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6-Nov-2009
Quarterly Report
As set forth in our registration statement on Form 10, originally filed on
December 30, 2004, as amended, we were not formed with the expectation that we
would be an entity that is required to file reports pursuant to the Exchange
Act. We became subject to the registration requirements of Section 12(g) of the
Exchange Act because the aggregate value of our assets exceeded applicable
thresholds and our units were held of record by 500 or more persons at
December 31, 2003. As a result of registration of our securities with the SEC
under the Exchange Act, we became subject to the reporting requirements of the
Exchange Act. In particular, we are required to file Quarterly Reports on Form
10-Q, Annual Reports on Form 10-K, and Current Reports on Form 8-K and otherwise
comply with the disclosure requirements of the Exchange Act applicable to
issuers filing registration statements pursuant to Section 12(g) of that act. As
a result of (i) current market conditions and (ii) the obligation to incur costs
of corporate compliance (including, without limitation, all federal, state and
local regulatory requirements applicable to us, including the Sarbanes-Oxley Act
of 2002, as amended), during the fourth quarter of 2004, our Manager began to
investigate whether liquidation would provide our unit holders with a greater
return on their investment than any other alternative. After reviewing the
issues facing us, our Manager approved a plan of liquidation on June 14, 2005,
which was thereafter approved by our unit holders at a special meeting of unit
holders on September 7, 2005.
Our plan of liquidation contemplates the orderly sale of all of our assets,
the payment of our liabilities and the winding up of operations and the
dissolution of our company. We engaged Robert A. Stanger & Co., Inc., or
Stanger, to perform financial advisory services in connection with our plan of
liquidation, including rendering opinions as to whether our net real estate
liquidation value range estimate and our estimated per unit distribution range
were reasonable. On June 16, 2005, Stanger opined that our net real estate
liquidation value range estimate and our estimated per unit distribution range
were reasonable from a financial point of view. Actual values realized for
assets and settlement of liabilities may differ materially from the amounts
estimated by us or reflected in Stanger's opinion.
We continually evaluate our 12.3% interest in the Congress Center property
and adjust our net real estate liquidation value accordingly. It is our policy
that when we execute a purchase and sale agreement for the sale of our real
property asset or become aware of market conditions or other circumstances that
indicate that the present value of our real property asset materially differs
from our expected net sale price, we will adjust our liquidation value
accordingly. Following the approval of our plan of liquidation by our unit
holders on September 7, 2005, we adopted the liquidation basis of accounting as
of August 31, 2005 and for all periods subsequent to August 31, 2005.
Our plan of liquidation gives our Manager the power to sell any and all of
our assets without further approval by our unit holders and provides that
liquidating distributions be made to our unit holders as determined by our
Manager. Due to unfavorable conditions in the current real estate market, we
have decided to extend our estimated sale date of the Congress Center property
to December 31, 2010. Although we can provide no assurances, we currently expect
to sell our 12.3% interest in the Congress Center property by December 31, 2010
and anticipate completing our plan of liquidation by March 31, 2011.
In accordance with our plan of liquidation, the Congress Center property is
actively managed to seek to achieve higher occupancy rates, control operating
expenses and maximize income from ancillary operations and services. However,
due to the adoption of our plan of liquidation, we will not acquire any new
properties, and are focused on liquidating our interest in the Congress Center
property.
For a more detailed discussion of our plan of liquidation, including the risk
factors and certain other uncertainties associated therewith, please read our
definitive proxy statement filed with the SEC on August 4, 2005.
Property Dispositions
We did not have any property dispositions during the three and nine months
ended September 30, 2009 and 2008.
Critical Accounting Policies
The complete listing of our Critical Accounting Policies was previously
disclosed in our 2008 Annual Report on Form 10-K, as filed with the SEC on
March 9, 2009.
Interim Financial Data
Our accompanying interim unaudited condensed consolidated financial
statements have been prepared by us in accordance with GAAP, and under the
liquidation basis of accounting effective August 31, 2005, in conjunction with
the rules and regulations of the SEC. Certain information and note disclosures
required for annual financial statements have been condensed or excluded
pursuant to
SEC rules and regulations. Accordingly, the interim unaudited condensed
consolidated financial statements do not include all of the information and
notes required by GAAP for complete financial statements. Our accompanying
interim unaudited condensed consolidated financial statements reflect all
adjustments, which are, in our opinion, of a normal recurring nature and
necessary for a fair presentation of our financial position including net assets
in liquidation and changes in net assets in liquidation for the interim periods.
Interim results of operations are not necessarily indicative of the results to
be expected for the full year; such results may be less favorable. Our
accompanying interim unaudited condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements
and the notes thereto included in our 2008 Annual Report on Form 10-K, as filed
with the SEC on March 9, 2009.
Factors Which May Influence Future Changes in Net Assets in Liquidation
Rental Income
The amount of rental income generated by the Congress Center property depends
principally on our ability to maintain the occupancy rates of currently leased
space, to lease currently available space and space available from unscheduled
lease terminations at the existing rental rates and the timing of the
disposition of the property. Negative trends in one or more of these factors
could adversely affect our rental income in future periods.
Scheduled Lease Expirations
As of September 30, 2009, the Congress Center property was 84.3% leased to 13
tenants, and 78.9% occupied by 12 tenants. None of the leases for the existing
gross leaseable area, or GLA, expire during 2009. Our leasing strategy through
our plan of liquidation focuses on negotiating renewals for leases scheduled to
expire and identifying new tenants or existing tenants seeking additional space
to occupy the GLA for which we are unable to negotiate such renewals.
Sarbanes-Oxley Act
The Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, and
related laws, regulations and standards relating to corporate governance and
disclosure requirements applicable to public companies have increased the costs
of compliance with corporate governance, reporting and disclosure practices,
which are now required of us. In addition, these laws, rules and regulations
create new legal bases for administrative enforcement, civil and criminal
proceedings against us in the case of non-compliance, thereby increasing our
risk of liability and potential sanctions. If we are unable to complete our plan
of liquidation by March 31, 2011, we expect that our efforts to continue to
comply with these laws and regulations will involve significant costs, and any
failure on our part to comply could result in fees, fines, penalties or
administrative remedies against us, which could reduce and/or delay the amount
of liquidating distributions to our unit holders under our plan of liquidation.
In accordance with our plan of liquidation, the then board of managers of our
Manager voted and approved that all costs associated with public company
compliance would be borne by our Manager. As such, we anticipate that our
Manager will pay for any and all costs related to our compliance with the
Sarbanes-Oxley Act, and we will not be required to reimburse our Manager for
such costs.
Changes in Net Assets in Liquidation
Three and Nine Months Ended September 30, 2009 and 2008
Net assets in liquidation decreased by $1,912,000, or $320.81 per unit, to
$2,101,000 during the three months ended September 30, 2009, compared to net
assets in liquidation of $4,013,000 as of June 30, 2009. The primary reason for
the decrease in our net assets was due to a decrease in the liquidation value of
$2,235,000 or $375.00 per unit, from our one remaining unconsolidated property
as a result of a decrease in the anticipated sales price, offset by an increase
in our estimated receipts in excess of estimated costs during liquidation of
$324,000, or $54.36 per unit, as a result of changes in estimates of net cash
flows of our one remaining unconsolidated property.
Net assets in liquidation decreased by $964,000, or $161.75 per unit, to
$4,579,000 during the three months ended September 30, 2008, compared to net
assets in liquidation of $5,543,000 as of June 30, 2008. The primary reason for
the decrease in our net assets was due to a decrease in the liquidation value of
$1,275,000, or $213.93 per unit, from our one remaining unconsolidated property
as a result of a decrease in the anticipated sales price, offset by an increase
in the asset for estimated receipts in excess of estimated costs during
liquidation of $314,000, or $52.68 per unit, as a result of changes in estimates
of net cash flows of our one remaining unconsolidated property.
Net assets in liquidation decreased by $1,879,000, or $315.27 per unit, to
$2,101,000 during the nine months ended September 30, 2009, compared to net
assets in liquidation of $3,980,000 as of December 31, 2008. The primary reason
for the decrease in our net assets was a decrease in the liquidation value of
our one remaining unconsolidated property of $2,654,000, or $445.30 per unit,
which is a result of a decrease in the anticipated sales price, offset by an
increase of $792,000, or $132.89 per unit, in our estimated receipts in excess
of estimated costs during liquidation caused by the extension of our estimated
sale date from December 31, 2009 to December 31, 2010 and associated changes in
estimates of net cash flows of our one remaining unconsolidated property.
Net assets in liquidation decreased by $1,349,000, or $226.34 per unit, to
$4,579,000 during the nine months ended September 30, 2008, compared to net
assets in liquidation of $5,928,000 as of December 31, 2007. The primary reason
for the decrease in our net assets was due to a decrease in the liquidation
value of $1,938,000, or $325.17 per unit, from our one remaining unconsolidated
property as a result of a decrease in the anticipated sales price, offset by an
increase in the asset for estimated receipts in excess of estimated costs during
liquidation of $461,000, or $77.35 per unit, which is a result of changes in
estimates of net cash flows of our one remaining unconsolidated property.
The net assets in liquidation of $2,101,000 as of September 30, 2009, plus
liquidating distributions to our unit holders of $18,900,000 through
September 30, 2009, would result in liquidating distributions to our unit
holders per unit of approximately $3,682.42 for Class A, $3,510.08 for Class B
and $3,375.82 for Class C, of which $3,171.22 per unit for each class has been
paid. These estimates for liquidating distributions per unit include projections
of costs and expenses expected to be incurred during the period required to
complete our plan of liquidation. These projections could change materially
based on the timing of the sale, the performance of the Congress Center property
and changes in the underlying assumptions of the projected cash flows.
Liquidity and Capital Resources
As of September 30, 2009, our total assets and net assets in liquidation were
$2,101,000. Our ability to meet our obligations is contingent upon the
disposition of our asset in accordance with our plan of liquidation. Management
estimates that the net proceeds from the sale of our interest in the Congress
Center property pursuant to our plan of liquidation will be adequate to pay our
obligations; however, we cannot provide any assurance as to the price we will
receive for the disposition of our one remaining asset or the net proceeds
therefrom.
Current Sources of Capital and Liquidity
We anticipate, but cannot assure, that our cash flow from operations and sale
of our interest in the Congress Center property will be sufficient during the
liquidation period to fund our cash needs for payment of expenses.
Our plan of liquidation gives our Manager the power to sell any and all of
our assets without further approval by our unit holders and provides that
liquidating distributions be made to our unit holders as determined at the
discretion of our Manager. Due to unfavorable conditions in the current real
estate market, we have decided to extend our estimated sale date of the Congress
Center property to December 31, 2010. Although we can provide no assurances, we
currently expect to sell our 12.3% interest in the Congress Center property by
December 31, 2010 and anticipate completing our plan of liquidation by March 31,
2011.
Other Liquidity Needs
We believe that we will have sufficient capital resources to satisfy our
liquidity needs during the liquidation period. We did not pay any liquidating
distributions to our unit holders during the three and nine months ended
September 30, 2009. Following payment of the monthly April 2005 distribution,
the then board of managers of our Manager decided to discontinue the payment of
monthly distributions. In accordance with our plan of liquidation, our Manager
can make liquidating distributions from proceeds received from the sale of
assets at their discretion.
As of September 30, 2009, we estimate that we will have $476,000 of
commitments and expenditures during the liquidation period, comprised mainly of
$436,000 in liquidating distributions to our Manager pursuant to the Operating
Agreement. However, there can be no assurance that we will not exceed the
amounts of these estimated expenditures.
An adverse change in the net inflows from unconsolidated operating activities
or net proceeds expected from the liquidation of our one real estate asset may
affect our ability to fund these items and may affect our ability to satisfy the
financial performance covenants under our mortgages on the Congress Center
property. If we fail to meet our financial performance covenants and are unable
to reach a satisfactory resolution with the lenders, the maturity dates for the
secured notes on the Congress Center property could be accelerated. Any of these
circumstances could adversely affect our ability to fund working capital,
liquidation costs and unanticipated cash needs.
Liquidating distributions will be determined by our Manager in its sole
discretion and are dependent on a number of factors, including the amount of
funds available for distribution, our financial condition, our capital
expenditures on the Congress Center property, among other factors our Manager
may deem relevant. To the extent any distributions are made to our unit holders
in excess of accumulated earnings, the excess distributions are considered a
return of capital to our unit holders for federal income tax purposes to the
extent of basis in our stock, and generally as capital gain thereafter.
The stated range of unit holder distributions disclosed in our plan of
liquidation are estimates only and actual results may be higher or lower than
estimated. The potential for variance on either end of the range could occur for
a variety of reasons, including, but not limited to: (i) unanticipated costs
could reduce net assets actually realized; (ii) if we wind up our business
significantly faster than anticipated, some of the anticipated costs may not be
necessary and net liquidation proceeds could be higher; (iii) a delay in our
liquidation could result in higher than anticipated costs and net liquidation
proceeds could be lower; (iv) circumstances may change and the actual net
proceeds realized from the sale of our interest in the Congress Center property
might be less, or significantly less, than currently estimated, including, among
other reasons, the discovery of new environmental issues or loss of a tenant or
tenants; and (v) actual proceeds realized from the sale of our interest in the
Congress Center property may be higher than currently estimated if market values
increase.
Subject to our Manager's actions and in accordance with our plan of
liquidation, we expect to meet our liquidity requirements through the completion
of the liquidation, through retained cash flow, disposition of our interest in
the Congress Center property, and additional long-term secured borrowings on the
Congress Center property. We do not intend to reserve funds to retire existing
debt upon maturity on the Congress Center property. We will, instead, seek to
refinance such debt at maturity or retire such debt through the disposition of
the remaining one unconsolidated property.
If we experience lower occupancy levels and reduced rental rates at the
Congress Center property, reduced revenues as a result of asset sale, or
increased capital expenditures and leasing costs at the Congress Center property
compared to historical levels due to competitive market conditions for new and
renewal leases, the effect would be a reduction of our net assets in
liquidation. This estimate is based on various assumptions, which are difficult
to predict, including the levels of leasing activity at year end and related
leasing costs. Any changes in these assumptions could adversely impact our
financial results, our ability to pay current liabilities as they come due and
our other unanticipated cash needs.
Capital Resources
General
Prior to the adoption of our plan of liquidation, our primary sources of
capital were our real estate operations, our ability to leverage any increased
market value in the real estate assets we owned and our ability to obtain debt
financing from third parties, including, our Manager or its affiliates. Prior to
July 1, 2008, our primary source of capital was distributions from the Congress
Center property. However, effective July 1, 2008, monthly distributions to the
Congress Center property's investors were suspended, including distributions to
us. As a result of this suspension of monthly distributions, our sole source of
cash flow is expected to be proceeds from the anticipated sale of the Congress
Center property. It is anticipated that funds previously used for distributions
will be applied towards future tenanting costs to lease spaces not covered by
the lender reserve and to supplement the lender reserve funding as necessary.
Prior to the suspension of distributions, we received approximately $29,000 per
month in distributions from the Congress Center property.
The primary uses of cash are to fund liquidating distributions to our unit
holders and operating expenses. We may also regularly require capital to invest
in the Congress Center property in connection with routine capital improvements,
and leasing activities, including funding tenant improvements, allowances and
leasing commissions. The amounts of the leasing-related expenditures can vary
significantly depending on negotiations with tenants and the willingness of
tenants to pay higher base rents over the life of their leases.
In accordance with our plan of liquidation, we anticipate our source for the
payment of our liquidating distributions to our unit holders to be primarily
from the net proceeds from the sale of our interest in the Congress Center
property.
Financing
As of September 30, 2009 and December 31, 2008, we had no consolidated
mortgage loans outstanding.
We did not have any consolidated restricted cash balances as of September 30,
2009 and December 31, 2008, held as credit enhancements and as reserves for
property taxes, capital expenditures and capital improvements.
On December 21, 2006, Realty received a termination notice from Employer's
Reinsurance Corporation notifying Realty of their intent to exercise their
option to terminate their lease for approximately 67,000 square feet effective
January 1, 2008 at the Congress Center property. From January 1, 2008 and
continuing through and including the payment date occurring on December 1, 2011,
the lender is entitled to receive $83,000 on a monthly basis from the borrower.
In January 2007, Employer's Reinsurance Corporation paid $3,773,000 to the
lender as an early termination fee penalty pursuant to their lease agreement.
We, along with G REIT Liquidating Trust (successor of G REIT, Inc.) and T REIT
Liquidating Trust (successor of T REIT, Inc.), or our affiliate co-owners, paid
the remaining $27,000 of the early termination fee penalty owed to the lender.
As of September 30, 2009, we have advanced $112,000 to the lender for the
reserves associated with the early lease termination. It is anticipated that
upon the sale of the Congress Center property, we, along with our affiliate
co-owners will receive repayment of any advances made to the lender for
reserves. In May 2009, NNN Congress Center, LLC entered into a lease agreement
with the Internal Revenue Service, or IRS, for approximately 28,000 square feet
of space previously leased by Employer's Reinsurance Corporation. The lease
begins on April 1, 2010, for a period of ten years, seven years firm, subject to
termination rights pursuant to the lease agreement at an annual rate of $31.00
per square foot. Pursuant to the lease agreement, there are scheduled annual
rent increases, and various rent concessions and commission credits have been
given to the IRS in lease years one and two. We will continue our marketing
efforts to re-lease the remaining un-leased space.
We believe that our cash balance of $368,000 as of September 30, 2009, should
provide sufficient liquidity to meet our cash needs during the next 12 months
from September 30, 2009. While we anticipate that our cash flow from operations
will be sufficient to fund our cash needs for corporate related expenses for the
next 12 months, we cannot assure that this will be case.
Unconsolidated Debt
Total mortgage debt of the Congress Center property was $93,836,000 and
. . .
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