Item 1B.
Unresolved Staff Comments.
Not applicable.
Real Estate Investments
As of December 31, 2010, we owned a 10.3% interest in the Congress Center property. Our interest in the Congress Center property is held as a member of an LLC that owns a TIC interest in the property. The following table presents certain information about the Congress Center property as of December 31, 2010:
Prior to the adoption of our plan of liquidation, our investment in unconsolidated real estate was accounted for under the equity method. Under the liquidation basis of accounting, our investment in unconsolidated real estate is recorded at fair value (on an undiscounted basis). The following information generally applies to the Congress Center property as of December 31, 2010:
•
we have no plans for any material renovations, improvements or development of the property, except in accordance with planned budgets and executed leases; and
•
our property is located in a market where we are subject to competition for attracting new tenants and retaining current tenants.
Ownership of Congress Center
The following is a summary of our relationship with entities with ownership interests in the Congress Center property as of December 31, 2010:
Indebtedness
As of December 31, 2010, there were two secured mortgage loans outstanding related to the Congress Center property, our proportionate share of which approximates $9,414,000. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 7, “Commitments and Contingencies,” to the consolidated financial statements included with this report.
Clearview Litigation
On February 11, 2004, Clearview Properties, or Clearview, filed a petition in the District Court of the 270th Judicial District, Harris County, Texas against Property Texas SC One Corporation, Clarion Partners, LLC, and Granite Partners I, LLC, three unaffiliated entities, and T REIT, our Advisor and Realty, or collectively, the Triple Net Entities. The complaint alleged that the Triple Net Entities willfully and intentionally interfered with an agreement between Property One and Clearview for the sale of certain real property located in Houston, Texas by Property One to Clearview. On January 7, 2005, Clearview filed an amended complaint which also alleged that the Triple Net Entities breached a contract between Clearview and the Triple Net Entities for the sale of the Houston, Texas property by Clearview to the Triple Net Entities and for conspiracy with Property One to breach this contract. On March 25, 2005, Clearview filed a further amended complaint which named T REIT, L.P. as an additional Triple Net Entity defendant and dropped Realty as a defendant. On May 4, 2005, the court denied a motion for summary judgment filed by the Triple Net Entities. On July 28, 2005, the Triple Net Entities filed their second amended motion for summary judgment to dismiss the claims against them, which was granted in favor of the Triple Net Entities by the court on August 8, 2005. On December 12, 2005, a one-day trial was held to determine the Triple Net Entities’ ability to recover from Clearview, attorneys’ fees, expenses and costs incurred in this case as provided for pursuant to the terms of the agreements underlying Clearview’s breach of contract claims against the Triple Net Entities. On May 17, 2006, the court entered a final judgment awarding T REIT, L.P. $212,000 in attorneys’ fees for services rendered, $25,000 for attorneys’ fees if Clearview unsuccessfully appeals the case to the court of appeals, and $13,000 for attorneys’ fees if Clearview unsuccessfully appeals the case to the Texas Supreme Court. Thereafter, Clearview appealed the case to the Fourteenth Court of Appeals. On January 29, 2009, the Fourteenth Court of Appeals affirmed the trial court’s summary judgment, reversed T REIT, L.P.’s attorneys’ fees award, and remanded the attorneys’ fee issue for a further proceeding. Clearview then filed a petition for review with the Supreme Court of Texas, which was subsequently denied on January 15, 2010. On March 8, 2010, Clearview filed a motion for rehearing with the Supreme Court of Texas on matters unrelated to the Triple Net Entities. The Supreme Court of Texas denied Clearview’s motion for rehearing on April 16, 2010. We are unable to determine the probability of the outcome or the amount or range of any potential recovery.
Other than the above, to our knowledge, there is no material pending legal proceedings. We also have routine litigation incidental to the business to which we are a party or of which certain of our properties are subject.
PART II
Item 5.
Item 5.
Market for Registrant’s Common Equity and Related Shareholder Matters and Issuer Purchases of Equity Securities.
Market Information
There is no public market for the units of beneficial interest in T REIT Liquidating Trust. The units of beneficial interest are not and will not be listed on any exchange, quoted by a securities broker or dealer, nor admitted for trading in any market, including the over-the-counter market. The units of beneficial interests are not transferable except by operation of law, will or intestate succession.
Beneficiaries
As of March 11, 2011, we had 1,904 beneficiaries.
Distributions
During the years ended December 31, 2010, 2009 and 2008, we did not make any distributions to our beneficiaries.
Equity Compensation Plan Information
In accordance with the plan of liquidation, all outstanding options under T REIT’s equity compensation plans were forfeited and the plans were terminated. We have no equity compensation plans as of December 31, 2010.
Item 6.
Item 6.
Selected Financial Data.
The following should be read with Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The use of the words “we,” “us” or “our” refers to T REIT Liquidating Trust and its subsidiaries, except where the context otherwise requires.
The following discussion should be read in conjunction with our consolidated financial statements and notes accompanying this Annual Report on Form 10-K. Such consolidated financial statements and information have been prepared to reflect our net assets in liquidation as of December 31, 2010 and 2009 (liquidation basis), together with the changes in net assets for the years ended December 31, 2010, 2009 and 2008.
Forward-Looking Statements
Historical results and trends should not be taken as indicative of future operations. Our statements contained in this report that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Actual results may differ materially from those included in the forward-looking statements. We intend these forward-looking statements to be covered by the safe-harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and are including this statement for purposes of complying with those safe-harbor provisions. Forward-looking statements, which are based on our assumptions and describe future plans, strategies and expectations for ourselves, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “prospects,” or similar expressions. Our ability to predict results or the actual effect of our future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on our operations and our future prospects on a consolidated basis include, without limitation, the following: changes in economic conditions generally and the real estate market specifically; legislative/regulatory changes; availability of capital; changes in interest rates; competition in the real estate industry; supply and demand for operating properties in our current market areas and changes in accounting principles generally accepted in the United States of America, or GAAP; predictions of the amount of liquidating distributions to be received by our beneficiaries; statements regarding the timing of asset dispositions and the sales price we will receive for assets; the effect of the liquidation; the availability of buyers to acquire our properties we make available for sale; the availability of financing; the absence of material litigation; our ongoing relationship with our Advisor; litigation, including, without limitation, the implementation and completion of the plan of liquidation.
These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. We make no representations or warranties (express or implied) about the accuracy of any such forward-looking statements contained in this report, and, unless otherwise required by law, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Additional information concerning us and our business, including additional factors that could materially affect our financial results, is included herein and in our other filings with the United States Securities and Exchange Commission, or the SEC.
Overview and Plan of Liquidation
T REIT, Inc., or T REIT, was formed in December 1998 in the Commonwealth of Virginia and qualified and elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended. T REIT was organized to acquire, manage and invest in a diversified portfolio of real estate projects of office, industrial, retail and service properties. T REIT was formed with the intent to be listed on a national stock exchange, quoted on a quotation system of a national securities association or merged with an entity whose shares are listed or quoted. In 2005, as a result of: (i) then current market conditions; (ii) the increasing 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, or the Sarbanes-Oxley Act); and (iii) the possible need to reduce monthly distributions, the T REIT board of directors determined that a liquidation would provide shareholders with a greater return on their investment over a reasonable period of time than through implementation of other alternatives considered.
On June 3, 2005, the board of directors of T REIT approved a plan of liquidation which was thereafter approved by the shareholders of T REIT at its 2005 Annual Meeting of Shareholders held on July 27, 2005. The T REIT plan of liquidation, or the plan of liquidation, contemplated the orderly sale of all of T REIT’s assets, the payment of its liabilities, the winding up of operations and the dissolution of T REIT. The board of director’s decision to adopt the plan of liquidation followed a lengthy process in which the board of directors and management reviewed a number of strategic alternatives with the goal of maximizing shareholder value. T REIT engaged an independent third party to perform financial advisory services in connection with T REIT’s plan of liquidation, including rendering an opinion as to whether T REIT’s net real estate liquidation value range estimate and estimated per share distribution range were reasonable. The plan of liquidation gave T REIT’s board of directors the power to sell any and all of its assets without further approval by its shareholders and provided that liquidating distributions be made to its shareholders as determined by T REIT’s board of directors. The plan of liquidation also provided for the transfer of T REIT’s remaining assets and liabilities to a liquidating trust if T REIT was unable to sell its assets and pay its liabilities within 24 months of its shareholders’ approval of the plan of liquidation (which was July 27, 2007). On May 10, 2007, T REIT’s board of directors approved the transfer and assignment of T REIT’s assets to a liquidating trust.
We were organized on July 16, 2007 as a liquidating trust pursuant to T REIT’s plan of liquidation. On July 20, 2007, in accordance with the Agreement and Declaration of Trust, or the Liquidating Trust Agreement, by and between T REIT and W. Brand Inlow, or our Trustee, T REIT transferred its then remaining assets and liabilities to us pursuant to the Liquidating Trust Agreement. Mr. Inlow previously served as an independent director of T REIT and as the chairman of T REIT’s board of directors. Upon the transfer of the assets and liabilities to us, each shareholder of T REIT as of July 16, 2007, or the Record Date, automatically became the holder of one unit of beneficial interest, or unit, in T REIT Liquidating Trust for each share of T REIT’s common stock then currently held of record by such shareholder. Following the conversion of shares to units of beneficial interest, all outstanding shares of T REIT’s common stock were deemed cancelled. The rights of beneficiaries in their beneficial interests are not represented by any form of certificate or other instrument. Shareholders of T REIT on the Record Date were not required to take any action to receive units of beneficial interests. On the date of the conversion, the economic value of each unit of beneficial interest was equivalent to the economic value of a share of T REIT’s common stock. On July 20, 2007, T REIT filed a Form 15 with the SEC, to terminate the registration of T REIT’s common stock under the Exchange Act, and T REIT announced that it would cease filing reports under the Exchange Act. Our Trustee will issue to beneficiaries and file with the SEC Annual Reports on Form 10-K and Current Reports on Form 8-K upon the occurrence of a material event relating to us.
Our purpose is to wind up the affairs of T REIT by liquidating the remaining assets, distributing the proceeds from the liquidation of our remaining assets to the holders of units, each a beneficiary and, collectively, our beneficiaries, and paying all liabilities, costs and expenses of T REIT and T REIT Liquidating Trust. Our existence was to terminate initially upon the earliest of (i) the distribution of all of our assets in accordance with the terms of Liquidating Trust Agreement, or (ii) the expiration of a period of three years from the date assets were first transferred to us, or July 20, 2010. However, we were able to extend our existence beyond the three-year term to July 20, 2013 as a result of our Trustee determining that an extension is reasonably necessary to fulfill our purpose and our receipt of additional No-Action Relief from the Staff of the SEC from compliance with certain registration and reporting requirements of the Exchange Act.
Pursuant to the transfer of assets and liabilities from T REIT to us, we acquired a 10.3% interest in the Congress Center, located in Chicago, Illinois, or the Congress Center property, or our unconsolidated property, and assumed approximately $9,828,000 of indebtedness, representing the proportionate share of a secured mortgage loan then outstanding on the Congress Center property. We hold our interest in the Congress Center property pursuant to a 100.0% membership interest in TREIT-Congress Center, LLC, which in turn holds a 35.5% membership interest in NNN Congress Center, LLC. NNN Congress Center , LLC holds a 28.9% interest in the Congress Center property. Although we acquired additional assets from T REIT, including interests in certain bank accounts, accounts receivable and assets for estimated receipts in excess of estimated costs during liquidation, our interest in the Congress Center property is our only material remaining asset. We intend to complete the plan of liquidation by either selling our unconsolidated property interest or participating in the sale of the Congress Center property with the other joint owners of the property. In each case, we refer to such a sale as the sale or disposition of our “remaining asset.” Although we can provide no assurances, we currently expect to sell our interest in the Congress Center property by December 31, 2012 and anticipate completing the plan of liquidation by March 31, 2013.
Critical Accounting Policies
Use of Estimates
The preparation of financial statements in accordance with GAAP and under the liquidation basis of accounting requires us to make estimates and judgments that affect the reported amounts of assets (including net assets in liquidation), liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We believe that our critical accounting policies are those that require significant judgments and estimates. These estimates are made and evaluated on an on-going basis using information that is currently available as well as various other assumptions believed to be reasonable under the circumstances. Actual results could vary from those estimates, perhaps in material adverse ways, and those estimates could be different under different assumptions or conditions.
Liquidation Basis of Accounting
Under the liquidation basis of accounting, all assets have been adjusted to their estimated fair values (on an undiscounted basis). Liabilities, including estimated costs associated with implementing and completing our plan of liquidation, were adjusted to their estimated settlement amounts. The valuation of our investment in unconsolidated real estate is based on current contracts, estimates and other indications of sales value net of estimated selling costs. Estimated future cash flows from property operations were made based on the anticipated sale dates of the asset. Due to the uncertainty in the timing of the anticipated sale date and the cash flows therefrom, results may differ materially from amounts estimated. These amounts are presented in the accompanying statement of net assets. The net assets represent the estimated liquidation value of our assets available to our beneficiaries upon liquidation. The actual values realized for assets and settlement of liabilities may differ materially, perhaps in adverse ways, from the amounts estimated.
The Congress Center property is continually evaluated and we adjust our net real estate liquidation value accordingly. It is our policy that when we execute a purchase and sale agreement or become aware of market conditions or other circumstances that indicate that our current value materially differs from our expected net sales price, we will adjust our liquidation value accordingly.
Asset for Estimated Receipts in Excess of Estimated Costs During Liquidation
Under the liquidation basis of accounting, we are required to estimate the cash flows from operations and accrue the costs associated with implementing and completing our plan of liquidation. We currently estimate that we will have operating cash inflows from our estimated receipts in excess of the estimated costs during liquidation. These amounts can vary significantly due to, among other things, the timing and estimates for executing and renewing leases, along with the estimates of tenant improvements incurred and paid, the timing of the sale of the Congress Center property, the timing and amounts associated with discharging known and contingent liabilities and the costs associated with winding up our operations. These costs are estimated and are expected to be paid over the remaining liquidation period.
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 by the Congress Center property 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 $24,000 per month in distributions from the Congress Center property. In December 2009, a one-time distribution was paid to the Congress Center property’s investors for year-end tax purposes. We received approximately $78,000 from this one-time distribution.
The change in the asset for estimated receipts in excess of estimated costs during liquidation for the year ended December 31, 2010 was as follows:
The change in the asset for estimated receipts in excess of estimated costs during liquidation for the year ended December 31, 2009 was as follows:
Net Assets in Liquidation
The net assets in liquidation of $1,579,000 plus cumulative liquidating distributions of $50,600,000 as of December 31, 2010 (which were paid to T REIT shareholders prior to the transfer of T REIT’s assets and liabilities to us) would result in liquidating distributions to our beneficiaries of approximately $11.33 per unit (of which $10.99 per share was paid to T REIT shareholders prior to the transfer of T REIT’s assets and liabilities to us). These estimates for liquidation distributions per unit include projections of costs and expenses expected to be incurred during the period required to complete the plan of liquidation. These projections could change materially based on the timing of any sale, the performance of the underlying asset and change in the underlying assumptions of the projected cash flows.
Revenue Recognition
Rental revenue is recorded on the contractual basis under the liquidation basis of accounting.
Factors Which May Influence Future Changes in Net Assets in Liquidation
Investment in Unconsolidated Real Estate
In calculating the estimated amount of liquidating distributions to our beneficiaries, we assumed that we would be able to locate a buyer for the Congress Center property at an amount based on our best estimate of market value for the property. However, we may have overestimated the sales price that we will ultimately be able to obtain for this asset. If the market value of the Congress Center property declines more than 4.7% from our current estimate of the market value as of December 31, 2010, our investment in unconsolidated real estate would be zero.
Rental Income
The amount of rental income generated by our properties 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 and the timing of the disposition of the properties. Negative trends in one or more of these factors could adversely affect our rental income in future periods.
Scheduled Lease Expirations
As of December 31, 2010, the Congress Center property was 95% leased to 15 tenants and 81% occupied by 13 tenants. Leases representing approximately 10% of the gross leaseable area expire during 2011. 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 for which we are unable to negotiate such renewals. For example, in January 2010, we completed an early renewal on one of our major tenants, and extended their lease expiration from December 2013 to December 2019.
Changes in Net Assets in Liquidation
For the year ended December 31, 2010
Net assets in liquidation decreased $135,000, or $0.03 per unit, during the year ended December 31, 2010. The decrease in our net assets is the result of a decrease in estimated receipts in excess of estimated costs during liquidation of $238,000, or $0.05 per unit, as a result of changes in estimates of net cash flows of our one remaining unconsolidated property, partially offset by an increase in the liquidation value of our one remaining unconsolidated property of $103,000, or $0.02 per unit, as a result of an increase in the anticipated sales price as well as a decrease in the balance of the mortgage loan as a result of the scheduled principal payments during 2010.
For the year ended December 31, 2009
Net assets in liquidation decreased $2,063,000, or $0.45 per unit, during the year ended December 31, 2009. The primary reason for the decrease in our net assets is a decrease in the value of our one remaining unconsolidated property of $2,356,000, or $0.51 per unit, as a result of a decrease in the anticipated sales price, offset by an increase in estimated receipts in excess of estimated costs during liquidation of $371,000 or $0.08 per unit, which was a result of changes in estimates of net cash flows of our one remaining unconsolidated property.
For the year ended December 31, 2008
Net assets in liquidation decreased $2,230,000, or $0.48 per unit, during the year ended December 31, 2008. The primary reason for the decrease in our net assets is a decrease in the value of our one remaining unconsolidated property of $2,107,000, or $0.46 per unit, as a result of a decrease in the anticipated sales price.
Liquidity and Capital Resources
As of December 31, 2010, our total assets and net assets in liquidation were $1,579,000. Our ability to meet our obligations is contingent upon the disposition of our interest in the Congress Center property in accordance with the 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 interest in the Congress Center property or the net proceeds therefrom.
Current Sources of Capital and Liquidity
We anticipate, but cannot assure, that our cash flow from the operations and sale of the Congress Center property will be sufficient to fund our cash needs for payment of expenses during the liquidation period.
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 $24,000 per month in distributions from the Congress Center property. In December 2009, a one-time distribution was paid to the Congress Center property’s investors for year-end tax purposes. We received approximately $78,000 from this one-time distribution. No distributions were received in 2010.
The plan of liquidation gives our Trustee the power to sell our interest in the Congress Center property without further approval by our beneficiaries and provides that liquidating distributions be made to our beneficiaries as determined at the discretion of our Trustee. Although we can provide no assurances, we currently expect to sell the Congress Center property by December 31, 2012 and anticipate completing the plan of liquidation by March 31, 2013.
Other Liquidity Needs
We believe that we will have sufficient capital resources to satisfy our liquidity needs during the liquidation period. As of December 31, 2010, we estimate that we will have $216,000 of commitments and expenditures during the remaining liquidation period, comprised of $216,000 of liquidation costs. However, there can be no assurance that we will not exceed the amounts of these estimated expenditures. An adverse change in the net cash flows from the unconsolidated operations of the Congress Center property or net proceeds expected from the liquidation of the Congress Center property may affect our ability to fund these items and may affect our ability to satisfy the financial covenants under the mortgages on the Congress Center property. If we fail to meet our financial 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.
During the years ended December 31, 2010, 2009 and 2008, we paid no liquidating distributions. Liquidating distributions will be determined in our Trustee’s sole discretion and are dependent on a number of factors, including the amount of funds available for distribution, our financial condition, and our capital expenditures on the Congress Center property, among other factors our Trustee may deem relevant.
The stated range of beneficiary distributions disclosed in the plan of liquidation is an estimate 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 some of the assets might be less, or significantly less, than currently estimated, including, for 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 some of the assets may be higher than currently estimated if market values increase.
Subject to our Trustee’s actions and in accordance with the plan of liquidation, we expect to meet our liquidity requirements through the completion of the liquidation, through retained cash flow, disposition of assets, and unsecured borrowings. We do not intend to reserve funds to retire existing debt upon maturity. We will, instead, seek to refinance such debt at maturity or retire such debt through the disposition of the Congress Center property.
If we experience lower occupancy levels and reduced rental rates at the Congress Center property, reduced revenues as a result of the sale of the Congress Center property, 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 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
Prior to the adoption of the 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 Advisor 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 our interest in 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 $24,000 per month in distributions from the Congress Center property. In December 2009, a one-time distribution was paid to the Congress Center property’s investors for year-end tax purposes. We received approximately $78,000 from this one-time distribution. No distributions were received in 2010.
The primary uses of cash are to fund distributions to our beneficiaries and for 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 the leases.
In accordance with the plan of liquidation, we anticipate our source for the payment of liquidating distributions to our beneficiaries to be primarily from the net proceeds from the sale of our interest in the Congress Center property.
We believe that our cash balance of $240,000 as of December 31, 2010 should provide sufficient liquidity to meet our cash needs during the next 12 months from December 31, 2010. While we anticipate that our existing cash balance will be sufficient to fund our cash needs for corporate related expenses for the next 12 months, we can provide no assurances that this will be the case.
Unconsolidated Debt
Total mortgage debt of the Congress Center property was $92,054,000 and $93,486,000 as of December 31, 2010 and 2009, respectively. Our pro rata share of the mortgage debt was $9,414,000 and $9,564,000 as of December 31, 2010 and 2009, respectively.
The Congress Center property is required by the terms of its loan documents to meet certain financial covenants and other requirements. As of December 31, 2010, the Congress Center property was in compliance with all such requirements.
Commitments and Contingencies
Insurance Coverage
Property Damage, Business Interruption, Earthquake and Terrorism
The insurance coverage provided through third-party insurance carriers is subject to coverage limitations. Should an uninsured or underinsured loss occur, we could lose all or a portion of our investment in, and anticipated cash flows from, the Congress Center property. In addition, there can be no assurance that third-party insurance carriers will be able to maintain reinsurance sufficient to cover any losses that may be incurred.
Debt Service Requirements
As of December 31, 2010, all consolidated debt has been repaid in full.
Contractual Obligations
As of December 31, 2010, all consolidated contractual obligations have been repaid in full.
Off-Balance Sheet Arrangements
There are no off-balance sheet transactions, arrangements or obligations (including contingent obligations) that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Inflation
We will be exposed to inflation risk as income from long-term leases is expected to be the primary source of cash flows from operations. We expect that there will be provisions in the majority of our tenant leases that would provide some protection from the impact of inflation. These provisions include rent steps, reimbursement billings for operating expense pass-through charges, real estate tax and insurance reimbursements on a per square foot allowance. However, due to the long-term nature of the leases, the leases may not re-set frequently enough to cover inflation.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
Market risks include risks that arise from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and other market changes that affect market sensitive instruments. We believe that the primary market risk to which we would be exposed would be an interest rate risk. As of December 31, 2010, we had no outstanding consolidated debt, therefore, we believe we have no interest rate or market risk. Additionally, the unconsolidated debt related to our interest in the Congress Center property is at a fixed interest rate.
Item 8.
Item 8.
Financial Statements and Supplementary Data.
See the index at “Item 15. Exhibits and Financial Statement Schedules.”
Item 9.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
We did not employ independent accountants to perform an audit on the financial statements contained in this Annual Report on Form 10-K.
Item 9A.
Item 9A.
Controls and Procedures.
(a) Evaluation of disclosure controls and procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our Trustee, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of December 31, 2010 was conducted under the supervision and with the participation of our Trustee of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our Trustee concluded that our disclosure controls and procedures as of December 31, 2010 were effective for the purposes stated above.
(b) Management’s Report on Internal Control over Financial Reporting. Our Trustee is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision of our Trustee and with the participation of our Trustee and Advisor, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on our evaluation under the Internal Control-Integrated Framework, our Trustee concluded that our internal control over financial reporting was effective as of December 31, 2010.
(c) Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting that occurred during the year ended December 31, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
PART III
Item 10.
Item 10.
Directors, Executive Officers and Corporate Governance.
As of March 11, 2011, we have no directors or executive officers. Our Advisor manages our day-to-day business affairs and assets, and carries out the directives of our Trustee.
The following biographical description sets forth information with respect to our Trustee as of March 11, 2011.
W. Brand Inlow, age 57, has served as our Trustee since July 2007, having previously served as an independent director of T REIT, Inc. from May 2002 to July 2007. He is a Principal, Co-Founder, and serves as Director of Acquisitions for McCann Realty Partners, LLC, an apartment investment company focusing on garden apartment communities in the Southeast formed in October 2004. Since October 2003, Mr. Inlow has provided professional consulting services to the multifamily industry on matters related to acquisitions, dispositions, asset management and property management operations, and through an affiliation with LAS Realty in Richmond, Virginia conducts commercial real estate brokerage. Mr. Inlow also is President of Jessie’s Wish, Inc., a Virginia non-profit corporation dedicated to awareness, education and financial assistance for patients and families dealing with eating disorders. Mr. Inlow served as President of Summit Realty Group, Inc. in Richmond, Virginia, from September 2001 through October 2003. Prior to joining Summit Realty, from November 1999 to September 2001 he was Vice President of Acquisitions for EEA Realty, LLC in Alexandria, Virginia where he was responsible for the acquisition, disposition and financing of company assets, which were primarily garden apartment properties. Prior to joining EEA Realty, from November 1991 to November 1999, Mr. Inlow worked for United Dominion Realty Trust, Inc., a publicly traded real estate investment trust, as Assistant Vice President and Senior Acquisition Analyst, where he was responsible for the acquisition of garden apartment communities. Mr. Inlow also serves as a trustee of G REIT Liquidating Trust and served as a director and audit committee member of Grubb & Ellis Apartment REIT, Inc. from December 2005 to September 2007.
Audit Committee
We do not have an audit committee or other committee that performs similar functions and, consequently, have not designated an audit committee financial expert. Due to our limited operations and level of activity, which primarily includes the sale of the remaining asset and the payment of outstanding obligations, our Trustee believes that the services of an audit committee financial expert are not warranted.
Fiduciary Relationship of our Advisor to Us
Our Advisor is deemed to be in a fiduciary relationship with us pursuant to the Advisory Agreement and under applicable law. Our Advisor’s fiduciary duties include responsibility for our control and management and exercising good faith and integrity in handling our affairs. Our Advisor has a fiduciary responsibility for the safekeeping and use of all of our funds and assets, whether or not they are in its immediate possession and control, and may not use or permit another to use such funds or assets in any manner except for our exclusive benefit.
Our funds will not be commingled with the funds of any other person or entity except for operating revenue from our properties.
Our Advisor may employ persons or firms to carry out all or any portion of our business. Some or all such persons or entities employed may be affiliates of our Advisor. It is not clear under current law the extent, if any, that such parties will have a fiduciary duty to us or our beneficiaries. Investors who have questions concerning the fiduciary duties of our advisor should consult with their own legal counsel.
Section 16(a) Beneficial Ownership Reporting Compliance
Not applicable.
Code of Ethics
We have not adopted a code of ethics nor do we currently intend to due to the fact that we have no employees and our Trustee manages our business and affairs. Nonetheless, our Trustee intends to promote honest and ethical conduct, full and fair disclosure in our reports to the SEC, and compliance with applicable governmental laws and regulations.
Trustee
Pursuant to the Liquidating Trust Agreement, Mr. Inlow receives $250 per month for services rendered as our Trustee. Mr. Inlow was paid $3,000 in each of the years ended December 31, 2010, 2009 and 2008 for services rendered.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.
Principal Beneficiaries
There is no public market for our units of beneficial interest. On July 16, 2007, T REIT formally closed its stock transfer books. The units are not and will not be listed on any exchange, quoted by a securities broker or dealer, nor admitted for trading in any market, including the over-the-counter market. The units of beneficial interests are not transferable except by will, intestate succession or operation of law.
The following table sets forth the beneficial ownership of units as of March 11, 2011, as to (i) each beneficiary that is known by us to have beneficially owned more than five percent of the units as of March 11, 2011; and (ii) our Trustee. All such information was provided by the person listed. All percentages have been calculated as of and are based upon 4,605,000 units outstanding at the close of business on such date.
The person in the table below has indicated that it has sole voting and investment power over the units listed.
Item 13.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
Our Advisor manages our day-to-day business affairs and assets and carries out the directives of our Trustee. Our Advisor is a Virginia limited liability company that was formed in April 1998 to advise syndicated limited partnerships, limited liability companies, and other entities regarding the acquisition, management and disposition of real estate assets. Prior to our formation, our Advisor held 22,100 shares of common stock of T REIT, which were converted into 22,100 units. Our Advisor intends to retain such units while serving as our Advisor.
Advisory Agreement
The Advisory Agreement between our Advisor and T REIT expired on February 22, 2005 and was not renewed for a consecutive one-year term. However, our Advisor continued to advise T REIT, and, following the transfer of assets to us, continues to advise us, on a month-to-month basis under the terms of the expired Advisory Agreement. Under the terms of the Advisory Agreement, our Advisor has responsibility for our day-to-day operations, administers our accounting and bookkeeping functions, serves as a consultant in connection with policy decisions to be made by our Trustee, manages our unconsolidated property interest and renders other services deemed appropriate by our Trustee. Our Advisor is entitled to reimbursement from us for expenses incurred in rendering its services, subject to certain limitations. Fees and costs reimbursed to our Advisor cannot exceed the greater of 2.0% of average invested assets, as defined in the Advisory Agreement, or 25.0% of net income for the previous four quarters. For the years ended December 31, 2010, 2009 and 2008, such reimbursement had not exceeded these limitations. We paid our Advisor approximately $9,000, $7,000 and $18,000, for services provided to us for the years ended December 31, 2010, 2009 and 2008, respectively.
Our Advisor may receive an annual asset management fee of up to 1.5% of our Average Invested Assets, as defined in the Advisory Agreement. This fee will be paid or accrued quarterly, but will not be paid until our beneficiaries have received distributions equal to a cumulative non-compounded rate of 8.0% per annum on their investment in us. We incurred $5,000, $27,000 and $62,000 in asset management fees in the years ended December 31, 2010, 2009 and 2008, respectively, and we paid our Advisor $4,000, $37,000 and $71,000 in asset management fees in the years ended December 31, 2010, 2009 and 2008, respectively. Of the amounts paid in 2010, 2009 and 2008, $1,000, $10,000 and $19,000 was for services provided in the prior year.
Property Management Fees
We pay our Advisor or its affiliate a property management fee equal to 5.0% of the gross revenue from our properties. For the years ended December 31, 2010, 2009 and 2008, we did not incur property management fees to our Advisor or its affiliate.
Real Estate Acquisition and Disposition Fees
Under the terms of the Advisory Agreement, our Advisor or its affiliate may receive acquisition and disposition fees in connection with the acquisition or disposition of our properties. We did not pay our Advisor or its affiliate any real estate acquisition or disposition fees for the years ended December 31, 2010, 2009 and 2008.
Incentive Distributions
Our Advisor owned 100 non-voting incentive performance units in T REIT, L.P. (T REIT’s operating partnership) and would have been entitled to incentive distributions of operating cash flow, as defined in the T REIT Limited Partnership Agreement, after our beneficiaries have received an 8.0% annual return on their invested capital. Pursuant to the approval of the plan of liquidation by our beneficiaries, our Advisor permanently waived any distributions that it is or may be entitled to receive in connection with its incentive performance units.
Incentive Bonuses and Milestone Payments
Our Trustee has discretion to pay up to an aggregate of $300,000 in retention and incentive based bonuses to some of the employees of our Advisor from time to time. Prior to July 20, 2007, $245,000 in retention and incentive bonuses were paid by T REIT. We have not paid any retention or incentive bonuses since July 20, 2007.
Review, Approval or Ratification of Transactions with Related Persons
All transactions between us and any related person, including our Advisor and its affiliates, are reviewed and approved by our Trustee. Additionally, the plan of liquidation provides that we may sell our remaining asset to one of our affiliates or an affiliate of our Advisor. If we enter such a transaction, we expect that our Trustee will require that an independent third party opine to us as to the fairness of the consideration to be received by us in such transaction, from a financial point of view, or conduct an appraisal of the applicable property as a condition to their approval. In no event will our Trustee approve a transaction if: (i) an independent third party, concludes after a review of the information then available, including any pending offers, letters of intent, contracts for sale, appraisals or other data, that the consideration to be received by us is not fair to us from a financial point of view; (ii) an independent third party, concludes that the consideration to be received is less than the appraised value of the applicable property; or (iii) we have received a higher offer for the applicable property from a credible party with whom we reasonably believe is ready, able and willing to close the transaction on the contract terms.
Item 14.
Item 14.
Principal Accounting Fees and Services.
None.
PART IV
Item 15.
Item 15.
Exhibits and Financial Statement Schedules.
(a)(1) Financial Statements:
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
(a)(2) Financial Statement Schedules:
All schedules have been omitted as the required information is inapplicable or the information is presented in the unaudited consolidated financial statements or related notes.
(a)(3) Exhibits:
The exhibits listed on the Exhibit Index (following the signatures section of this report) are included, or incorporated by reference, in this annual report.
(b) Exhibits:
See item 15(a)(3) above.
(c) Financial Statement Schedules:
All schedules have been omitted as the required information is inapplicable or the information is presented in the unaudited consolidated financial statements or related notes.
T REIT LIQUIDATING TRUST
CONSOLIDATED STATEMENTS OF NET ASSETS
(Liquidation Basis)
As of December 31, 2010 and 2009
(Unaudited)
The accompanying notes are an integral part of these unaudited consolidated financial statements.
T REIT LIQUIDATING TRUST
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(Liquidation Basis)
For the Years Ended December 31, 2010, 2009 and 2008
(Unaudited)
The accompanying notes are an integral part of these unaudited consolidated financial statements.
T REIT LIQUIDATING TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. Organization and Description of Business
The use of the words “we,” us,” or “our” refers to T REIT Liquidating Trust and its subsidiaries, except where the context otherwise requires.
T REIT, Inc., or T REIT, was formed in December 1998 in the Commonwealth of Virginia and qualified and elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, as amended. T REIT was organized to acquire, manage and invest in a diversified portfolio of real estate projects of office, industrial, retail and service properties. T REIT was formed with the intent to be listed on a national stock exchange, quoted on a quotation system of a national securities association or merged with an entity whose shares are listed or quoted. In 2005, as a result of: (i) then current market conditions; (ii) the increasing 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, or the Sarbanes-Oxley Act); and (iii) the possible need to reduce monthly distributions, the T REIT board of directors determined that a liquidation would provide shareholders with a greater return on their investment over a reasonable period of time than through implementation of other alternatives considered.
On June 3, 2005, the board of directors of T REIT approved a plan of liquidation which was thereafter approved by the shareholders of T REIT at its 2005 Annual Meeting of Shareholders held on July 27, 2005. The T REIT plan of liquidation, or the plan of liquidation, contemplated the orderly sale of all of T REIT’s assets, the payment of its liabilities, the winding up of operations and the dissolution of T REIT. The board of director’s decision to adopt the plan of liquidation followed a lengthy process in which the board of directors and management reviewed a number of strategic alternatives with the goal of maximizing shareholder value. T REIT engaged an independent third party to perform financial advisory services in connection with T REIT’s plan of liquidation, including rendering an opinion as to whether T REIT’s net real estate liquidation value range estimate and estimated per share distribution range were reasonable. The plan of liquidation gave T REIT’s board of directors the power to sell any and all of its assets without further approval by its shareholders and provided that liquidating distributions be made to its shareholders as determined by T REIT’s board of directors. The plan of liquidation also provided for the transfer of T REIT’s remaining assets and liabilities to a liquidating trust if T REIT was unable to sell its assets and pay its liabilities within 24 months of its shareholders’ approval of the plan of liquidation (which was July 27, 2007). On May 10, 2007, T REIT’s board of directors approved the transfer and assignment of T REIT’s assets to a liquidating trust.
We were organized on July 16, 2007 as a liquidating trust pursuant to T REIT’s plan of liquidation. On July 20, 2007, in accordance with the Agreement and Declaration of Trust, or the Liquidating Trust Agreement, by and between T REIT and W. Brand Inlow, or our Trustee, T REIT transferred its then remaining assets and liabilities to us pursuant to the Liquidating Trust Agreement. Mr. Inlow previously served as an independent director of T REIT and as the chairman of T REIT’s board of directors. Upon the transfer of the assets and liabilities to us, each shareholder of T REIT as of July 16, 2007, or the Record Date, automatically became the holder of one unit of beneficial interest, or unit, in T REIT Liquidating Trust for each share of T REIT’s common stock then currently held of record by such shareholder. Following the conversion of shares to units of beneficial interest, all outstanding shares of T REIT’s common stock were deemed cancelled. The rights of beneficiaries in their beneficial interests are not represented by any form of certificate or other instrument. Shareholders of T REIT on the Record Date were not required to take any action to receive units of beneficial interests. On the date of the conversion, the economic value of each unit of beneficial interest was equivalent to the economic value of a share of T REIT’s common stock. On July 20, 2007, T REIT filed a Form 15 with the United States Securities and Exchange Commission, or the SEC, to terminate the registration of T REIT’s common stock under the Securities Exchange Act of 1934, as amended, or the Exchange Act, and T REIT announced that it would cease filing reports under the Exchange Act. Our Trustee will issue to beneficiaries and file with the SEC Annual Reports on Form 10-K and Current Reports on Form 8-K upon the occurrence of a material event relating to us.
Our purpose is to wind up the affairs of T REIT by liquidating the remaining assets, distributing the proceeds from the liquidation of our remaining assets to the holders of units, each a beneficiary and, collectively, our beneficiaries, and paying all liabilities, costs and expenses of T REIT and T REIT Liquidating Trust. Our existence was to terminate initially upon the earliest of (i) the distribution of all of our assets in accordance with the terms of Liquidating Trust Agreement, or (ii) the expiration of a period of three years from the date assets were first transferred to us, or July 20, 2010. However, we were able to extend our existence beyond the three-year term to July 20, 2013 as a result of our Trustee determining that an extension is reasonably necessary to fulfill our purpose and our receipt of additional No-Action Relief from the Staff of the SEC from compliance with certain registration and reporting requirements of the Exchange Act.
T REIT LIQUIDATING TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Pursuant to the transfer of assets and liabilities from T REIT to us, we acquired a 10.3% interest in the Congress Center, located in Chicago, Illinois, or the Congress Center property, or our unconsolidated property, and assumed approximately $9,828,000 of indebtedness, representing the proportionate share of a secured mortgage loan then outstanding on the Congress Center property. We hold our interest in the Congress Center property pursuant to a 100.0% membership interest in TREIT-Congress Center, LLC, which in turn holds a 35.5% membership interest in NNN Congress Center, LLC. NNN Congress Center , LLC holds a 28.9% interest in the Congress Center property. Although we acquired additional assets from T REIT, including interests in certain bank accounts, accounts receivable and assets for estimated receipts in excess of estimated costs during liquidation, our interest in the Congress Center property is our only material remaining asset. We intend to complete the plan of liquidation by either selling our unconsolidated property interest or participating in the sale of the Congress Center property with the other joint owners of the property. In each case, we refer to such a sale as the sale or disposition of our “remaining asset.” Although we can provide no assurances, we currently expect to sell our interest in the Congress Center property by December 31, 2012 and anticipate completing the plan of liquidation by March 31, 2013.
2. Summary of Significant Accounting Policies
The summary of significant accounting policies presented below is designed to assist in understanding our consolidated financial statements. Such financial statements and accompanying notes are the representations of our management, who are responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America, or GAAP, in all material respects, and have been consistently applied in preparing the accompanying consolidated financial statements.
Use of Estimates
The preparation of financial statements in accordance with GAAP and under the liquidation basis of accounting requires us to make estimates and judgments that affect the reported amounts of assets (including net assets in liquidation), liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We believe that our critical accounting policies are those that require significant judgments and estimates. These estimates are made and evaluated on an on-going basis using information that is currently available as well as various other assumptions believed to be reasonable under the circumstances. Actual results could vary from those estimates, perhaps in material adverse ways, and those estimates could be different under different assumptions or conditions.
Principles of Consolidation
The accompanying consolidated financial statements include our accounts and any variable interest entities, as defined in Financial Accounting Standards Board, Accounting Standards Codification, or FASB Codification, Topic 810, Consolidation, that we have concluded should be consolidated. All material intercompany transactions and account balances have been eliminated in consolidation.
Liquidation Basis of Accounting
Under the liquidation basis of accounting, all assets have been adjusted to their estimated fair values (on an undiscounted basis). Liabilities, including estimated costs associated with implementing and completing our plan of liquidation, were adjusted to their estimated settlement amounts. The valuation of our investment in unconsolidated real estate is based on current contracts, estimates and other indications of sales value net of estimated selling costs. Estimated future cash flows from property operations were made based on the anticipated sale dates of the asset. Due to the uncertainty in the timing of the anticipated sale date and the cash flows therefrom, results may differ materially from amounts estimated. These amounts are presented in the accompanying statement of net assets. The net assets represent the estimated liquidation value of our assets available to our beneficiaries upon liquidation. The actual values realized for assets and settlement of liabilities may differ materially, perhaps in adverse ways, from the amounts estimated.
T REIT LIQUIDATING TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
The Congress Center property is continually evaluated and we adjust our net real estate liquidation value accordingly. It is our policy that when we execute a purchase and sale agreement or become aware of market conditions or other circumstances that indicate that our current value materially differs from our expected net sales price, we will adjust our liquidation value accordingly.
Cash and Cash Equivalents
Cash and cash equivalents consist of highly liquid investments with a maturity of three months or less when purchased.
Concentration of Credit Risk
Financial instruments that potentially subject us to a concentration of credit risk are primarily cash investments and accounts receivable from tenants. Cash is generally placed in money market accounts and the amount of credit exposure to any one commercial issuer is limited. We have cash in financial institutions which is insured by the Federal Deposit Insurance Corporation, or FDIC, up to $250,000 per depositor per insured bank. As of December 31, 2010, we had no cash balances in excess of FDIC insured limits. Concentration of credit risk with respect to accounts receivable from tenants is limited. We perform credit evaluations of prospective tenants and security deposits are obtained upon lease execution.
We are also subject to a concentration of regional economic exposure in the Midwest region of the United States as our sole remaining asset consists of a 10.3% interest in the Congress Center property, located in Chicago, Illinois. Regional and local economic downturns in the Midwest and Illinois could adversely impact our operations.
As of December 31, 2010, we had no consolidated properties, however, five tenants at the Congress Center property accounted for 10.0% or more of the aggregate annual rental income at that property for the year ended December 31, 2010, as follows:
T REIT LIQUIDATING TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
As of December 31, 2009, we had no consolidated properties, however, five tenants at the Congress Center property accounted for 10.0% or more of the aggregate annual rental income at that property for the year ended December 31, 2009, as follows:
Revenue Recognition
Rental revenue is recorded on the contractual basis under the liquidation basis of accounting.
Income Taxes
We will be treated as a grantor trust for income tax purposes and accordingly, will not be subject to federal or state income tax on any income earned or gain recognized by us. We will recognize taxable gain or loss when an asset is disposed of for an amount greater or less than the fair market value of such asset at the time it was transferred from T REIT to us. Our beneficiaries will be treated as the owner of a pro rata portion of each asset, including cash, received by and held by us and will be required to report on his or her federal and state income tax return his or her pro rata share of taxable income, including gains and losses recognized by us. Accordingly, there is no provision for federal or state income taxes in the accompanying consolidated financial statements.
Segments
FASB Codification Topic 280, Segment Reporting, establishes standards for reporting financial and descriptive information about an enterprise’s reportable segments. We have determined that we have one reportable segment, with activities related to investing in an unconsolidated office building. As such, our operations have been aggregated into one reportable segment for all periods presented.
3. Asset for Estimated Receipts in Excess of Estimated Costs during Liquidation
Under the liquidation basis of accounting, we are required to estimate the cash flows from operations and accrue the costs associated with implementing and completing our plan of liquidation. We currently estimate that we will have operating cash inflows from our estimated receipts in excess of the estimated costs during liquidation. These amounts can vary significantly due to, among other things, the timing and estimates for executing and renewing leases, along with the estimates of tenant improvements incurred and paid, the timing of the sale of the Congress Center property, the timing and amounts associated with discharging known and contingent liabilities and the costs associated with winding up our operations. These costs are estimated and are expected to be paid over the remaining liquidation period.
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 by the Congress Center property 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 $24,000 per month in distributions from the Congress Center property. In December 2009, a one-time distribution was paid to the Congress Center property’s investors for year-end tax purposes. We received approximately $78,000 from this one-time distribution.
T REIT LIQUIDATING TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
The change in the asset for estimated receipts in excess of estimated costs during liquidation for the year ended December 31, 2010 was as follows:
The change in the asset for estimated receipts in excess of estimated costs during liquidation for the year ended December 31, 2009 is as follows:
4. Net Assets in Liquidation
Net assets in liquidation decreased $135,000, or $0.03 per unit, during the year ended December 31, 2010. The decrease in our net assets is the result of a decrease in estimated receipts in excess of estimated costs during liquidation of $238,000, or $0.05 per unit, as a result of changes in estimates of net cash flows of our one remaining unconsolidated property, partially offset by an increase in the liquidation value of our one remaining unconsolidated property of $103,000, or $0.02 per unit, as a result of an increase in the anticipated sales price as well as a decrease in the balance of the mortgage loan as a result of the scheduled principal payments during 2010.
Net assets in liquidation decreased $2,063,000, or $0.45 per unit, during the year ended December 31, 2009. The primary reasons for the decrease in our net assets includes a decrease in the value of our unconsolidated property of $2,356,000, or $0.51 per unit, 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 of $371,000, or $0.08 per unit, which was a result of changes in net cash flows our one remaining unconsolidated property.
Net assets in liquidation decreased $2,230,000, or $0.48 per unit, during the year ended December 31, 2008. The primary reason for the decrease in our net assets is a decrease in the value of our unconsolidated property of $2,107,000, or $0.46 per unit, as a result of a decrease in the anticipated sales price.
The net assets in liquidation of $1,579,000, plus cumulative liquidating distributions of $50,600,000 as of December 31, 2010 (which were paid to T REIT shareholders prior to the transfer of T REIT’s assets and liabilities to us) would result in liquidating distributions to our beneficiaries per unit of approximately $11.33 per unit (of which $10.99 per share was paid to T REIT shareholders prior to the transfer of T REIT’s assets and liabilities to us). These estimates for liquidation distributions per unit include projections of costs and expenses expected to be incurred during the period required to complete the plan of liquidation. These projections could change materially based on the timing of any sale, the performance of the underlying assets and any changes in the underlying assumptions of the projected cash flows.
T REIT LIQUIDATING TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
5. Real Estate Investments
As of December 31, 2010 and 2009, our real estate investment is comprised of a 10.3% interest in the Congress Center property, located in Chicago, Illinois. We did not have any property dispositions during the years ended December 31, 2010, 2009 and 2008.
6. Related Party Transactions
Advisory Agreement
Advisory Fees
The Advisory Agreement between our Advisor and T REIT expired on February 22, 2005 and was not renewed for a consecutive one-year term. However, our Advisor continued to advise T REIT, and, following the transfer of assets to us, continues to advise us, on a month-to-month basis under the terms of the expired Advisory Agreement. Under the terms of the Advisory Agreement, our Advisor has responsibility for our day-to-day operations, administers our accounting and bookkeeping functions, serves as a consultant in connection with policy decisions to be made by our Trustee, manages our unconsolidated property interest and renders other services deemed appropriate by our Trustee. Our Advisor is entitled to reimbursement from us for expenses incurred in rendering its services, subject to certain limitations. Fees and costs reimbursed to our Advisor cannot exceed the greater of 2.0% of average invested assets, as defined in the Advisory Agreement, or 25.0% of net income for the previous four quarters. For the years ended December 31, 2010, 2009 and 2008, such reimbursement had not exceeded these limitations. We paid our Advisor approximately $9,000, $7,000 and $18,000, for services provided to us for the years ended December 31, 2010, 2009 and 2008, respectively.
Our Advisor may receive an annual asset management fee of up to 1.5% of our Average Invested Assets, as defined in the Advisory Agreement. This fee will be paid or accrued quarterly, but will not be paid until our beneficiaries have received distributions equal to a cumulative non-compounded rate of 8.0% per annum on their investment in us. We incurred $5,000, $27,000 and $62,000 in asset management fees in the years ended December 31, 2010, 2009 and 2008, respectively, and we paid our Advisor $4,000, $37,000 and $71,000 in asset management fees in the years ended December 31, 2010, 2009 and 2008, respectively. Of the amounts paid in 2010, 2009 and 2008, $1,000, $10,000 and $19,000 was for services provided in the prior year.
Property Management Fees
We pay our Advisor or its affiliate a property management fee equal to 5.0% of the gross revenue from our properties. For the years ended December 31, 2010, 2009 and 2008, we did not incur property management fees to our Advisor or its affiliate.
Real Estate Acquisition and Disposition Fees
Under the terms of the Advisory Agreement, our Advisor or its affiliate may receive acquisition and disposition fees in connection with the acquisition or disposition of our properties. We did not pay our Advisor or its affiliate any real estate acquisition or disposition fees for the years ended December 31, 2010, 2009 and 2008.
Incentive Distributions
Our Advisor owned 100 non-voting incentive performance units in T REIT, L.P. (T REIT’s operating partnership) and would have been entitled to incentive distributions of operating cash flow, as defined in the T REIT Limited Partnership Agreement, after our beneficiaries have received an 8.0% annual return on their invested capital. Pursuant to the approval of the plan of liquidation by our beneficiaries, our Advisor permanently waived any distributions that it is or may be entitled to receive in connection with its incentive performance units.
T REIT LIQUIDATING TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Incentive Bonuses and Milestone Payments
Our Trustee has discretion to pay up to an aggregate of $300,000 in retention and incentive based bonuses to some of the employees of our Advisor from time to time. Prior to July 20, 2007, $245,000 in retention and incentive bonuses were paid by T REIT. We have not paid any retention or incentive bonuses since July 20, 2007.
Review, Approval or Ratification of Transactions with Related Persons
All transactions between us and any related person, including our Advisor and its affiliates, are reviewed and approved by our Trustee. Additionally, the plan of liquidation provides that we may sell our remaining asset to one of our affiliates or an affiliate of our Advisor. If we enter such a transaction, we expect that our Trustee will require that an independent third party opine to us as to the fairness of the consideration to be received by us in such transaction, from a financial point of view, or conduct an appraisal of the applicable property as a condition to their approval. In no event will our Trustee approve a transaction if: (i) an independent third party, concludes after a review of the information then available, including any pending offers, letters of intent, contracts for sale, appraisals or other data, that the consideration to be received by us is not fair to us from a financial point of view; (ii) an independent third party, concludes that the consideration to be received is less than the appraised value of the applicable property; or (iii) we have received a higher offer for the applicable property from a credible party with whom we reasonably believe is ready, able and willing to close the transaction on the contract terms.
7. Commitments and Contingencies
Litigation
On February 11, 2004, Clearview Properties, or Clearview, filed a petition in the District Court of the 270th Judicial District, Harris County, Texas against Property Texas SC One Corporation, Clarion Partners, LLC, and Granite Partners I, LLC, three unaffiliated entities, and T REIT, our Advisor and Realty, or collectively, the Triple Net Entities. The complaint alleged that the Triple Net Entities willfully and intentionally interfered with an agreement between Property One and Clearview for the sale of certain real property located in Houston, Texas by Property One to Clearview. On January 7, 2005, Clearview filed an amended complaint which also alleged that the Triple Net Entities breached a contract between Clearview and the Triple Net Entities for the sale of the Houston, Texas property by Clearview to the Triple Net Entities and for conspiracy with Property One to breach this contract. On March 25, 2005, Clearview filed a further amended complaint which named T REIT, L.P. as an additional Triple Net Entity defendant and dropped Realty as a defendant. On May 4, 2005, the court denied a motion for summary judgment filed by the Triple Net Entities. On July 28, 2005, the Triple Net Entities filed their second amended motion for summary judgment to dismiss the claims against them, which was granted in favor of the Triple Net Entities by the court on August 8, 2005. On December 12, 2005, a one-day trial was held to determine the Triple Net Entities’ ability to recover from Clearview, attorneys’ fees, expenses and costs incurred in this case as provided for pursuant to the terms of the agreements underlying Clearview’s breach of contract claims against the Triple Net Entities. On May 17, 2006, the court entered a final judgment awarding T REIT, L.P. $212,000 in attorneys’ fees for services rendered, $25,000 for attorneys’ fees if Clearview unsuccessfully appeals the case to the court of appeals, and $13,000 for attorneys’ fees if Clearview unsuccessfully appeals the case to the Texas Supreme Court. Thereafter, Clearview appealed the case to the Fourteenth Court of Appeals. On January 29, 2009, the Fourteenth Court of Appeals affirmed the trial court’s summary judgment, reversed T REIT, L.P.’s attorneys’ fees award, and remanded the attorneys’ fee issue for a further proceeding. Clearview then filed a petition for review with the Supreme Court of Texas, which was subsequently denied on January 15, 2010. On March 8, 2010, Clearview filed a motion for rehearing with the Supreme Court of Texas on issues unrelated to the Triple Net Entities. The Supreme Court of Texas denied Clearview’s motion for rehearing on April 16, 2010. We are unable to determine the probability of the outcome or the amount or range of any potential recovery. If Clearview prevails in this action, it could have a material adverse effect upon the funds available for distributions to our beneficiaries.
T REIT LIQUIDATING TRUST
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - (Continued)
Other than as set forth above, to our knowledge, there are no material pending legal proceedings. We also have routine litigation incidental to the business to which we are a party or of which certain of our properties are subject.
Unconsolidated Debt
Total mortgage debt of the Congress Center property was $92,054,000 and $93,486,000 as of December 31, 2010 and 2009, respectively. Our pro rata share of the mortgage debt was $9,414,000 and $9,564,000 as of December 31, 2010 and 2009, respectively.
The Congress Center property is required by the terms of its loan documents to meet certain financial covenants and other requirements. As of December 31, 2010, the Congress Center property was in compliance with all such requirements.
Environmental Matters
We have a policy for monitoring the Congress Center property for the presence of hazardous or toxic substances. While there can be no assurance that a material environmental liability does not exist, we are not currently aware of any environmental liability with respect to our one remaining unconsolidated property that would have a material adverse effect on our cash flows, financial condition or results of operations. Further, we are not aware of any environmental liability or any unasserted claim or assessment with respect to an environmental liability that we believe would require additional disclosure or the recording of a loss contingency.
Other
Our other commitments and contingencies include the usual obligations of a real estate company in the normal course of business. In the opinion of management, these matters are not expected to have a material impact on our financial position and consolidated results of operations.
SIGNATURE
Pursuant to the requirements of the 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 by the undersigned, thereunto duly authorized.
T REIT LIQUIDATING TRUST
(Registrant)
By:
/s/ W. Brand inlow
W. Brand Inlow
Trustee
Date: March 11, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the registrant and in the capacities and on the dates indicated.
By:
/s/ W. Brand inlow
W. Brand Inlow
Trustee
Date: March 11, 2011
EXHIBIT INDEX
Pursuant to Item 601(a)(2) of Regulation S-K, this exhibit index immediately precedes the exhibits.
The following exhibits are included, or incorporated by reference, in the Annual Report on Form 10-K for the fiscal year 2010 (and are numbered in accordance with Item 601 of Regulation S-K).