-half of one percent (.5%) of the gross revenues of the Property. The asset management agreement between the Company and FSP Property Management LLC may be terminated by either party without cause at any time, upon at least thirty (30) days’ written notice. For the years ended December 31, 2016 and 2015, management fees paid were approximately $87,000 and $78,000, respectively.

 

Investor Services Agreement

 

On August 14, 2012, the Company entered into an Investor Services Agreement (the “FSPI Agreement”) with FSP Investments LLC for the provision of investor services to holders of Preferred Stock. FSP Investments LLC is a wholly-owned subsidiary of Franklin Street, which is the sole holder of the one share of Common Stock that is issued and outstanding. FSP Investments LLC acted as a real estate investment firm and broker/dealer with respect to (a) the Company’s organization, (b) the Company’s acquisition of the Property and (c) the sale of the Company’s equity interests. The FSPI Agreement requires the Company to pay a monthly service fee of $500 for services performed under the FSPI Agreement, and to reimburse FSP Investments LLC for its reasonable out-of-pocket expenses incurred in connection with the FSPI Agreement. The FSPI Agreement may be terminated by either party with thirty days written notice or immediately upon certain events of default set forth in the FSPI Agreement. For the years ended December 31, 2016 and 2015, investor services fees paid were approximately $16,000 and $14,000, respectively.

 

Ownership of Preferred Stock and Common Stock

 

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

 

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

 

Director Independence

 

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

Item 14.       Principal Accounting Fees and Services

 

Independent Auditor Fees and Other Matters

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

Fee Category		2016				2015
Audit Fees (1)		$	96,000			$	70,000
Audit-Related Fees (2)			—				—
Tax Fees (3)			7,000				6,000
All Other Fees (4)			—				—
		$	103,000			$	76,000

 

(1)

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

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

(3) Tax fees consist of fees for tax compliance, tax advice and tax planning services. Tax compliance services, which relate to the preparation of tax returns, claims for refunds and tax payment-planning services, accounted for $6,000 of the total tax fees incurred in both 2016 and 2015.

(4) The Company was not billed by its independent registered public accounting firm in 2016 or 2015 for any other fees.

Pre-Approval Policy and Procedures

 

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

 

PART IV

 

Item 15.       Exhibits, Financial Statement Schedules

 

(a)

The following documents are filed as part of this report.

 

1.

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

 

2.

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

 

3.

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

 

Item 16.       Form 10-K Summary

 

Not applicable.

 

 

 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf as of March 17, 2017 by the undersigned, thereunto duly authorized.

FSP 303 East Wacker Drive Corp.

By:

/s/ George J. Carter

George J. Carter

Chief Executive Officer

 

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

Signature	Title	Date
/s/ George J. Carter George J. Carter	Chief Executive Officer and Director (Principal Executive Officer)	March 17, 2017
/s/ John G. Demeritt John G. Demeritt	Executive Vice President, Chief Financial Officer, Treasurer and Director (Principal Financial Officer)	March 17, 2017
/s/ Jeffrey B. Carter Jeffrey B. Carter	President, Chief Investment Officer and Director	March 17, 2017
/s/ John F. Donahue John F. Donahue	Executive Vice President and Director	March 17, 2017

 

EXHIBIT INDEX

 

Exhibit No.	Description
3.1	Certificate of Incorporation, incorporated herein by reference to Exhibit 3.1 to FSP 303 East Wacker Drive Corp.’s Registration Statement on Form 10 filed on April 11, 2008 (File No. 000-53165)
3.2	By-Laws, incorporated herein by reference to Exhibit 3.2 to FSP 303 East Wacker Drive Corp.’s Registration Statement on Form 10 filed on April 11, 2008  (File No. 000-53165)
10.1	Asset Management Agreement, dated January 5, 2007, between FSP 303 East Wacker Drive LLC and FSP Property Management LLC, as amended by that certain First Amendment to Asset Management Agreement, dated August 23, 2007, between FSP 303 East Wacker Drive LLC and FSP Property Management LLC, incorporated herein by reference to Exhibit 10.3 to FSP 303 East Wacker Drive Corp.’s Registration Statement on Form 10 filed on April 11, 2008  (File No. 000-53165)
10.2	Investor Services Agreement dated August 14, 2012 by and between FSP 303 East Wacker Drive Corp. and FSP Investments LLC, incorporated herein by reference to Exhibit 10.1 to FSP 303 East Wacker Drive Corp.’s Form 10-Q filed on August 14, 2012 (File No. 000-53165).
10.3	Voting Agreement, dated January 1, 2007, among FSP 303 East Wacker Drive Corp., George J. Carter and Franklin Street Properties Corp., incorporated herein by reference to Exhibit 10.4 to FSP 303 East Wacker Drive Corp.’s Registration Statement on Form 10 filed on April 11, 2008  (File No. 000-53165)
10.4	Mortgage Note dated August 3, 2011 from FSP 303 East Wacker Drive LLC in favor of John Hancock Life Insurance Company (U.S.A.), incorporated herein by reference to Exhibit 10.1 to FSP 303 East Wacker Drive Corp.’s Current Report on Form 8-K filed on August 4, 2011 (File No. 000-53165)
10.5	Tenant Improvement and Leasing Commissions Agreement dated August 3, 2011 by and between FSP 303 East Wacker Drive LLC and John Hancock Life Insurance Company (U.S.A.), incorporated herein by reference to Exhibit 10.2 to FSP 303 East Wacker Drive Corp.’s Current Report on Form 8-K filed on August 4, 2011 (File No. 000-53165)
10.6	Mortgage, Assignment of Leases and Rents and Security Agreement dated August 3, 2011 from FSP 303 East Wacker Drive LLC in favor of John Hancock Life Insurance Company (U.S.A.), incorporated herein by reference to Exhibit 10.3 to FSP 303 East Wacker Drive Corp.’s Current Report on Form 8-K filed on August 4, 2011 (File No. 000-53165)
10.7	Guaranty Agreement dated August 3, 2011 from FSP 303 East Wacker Drive LLC and FSP 303 East Wacker Drive Corp. in favor of John Hancock Life Insurance Company (U.S.A.), incorporated herein by reference to Exhibit 10.4 to FSP 303 East Wacker Drive Corp.’s Current Report on Form 8-K filed on August 4, 2011 (File No. 000-53165)
10.8	Indemnification Agreement dated August 3, 2011 from FSP 303 East Wacker Drive LLC and FSP 303 East Wacker Drive Corp. in favor of John Hancock Life Insurance Company (U.S.A.), incorporated herein by reference to Exhibit 10.5 to FSP 303 East Wacker Drive Corp.’s Current Report on Form 8-K filed on August 4, 2011 (File No. 000-53165)
21.1	Subsidiaries of FSP 303 East Wacker Drive Corp., incorporated herein by reference to Exhibit 21.1 to FSP 303 East Wacker Drive Corp.’s Registration Statement on Form 10 filed on April 11, 2008   (File No. 000-53165)
31.1*	Certification of FSP 303 East Wacker Drive Corp.'s principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification of FSP 303 East Wacker Drive Corp.'s principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certification of FSP 303 East Wacker Drive Corp.'s principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*	Certification of FSP 303 East Wacker Drive Corp.'s principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101*	The following materials from FSP 303 East Wacker Drive Corp.’s Annual Report on Form 10-K for the year ended December 31, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Changes in Stockholders’ Equity; (iv) the Consolidated Statements of Cash Flows; and (v) the Notes to Consolidated Financial Statements.
*	Filed herewith.

FSP 303 East Wacker Drive Corp.

Index to Consolidated Financial Statements

 

Table of Contents

 

		Page
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets as of December 31, 2016 and 2015		F-3
Consolidated Statements of Operations for the years ended December 31, 2016 and 2015		F-4
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2016 and 2015		F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2016 and 2015		F-6
Notes to Consolidated Financial Statements		F-7
Financial Statement Schedule – Schedule III		F-17

 

[LETTERHEAD OF MARCUM LLP]

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Stockholders

of FSP 303 East Wacker Drive Corp.:

 

We have audited the accompanying consolidated balance sheets of FSP 303 East Wacker Drive Corp. (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years then ended. Our audits also included the financial statement schedule on page F-17 to F-18. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

 

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

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of FSP 303 East Wacker Drive Corp., as of December 31, 2016 and 2015, and the consolidated results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

 

/s/ Marcum llp

Marcum llp

Boston, Massachusetts

March 17, 2017

 

 

 

FSP 303 East Wacker Drive Corp.
Consolidated Balance Sheets

 

		December 31,
(in thousands, except share and par value amounts)		2016				2015
Assets:
Real estate investments, at cost:
Land		$	26,200			$	26,200
Buildings and improvements			159,834				154,014
Furniture and equipment			837				738
			186,871				180,952
Less accumulated depreciation			42,223				37,563
Real estate investments, net			144,648				143,389
Acquired real estate leases, net of accumulated amortization of $0 and $1,016, respectively			—				72
Acquired favorable real estate leases, net of accumulated amortization of $0 and $911, respectively			—				59
Cash and cash equivalents			25,355				23,810
Restricted cash			6,519				7,668
Restricted investment			—				5,998
Tenant rent receivables, net of allowance for doubtful accounts of $98 and $162, respectively			125				95
Step rent receivable			6,060				5,528
Deferred leasing costs, net of accumulated amortization of $2,603 and $2,119, respectively			5,774				4,994
Prepaid expenses and other assets			66				47
Total assets		$	188,547			$	191,660
Liabilities and Stockholders’ Equity:
Liabilities:
Accounts payable and accrued expenses		$	5,918			$	5,576
Tenant security deposits			455				385
Loan payable, less unamortized financing costs of $141 and $171, respectively			34,678				34,829
Acquired unfavorable real estate leases, net of accumulated amortization of $0 and $110, respectively			—				11
Total liabilities			41,051				40,801
Commitments and Contingencies:			—				—
Stockholders’ Equity:
Preferred Stock, $.01 par value, 2,210 shares authorized, issued and outstanding, aggregate liquidation preference $221,000			—				—
Cmmon Stock, $.01 par value, 1 share authorized, issued and outstanding			—				—
Additional paid-in capital			197,162				197,162
Retained earnings and distributions in excess of earnings			(49,666	)			(46,303	)
Total Stockholders’ Equity			147,496				150,859
Total Liabilities and Stockholders’ Equity		$	188,547			$	191,660
See accompanying notes to consolidated financial statements.

 

 

FSP 303 East Wacker Drive Corp.
Consolidated Statements of Operations

 

		For the Year Ended December 31,
(in thousands, except share and per share amounts)		2016				2015
Revenues:
Rental		$	17,871			$	15,575
Total revenue			17,871				15,575
Expenses:
Rental operating expenses			6,274				6,080
Real estate taxes and insurance			4,446				3,454
Depreciation and amortization			6,739				7,466
Interest expense			1,719				1,721
Total expenses			19,178				18,721
Net loss before interest income			(1,307	)			(3,146	)
Interest income			39				29
Net loss attributable to preferred stockholders		$	(1,268	)		$	(3,117	)
Weighted average number of preferred shares outstanding,
basic and diluted			2,210				2,210
Net loss per preferred share, basic and diluted		$	(574	)		$	(1,410	)
See accompanying notes to consolidated financial statements.

 

 

FSP 303 East Wacker Drive Corp.
Consolidated Statements of Changes in Stockholders’ Equity
For the Years Ended December 31, 2015 and 2016

 

(in thousands, except per share amounts)		Preferred Stock				Common  Stock				Additional Paid-in Capital				Retained Earnings and Distributions in Excess of Earnings				Total Stockholders' Equity
Balance, January 1, 2015		$	—			$	—			$	197,162			$	(43,186	)		$	153,976
Net loss			—				—				—				(3,117	)			(3,117	)
Balance, December 31, 2015			—				—				197,162				(46,303	)			150,859
Distributions			—				—				—				(2,095	)			(2,095	)
Net loss			—				—				—				(1,268	)			(1,268	)
Balance, December 31, 2016		$	—			$	—			$	197,162			$	(49,666	)		$	147,496
See accompanying notes to consolidated financial statements.

 

 

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

 

		For the Year Ended December 31,
(in thousands)		2016				2015
Cash flows from operating activities:
Net loss		$	(1,268	)		$	(3,117	)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization			6,769				7,496
Amortization of favorable real estate leases			59				123
Amortization of unfavorable real estate leases			(11	)			(16	)
Increase (decrease) in bad debt reserve			(64	)			162
Changes in operating assets and liabilities:
Restricted cash			1,149				(5,149	)
Tenant rent receivable			34				367
Step rent receivable			(532	)			(443	)
Prepaid expenses and other assets			(19	)			19
Accounts payable and accrued expenses			494				(136	)
Tenant security deposits			70				(14	)
Payment of deferred leasing costs			(1,674	)			(989	)
Net cash provided by (used for) operating activities			5,007				(1,697	)
Cash flows from investing activities:
Purchase of real estate assets			(7,184	)			(4,475	)
Redemptions of restricted investments			17,000				36,013
Purchase of restricted investments			(11,002	)			(26,012	)
Net cash provided by (used for) investing activities			(1,186	)			5,526
Cash flows from financing activities:
Principal payments of the loan payable			(181	)			—
Distributions to stockholders			(2,095	)			—
Net cash used for financing activities			(2,276	)			—
Net increase in cash and cash equivalents			1,545				3,829
Cash and cash equivalents, beginning of year			23,810				19,981
Cash and cash equivalents, end of year		$	25,355			$	23,810
Supplemental disclosure of cash flow information:
Cash paid for interest		$	1,690			$	1,691
Disclosure of non-cash investing activities:
Accrued costs for purchase of real estate assets		$	85			$	237
See accompanying notes to consolidated financial statements.

 

FSP 303 East Wacker Drive Corp.

Notes to Consolidated Financial Statements

 

1.      Organization

 

FSP 303 East Wacker Drive Corp. (the “Company”) was organized on December 13, 2006 as a corporation under the laws of the State of Delaware to purchase, own, and operate a twenty-eight story Class “A” multi-tenant office tower containing approximately 860,000 rentable square feet of space located in downtown Chicago, Illinois (the “Property”). The Company acquired the Property and commenced operations on January 5, 2007. Franklin Street Properties Corp. (“Franklin Street”) (NYSE MKT: FSP) holds the sole share of the Company’s common stock, $.01 par value per share (the “Common Stock”). Between February 2007 and December 2007, FSP Investments LLC, a wholly-owned subsidiary of Franklin Street, completed the sale on a best efforts basis of 2,210 shares of the Company’s preferred stock, $.01 par value per share (the “Preferred Stock”). FSP Investments LLC sold the Preferred Stock in a private placement offering to “accredited investors” within the meaning of Regulation D under the Securities Act of 1933.

 

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

 

2.       Summary of Significant Accounting Policies

 

BASIS OF PRESENTATION

 

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

 

ESTIMATES AND ASSUMPTIONS

 

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

 

REAL ESTATE AND DEPRECIATION

 

Real estate assets are stated at cost less accumulated depreciation. If the Company determines that impairment has occurred, the affected assets are reduced to their fair value.

 

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

 

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

 

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

 

	Category	Years
	Building - Commercial	39
	Building Improvements	15-39
	Furniture & Equipment	5-7
	Tenant Improvements	shorter of estimated useful life or the term of the lease

 

The Company reviews the Property to determine if the carrying amount will be recovered from future cash flows if certain indicators of impairment are identified at the Property. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. When indicators of impairment are present and the sum of the undiscounted future cash flows is less than the carrying value of such asset, an impairment loss is recorded equal to the difference between the asset’s current carrying value and its fair value based on discounting its estimated future cash flows. At December 31, 2016 and 2015, no impairment charges were recorded.

 

FSP 303 East Wacker Drive Corp.

Notes to Consolidated Financial Statements

 

2.       Summary of Significant Accounting Policies (continued)

 

REAL ESTATE AND DEPRECIATION (continued)

 

Depreciation expense of $5,773,000 and $6,188,000 is included in Depreciation and Amortization in the Company’s Consolidated Statements of Operations for the years ended December 31, 2016 and 2015, respectively.

 

ACQUIRED REAL ESTATE LEASES

 

Acquired real estate leases represent the estimated value of legal and leasing costs related to acquired leases that were included in the purchase price when the Company acquired the Property. The Company segregates these costs from its investment in real estate. The Company subsequently amortizes these costs on a straight-line basis over the remaining lives of the related leases. Amortization expense of $72,000 and $132,000 is included in Depreciation and Amortization in the Company’s Consolidated Statements of Operations for the years ended December 31, 2016 and 2015, respectively.

 

Acquired real estate lease costs included in the purchase price of the Property were $11,222,000 and were fully amortized and written off as of December 31, 2016. Detail of the acquired real estate leases is as follows:

 

(in thousands)		December 31,
		2016				2015
Cost		$	—			$	1,088
Accumulated amortization			—				(1,016	)
Book value		$	—			$	72

 

ACQUIRED FAVORABLE REAL ESTATE LEASES

 

Acquired favorable real estate leases represent the value related to the leases when the lease payments due under a tenant’s lease exceed the market rate of the lease at the date the Property was acquired. The Company reports this value separately from its investment in real estate. The Company subsequently amortizes this amount on a straight-line basis over the remaining life of the tenant’s lease. Amortization of $59,000 and $123,000 is shown as a reduction of rental income in the Company’s Consolidated Statements of Operations for the years ended December 31, 2016 and 2015, respectively.

 

The acquired favorable real estate leases included in the purchase price of the property were $8,034,000 and were fully amortized and written off as of December 31, 2016. Detail of the acquired favorable real estate leases is as follows:

 

(in thousands)		December 31,
		2016				2015
Cost		$	—			$	970
Accumulated amortization			—				(911	)
Book value		$	—			$	59

 

ACQUIRED UNFAVORABLE REAL ESTATE LEASES

 

Acquired unfavorable real estate leases represent the value relating to leases with rents below the market rate at the time the Property was acquired. Amortization is computed using the straight-line method over the lives of the leases assumed. Amortization of $11,000 and $16,000 is included with rental revenue in the Company’s Consolidated Statements of Operations for the years ended December 31, 2016 and 2015.

FSP 303 East Wacker Drive Corp.

Notes to Consolidated Financial Statements

 

2. Summary of Significant Accounting Policies (continued)

ACQUIRED UNFAVORABLE REAL ESTATE LEASES (continued)

 

The acquired unfavorable real estate leases included in the purchase price of the property were $613,000 and were fully amortized and written off as of December 31, 2016. Details of the acquired unfavorable real estate leases are as follows:

 

 

(in thousands)		December 31,
		2016				2015
Cost		$	—			$	121
Accumulated amortization			—				(110	)
Book value		$	—			$	11

 

CASH AND CASH EQUIVALENTS

 

The Company considers all highly liquid debt instruments with an initial maturity of three months or less to be cash equivalents.

 

RESTRICTED CASH AND INVESTMENT

 

The Company is required under the loan payable to hold proceeds from the loan payable in a restricted reserve account or accounts.  These proceeds are classified as restricted cash or restricted investments on the Consolidated Balance Sheets, depending on the initial maturity of the respective instrument.  Restricted cash at December 31, 2016 consisted of amounts in a money market account totaling $6,519,000.  There were no restricted investments at December 31, 2016. Restricted cash at December 31, 2015 consisted of amounts in a money market account and certificate of deposit totaling $7,668,000.  Restricted investments at December 31, 2015 consisted of investments in certificates of deposit and in a U.S. Treasury Bill, which the Company has the ability and intent to hold until their maturity, with a total face value of $6,000,000 and a total carrying value of $5,998,000. 

 

CONCENTRATION OF CREDIT RISKS

 

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

 

For the years ended December 31, 2016 and 2015, rental income was derived from various tenants. As such, future receipts are dependent upon the financial strength of the lessees and their ability to perform under the lease agreements.

 

The following tenant represents greater than 10% of rental revenue as of December 31, 2016 and 2015:

			2016				2015
Maximus				26.9	%			25.2	%

 

FINANCIAL INSTRUMENTS

 

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

 

TENANT RENT AND OTHER RECEIVABLES

 

Tenant rent and other receivables are reported at the amount the Company expects to collect on balances outstanding at year-end. The Company provides an allowance for doubtful accounts based on its estimate of a tenant’s ability to make future rent payments. The computation of this allowance is based in part on the tenant’s payment history and current credit status. Management monitors outstanding balances and tenant relationships and concluded that as of December 31, 2016 and 2015, the allowance for doubtful accounts was $98,000 and $162,000 respectively.

FSP 303 East Wacker Drive Corp.

Notes to Consolidated Financial Statements

 

2.      Summary of Significant Accounting Policies (continued)

 

STEP RENT RECEIVABLE

 

Certain leases provide for fixed rental increases over the life of the lease. Rental revenue is recognized on the straight-line basis over the related lease term; however, billings by the Company are based on required minimum rentals in accordance with the lease agreements. Step rent receivable, which is the cumulative revenue recognized in excess of amounts billed by the Company, is $6,060,000 and $5,528,000 at December 31, 2016 and 2015, respectively.

 

DEFERRED LEASING COSTS

 

Deferred leasing commissions represent direct and incremental external leasing costs incurred in the leasing of commercial space. These costs are capitalized and are amortized on a straight-line basis over the terms of the related lease agreements. Amortization expense was $894,000 and $1,146,000 for the years ended December 31, 2016 and 2015, respectively.

 

REVENUE RECOGNITION

 

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

 

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

 

		Year Ended				Year Ended
		December 31,				December 31,
(in thousands)		2016				2015
Income from leases		$	10,955			$	10,347
Straight-line rent adjustment			503				181
Reimbursable expenses and parking			6,424				5,134
Termination fees			37				20
Amortization of favorable leases			(59	)			(123	)
Amortization of unfavorable leases			11				16
Total		$	17,871			$	15,575

 

INTEREST INCOME

 

Interest income is recognized when the earnings process is complete.

 

INCOME TAXES

 

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

 

FSP 303 East Wacker Drive Corp.

Notes to Consolidated Financial Statements

 

2.      Summary of Significant Accounting Policies (continued)

 

NET LOSS PER SHARE

 

Basic net loss per share of Preferred Stock is computed by dividing net loss by the weighted average number of shares of Preferred Stock outstanding during the period. Diluted net loss per share of Preferred Stock reflects the potential dilution that could occur if securities or other contracts to issue shares were exercised or converted into shares. There were no potential dilutive shares outstanding at December 31, 2016 and 2015. Subsequent to the completion of the offering shares of Preferred Stock, the holder of Common Stock is not entitled to share in any income nor in any related dividend.

 

FAIR VALUE MEASUREMENTS

 

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

 

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

 

SUBSEQUENT EVENTS

 

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

 

RECENT ACCOUNTING STANDARDS

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (“Topic 606”), which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. This update is effective for interim and annual reporting periods beginning after December 15, 2017. A substantial portion of our revenue consists of rental income from leasing arrangements, which is specifically excluded from Topic 606. We are continuing to evaluate Topic 606; however, we do not believe there will be a material impact on the timing of our revenue recognition in the consolidated financial statements. We currently expect to adopt the standard using the modified retrospective approach.

 

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This update requires an entity to evaluate whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the financial statements are available to be issued when applicable) and to provide related footnote disclosures in certain circumstances. This update is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter with early adoption permitted. The implementation of this update did not cause any significant changes to the consolidated financial statements.

 

 

FSP 303 East Wacker Drive Corp.

Notes to Consolidated Financial Statements

 

2.       Summary of Significant Accounting Policies (continued)

 

RECENT ACCOUNTING STANDARDS (continued)

 

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis” (“ASU 2015-02”). ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. ASU 2015-02 modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with variable interest entities (“VIEs”), particularly those that have fee arrangements and related party relationships. ASU 2015-02 is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments in ASU 2015-02 using: (a) a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning of the fiscal year of adoption; or (b) by applying the amendments retrospectively. The implementation of this update did not cause any material changes to the consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), (“ASU 2016-02”). ASU 2016-02 requires lessees to establish a lease liability for the obligation to make lease payments and a right of use asset for the right to use the underlying asset for the lease term on their balance sheets. Lessees will continue to recognize lease expenses on their income statements in a manner similar to current accounting. The guidance also eliminates current real estate-specific provisions for all entities. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. This new standard is effective for annual periods beginning after December 15, 2018, and interim periods thereafter with early adoption permitted. The Company is currently evaluating the potential changes from ASU 2016-02 to future financial reporting and disclosures.

 

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows. This ASU provides guidance on the presentation of cash, cash equivalents and restricted cash in the statement of cash flows to reduce the current diversity in practice. The amendments in this update are effective for public business entities for fiscal year beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. Adoption of this standard is not expected to have a material impact on the financial statements.

 

RECLASSIFICATION

 

Certain amounts from the 2015 financial statements have been reclassified to conform to the 2016 presentation. The reclassification was related primarily to conform to ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. This new standard was effective for interim and annual reporting periods beginning after December 15, 2015 and requires retrospective application. Approximately $171,000 of debt issuance costs were reclassified from other assets to contra term loans on the balance sheet at December 31, 2015. There was no change to net income for any period presented as a result of this reclassification.

 

3.       Income Taxes

 

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

 

The Company adopted an accounting pronouncement related to uncertainty in income taxes effective January 1, 2007, which did not result in recording a liability, nor was any accrued interest and penalties recognized with the adoption. Accrued interest and penalties will be recorded as income tax expense, if the Company records a liability in the future. The Company’s effective tax rate was not affected by the adoption. The Company files income tax returns in the U.S. federal jurisdiction and the State of Illinois jurisdiction. The statute of limitations for the Company’s income tax returns is generally three years and as such, the Company’s returns that remain subject to examination would be primarily from 2013 and thereafter.

 

During the years 2007 to 2016, the Company incurred net operating losses for income tax purposes of approximately $14,131,000 which can be carried forward until it expires between 2027 and 2036. The gross amount of net operating losses available to the Company was $14,131,000 and $12,760,000 as of December 31, 2016 and 2015, respectively.

 

FSP 303 East Wacker Drive Corp.

Notes to Consolidated Financial Statements

 

3.       Income Taxes (continued)

 

At December 31, 2016, the Company’s net tax basis of its real estate assets was $164,610,000.

 

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

 

		Year Ended				Year Ended
		December 31,				December 31,
(in thousands)		2016				2015
Net loss		$	(1,268	)		$	(3,117	)
Adjustments:  Book depreciation and amortization			6,796				7,496
Amortization of favorable real estate leases			59				123
Deferred rent			290				9
Allowance for bad debt expenses			(64	)			162
Tax depreciation and amortization			(6,460	)			(5,526	)
Amortization of unfavorable real estate leases			(11	)			(16	)
Straight-line rent adjustment			(713	)			(386	)
Taxable loss		$	(1,371	)		$	(1,255	)

 

The following schedule summarizes the tax components of the distributions paid for the years ended December 31, 2016 and 2015:

 

(dollars in thousands)		2016								2015
		Preferred				%				Preferred				%
Ordinary income		$	—				0	%		$	—				0	%
Return of Capital			2,095				100	%			—				0	%
Total		$	2,095				100	%		$	—				0	%

 

4.       Loan Payable

 

On August 3, 2011, the Company entered into a mortgage note in favor of John Hancock Life Insurance Company (U.S.A.) (the “Lender”) to evidence a loan in the original principal amount of $35,000,000 that matures on September 1, 2021 (the “Loan”). The proceeds of the Loan are being held by the Lender for the Company’s benefit in a restricted reserve account or accounts to be drawn upon by the Company from time to time for tenant improvement costs and leasing commissions at the Property upon satisfaction of certain conditions. The Loan bears interest at the fixed rate of 4.83% per annum. The Company was obligated to make monthly payments of interest only for the initial 60 months of the Loan. Thereafter, the Company is obligated to make monthly payments of principal and interest for the remaining 60 months, based on a 25-year amortization schedule, until the maturity date, when all outstanding amounts become due. Commencing on October 1, 2016, the Loan became payable in monthly payments of principal and interest in the amount of $201,155. The Company may prepay the Loan with a prepayment premium, as defined in the Loan agreement. The Loan is secured, in part, by a mortgage, assignment of leases and rents and security agreement (the “Mortgage”) from the Company in favor of the Lender. The Mortgage constitutes a lien against the Property and has been recorded in the land records of Cook County, Illinois. Subject to customary exceptions, the Loan is nonrecourse to the Company. As of December 31, 2016, the Company had drawn an aggregate of $28,506,000 from the restricted reserve account(s). Interest expense paid on the Loan for the years ended December 31, 2016 and 2015 was $1,690,000 and $1,691,000, respectively. The documents evidencing and securing the Loan include restrictions on property liens and require compliance with various non-financial covenants, which include the requirement that the Company provide annual reports to the Lender. The Company was in compliance with the Loan covenants as of December 31, 2016 and December 31, 2015.

FSP 303 East Wacker Drive Corp.

Notes to Consolidated Financial Statements

4.        Loan Payable (continued)

 

As of December 31, 2016, scheduled principal payments under the Loan for the next five years are as follows:

 

(in thousands)
2017			$	749
2018				786
2019				824
2020				865
2021				31,595

 

Fees paid associated with the Loan were $304,000 and are being amortized on the straight-line basis over the term of the Loan. Amortization expense for each of the years ended December 31, 2016 and 2015 is $30,000 and is included in interest expense in the Company’s Consolidated Statements of Operations.

 

5.       Capital Stock

 

PREFERRED STOCK

 

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

 

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

 

COMMON STOCK

 

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

 

6.

Related Party Transactions

 

Asset Management Agreement

 

The Company has in the past engaged in and currently engages in transactions with a related party, Franklin Street, and its wholly-owned subsidiaries, FSP Investments LLC and FSP Property Management LLC (collectively “FSP”). The Company expects to continue to have related party transactions with FSP in the form of management fees paid to FSP to manage the Company on behalf of its stockholders. FSP Property Management LLC currently provides the Company with asset management and financial reporting services. The asset management agreement between the Company and FSP Property Management LLC requires the Company to pay FSP Property Management LLC a monthly fee equal to one-half of one percent (.5%) of the gross revenues of the Property. The asset management agreement between the Company and FSP Property Management LLC may be terminated by either party without cause at any time, upon at least thirty (30) days’ written notice. For the years ended December 31, 2016 and 2015, management fees paid were approximately $87,000 and $78,000, respectively.

FSP 303 East Wacker Drive Corp.

Notes to Consolidated Financial Statements

 

6.

Related Party Transactions (continued)

 

Investor Services Agreement

 

On August 14, 2012, the Company entered into an Investor Services Agreement (the “FSPI Agreement”) with FSP Investments LLC for the provision of investor services to holders of Preferred Stock. FSP Investments LLC is a wholly-owned subsidiary of Franklin Street, which is the sole holder of the one share of the Company’s Common Stock that is issued and outstanding. FSP Investments LLC acted as a real estate investment firm and broker/dealer with respect to (a) the Company’s organization, (b) the Company’s acquisition of the Property and (c) the sale of the Company’s equity interests. The FSPI Agreement requires the Company to pay a monthly service fee of $500 for services performed under the FSPI Agreement, and to reimburse FSP Investments LLC for its reasonable out-of-pocket expenses incurred in connection with the FSPI Agreement. The FSPI Agreement may be terminated by either party with thirty days written notice or immediately upon certain events of default set forth in the FSPI Agreement. For the years ended December 31, 2016 and 2015, investor services fees and expenses paid were approximately $16,000 and $14,000, respectively.

 

Ownership of Preferred Stock and Common Stock

 

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

 

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

 

7.       Commitments and Contingencies

 

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

 

	Year Ending
(in thousands)	December 31,	Amount
	2017	$         10,846
	2018	8,620
	2019	8,065
	2020	7,829
	2021	7,144
	Thereafter	17,857
		$         60,361

 

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

 

8.       Segment Reporting

 

The Company operates in one industry segment, which is real estate ownership of commercial property. At December 31, 2016 and 2015, the Company owned and operated the Property in that one segment.

 

 

FSP 303 East Wacker Drive Corp.

Notes to Consolidated Financial Statements

 

9.       Accounts Payable and Accrued Expenses

 

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

 

	December 31,
(in thousands)		2016				2015
Accrued property tax		$	4,407			$	3,909
Deferred rental income			686				759
Accrued capital expenditures			85				163
Accounts payable and other accrued expenses			740				671
Due to tenant - tenant improvements			—				74
Total		$	5,918			$	5,576

 

10.      Cash Distributions

 

The Company’s board of directors declared and paid cash distributions as follows:

 

Quarter Paid		Distributions Per Preferred Share				Total Distributions
First quarter of 2016		$	—			$	—
Second quarter of 2016		$	316			$	698,360
Third quarter of 2016		$	316			$	698,360
Fourth quarter of 2016		$	316			$	698,360
First quarter of 2015		$	—			$	—
Second quarter of 2015		$	—			$	—
Third quarter of 2015		$	—			$	—
Fourth quarter of 2015		$	—			$	—

 

11.      Subsequent Event

 

The Company declared a cash distribution of $330 per share of Preferred Stock on January 24, 2017 to the holders of record of Preferred Stock on February 7, 2017, payable on February 14, 2017.

 

 

 

SCHEDULE III

 

FSP 303 East Wacker Drive Corp.

Real Estate and Accumulated Depreciation

December 31, 2016

 

 

(in thousands)

		Initial Cost			Historical Costs
Description	Encumbrances	Land	Buildings Improvements and Equipment	Costs Capitalized (Disposals) Subsequent to Acquisition	Land	Buildings Improvements and Equipment	Total (1)	Accumulated Depreciation	Total Costs, Net of Accumulated Depreciation	Depreciable Life (Years)	Date of Acquisition
		(in thousands)
303 East Wacker, Chicago, Illinois	$34,819	$26,200	$128,502	$32,169	$26,200	$160,671	$186,871	$42,223	$144,648	5- 39	2007

 

(1)

The aggregate cost for Federal Income Tax purposes is $205,511.

 

FSP 303 East Wacker Drive Corp.

 

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

 

		December 31,				December 31,
(in thousands)		2016				2015
Real estate investments, at cost:
Balance, beginning of year		$	180,952			$	177,418
Improvements			7,032				3,534
Dispositions			(1,113	)			—
Balance, end of year		$	186,871			$	180,952
Accumulated depreciation:
Balance, beginning of year		$	37,563			$	31,375
Depreciation			5,773				6,188
Dispositions			(1,113	)			—
Balance, end of year		$	42,223			$	37,563