ITEM 1. BUSINESS.
BACKGROUND
We are a Delaware limited partnership formed on October 10, 2006 to acquire, develop and operate, directly or indirectly through joint venture arrangements, a portfolio of commercial real estate consisting primarily of multi-tenant shopping centers and mixed-use properties. We commenced our principal operations on December 8, 2006 when we met the required minimum $1.0 million in our Offering and issued 40 initial Units. We closed the Offering on March 31, 2008 when we had received $49.7 million from the sale of 1,991 Units. We invested substantially all of the net proceeds of the Offering in real properties.
We issued Units in the Offering in reliance upon exemptions from the registration requirements of the Securities Act and state securities laws. As a result, our Limited Partners may not transfer the Units except pursuant to an effective registration statement or pursuant to an exemption from registration. The Units are not currently listed on a securities exchange, and there currently is no established public trading market for the Units. We do not intend to list the Units on a securities exchange in the future.
Our General Partner is a Delaware corporation and a wholly-owned subsidiary of AmREIT, an SEC reporting, Maryland corporation that has a class of securities listed on the NYSE and that has elected to be taxed as a REIT. AmREIT and its predecessors have sponsored and advised 20 partnerships or similar investment funds, formed for the purpose of investing in properties during its 29-year history. Our General Partner has the exclusive right to manage our business and affairs on a day-to-day basis pursuant to our limited partnership agreement. The Limited Partners have the right to remove and replace our General Partner, with or without cause, by a vote of the Limited Partners owning a majority of the outstanding Units (excluding any Units held by our General Partner). Our General Partner is responsible for all of our investment decisions, including decisions relating to the properties to be developed, the method and timing of financing or refinancing the properties, the selection of tenants, the terms of the leases, the method and timing of the sale of our properties and the reinvestment of net sales proceeds, if in the best interest of the Limited Partners. Our General Partner utilizes the services of AmREIT and its affiliates in performing its duties under our limited partnership agreement. Our General Partner has invested $1,000 in us in exchange for its general partner interest and has invested $800,000 in us in exchange for 32 Units.
Rental income accounted for 100% of our total revenue during the years ended December 31, 2012, 2011, and 2010, primarily from net leasing arrangements that include the payment of base rent and the reimbursement of the operating expenses of the properties by our tenants. As a result, our operating results and cash flows are primarily influenced by rental income from our properties and interest expense on our property indebtedness. As of December 31, 2012, our properties had an average occupancy of 91%, and the average leverage ratio of the properties in which we have an investment was approximately 58%, with 84% of such debt carrying a fixed rate of interest.
OUR PORTFOLIO AND JOINT VENTURES
We wholly-own one property, we have a controlling interest (60%) in one property, and have non-controlling investments in four additional properties, all of which are located in Texas, through joint ventures with affiliates and non-affiliates. Five of the properties are multi-tenant retail properties and the sixth property consists of vacant land for development. Our five multi-tenant retail properties comprise approximately 1,268,000 square feet of GLA. See “Item 2. Properties” for a more detailed description of our investments in properties.
The joint ventures are structured as limited partnerships, in which we own interests. Each of these limited partnerships owns one of the five underlying properties. The general partner of each joint venture is responsible for establishing policies and operating procedures with respect to the business and affairs of the underlying property. However, we and each of our joint venture partners must approve all significant decisions involving the properties, including decisions involving acquisitions and dispositions of properties, refinancing, operational budgets and significant capital improvements.
Our current joint venture investments contain the following features:
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our right either to approve significant decisions of the joint venture or to influence operations of the joint venture, subject to the right of the joint venture partner to approve sales or refinancing;
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the total compensation paid by us and the joint venture to our General Partner and its affiliates in connection with a joint venture will not exceed the compensation that would be permissible under our limited partnership agreement if we owned 100% of the joint venture;
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no duplication of joint venture costs and expenses or of costs and expenses relating to the joint venture business, including organization and syndication expenses, acquisition and development costs; and
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any purchase, sale or financing transactions between the joint venture partner and our General Partner or its affiliates must be on terms that are commercially reasonable and comparable to those relating to transactions between unrelated parties.
OUR INVESTMENT OBJECTIVES
We believe that the retail real estate market is likely to remain at depressed levels during 2013 when compared to pre-recession levels; however, it is difficult to determine the breadth and duration of the unfavorable financial conditions and how such conditions may affect our tenants and the valuation of our assets. To navigate these challenging market conditions, we and our General Partner have created a strategic plan to maximize the potential value of our real estate portfolio in anticipation of the liquidation period that is scheduled to commence in November 2013. The components of this strategic plan are as follows:
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Complete our development and redevelopment projects with a goal to stabilize these projects during 2013. We believe that completing our development and redevelopment projects, including their lease-up and stabilization, will allow us to maximize the potential value and return on these properties upon sale. Our investments in Cambridge & Holcombe and Woodlake Pointe represent our assets currently under development and redevelopment. See Note 4 for further discussion of redevelopment plans at each of these properties.
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Continue to operate our projects in a first-class manner with a goal to generate operating cash flow in order to re-commence distributions in 2014. We believe that upon stabilization of our development and redevelopment properties, coupled with continued and disciplined management of our operating properties, we will generate sufficient liquidity that could allow us to re-commence distributions to our Limited Partners; however, this will most likely occur during the liquidation phase as we begin to sell our real estate assets. If the real estate market has not sufficiently recovered prior to our liquidation period commencement date of November 15, 2013, and our General Partner believes that extending the operating period would be in the best interest of our Limited Partners, we may seek approval from the Limited Partners to postpone the liquidation commencement date.
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Sell our properties opportunistically, likely beginning in 2014, after the market has had a chance to recover. Once a property is marketed for sale, it may take several months, or even longer, to receive offers and complete due diligence by both parties. Our General Partner will in good faith begin to review market sales opportunities for our operating properties at the conclusion of our operating period, but retail property valuations may continue to be depressed, and accordingly attractive sales opportunities may not exist in the near term. When deciding whether or when to sell properties, our General Partner will consider many factors including, but not limited to the potential appreciation of the property value as well as the timing of cash flows. During the liquidation period, we expect to distribute the net proceeds, if any, generated from property sales to our Limited Partners unless the General Partner has identified attractive acquisition opportunities and obtained a majority vote of the Limited Partners to re-invest such proceeds.
Although we believe that our strategic plan maximizes the potential value of our properties and is in the best interest of our Limited Partners, no assurances can be given that this strategy will be successful, and it is possible that investors may not recover all of their original investment. We currently do not expect to distribute net sales proceeds or any net cash flows from operations to our Limited Partners until we enter the liquidation phase. If the real estate market has not sufficiently recovered prior to our liquidation period commencement date of November 2013, we may seek to postpone liquidation if we feel it is in the best interests of our Limited Partners at that time.
Operating Period - Our operating period will continue until November 15, 2013 (our scheduled liquidation commencement date); however, the operating period may be extended to November 15, 2015 with the consent of the majority of Units held by our Limited Partners. During our operating period, our General Partner intends to hold our properties until such time as a sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears that such objectives will not be met as outlined in our strategy above.
Liquidation Period - At the end of our operating period, if not extended, our General Partner will in good faith actively market for sale all of our properties other than those in the development or redevelopment stage and commence an orderly Partnership liquidation. Properties in the development or redevelopment stage at the end of the operating period will be marketed for sale upon completion. Once our General Partner has marketed for sale all of our properties, it will likely take months or years for our General Partner to sell all of our properties and wind up our operations. If our General Partner does not take all commercially reasonable efforts to diligently pursue the portfolio sale and liquidation of our portfolio on our behalf as described above, it shall forfeit its $800,000 investment in our Units. In connection with the sale of a property, we may take purchase money obligations secured by a mortgage on the property as partial payment, thereby delaying any distribution of sale proceeds to our Limited Partners over the term to maturity of such obligations. The terms of payment to be accorded by us will be affected by custom in the area in which the property is located and the then-prevailing economic conditions.
As the sole owner of our General Partner, AmREIT has the ability to purchase our wholly-owned properties that our General Partner determines are in our best interests to sell. For properties we own through a joint venture, AmREIT typically has contractual buy-sell or rights of first offer, subject to the approval of our joint venture partners. If our General Partner determines that it is in our best interests to sell one of our properties, our General Partner will notify AmREIT of our desire to sell such property. AmREIT will then have 30 days to determine whether to pay the market value to acquire the property for itself. To determine the market value of a property, both we and AmREIT, at our own cost and expense, will appoint a real estate appraiser with at least five years full-time commercial appraisal experience and who is a member of the Appraisal Institute. If either of us fails to appoint an appraiser, the single appraiser appointed will be the sole appraiser and will determine the market value. Each appraiser shall conduct an independent appraisal of the property within 30 days after the two appraisers are appointed. If the appraised values are within five percent of each other, the market value of the property will be the mean of the two appraisals. If the two appraisals are more than five percent apart, a third appraiser meeting the qualifications stated above and independent from each party shall be appointed by the existing appraisers. Upon completion of the third appraisal, if the low appraisal and/or the high appraisal are/is more than five percent lower and/or higher than the middle appraisal, the low appraisal and/or the high appraisal will be disregarded. If only one appraisal is disregarded, the remaining two appraisals will be added together and their total divided by two, with the resulting quotient being the market value. If both the low appraisal and the high appraisal are disregarded as stated above, the middle appraisal will be the market value. AmREIT will have 10 business days after the final determination of market value to elect to purchase the property.
Liquidity Challenges
We face significant liquidity challenges in implementing our strategic plan and investment strategy. Projected cash sources (including cash on hand) and uses for cash indicate periods of cash shortfalls during the year ended December 31, 2013. Further, we borrowed an additional $860,000 from AmREIT during the first quarter of 2013, primarily to fund the payment of property taxes and to fund tenant improvements and leasing commissions for our lease-up strategy at Casa Linda. However, we believe that we will be able to generate sufficient liquidity to satisfy any cash shortfalls for the remainder of 2013 through (1) managing the timing of forecasted capital expenditures related to the lease-up of properties, (2) managing the timing of operating expense payments and, to the extent possible, accelerating cash collections, (3) obtaining funds through additional borrowings from our General Partner (4) deferring the payment of fees owed to our General Partner and its affiliates, and/or (5) selling certain of our investments, including our anticipated sale of a single tenant building and portion of land at our Woodlake Pointe property. See also Note 11 in the Notes to Consolidated Financial Statements.
We expect to fund approximately $1.5 million in capital expenditures over the next two years at our Casa Linda property (a 50% joint venture between us and MIG III) representing our 50% share of a lease-up strategy at this property. The lease-up strategy includes certain tenant build-out and site improvements to support a refinance of the property’s $38.0 million mortgage loan that matures January 2014. The joint venture has made progress with signing new leases, but additional improvements and vacancy lease-up are needed. The joint venture will likely require a one-year extension of the loan to complete this strategy so that we can later accomplish a long-term refinance of the property. We believe we will be successful in obtaining a one-year extension based on our preliminary discussions with the lending agent; however, no assurances can be given that we will be successful in obtaining the extension. We do not guarantee this debt and our risk of loss is limited to our investment balance in the Casa Linda joint venture of $2.7 million as of December 31, 2012.
On March 15, 2013, our Woodlake Pointe joint venture entered into a letter of intent to sell a portion of the land and a single tenant building at our Woodlake Pointe property for $12.0 million to an unrelated third party. The land and building are secured by a $6.2 million loan that will be repaid in full with proceeds from the sale. The sale is expected to close in the second quarter of 2013, and our portion of the net cash proceeds (60%) is approximately $3.1 million. We plan to use the proceeds to fund the Casa Linda lease-up strategy (discussed above) and for working capital needs.
There is no guarantee that we and our joint ventures will be successful with some or all of the above liquidity initiatives and we may continue to look to AmREIT to provide additional financial support to meet our operating needs.
AmREIT has agreed to continue to provide financial support to us through and including the next twelve months in the form of continued deferral of payment of advisory fees earned and payable to the extent such deferral of fees is necessary for our continued operation. Such fees may include property management fees, asset management fees, development fees, interest on amounts owed to AmREIT and reimbursement of certain of AmREIT’s general and administrative costs. AmREIT has agreed that it will not require us to repay the $3.7 million notes payable due to AmREIT until a date subsequent to January 1, 2014 if such repayment were to prevent the execution of our strategy or present an unnecessary financial hardship. AmREIT’s agreement to provide such financial support and continued deferral of payment is subject to its continued ability to do so.
Additionally, we may have liquidity demands based upon our requirement to perform under guarantees of certain of our joint ventures to the extent they are unable to fully satisfy certain guaranteed debts. During 2011, the $8.1 million mortgage loan owed by our Cambridge Holcombe joint venture matured unpaid. On April 26, 2012, the joint venture successfully extended this debt until March 27, 2013 in exchange for a 10% principal reduction on the note and payment of accrued interest. Our portion of this payment (50%) was $536,000, which was funded through a loan from AmREIT. The joint venture has entered into a contract to sell one acre of the property to a third party, subject to a due diligence period that expired in December 2012. Pursuant to the sales contract, the third party has deposited $325,000 into a non-refundable escrow account. The third party has the ability to extend closing the sale for up to an additional nine months with a $25,000 non-refundable payment for each month they extend. Based on preliminary discussions with the lender, we expect to extend the loan until September 2014 with the assignment of the aforementioned sales contract as additional security and a joint and several guaranty by us and our joint venture partner of 60% of the loan balance. We expect that the proceeds from the sale should be sufficient to pay off the loan in full and leave the remaining acre on the Cambridge & Holcombe site unencumbered.
The above steps may not be sufficient to meet all of our cash flow needs, and we could incur individual setbacks and possibly significant losses. Deterioration in the United States economy or the bankruptcy or insolvency of one or more of our significant tenants could cause us not to have enough cash to meet our current plans, which could further negatively impact our future financial condition or results of operations. Notwithstanding the strategic plan and the liquidity initiatives described above, we still may incur cash shortfalls if we are required to perform under certain guarantees of our joint ventures or are unable to refinance certain debt as it comes due, which could result in lender repossession of one or more properties owned by us and/or our joint ventures or the forced to sale of one or more properties at a time when it is disadvantageous to do so, potentially resulting in losses on the disposition of those properties.
Current Market Conditions
Over the past several years, our results of operations and valuations of our real estate assets have been negatively impacted by overall weakness in economic conditions. The United States economy is still experiencing weakness from the past economic recession, which resulted in increased unemployment, weakening of tenant financial condition, large-scale business failures and tight credit markets. High levels of unemployment have persisted, and rental rates and valuations for retail space have not fully recovered to pre-recession levels and may not for a number of years. Furthermore, the uncertainty surrounding the rapidly increasing national debt of the United States and continuing global economic uncertainty have kept markets volatile. Most of our retail properties were purchased prior to 2008 when retail real estate market prices were much higher, and our property valuations have been negatively impacted by these market dynamics.
Leverage
We have leveraged and intend to leverage our investments in properties with operating histories using traditional, commercial real estate lending sources, as underwritten by our General Partner and the lender. We have not leveraged and do not intend to leverage equity contributed to joint venture developments, anticipating that local developers will employ construction financing consistent with that of traditional real estate projects and underwritten by the development partner, our General Partner and the lender.
We may finance the acquisition of future properties with new financing or the assumption of existing indebtedness. We may incur secured or unsecured indebtedness at any time during our term. We may refinance a property after it has increased in value or when more favorable terms are available. Refinancing may permit us to retain such property and at the same time generate distributions to the Partners, enable us to engage in renovation or remodeling activities, or to make further acquisitions. We may incur debt for expenditures related to the properties, including to facilitate the sale or to pay for capital expenditures. There is no fixed limit on the term of any particular borrowing or the amount thereof. Generally, we may not incur indebtedness (or any refinancing thereof) to acquire or improve properties in an amount greater than 75% of our cash and cash equivalents plus the market value of our portfolio based on a cap rate approach applied to the net operating income of the property, with a target of 60% of the value of our assets. No assurance can be given as to the future availability of credit, the amount or terms thereof, or the restrictions that may be imposed on our future borrowings by lenders. The terms of our loans may require the properties to be held by special purpose entities whose controlling interest must be held by a corporation.
We may borrow money from AmREIT or its affiliates if our General Partner, in the exercise of its fiduciary duties, determines that the transaction is on terms that are fair and reasonable and no less favorable to us than comparable loans between unaffiliated parties.
COMPETITION
All of our properties are located in geographic areas that include competing properties. The number of competitive properties in a particular area could have a material adverse effect on both our ability to lease space at our properties and on the rents charged. When pursuing acquisition development and redevelopment opportunities, we also compete with an indeterminate number of other real estate investors, including domestic and foreign corporations and financial institutions, publicly-traded and privately-held REITs, private institutional investment funds, investment banking firms, life insurance companies and pension funds, some of which have greater financial resources than we do. Similarly, should we decide to dispose of any property, we may compete with third-party sellers of similar types of commercial properties for suitable purchasers, which may result in our receiving lower net proceeds from a sale or in our not being able to dispose of such property at a time of our choosing due to the lack of an acceptable return.
In operating and managing our properties, we compete for tenants based upon a number of factors including, but not limited to, location, rental rates, security, flexibility, expertise to design space to meet prospective tenants’ needs and the manner in which the property is operated, maintained and marketed. We may be required to provide rent concessions, incur charges for tenant improvements and other inducements, or we may not be able to timely lease vacant space, all of which would adversely impact our results of operations. In light of the recent economic downturn, we have had to utilize rent concessions and undertake tenant improvements to a greater extent than we historically have done.
GOVERNMENTAL REGULATIONS
Our properties and the tenants of our properties are subject to various federal, state and local environmental, health and safety laws, including laws governing the management of wastes, underground and aboveground storage tanks, local fire safety requirements, and local land use and zoning regulations. For example, some of our tenants handle regulated substances or wastes as part of their operations on our properties. Noncompliance with these environmental, health and safety laws could subject us or our tenants to liability. These environmental liabilities could affect a tenant’s ability to make rental payments to us. Moreover, changes in laws could increase the potential costs of compliance with environmental laws or health and safety laws, including increasing liability for noncompliance or requiring significant unanticipated expenditures. We are not presently aware of any instances of material non-compliance with environmental laws or health and safety laws at our properties, and we believe that we have all permits and approvals necessary under current law to operate our properties.
Environmental Regulations
Under various federal, state, and local environmental laws, ordinances, and regulations, a current or former owner or operator of real property may be liable for the cost to remove or remediate hazardous or toxic substances, asbestos-containing materials, wastes, or petroleum products at, on, under, from, or in such property. These costs could be substantial and liability under these laws may attach whether or not the owner or operator knew of, or was responsible for, the presence of such contamination. The presence of contamination on one of our properties, or the failure to properly remediate a contaminated property, could give rise to a lien in favor of the government for costs it may incur to address the contamination, or otherwise adversely affect our ability to redevelop, sell or lease the property or mortgage the property. In addition, if contamination is discovered on one of our properties, environmental laws may impose restrictions on the manner in which a property may be used or businesses may be operated, and these restrictions may require substantial expenditures or prevent us from entering into leases with prospective tenants. We also may be liable for the costs of remediating contamination at off-site disposal or treatment facilities when we arrange for disposal or treatment of hazardous substances at such facilities, without regard to whether we comply with environmental laws in doing so.
Some of our properties are adjacent to or near other properties used for industrial or commercial purposes or that have contained or currently contain underground storage tanks used to store petroleum products or other hazardous or toxic substances. Releases from these nearby properties could impact our properties. In addition, certain of our properties are currently used, have been used, and may be used in the future by others, including former owners or tenants of our properties, for commercial or industrial activities, such as gas stations and dry cleaners, that may release petroleum products or other hazardous or toxic substances at our properties or to surrounding properties.
We have obtained Phase I Environmental Site Assessments or similar environmental audits from an independent environmental consultant for substantially all our properties. A Phase I Environmental Site Assessment is a written report that identifies existing or potential environmental conditions associated with a particular property. These environmental site assessments generally involve a review of records, interviews and visual inspection of the property; however, they have a limited scope (e.g., they do not include soil sampling or ground water analysis) and may not reveal all potential environmental liabilities. Further, material environmental conditions may have arisen after the review was completed or may arise in the future, and future laws, ordinances or regulations may impose additional material environmental liability beyond what was known at the time the site assessment was conducted. Phase II environmental assessments generally involve the testing of soil, groundwater or other media and conditions. While environmental assessments conducted prior to acquiring our properties have not revealed, nor are we aware of, any environmental liability that we believe will have a material adverse effect on our operations, certain properties that we have acquired contain, or contained, uses that could have impacted our properties, including dry-cleaning establishments utilizing solvents or gas stations. Where we believed it was warranted, subsurface investigations or samplings of building materials were undertaken with respect to these and other properties. To date, the costs associated with these investigations and any subsequent remedial measures taken to address any identified impacts have not resulted in material costs. Prior to purchasing properties in the future, we plan to conduct Phase I Environmental Site Assessments and other environmental investigations, if warranted.
Americans with Disabilities Act of 1990
Under the Americans with Disabilities Act of 1990, or ADA, all places of public accommodation are required to meet certain federal requirements related to access and use by disabled persons. Compliance with the ADA might require removal of structural barriers to handicapped access in certain public areas where such removal is “readily achievable.” We believe that our properties are in substantial compliance with the ADA and that we will not be required to make substantial capital expenditures to address the requirements of the ADA. Noncompliance with the ADA, however, could result in the imposition of fines or an award of damages to private litigants. The obligation to make readily achievable accommodations is an ongoing one, and we will continue to assess our properties and to make alterations as appropriate in this respect.
CONFLICTS OF INTEREST
Our General Partner is subject to various conflicts of interest arising out of its relationship with us, the Limited Partners and AmREIT. Our General Partner and its affiliates have and will continue to try to balance our interests with their duties to other AmREIT-sponsored programs. However, to the extent that our General Partner or its affiliates take actions that are more favorable to other entities than to us, these actions could have a negative impact on our financial performance and, consequently, on distributions to our Limited Partners. Some of these conflicts are described below.
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Our General Partner has no assets other than its general partner interest in us and its investment in our Units and therefore cannot provide us with financial assistance in the event we have capital needs.
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AmREIT, the parent of our General Partner, has substantial financial obligations related to its properties and its interest in other programs and may not be able to provide us financial assistance in the event we have capital needs.
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AmREIT sponsors and manages other similar real estate programs and ventures that may compete with us. Conflicts of interest with our General Partner’s management may arise in its allocating opportunities between us and other programs, particularly where our General Partner’s profit or loss interest in such other investment is different than our General Partner’s interest in the Partnership.
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Conflicts of interest may arise in connection with performance of our General Partner’s responsibilities to us and its responsibilities to its other affiliated entities, such as allocation of its time and access to resources, such as financing, goods, material or labor, or in connection with its access to the leasing or resale markets.
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Because the management of our General Partner manages other investment funds and entities with similar investment strategies, including AmREIT, competition for properties will create a conflict of interest.
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Our General Partner’s management is engaged in substantial activities apart from our business, including their duties to AmREIT and other real estate programs sponsored by AmREIT. As such, the time that they can devote to our affairs is limited.
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Our General Partner retains the services of affiliated leasing agents to lease the properties in which we have invested, and these leasing agents can face conflicts of interest if they are seeking to lease our properties and similar properties of our affiliates at the same time.
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Conflicts of interest could arise in connection with any interests of our General Partner may have in a particular property, including any interests our General Partner may have as an affiliate of AmREIT in connection with any sale of a property to AmREIT.
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Our General Partner may receive compensation in the form of a brokerage commission for the work performed in the sale of our properties to third-party real estate investors, and our General Partner may have an incentive to sell a property even if not in the best interest of our Limited Partners.
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The compensation payable to our General Partner and its affiliates has not been determined by arm’s-length negotiations and might exceed that which would be paid to unrelated persons under similar circumstances in arm’s length transactions. Also, a significant portion of this compensation is payable irrespective of the quality of the services provided or our success or profitability.
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AmREIT or its affiliates, including our General Partner, may in the future serve as management for the general partner of other companies or ventures, and acquire, develop and operate real estate related activities in the same areas as ours for their own account.
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ARIC, an affiliate of our General Partner, performs property management services for all of the properties in which we have an interest and may provide property management services for properties in which we acquire an interest in the future. Therefore, we might not always have the benefit of independent property management to the same extent as if our General Partner and the property manager were unaffiliated.
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Our legal counsel acts and may in the future act as counsel to us, our General Partner, AmREIT and certain of our respective affiliates, that may become adverse to us, which may preclude our counsel from representing any or all of such parties.
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Our General Partner is primarily responsible for contesting federal income tax adjustments proposed by the IRS. In the event of an audit of our federal income tax returns by the IRS, it is possible that the interests of our General Partner in such an audit could become inconsistent with or adverse to the interests of the Limited Partners.
Management expects to manage the above conflicts by actively monitoring opportunities and resources to determine the most appropriate course of action under the circumstances. Additionally, in the event our General Partner or its affiliates receive compensation from us for any additional services performed on our behalf, such services will only be provided on terms and conditions no less favorable to us than can be obtained from independent third parties for comparable services in the same location. Such services may include, but are not limited to, leasing coordination fees, construction and construction management fees, including in connection with renovation and remodeling, and tax appeal fees. The fees for such services, if provided by affiliates, will be separately itemized and retained in our records.
We may, from time to time, sell some of our properties to AmREIT. As a result of the inherent conflict in such a sale, we will only sell a property to AmREIT if it agrees to pay the market value or the amount of a bona fide final third-party offer for that property. In addition, we may borrow money from AmREIT or its affiliates. Although our General Partner will only approve an affiliated borrowing transaction if, in the exercise of its fiduciary duties, it determines that the terms are fair and reasonable and no less favorable to us than comparable loans between unaffiliated third parties, our General Partner could face conflicts of interest in connection with such a transaction that may not be resolved in the best interests of our Limited Partners.
EMPLOYEES
We have no employees. Our affairs are managed by our General Partner, and our General Partner and its affiliates provide services to us related to acquisitions, property management, accounting, investor relations and other administrative services. We are dependent upon our General Partner and its affiliates for these services.
See “Item 13. Certain Relationships and Related Transactions, and Director Independence” for a discussion of our compensation arrangements.
ITEM 1A.
ITEM 1A. RISK FACTORS.
Not applicable.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2.
ITEM 2. PROPERTIES.
Corporate Office
Our principal office is located at 8 Greenway Plaza, Suite 1000, Houston, Texas 77046. Our telephone number is (713) 850-1400.
Real Estate Investment Properties
During the period from October 10, 2006 (inception) through December 31, 2012, we have acquired interests in six properties. We wholly-own one property, we have a controlling interest (60%) in one property and have non-controlling investments in four properties through joint venture arrangements. We have included a description of the types of real estate in which we have invested and will invest, and a summary of our investment policies and limitations on investment and the competitive conditions in which we operate under “Item 1. Business” above. We believe our properties are suitable for their intended use and are adequately insured.
As of December 31, 2012, we owned interests in the following properties, all of which are located in Texas:
(1)
Percent leased is calculated as (i) GLA under commenced leases as of December 31, 2012, divided by (ii) total GLA, expressed as a percentage.
(2)
Annualized base rent is calculated by multiplying (i) monthly base rent as of December 31, 2012 by (ii) 12. Annualized base rent represents base rents in place on leases with rent having commenced as of December 31, 2012 and does not reflect straight-line rent or other adjustments under GAAP. Our leases do not contain material tenant concessions or rent abatements.
(3)
As of December 31, 2012, a portion of this property was occupied by a tenant with a temporary lease.
(4)
Properties are owned through a joint venture that is not consolidated in our financial statements.
(5)
Property is vacant land and is planned for development.
(6)
Represents weighted average percent leased.
The majority of our properties have leases that are either leased directly to or guaranteed by the lessee’s parent company, not just the operator of the individual location, and are in areas of substantial retail shopping traffic. Our strategy is to acquire properties that attract tenants that provide basic staples and convenience items to local customers. We believe that sales of these items are less sensitive to business cycle fluctuations than higher priced retail items.
Operating Properties - Our operating properties consist primarily of multi-tenant centers, mixed-use properties and, on a selective basis, free standing single-tenant properties. Of our six properties in which we own an interest, Casa Linda, Shadow Creek Ranch, Woodlake Square and Village on the Green are operating. These investments are primarily shopping centers that are grocery-anchored or mixed-use properties whose tenants consist of national, regional and local retailers. Our grocery-anchored shopping centers are anchored by an established grocery store operator in the region. Our mixed-use properties consists of a combination of office and hospitality tenants that are typically anchored by a combination of national and regional tenants that provide customer traffic and tenant draw for specialty and restaurant tenants that support the local consumer. We also own shopping centers that are leased to national drug stores, national restaurant chains, national value-oriented retail stores and other regional and local retailers.
Development and Redevelopment Properties - We have also invested in development and redevelopment properties, either directly or indirectly through joint ventures. The amount of equity committed to development and redevelopment projects is generally 25% to 100% of the total cost of the project, with the remaining costs being funded through lines of credit, construction financing or other property level mortgage financing. As of December 31, 2012, our Cambridge & Holcombe and Woodlake Pointe properties were under development and redevelopment, respectively.
Our General Partner may hire a general contractor to provide construction and construction management services for each of our development and redevelopment projects. The general contractor will be entitled to fees for providing these services, and these fees may be paid on a fixed price basis or a cost plus basis. AmREIT Construction Company, an affiliate of our General Partner, has historically provided construction and construction management services for many of our development and redevelopment projects. In the future, we may engage ARIC, also an affiliate of our General Partner, for construction management services. In these cases, such services will be provided on terms and conditions no less favorable to us than can be obtained from independent third parties for comparable services in the same location.
Each of our development and redevelopment projects has and will have a project manager assigned to ensure all necessary functions are performed. The project manager is responsible for coordinating all phases of the project, including the feasibility study of each project prior to the commencement of development and much of the pre-development work. Each project also has a construction manager who is responsible for coordinating all the outsourced trades including architectural, engineering, environmental and construction contractors. The construction manager will be an employee of ARIC in the event that ARIC is providing construction management services to a development project. The project and construction managers are jointly responsible for the preparation and adherence to the development budgets. Capital inflows and outflows are carefully tracked and compared against budgets. Actual costs versus budget reports are prepared on a monthly basis for review by various parties including the development team, management team and lenders. The project and construction managers work in unison to ensure each project is built within budget and on a timely basis.
Net Leases - We typically enter into net leases with our tenants. “Net leases” are leases that typically require tenants to pay all or a majority of the operating expenses, including real estate taxes, special assessments and sales and use taxes, utilities, insurance and building repairs related to the property, in addition to base rent. Our leases do not contain material tenant concessions or rent abatements. Since each lease is an individually negotiated contract between us or the joint venture and the tenant, each contract will have different obligations for both the landlord and tenant. Many large national tenants have standard lease forms that generally do not vary from property to property, and we have limited ability to revise the terms of leases for those tenants. We have acquired and may in the future acquire properties under which the lease terms have partially run. We evaluate the lease term risk based on criteria such as whether the property is in an attractive location, is difficult to replace or has other significant favorable real estate attributes. Some of our leases contain provisions that increase the amount of base rent payable at points during the lease term and/or provide for percentage rent that can be calculated by a number of factors. Our leases generally require that each tenant obtain, at its own expense, property insurance naming the above parties as an insured party for fire and other casualty losses in an amount that generally equals the full replacement value of such property. Our tenants are generally required to obtain our General Partner’s approval of all such insurance.
Description of Our Wholly-Owned Property
Village on the Green
On March 25, 2008, through our wholly-owned special purpose entity, AmREIT VOG, LP, we purchased the Village on the Green property, a 36,306 square foot retail shopping center located in San Antonio, Texas. The property was purchased from an unaffiliated third party. The property has a 10-year mortgage loan in the amount of $6.2 million that bears an annual interest rate of 5.52% that matures in April 2017. As of December 31, 2012, major tenants of the Village on the Green property included Paesano’s Restaurant as the largest tenant occupying 8,300 square feet, Theo & Herb Designer Shoes, Alamo Heights Pediatrics and Rouse Dental Office.
Description of Our Joint Venture Properties
Woodlake Pointe
On November 21, 2007, through a joint venture arrangement with MIG III and ARIC, we acquired a 40% interest in AmREIT Westheimer Gessner, LP, which owns the Woodlake Pointe property, a 82,120 square-foot retail shopping center located in Houston, Texas. The property was purchased from an unaffiliated third party. In May 2008, the joint venture acquired a tract of land adjacent to the Woodlake Pointe property. In June 2008, we acquired an additional 20% investment interest in AmREIT Westheimer Gessner, LP from an affiliated entity at its net book value. As a result of our 60% ownership interest, we consolidate AmREIT Westheimer Gessner, LP into our results of operations. Our affiliates, MIG III and ARIC, own the remaining 40% interest in AmREIT Westheimer Gessner, LP.
During November 2011, Woodlake Pointe obtained a $6.7 million construction loan to fund its redevelopment. As of December 31, 2012, Woodlake Pointe had incurred approximately $5.7 million in redevelopment costs, including tenant improvements and leasing costs. Because this property was under redevelopment, and the tenant of the original shopping center was temporarily occupying the premises, we recorded rental income from the original shopping center as a reduction to the basis of the asset. In October 2012, the redevelopment of a new 45,000 square foot building was complete and opened for business. On March 15, 2013, our Woodlake Pointe joint venture entered into a letter of intent to sell a portion of the land and a single tenant building at our Woodlake Pointe property for $12.0 million to an unrelated third party. The land and building are secured by a $6.2 million loan that will be repaid in full with proceeds from the sale. The sale is expected to close in the second quarter of 2013, and our portion of the net cash proceeds (60%) is approximately $3.1 million. We plan to use the proceeds to fund the Casa Linda lease-up strategy (discussed below) and for working capital needs.
Casa Linda Plaza
On December 8, 2006, through a joint venture arrangement with an affiliate of our General Partner, MIG III, we acquired a 50% interest in the Casa Linda property, a 324,569 square foot retail shopping center located in Dallas, Texas. Our joint venture partner owns the remaining 50% interest in the joint venture. The property was purchased from an unaffiliated third-party. The property is secured by a $38.0 million, seven-year mortgage loan that matures January 2014. The loan bears an annual interest rate of 5.48% and is interest-only until maturity. During 2012, we and MIG III initiated a lease-up strategy that includes certain tenant build-out and site improvements to support a refinance of the property’s mortgage. The joint venture has made progress with signing new leases, but additional improvements and vacancy lease-up are needed. The joint venture will likely require a one-year extension of the loan to complete this strategy so that we can later accomplish a long-term refinance of the property. We believe we will be successful in obtaining a one-year extension based on our preliminary discussions with the lending agent; however, no assurances can be given that we will be successful in obtaining the extension. We do not guarantee this debt and our risk of loss is limited to our investment balance in the Casa Linda joint venture of $2.7 million as of December 31, 2012.
Woodlake Square
On August 31, 2007, through a joint venture arrangement with affiliates of our General Partner, MIG III and ARIC, we acquired a 40% interest in the Woodlake Square property, a 205,522 square foot retail shopping center located in Houston, Texas. The property was purchased from an unaffiliated third party. Our joint venture partners acquired the remaining 60% interest in the property. In June 2008, we acquired an additional 20% investment interest in AmREIT Woodlake, LP from an affiliated entity at its net book value.
In July 2010, we and our affiliated joint venture partners on our Woodlake Square property, MIG III and ARIC, entered into a joint venture agreement with a third party on our Woodlake Square property. As part of this transaction, we and our affiliates sold 90% of our interest in the property and retained a 10% ownership interest, which carries a promoted interest in cash flows once an 11.65% preferred return threshold is met on the project. Prior to the above transaction, we consolidated the property, and we recorded an impairment of approximately $618,000, which has been recorded as impairment in our consolidated statements of operations for the year ended December 31, 2010. Subsequent to the above transaction, we retained a 6% interest in the joint venture. The sale generated cash proceeds of approximately $3.4 million (our share was approximately $2.0 million), and the $23.8 million loan on the property was paid in full at closing. The new entity in which we now own a 6% interest, VIF II/AmREIT Woodlake L.P., is the borrower under a $20.9 million loan. We, along with our affiliate, MIG III are joint and several repayment guarantors on the loan. As a result of our reduced ownership interest and decision-making ability, we no longer have a controlling financial interest in the property, and we deconsolidated this property as of the date of the transaction and began accounting for this investmentunder the equity method of accounting.
Redevelopment of the property began in July 2010 and was completed in April 2011. As of December 31, 2012, VIF II/AmREIT Woodlake L.P had incurred approximately $6.8 million in redevelopment costs with a total expected cost of approximately $8.3 million, including additional tenant improvements and leasing costs. The property was 88% leased at December 31, 2012. Randall’s, the largest tenant, signed a new lease in January 2010 that expires in 2036. Additional tenants include Walgreen’s, Jos. A. Bank Clothiers and Ragin Cajun. On February 23, 2012, this entity sold a parcel of land that resulted in a gain of approximately $437,000. Our 6% share of this gain (approximately $26,000) is included in our equity in losses from non-consolidated entities on our consolidated statement of operations.
Cambridge Holcombe
On December 31, 2007, we acquired a 50% interest in the Cambridge Holcombe property through a joint venture arrangement with an unaffiliated third party. This vacant land is located in the Texas Medical Center in Houston, Texas. The property was purchased from an unaffiliated third party. We are in the initial stages of planning this property’s development. An impairment test was performed during 2010, and we recorded an impairment of approximately $2.6 million on this investment. Our portion of the impairment was recorded as a component of equity in losses from non-consolidated subsidiaries in our consolidated statements of operations. During 2011, the $8.1 million mortgage loan owed by our Cambridge Holcombe joint venture matured unpaid. On April 26, 2012, the joint venture successfully extended this debt until March 27, 2013 in exchange for a 10% principal reduction on the note and payment of accrued interest. Our portion of this payment (50%) was $536,000, which was funded through a loan from AmREIT. The joint venture has entered into a contract to sell one acre of the property to a third party, subject to a due diligence period that expired in December 2012. Pursuant to the sales contract, the third party has deposited $325,000 into a non-refundable escrow account. The third party has the ability to extend closing the sale for up to an additional nine months with a $25,000 non-refundable payment for each month they extend. Based on preliminary discussions with the lender, we expect to extend the loan until September 2014 with the assignment of the aforementioned sales contract as additional security and a joint and several guaranty by us and our joint venture partner of 60% of the loan balance. We expect that the proceeds from the sale should be sufficient to pay off the loan in full and leave the remaining acre on the Cambridge & Holcombe site unencumbered.
Shadow Creek Ranch
On February 29, 2008, through a joint venture arrangement with an unaffiliated third party and certain AmREIT affiliates, we acquired a 10% interest in the Shadow Creek Ranch property, a 624,013 square foot retail shopping center located in Pearland, Texas. Our joint venture partners own the other 90% interest in the venture. The property was purchased from an unaffiliated third party. We used proceeds from the Offering and obtained a 7-year mortgage loan from Metropolitan Life Insurance Company to fund our investment in the Shadow Creek Ranch property. The loan was in the amount of $65.0 million and bears an annual interest rate of 5.48% until its maturity in March 2015. As of December 31, 2012, the outstanding balance of the loan was $63.4 million.
The development of the Shadow Creek Ranch shopping center was completed in the first quarter of 2008. Approximately 6,000 square feet of land remains to be developed into pad sites next to the shopping center. The major tenants of the Shadow Creek Ranch property include H-E-B, a regional grocer, as the largest tenant occupying 150,615 square feet, with Burlington Coat Factory, Academy Sports & Outdoors, Ashley Furniture and Hobby Lobby as other large tenants.
Location of Properties and Concentration of Credit Risk
We have geographic concentration in our property holdings as all of our properties are located in Texas. The economies of the Texas metropolitan markets where we own investments have a significant impact on our cash flow and the value of our properties. Although a downturn in the economies of these metropolitan areas could adversely affect our business, general retail and grocery-anchored shopping centers that provide necessity-type items tend to be less sensitive to macroeconomic downturns. We also have tenant concentration in our properties. See Note 8 of the Notes to Consolidated Financial Statements.
The following table shows the tenants which occupy 10% or more of the GLA for each property in which we own an interest and the lease expirations of such tenants, each as of December 31, 2012, assuming that tenants exercise no renewal options, but do exercise early termination rights.
Lease Expirations
The following table shows lease expirations for our two consolidated properties as of December 31, 2012, during each of the next ten years and thereafter, assuming that tenants exercise no renewal options, but do exercise early termination rights.
The following table shows lease expirations for our four non-consolidated properties as of December 31, 2012, during each of the next ten years and thereafter, assuming that tenants exercise no renewal options, but do exercise early termination rights.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of business, we may become subject to litigation or claims. Neither we nor our properties are the subject of any material pending legal proceeding, nor are we aware of any proceeding that a governmental authority is contemplating against us.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information and Holders
As of March 28, 2013, we had 1,991 Units outstanding, held by 813 Limited Partners.
There is no established public trading market for our Units. As of December 31, 2012, none of the Units were subject to any outstanding options or warrants, and we had not issued any securities convertible into our Units. The Units, which are “restricted securities” as defined in Rule 144 promulgated by the SEC under the Securities Act, must be held indefinitely unless they are subsequently registered under the Securities Act and any applicable state securities laws or unless, upon the advice of counsel satisfactory to us, the Units are sold in a transaction that is exempt from the registration requirements of such laws. We have not agreed to register under the Securities Act for sale by Limited Partners, and there were no Units that are being, or have been publicly proposed to be, publicly offered by us. No Units have been sold since we closed the Offering on March 31, 2008.
Distributions
We have reported a cumulative net loss for GAAP and tax purposes, primarily due to the non-cash charges associated with depreciation of our real estate assets. Accordingly, all of the distributions we have paid constitute a return of capital to our Limited Partners for tax purposes. We suspended all distribution payments in July 2009, and do not anticipate reinstating distributions until improvements in the real estate and liquidity markets warrant such reinstatement.
Since our inception, we have redeemed three Units. As of June 30, 2009, we suspended all future redemptions of Units.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
Not applicable.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto. See also “Cautionary Note Regarding Forward Looking Statements” preceding “Item 1. Business.”
OVERVIEW AND EXECUTIVE SUMMARY
We are a Delaware limited partnership formed on October 10, 2006 to acquire, develop and operate, directly or indirectly through joint venture arrangements, a portfolio of commercial real estate consisting primarily of multi-tenant shopping centers and mixed-use properties. Our general partner is a Delaware corporation and a wholly-owned subsidiary of AmREIT, an SEC reporting, Maryland corporation that has a class of securities listed on the NYSE and that has elected to be taxed as a REIT. AmREIT and its predecessors have sponsored and advised 20 partnerships, or similar investment funds, formed for the purpose of investing in properties during its 29-year history. Our General Partner has the exclusive right to manage our business and affairs on a day-to-day basis pursuant to our limited partnership agreement. The Limited Partners have the right to remove and replace our General Partner, with or without cause, by a vote of the Limited Partners owning a majority of the outstanding Units (excluding any Units held by our General Partner). Our General Partner is responsible for all of our investment decisions, including decisions relating to the properties to be developed, the method and timing of financing or refinancing the properties, the selection of tenants, the terms of the leases, the method and timing of the sale of our properties and the reinvestment of net sales proceeds. Our General Partner utilizes the services of AmREIT and its affiliates in performing its duties under our limited partnership agreement. Our General Partner has invested $1,000 in us in exchange for its general partner interest and has invested $800,000 in us in exchange for 32 Units.
Rental income accounted for 100% of our total revenue during the years ended December 31, 2012, 2011, and 2010, primarily from net leasing arrangements that include the payment of base rent and the reimbursement of the operating expenses of the properties by our tenants. As a result, our operating results and cash flows are primarily influenced by rental income from our properties and interest expense on our property indebtedness. As of December 31, 2012, our properties had an average occupancy of 91%, and the average debt leverage ratio of the properties in which we have an investment was approximately 58%, with 84% of such debt carrying a fixed rate of interest.
Our Portfolio and Joint Ventures
As of December 31, 2012, we directly owned one property comprising 36,000 square feet of GLA, have a controlling interest in one property comprising 127,000 square feet of GLA, and owned joint venture interests in four additional properties comprising 1,105,000 square feet of GLA. All of our properties are located in highly populated, suburban communities in Texas. We acquired all of these properties subsequent to our formation.
The joint ventures are structured as limited partnerships in which we own interests. Each of these limited partnerships owns one of the five underlying properties. Each general partner is responsible for establishing policies and operating procedures with respect to the business and affairs of the underlying property. However, we and each of our joint venture partners must approve all significant decisions involving the properties, including decisions involving acquisitions and dispositions of properties, refinancing, operational budgets and significant capital improvements.
SUMMARY OF CRITICAL ACCOUNTING POLICIES
Our results of operations and financial condition, as reflected in the accompanying consolidated financial statements and related footnotes, are subject to management’s evaluation and interpretation of business conditions, retailer performance, changing capital market conditions and other factors, which could affect the ongoing viability of our tenants. Management believes the most critical accounting policies in this regard are revenue recognition, regular evaluation of whether the value of a real estate asset has been impaired, accounting for the investment in real estate assets and accounting for the investment in non-consolidated entities. We evaluate our assumptions and estimates on an on-going basis. We base our estimates on historical experience as well as various other assumptions that we believe 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.
Revenue Recognition
We lease space to tenants under agreements with varying terms. Our leases are accounted for as operating leases, and, although certain leases of the properties provide for tenant occupancy during periods for which no rent is due and/or for increases or decreases in the minimum lease payments over the terms of the leases, revenue is recognized on a straight-line basis over the terms of the individual leases. Revenue recognition under a lease begins when the lessee takes possession of or controls the physical use of the leased asset. Generally, possession or control occurs on the lease commencement date. In all cases, we have determined that we are the owner of any tenant improvements that we fund pursuant to the lease terms. In cases where significant tenant improvements are made prior to lease commencement, the leased asset is considered to be the finished space, and revenue recognition therefore begins when the improvements are substantially complete. Revenue from tenant reimbursements of taxes, maintenance expenses and insurance is recognized in the period the related expense is recorded. Additionally, certain of our lease agreements contain provisions that grant additional rents based upon tenants’ sales volumes (contingent or percentage rent). Percentage rents are recognized when the tenants achieve the specified targets as defined in their lease agreements. Accrued rents are included in tenant and accounts receivable, net.
Impairment of Long Lived Assets
We review our properties for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through operations. We determine whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the residual value of the property, with the carrying value of the individual property. If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its fair value. Both the estimated undiscounted cash flow analysis and fair value determination are based upon various factors which require complex and subjective judgments to be made by management. Such assumptions include projecting lease-up periods, holding periods, cap rates, rental rates, operating expenses, lease terms, tenant credit-worthiness, tenant improvement allowances, terminal sales value and certain macroeconomic factors among other assumptions to be made for each property.
Real Estate Development
Expenditures related to the development of real estate are carried at cost, which includes capitalized carrying charges, acquisition costs and development costs. Carrying charges, primarily interest, real estate taxes and loan acquisition costs, and direct and indirect development costs related to buildings under construction are capitalized as part of construction in progress. The capitalization of such costs ceases at the earlier of one year from the date of completion of major construction or when the property, or any completed portion, becomes available for occupancy.
Depreciation
Depreciation is computed using the straight-line method over an estimated useful life of up to 39 years for buildings, up to 11 years for site improvements and over the life of the respective leases for tenant improvements. The determination of useful lives requires judgment and includes significant estimates which management reassesses as circumstances warrant. In the case of a property redevelopment, we reassess the useful lives of specific buildings or other improvements to be demolished as part of that redevelopment once the redevelopment is probable of occurring. During 2010, we re-evaluated the useful lives of certain buildings within our Woodlake Square retail center as a result of our decision to redevelop the property and demolish certain buildings. As a result of this change in estimate, depreciation expense was $6.2 million higher in 2010 during the period in which we consolidated the Woodlake Square property than it otherwise would have been.
Investment in Non-Consolidated Entities
As of December 31, 2012, we had ownership interests in five real estate properties through ownership interests in joint ventures. Although we exercise significant influence over the activities of these properties, we do not have a controlling financial interest in four of the five joint ventures. Accordingly, our joint venture interests in these four properties are reported under the equity method. Our joint ventures recognize revenues from rents and tenant reimbursements in the same manner as discussed under “Revenue Recognition” above; however, we record our percentage interest in the earnings and losses of these entities in our statement of operations on a net basis in equity in losses from non-consolidated entities on our consolidated statements of operations.
We review our investments in non-consolidated entities for other-than-temporary impairment. Accordingly, we review the investments held by the underlying investee entities for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through operations. We determine whether an impairment in value occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the residual value of the investment, with the carrying value of the individual investment. If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its fair value. Both the estimated undiscounted cash flow analysis and fair value determination are based upon various factors that require complex and subjective judgments to be made by management. Such assumptions include projecting lease-up periods, holding periods, cap rates, rental rates, operating expenses, lease terms, tenant creditworthiness, tenant improvement allowances, terminal sales value and certain macroeconomic factors among other assumptions to be made for each investment. No impairment charges were recognized during the years ended December 31, 2012 and December 31, 2011. As discussed in Note 4 to the Notes to Consolidated Financial Statements, our joint venture that owns the Cambridge Holcombe property recorded an impairment during the year ended December 31, 2010. Our portion of such impairment was approximately $2.6 million and was recorded in equity in losses from non-consolidated subsidiaries.
RESULTS OF OPERATIONS
Factors which may influence our results of operations from period to period include:
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 and to lease currently available space and space available from unscheduled lease terminations at levels not less than the existing rental rates. Negative trends in one or more of these factors could adversely affect our rental income in future periods.
Scheduled Lease Expirations - During 2013, 53% of the total square footage of our two consolidated properties is scheduled to expire (94.6% of which is related to the expiration of a temporary lease with The Urban Rug Outlet for 82,120 square feet at Woodlake Pointe which is under redevelopment), and 5.2% of the total square footage of our non-consolidated properties is scheduled to expire. Our leasing strategy for 2013 focuses on negotiating renewals for leases scheduled to expire during the year and identifying new tenants or existing tenants seeking additional space to occupy the square footage for which we are unable to negotiate such renewals.
Comparison of the year ended December 31, 2012 to the year ended December 31, 2011
Revenue. Revenue increased approximately $337,000 for the year ended December 31, 2012 as compared to 2011 ($1.3 million in 2012 versus $931,000 in 2011). The increase is primarily due to a favorable reconciliation and resolution of prior year common area maintenance recoveries received during the first quarter of 2012 and additional rental income from a new single tenant at our Woodlake Pointe property that opened for business during the fourth quarter of 2012.
Asset Management Fees - Related Party. Asset management fees - related party decreased approximately $186,000 for the year ended December 31, 2012 as compared to 2011 ($154,000 in 2012 versus $340,000 in 2011). Our asset management fees are calculated based upon the net value of our assets, which decreased between the 2011 and the 2012 periods.
Property Expense. Property expense increased $101,000 for the year ended December 31, 2012 as compared to 2011 ($524,000 in 2012 versus $423,000 in 2011). The increase is primarily due a $94,000 property tax refund that was received during the third quarter of 2011, reducing 2011 property expense with no similar refund received during 2012.
Interest Expense. Interest expense increased approximately $120,000 for the year ended December 31, 2012 as compared to 2011 ($543,000 in 2012 versus $423,000 in 2011). This increase in interest is primarily related to an increase in our notes payable - related party and our construction loan related to our Woodlake Pointe property.
Equity in Losses From Non-Consolidated Entities. Loss from non-consolidated entities decreased approximately $243,000 for the year ended December 31, 2012 as compared to 2011 ($1.1 million in 2012 versus $1.3 million in 2011). The decrease in loss is attributable to an increase in occupancy at our Shadow Creek Ranch property, which resulted in an increase to net income of $926,000 (our portion of which was $93,000). Also contributing to the decrease is the sale of a parcel of land at our Woodlake Square property that occurred during the first quarter 2012, which resulted in a gain on sale of approximately $437,000 (our portion of which was $26,000).
Net Loss Attributable to Non-controlling Interests. Net loss attributable to non-controlling interests decreased approximately $119,000 for the year ended December 31, 2012 as compared to 2011 ($100,000 in 2012 versus $219,000 in 2011). The decrease is primarily due to additional income received from a new tenant at our Woodlake Pointe property that opened for business during the further quarter of 2012.
Comparison of the year ended December 31, 2011 to the year ended December 31, 2010
Revenue. Revenue decreased approximately $1.6 million for the year ended December 31, 2011 as compared to 2010 ($931,000 in 2011 versus $2.5 million in 2010). The decrease is primarily due to the sale of 90% interest and related deconsolidation of Woodlake Square in July 2010. The year ended December 31, 2010 includes rental income of $1.5 million generated from the operations of Woodlake Square prior to its sale, whereas our 6% share of the property’s earnings was recorded through the equity in loss from non-consolidated entities during 2011.
Asset Management Fees - Related Party. Asset management fees - related party decreased approximately $90,000 for the year ended December 31, 2011 as compared to 2010 ($340,000 in 2011 versus $430,000 in 2010). Our asset management fees are calculated based upon the net value of our assets, which has decreased between 2010 and 2011.
Property Expense. Property expense decreased $564,000 for the year ended December 31, 2011 as compared to 2010 ($423,000 in 2011 versus $987,000 in 2010). The decrease is primarily due to the sale of 90% interest and related deconsolidation of Woodlake Square in July 2010. The year ended December 31, 2010 includes property expenses of $554,000 incurred by Woodlake Square prior to its sale, whereas our 6% share of the property’s earnings was recorded through the equity in loss from non-consolidated entities during 2011.
Property Management Fees - Related Party. Property management fees - related party decreased $46,000 for the year ended December 31, 2011 as compared to 2010 ($44,000 in 2011 versus $90,000 in 2010). The decrease is primarily due to the sale of 90% interest and related deconsolidation of Woodlake Square in July 2010. The year ended December 31, 2010 includes property management fees of $47,000 incurred by Woodlake Square prior to its sale, whereas our 6% share of the property’s earnings was recorded through the equity in loss from non-consolidated entities during 2011.
Depreciation and Amortization Expense. Depreciation and amortization expense decreased approximately $7.1 million for the year ended December 31, 2011 as compared to 2010 ($543,000 in 2011 versus $7.7 million in 2010). The decrease is primarily due to the sale of 90% interest and related deconsolidation of Woodlake Square in July 2010. The year ended December 31, 2010 includes depreciation expense of $7.0 million recorded by Woodlake Square prior to its deconsolidation, whereas our 6% share of the property’s earnings after deconsolidation was recorded through the equity in loss from non-consolidated entities during 2011.
Impairment. As discussed further in Note 11 of the Notes to Consolidated Financial Statements, we recorded a $618,000 impairment on our investment in Woodlake Square in July 2010 with no impairment during 2011.
Interest Expense. Interest expense decreased approximately $431,000 for the year ended December 31, 2011 as compared to 2010 ($423,000 in 2011 versus $854,000 in 2010). The decrease is primarily due to the sale of 90% interest and related deconsolidation of Woodlake Square in July 2010. The year ended December 31, 2010 includes interest expense of $454,000 incurred by Woodlake Square prior to its deconsolidation, whereas our 6% share of the property’s interest expense after deconsolidation was recorded through the equity in loss from non-consolidated entities during 2011.
Equity in Losses From Non-Consolidated Entities. Loss from non-consolidated entities decreased approximately $2.3 million for the year ended December 31, 2011 as compared to 2010 ($1.3 million in 2011 versus $3.6 million in 2010). These amounts represent our ownership portion of our joint ventures’ net income or loss for the period. The decrease in loss is attributable to our portion of the impairment loss that was recognized on our Cambridge and Holcombe property in 2010, partially offset by the addition of Woodlake Square as the result of the sale of our 90% interest. We deconsolidated the property in July 2010 and now account for the property under the equity method of accounting. Woodlake Square’s earnings were included in the consolidated financials for seven months of 2010, whereas our share of the property’s earnings was recorded through the equity in loss from non-consolidated entities 2011.
Net Loss Attributable to Non-Controlling Interests. Net loss attributable to non-controlling interests decreased approximately $2.9 million for the year ended December 31, 2011 as compared to 2010 ($219,000 in 2011 versus $3.1 million in 2010). The decrease is primarily due to the deconsolidation of Woodlake Square in July 2010. The year ended December 31, 2010 includes a net loss of $2.9 million associated with Woodlake Square, whereas our 6% share of the property’s earnings during all of 2011 (after deconsolidation) was recorded through the equity in loss from non-consolidated entities. Our remaining net loss attributable to non-controlling interests for 2011 relates to the 40% interest in Woodlake Pointe that is owned by an affiliated entity.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2012 and December 31, 2011, our cash and cash equivalents totaled approximately $129,000 and approximately $422,000, respectively.
Our short-term liquidity requirements consist primarily of operating expenses and other expenditures associated with our properties, regular debt service requirements, capital expenditures and, potentially, acquisitions. We anticipate that our primary long-term liquidity requirements will include, but will not be limited to, operating expenses, making scheduled debt service payments, funding renovations, expansions, and other significant capital expenditures for our existing portfolio of properties and acquiring new assets compatible with our investment strategy, subject to the availability of attractive properties and our ability to consummate acquisitions on satisfactory terms.
We face significant liquidity challenges in implementing our strategic plan and investment strategy. Projected cash sources (including cash on hand) and uses for cash indicate periods of cash shortfalls during the year ended December 31, 2013. Further, we borrowed an additional $860,000 from AmREIT during the first quarter of 2013, primarily to fund the payment of property taxes and to fund tenant improvements and leasing commissions for our lease-up strategy at Casa Linda. However, we believe that we will be able to generate sufficient liquidity to satisfy any cash shortfalls for the remainder of 2013 through (1) managing the timing of forecasted capital expenditures related to the lease-up of properties, (2) managing the timing of operating expense payments and, to the extent possible, accelerating cash collections, (3) obtaining funds through additional borrowings from our General Partner (4) deferring the payment of fees owed to our General Partner and its affiliates, and/or (5) selling certain of our investments, including our anticipated sale of a single tenant building and portion of land at our Woodlake Pointe property. See also Note 11 in the Notes to Consolidated Financial Statements.
We expect to fund approximately $1.5 million in capital expenditures over the next two years at our Casa Linda property (a 50% joint venture between us and MIG III) representing our 50% share of a lease-up strategy at this property. The lease-up strategy includes certain tenant build-out and site improvements to support a refinance of the property’s $38.0 million mortgage loan that matures January 2014. The joint venture has made progress with signing new leases, but additional improvements and vacancy lease-up are needed. The joint venture will likely require a one-year extension of the loan to complete this strategy so that we can later accomplish a long-term refinance of the property. We believe we will be successful in obtaining a one-year extension based on our preliminary discussions with the lending agent; however, no assurances can be given that we will be successful in obtaining the extension. We do not guarantee this debt and our risk of loss is limited to our investment balance in the Casa Linda joint venture of $2.7 million as of December 31, 2012.
On March 15, 2013, our Woodlake Pointe joint venture entered into a letter of intent to sell a portion of the land and a single tenant building at our Woodlake Pointe property for $12.0 million to an unrelated third party. The land and building are secured by a $6.2 million loan that will be repaid in full with proceeds from the sale. The sale is expected to close in the second quarter of 2013, and our portion of the net cash proceeds (60%) is approximately $3.1 million. We plan to use the proceeds to fund the Casa Linda lease-up strategy (discussed above) and for working capital needs.
There is no guarantee that we and our joint ventures will be successful with some or all of the above liquidity initiatives and we may continue to look to AmREIT to provide additional financial support to meet our operating needs.
AmREIT has agreed to continue to provide financial support to us through and including the next twelve months in the form of continued deferral of payment of advisory fees earned and payable to the extent such deferral of fees is necessary for our continued operation. Such fees may include property management fees, asset management fees, development fees, interest on amounts owed to AmREIT and reimbursement of certain of AmREIT’s general and administrative costs. AmREIT has agreed that it will not require us to repay the $3.7 million notes payable due to AmREIT until a date subsequent to January 1, 2014 if such repayment were to prevent the execution of our strategy or present an unnecessary financial hardship. AmREIT’s agreement to provide such financial support and continued deferral of payment is subject to its continued ability to do so.
Even with the above, we may still incur individual setbacks and significant losses. Additionally, we may have liquidity demands based upon our requirement to perform under guarantees of certain of our joint ventures to the extent they are unable to fully satisfy certain guaranteed debts. During 2011, the $8.1 million mortgage held by our Cambridge Holcombe joint venture matured unpaid. On April 26, 2012, the joint venture successfully extended this debt until March 27, 2013 in exchange for a 10% principal reduction on the note and payment of accrued interest. Our portion of this payment (50%) was $536,000, which was funded through a loan from AmREIT. The joint venture has entered into a contract to sell one acre of the property to a third party, subject to a due diligence period that expired in December 2012. The third party has $325,000 held in escrow that is non-recoverable; however, has the ability to extend the contract for up to an additional nine months with a $25,000 non-refundable payment for each month they extend. Based on preliminary discussions with the lender, we expect to extend the loan until September 2014 with the assignment of the aforementioned sales contract as additional security and a joint and several guaranty by us and our joint venture partner of 60% of the loan balance. The anticipated proceeds from the sale will pay off the loan in full and leave the remaining acre on the Cambridge & Holcombe site unencumbered.
Based on the foregoing, it is possible that investors may not recover all of their original investment. We currently do not expect to distribute net sales proceeds or any net cash flows from operations to our Partners until we enter the liquidation phase. If the real estate market has not sufficiently recovered prior to our liquidation period commencement date of November 2013, we may seek to postpone liquidation if we feel it is in the best interests of our Limited Partners at that time.
Current Market Conditions
Over the past several years our results of operations and valuations of our real estate assets have been negatively impacted by overall economic conditions. The United States economy is still experiencing weakness from the past economic recession, which resulted in increased unemployment, weakening of tenant financial condition, large-scale business failures and tight credit markets. High levels of unemployment have persisted, and rental rates and valuations for retail space have not fully recovered to pre-recession levels and may not for a number of years. Furthermore, the uncertainty surrounding the rapidly increasing national debt of the United States and continuing global economic uncertainty have kept markets volatile. Most of our retail properties were purchased prior to 2008 when retail real estate market prices were much higher, and our property valuations have been negatively impacted by these market dynamics.
Our Historical Cash Flows
Operating Activities - During the year ended December 31, 2012, net cash flows used in operating activities decreased $154,000 as compared to 2011 ($394,000 used in operating activities in 2012 compared to $548,000 used in 2011). This decrease in operating cash outflows was primarily attributable to a reduction in operating losses.
Investing Activities - Net cash flows used in investing activities increased approximately $6.3 million during the year ended December 31, 2012 as compared to 2011 ($6.8 million of net cash flows used in investing activities in 2012 versus $495,000 in 2011). This increase in investing outflows was primarily due to $6.1 million in real estate improvements at our Woodlake Pointe property as part of its redevelopment.
Financing Activities - Net cash flows provided by financing activities increased approximately $6.8 million during the year ended December 31, 2012 as compared to 2011 ($6.9 million in 2012 versus $156,000 in 2011). The increase was primarily attributable to approximately $6.0 million in construction draws on our Woodlake Pointe construction loan to fund the redevelopment of that property, and approximately $892,000 loaned to us by our General Partner.
Future Contractual Obligations
As of December 31, 2012, we had the following contractual long-term mortgage debt obligations (see also Note 6 to our accompanying consolidated financial statements for further discussion regarding the specific terms of our debt) (in thousands):
Indemnification of General Partner
Our Limited Partners, within the limits of their respective capital contributions and to the extent of their allocable portion of Partnership assets, agree to indemnify and hold our General Partner harmless from and against actual and reasonable third-party claims or lawsuits arising out of our activities and operations, except those instances in which our General Partner failed to adhere to its fiduciary obligations to us, or acted with gross negligence or willful or wanton misconduct. Amounts paid to indemnify our General Partner may be recouped to the extent such payments relate to a third-party claim or lawsuit arising out of a breach by our General Partner of its fiduciary obligations to us.
Off-Balance Sheet Arrangements
As of December 31, 2012, none of our off-balance sheet arrangements had or are reasonably likely to have a material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital resources or capital expenditures. However, we own interests in several unconsolidated joint ventures that are accounted for under the equity method as we exercise significant influence over, but do not control, the investee.
We also serve as the guarantor of debt in the amount of $39.8 million that is the primary obligation of our non-consolidated joint ventures. Included in this amount is $3.6 million related to our Cambridge & Holcombe joint venture that matures in March 2013. See Note 4 of the Notes to Consolidated Financial Statements for a further discussion of the joint venture’s plans to repay this debt. The remaining debt for which we serve as guarantor matures in 2014 and 2015.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Index to Financial Statements beginning on page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our General Partner’s CEO and CFO, our principal executive officer and principal financial officer respectively, our General Partner’s management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Exchange Act) as of December 31, 2012. Based on that evaluation, our General Partner’s CEO and CFO concluded, that as of December 31, 2012, our disclosure controls and procedures were effective in causing material information relating to us to be recorded, processed, summarized and reported by management on a timely basis and to ensure the quality and timeliness of our public disclosures with SEC disclosure obligations.
Management’s Annual Report on Internal Control over Financial Reporting
Our General Partner and its affiliates maintain a system of internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, which is a process designed under the supervision of the AmREIT principal executive officer and principal financial officer and effected by AmREIT’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that:
•
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
•
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Partnership and its subsidiaries are being made only in accordance with authorizations of management and directors of our General Partner; and
•
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Our General Partner is responsible for establishing and maintaining adequate internal control over financial reporting, and, with the participation of AmREIT’s CEO and CFO, who are our principal executive officer and principal financial officer, respectively, conducted an evaluation of the effectiveness of AmREIT’s internal control over financial reporting as of December 31, 2012 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, we believe that our internal control over financial reporting is effective as of December 31, 2012.
Changes in Internal Control Over Financial Reporting
There has been no change to our internal control over financial reporting during the three months ended December 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS.
We have no directors or executive officers. We are managed by our General Partner, which does not have any employees and relies upon the personnel of AmREIT and its affiliates to perform services for us. Our limited partnership agreement provides that we will continue until December 31, 2026, unless sooner terminated. As we have no directors and are managed by our General Partner, we have no standing audit, nominating, or compensation committees.
The following table sets forth certain information regarding the officers and director of our General Partner, all of whom are officers of AmREIT and expected to make a significant contribution to us.
Name
Age
Position
H. Kerr Taylor
Chairman, President and Chief Executive Officer
Chad C. Braun
Vice President, Chief Financial Officer, Chief Operating Officer, Treasurer and Secretary
Brett P. Treadwell
Managing Vice President - Finance
H. Kerr Taylor serves as our General Partner’s President, Chief Executive Officer and Director, and has served in this capacity since the formation of the Partnership. He is the founder of AmREIT and serves as its Chairman of the Board, Chief Executive Officer and President. Mr. Taylor has guided the growth of AmREIT and its predecessors for over 29 years. His primary responsibilities include overseeing strategic initiatives as well as building, mentoring and leading AmREIT’s team of professionals. Mr. Taylor has over 33 years of experience within the real estate industry, and has participated in over 300 transactions involving brokerage, development and management of premier real estate projects. He attended Trinity University, graduating with a Bachelor of Arts degree and then attended Southern Methodist University where he received his Masters Degree in Business Administration. Mr. Taylor also attended law school at South Texas College of Law where he received his Doctor of Jurisprudence. Mr. Taylor is chairman of the board of Pathways for Little Feet and serves as a board member of Life House, Inc., Uptown District and as an Elder of First Presbyterian Church. Mr. Taylor is a lifetime member of the International Council of Shopping Centers and Urban Land Institute and is a member of the Texas Bar Association.
Mr. Taylor was selected and is qualified to serve as the sole director or our General Partner because of his intimate knowledge of AmREIT and its affiliated companies and his extensive experience within the real estate industry.
Chad C. Braun serves as our General Partner’s Executive Vice President, Chief Financial Officer, Chief Operating Officer, Treasurer and Secretary, and has served in this capacity since the formation of the Partnership. He also serves in this same position for AmREIT. Mr. Braun is responsible for corporate finance, equity capital markets, debt structuring and placement, investor relations, accounting, SEC reporting, and he oversees investment sponsorship and product creation. Mr. Braun has over 18 years of accounting, financial and real estate experience, and prior to joining AmREIT in 1999, he served as a manager in the real estate advisory services group at Ernst & Young LLP. He has provided extensive consulting and audit services, including financial statement audits, portfolio acquisition and disposition, portfolio management, merger integration and process improvement, financial analysis and capital markets and restructuring transactions, to a number of real estate investment trusts and private real estate companies. Mr. Braun graduated from Hardin Simmons University with a Bachelor of Business Administration degree in accounting and finance and subsequently earned the CPA designation and his Series 63, 7, 24 and 27 securities licenses. He is a member of the National Association of Real Estate Investment Trusts and the Texas Society of Certified Public Accountants.
Brett P. Treadwell serves as our General Partner’s Managing Vice President - Finance and has served in this capacity since the formation of the Partnership. He also serves in this position for AmREIT. Within AmREIT he is responsible for leading AmREIT’s financial reporting team as well as assisting in establishing and executing AmREIT’s strategic financial initiatives. He oversees our filings with the SEC, our periodic internal reporting to management and our compliance with the Sarbanes-Oxley Act of 2002. Mr. Treadwell has over 20 years of accounting and financial experience and prior to joining AmREIT in 2004, he served as a senior manager with Arthur Andersen LLP and with PricewaterhouseCoopers, LLP. He has provided extensive audit services, regularly dealt with both debt and equity offerings for publicly traded and privately owned clients in various industries and has strong experience with SEC reporting and registration statements and offerings. Mr. Treadwell graduated Magna Cum Laude from Baylor University with a Bachelor of Business Administration and subsequently earned the CPA designation.
Section 16(a) Beneficial Ownership Reporting Compliance
Based on a review of Forms 3, 4 and 5 furnished to us under Rule 16a-3(e) of the Exchange Act during the fiscal year ended December 31, 2012, we know of no reporting person who has failed to file on a timely basis, as disclosed in the above forms, any report required by Section 16(a) of the Exchange Act during the fiscal year ended December 31, 2012.
Code of Ethics
We have not adopted a Code of Ethics because we are managed by our General Partner, and therefore, have no officers or employees to whom a Code of Ethics would apply.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
We are managed by our General Partner, and we have no directors, executive officers or employees to whom we pay compensation.
See “Item 13. Certain Relationships and Related Transactions, and Director Independence” below for the fees and expenses we pay to our General Partner and its affiliates.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDER MATTERS.
Securities Authorized for Issuance Under Equity Compensation Plans
We do not have any compensation plans under which we are authorized to issue equity securities.
Security Ownership of Certain Beneficial Owners and Management
We know of no person (including a “group” as that term is used in Section 13(d)(3) of the Exchange Act) who is the beneficial owner of more than five percent of our Units.
We have no officers or directors. Our General Partner owns our sole general partner interest and also owns 32 Units. None of the officers of our General Partner owns any of our Units.
As of March 28, 2013, there were 1,991 Units issued and outstanding owned by 813 investors.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Compensation Arrangements
Our General Partner and its affiliates received the payments and fees from us described below. These payments and fees were not negotiated and may be higher than payments and fees that would have resulted from an arm’s length transaction with an unrelated entity. In addition to the fees paid by us as described below, the non-consolidated entities in which we have an investment paid a total of $1.2 million and $1.2 million in property management, construction management and leasing fees to one of our affiliated entities for the fiscal year ended December 31, 2012 and 2011, respectively.
For the year ended
December 31,
Type and Recipient
Determination of Amount
Asset Management Fee - General Partner
A fee equal to 1.0% of net invested capital under management for accounting related services, investor relations, facilitating the deployment of capital, and other services provided by our General Partner to us.
$ 153,552
$ 340,333
Acquisition Fees - General Partner
A fee not to exceed, for any single acquisition, 3% of the contract purchase price up to $20 million, and 2% of the contract purchase price in excess of $20 million.
No amounts
have been paid
No amounts
have been paid
Development and Redevelopment Fees - General Partner
Development and redevelopment fees on properties we acquire an interest in and for which we intend to develop, redevelop or substantially renovate. These fees will be based on the total project costs, including the cost of acquiring the property, and will be paid as project costs are incurred. These fees shall not exceed, for any single property, 6% of the project cost up to $10 million, 5% of the project cost between $10 million and $20 million, and 4% of the project cost in excess of $20 million. We will not pay both acquisition fees and development or redevelopment fees on the same property.
No amounts
have been paid
No amounts
have been paid
For the year ended
December 31,
Type and Recipient
Determination of Amount
Property Management and Leasing Fees - Affiliates of the General Partner
Property management fees not to exceed 4% of the gross revenues (including, without limitation, base rent, percentage rent and expense reimbursement) received from multi-tenant or multi-pad properties, for providing management, operating, maintenance and other services required to maintain a property. Leasing fees not to exceed 4% of base rent on a lease renewal and not to exceed 6% of base rent on an initial lease; provided, however, on leases of over 10,000 square feet, leasing commissions may be paid on the basis of square footage, not to exceed $6.00 per square foot.
$ 238,790
$ 192,874
Interest expense on notes payable- related party
We incur interest on amounts loaned to us by our General Partner. See Note 6 of the Notes to Consolidated Financial Statements for a discussion of our notes payable- related party.
$ 152,285
$ 81,183
Reimbursement of Operating Expenses - General Partner
We reimburse the actual expenses incurred by our General Partner for performing acquisition, development, management and administrative functions for us, including construction and construction management fees for development and redevelopment projects.
$ 284,711
$ 283,597
Distributions During Operating Stage - General Partner
Our General Partner is entitled to distributions during our operating period.
No amounts
have been paid
No amounts
have been paid
Real Estate Brokerage Commissions - General Partner (1)
A fee not to exceed 6% of the sales price on co-brokered transactions and not to exceed 4% of the sales price on individually brokered transactions. Additionally, our General Partner and its affiliates will not be paid real estate brokerage commissions on the sale of a property if the property being sold has not generated an annual return of at least 8.5% per annum on the equity contributed to such property.
No amounts
have been paid
No amounts
have been paid
Liquidating Stage
Distributions of Net Cash Flow - General Partner
Our General Partner is entitled to distributions after our operating period.
No amounts
have been paid
No amounts
have been paid
(1)
The real estate brokerage commissions payable during the liquidation period will also be payable for actively managed properties sold during the operation period.
Joint Ventures with Affiliates
As of December 31, 2012, we had entered into four joint ventures with our affiliates.
In December 2006, we acquired a 50% interest in AmREIT Casa Linda, LP, which owns Casa Linda Plaza, a multi-tenant retail property located in Dallas, Texas. The remaining 50% is owned by MIG III, our affiliate.
In August 2007, we acquired a 40% interest in AmREIT Woodlake, LP, which owns Woodlake Square, a multi-tenant retail property located in Houston, Texas. In June 2008, we acquired an additional 20% investment interest in AmREIT Woodlake, LP from an affiliated entity at its net book value. Our affiliates, MIG III and ARIC, both owned the remaining 40% interest in AmREIT Woodlake, LP. We consolidated AmREIT Woodlake, LP in our results of operations effective January 1, 2008 as a result of the additional 20% interest that we acquired in June 2008. As discussed below, we deconsolidated AmREIT Woodlake, LP in July 2010 with the sale of the 90% interest to a third party.
In July 2010, we and our affiliated joint venture partners on our Woodlake Square property, MIG III and ARIC, entered into a joint venture agreement with a third party on our Woodlake Square property. As part of this transaction, we and our affiliates sold 90% of our interest in the property and retained a 10% ownership interest, which carries a promoted interest in cash flows once an 11.65% preferred return threshold is met on the project. Prior to the above transaction, we consolidated the property, and we recorded an impairment of approximately $618,000 which has been recorded as impairment in our consolidated statements of operations for the year ended December 31, 2010. Subsequent to the above transaction, we retained a 6% interest in the joint venture. The sale generated cash proceeds of approximately $3.4 million (our share was approximately $2.0 million), and the $23.8 million loan on the property was paid in full at closing. The new entity in which we now own a 6% interest, VIF II/AmREIT Woodlake L.P., is the borrower on a new $20.9 million loan, which has a 3-year term with two one-year extension options, provided certain conditions are met. We, along with our affiliate, MIG III are joint and several repayment guarantors on the loan. As a result of our reduced ownership interest and decision-making ability, we no longer have a controlling financial interest in the property, and we deconsolidated this property as of the date of the transaction and began accounting for the property under the equity method of accounting.
In November 2007, we acquired a 40% interest in AmREIT Westheimer Gessner, LP, a joint venture that owns Woodlake Pointe, a multi-tenant retail property located in Houston, Texas. In June 2008, we acquired an additional 20% investment interest in AmREIT Westheimer Gessner, LP from an affiliated entity at its net book value. As a result of our 60% ownership interest, we consolidate AmREIT Westheimer Gessner, LP into our results of operations. In May 2008, the joint venture acquired an additional tract of land adjacent to Woodlake Pointe property. Our affiliates, MIG III and ARIC, own the remaining 40% interest in AmREIT Westheimer Gessner, LP.
In February 2008, we acquired a 10% interest in Shadow Creek Holding Company LLC, which owns Shadow Creek Ranch, a multi-tenant retail property located in Pearland, Texas, for approximately $4.8 million. The remaining 90% is owned by an unaffiliated third party (80%) and AmREIT (10%).
Directors
We have no directors and are managed by our General Partner. H. Kerr Taylor is the sole director of our General Partner.
Loans from Affiliates
As of December 31, 2012 and 2011, we had $3.7 million and $2.0 million, respectively, that was owed to AmREIT in notes payable - related party. See also Note 6 of the Notes to Consolidated Financial Statements. We borrowed an additional $860,000 from AmREIT during the first quarter of 2013, primarily to fund the payment of property taxes and to fund tenant improvements and leasing commissions for our lease-up strategy at Casa Linda.
AmREIT Realty Investment Corporation
ARIC is a fully integrated real estate development and operating business that is wholly owned by AmREIT, the parent of our General Partner. ARIC employs a full complement of brokers and real estate professionals who provide development, acquisition, brokerage, leasing, construction management, asset and property management services to AmREIT affiliated entities and to third parties. ARIC serves as one of our property managers and is responsible for managing and leasing some of our properties. We pay ARIC property management and leasing fees as described above. ARIC hires, directs and establishes policies for employees who will have direct responsibility for the operations of each property it manages, which may include but is not limited to on-site managers and building and maintenance personnel. Certain employees of the property manager may be employed on a part-time basis and may also be employed by our General Partner or its affiliates. ARIC also directs the purchase of equipment and supplies and supervises all maintenance activity. The management fees paid to ARIC includes, without additional expense to us, all of its general overhead costs.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
KPMG LLP, independent registered public accounting firm and certified public accountants (“KPMG”), served as our independent accountants for the fiscal year ended December 31, 2012. The following is an explanation of the fees billed to us by KPMG for professional services rendered for the fiscal years ended December 31, 2012 and December 31, 2011.
Audit Fees
The aggregate fees billed to us for professional services related to the audit of our annual financial statements, review of financial statements included in our Forms 10-Q, or other services normally provided by KPMG in connection with statutory and regulatory filings or engagements for the fiscal years ended December 31, 2012 and December 31, 2011 totaled $138,500 and $129,050, respectively.
Audit-Related Fees, Tax Fees and All Other Fees
The services that have been performed by KPMG have been limited to audit services. Accordingly, we have paid no audit-related fees, tax fees or other fees to KPMG for the fiscal years ended December 31, 2012 and 2011.
Audit Committee’s Pre-Approval Policies and Procedures
The Company does not have an independent audit committee. Our General Partner must approve any services to be performed by our independent auditors and has approved all audit fees for the years ended December 31, 2012 and 2011, respectively.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
1.
Financial Statements. The list of our financial statements filed as part of this Annual Report on Form 10-K is set forth on page.
2.
Financial Statement Schedules. The list of our financial statement schedules filed as part of this Annual Report on Form 10-K is set forth on page.
3.
Exhibits.
It is inappropriate for readers to assume the accuracy of, or rely upon any covenants, representations or warranties that may be contained in agreements or other documents filed as Exhibits to, or incorporated by reference in, this report. Any such covenants, representations or warranties may have been qualified or superseded by disclosures contained in separate schedules or exhibits not filed with or incorporated by reference in this report, may reflect the parties’ negotiated risk allocation in the particular transaction, may be qualified by materiality standards that differ from those applicable for securities law purposes, and may not be true as of the date of this report or any other date and may be subject to waivers by any or all of the parties. Where exhibits and schedules to agreements filed or incorporated by reference as Exhibits hereto are not included in these exhibits, such exhibits and schedules to agreements are not included or incorporated by reference herein.
The following exhibits are filed as part of or incorporated by reference in this Annual Report:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AmREIT MONTHLY INCOME & GROWTH FUND IV, L.P. AND SUBSIDIARIES
FINANCIAL STATEMENTS:
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2012 and December 31,
Consolidated Statements of Operations for the years ended December 31, 2012, 2011 and 2010
Consolidated Statements of Partners’ Capital for the years ended December 31, 2012, 2011 and 2010
Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010
Notes to Consolidated Financial Statements
FINANCIAL STATEMENT SCHEDULES:
Schedule III - Consolidated Real Estate Owned and Accumulated Depreciation
for the year ended December 31, 2012
S-1
All other financial statement schedules are omitted as the required information is either inapplicable or is included in the financial statements or related notes.
Report of Independent Registered Public Accounting Firm
The Partners
AmREIT Monthly Income & Growth Fund IV, L.P.:
We have audited the accompanying consolidated balance sheets of AmREIT Monthly Income & Growth Fund IV, L.P. and subsidiaries (the “Partnership”) as of December 31, 2012 and 2011, and the related consolidated statements of operations, partners’ capital and cash flows for each of the years in the three-year period ended December 31, 2012. In connection with our audits of the consolidated financial statements, we have also audited the related financial statement schedule. These consolidated financial statements and the financial statement schedule are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AmREIT Monthly Income & Growth Fund IV, L.P. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2012 in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ KPMG LLP
Houston, Texas
March 28, 2013
AmREIT MONTHLY INCOME & GROWTH FUND IV, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except Unit data)
See Notes to Consolidated Financial Statements.
AmREIT MONTHLY INCOME & GROWTH FUND IV, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2012, 2011 and 2010
(in thousands, except for per Unit data)
See Notes to Consolidated Financial Statements.
AmREIT MONTHLY INCOME & GROWTH FUND IV, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS’CAPITAL
For the years ended December 31, 2012, 2011 and 2010
(in thousands)
See Notes to Consolidated Financial Statements.
AmREIT MONTHLY INCOME & GROWTH FUND IV, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2012, 2011 and 2010
(in thousands)
See Notes to Consolidated Financial Statements.
AmREIT MONTHLY INCOME & GROWTH FUND IV, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012, 2011 and 2010
1.
DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
General
We were formed on October 10, 2006, to acquire, develop and operate, directly or indirectly through joint venture arrangements, a portfolio of commercial real estate consisting primarily of multi-tenant shopping centers and mixed-use developments. Our General Partner is a subsidiary of AmREIT, an SEC reporting, Maryland corporation that has a class of securities listed on the NYSE and that has elected to be taxed as a REIT. The General Partner maintains its principal place of business in Houston, Texas. We commenced our principal operations on December 8, 2006 when we met the required minimum $1.0 million in our Offering and issued 40 initial Units. We closed the Offering on March 31, 2008 when we had received $49.7 million from the sale of 1,991 Units. We invested substantially all of the net proceeds of the Offering in real properties.
As of December 31, 2012, our investments included a wholly-owned property comprising approximately 36,000 square feet of GLA, one property in which we own a controlling interest (60%) comprising approximately 127,000 square feet of GLA and four properties in which we own a non-controlling interest through joint ventures comprising approximately 1.1 million square feet of GLA.
Our operating period will continue until November 15, 2013 (our scheduled liquidation period commencement date); however, the operating period may be extended to November 15, 2015 with the consent of the majority of Units held by our Limited Partners. During our operating period, our General Partner intends to hold our properties until such time as a sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears that such objectives will not be met as outlined in our strategy discussed below.
At the end of our operating period, if not extended, our General Partner will in good faith actively market for sale all of our properties other than those in the development or redevelopment stage and commence an orderly Partnership liquidation. Properties in the development or redevelopment stage at the end of the operating period will be marketed for sale upon completion. Once our General Partner has marketed for sale all of our properties, it will likely take months or years for our General Partner to sell all of our properties and wind up our operations. If our General Partner does not take all commercially reasonable efforts to diligently pursue the portfolio sale and liquidation of our portfolio on our behalf as described above, it shall forfeit its $800,000 investment in our Units.
Liquidity Challenges
We face significant liquidity challenges in implementing our strategic plan and investment strategy. Projected cash sources (including cash on hand) and uses for cash indicate periods of cash shortfalls during the year ended December 31, 2013. Further, we borrowed an additional $860,000 from AmREIT during the first quarter of 2013, primarily to fund the payment of property taxes and to fund tenant improvements and leasing commissions for our lease-up strategy at Casa Linda. However, we believe that we will be able to generate sufficient liquidity to satisfy any cash shortfalls for the remainder of 2013 through (1) managing the timing of forecasted capital expenditures related to the lease-up of properties, (2) managing the timing of operating expense payments and, to the extent possible, accelerating cash collections, (3) obtaining funds through additional borrowings from AmREIT (4) deferring the payment of fees owed to our General Partner and its affiliates, and/or (5) selling certain of our investments including our anticipated sale of a single tenant building and portion of land at our Woodlake Pointe property. See also Note 11.
We expect to fund approximately $1.5 million in capital expenditures over the next two years at our Casa Linda property (a 50% joint venture between us and MIG III) representing our 50% share of a lease-up strategy at this property. The lease-up strategy includes certain tenant build-out and site improvements to support a refinance of the property’s $38.0 million mortgage loan that matures January 2014. The joint venture has made progress with signing new leases, but additional improvements and vacancy lease-up are needed. The joint venture will likely require a one-year extension of the loan to complete this strategy so that we can later accomplish a long-term refinance of the property. We believe we will be successful in obtaining a one-year extension based on our preliminary discussions with the lending agent; however, no assurances can be given that we will be successful in obtaining the extension. We do not guarantee this debt and our risk of loss is limited to our investment balance in the Casa Linda joint venture of $2.7 million as of December 31, 2012.
On March 15, 2013, our Woodlake Pointe joint venture entered into a letter of intent to sell a portion of the land and a single tenant building at our Woodlake Pointe property for $12.0 million to an unrelated third party. The land and building are secured by a $6.2 million loan that will be repaid in full with proceeds from the sale. The sale is expected to close in the second quarter of 2013, and our portion of the net cash proceeds (60%) is approximately $3.1 million. We plan to use the proceeds to fund the Casa Linda lease-up strategy (discussed above) and for working capital needs.
There is no guarantee that we and our joint ventures will be successful with some or all of the above liquidity initiatives and we may continue to look to AmREIT to provide additional financial support to meet our operating needs.
AmREIT has agreed to continue to provide financial support to us through and including the next twelve months in the form of continued deferral of payment of advisory fees earned and payable to the extent such deferral of fees is necessary for our continued operation. Such fees may include property management fees, asset management fees, development fees, interest on amounts owed to AmREIT and reimbursement of certain of AmREIT’s general and administrative costs. We borrowed an additional $860,000 from AmREIT during the first quarter of 2013 to fund a cash shortfall. This shortfall is primarily driven by the payment of property taxes, along with the tenant improvements and leasing commissions being incurred as part of our lease-up strategy at Casa Linda. See Note 4. AmREIT has agreed that it will not require us to repay the $3.7 million notes payable due to AmREIT until a date subsequent to January 1, 2014 if such repayment were to prevent the execution of our strategy or present an unnecessary financial hardship. AmREIT’s agreement to provide such financial support and deferral of payment is subject to its continued ability to do so.
Even with the above, we may have liquidity demands based upon our requirement to perform under guarantees of certain of our joint ventures to the extent they are unable to fully satisfy certain guaranteed debts. During 2011, the $8.1 million mortgage loan owed by our Cambridge Holcombe joint venture matured unpaid. On April 26, 2012, the joint venture successfully extended this debt until March 27, 2013 in exchange for a 10% principal reduction on the note and payment of accrued interest. Our portion of this payment (50%) was $536,000, which was funded through a loan from AmREIT. The joint venture has entered into a contract to sell one acre of the property to a third party, subject to a due diligence period that expired in December 2012. Pursuant to the sales contract, the third party has deposited $325,000 into a non-refundable escrow account. The third party has the ability to extend closing the sale for up to an additional nine months with a $25,000 non-refundable payment for each month they extend. Based on preliminary discussion with the lender, we expect to extend the loan until September 2014 with the assignment of the aforementioned sales contract as additional security and a joint and several guaranty by us and our joint venture partner of 60% of the loan balance. We expect that the proceeds from the sale should be sufficient to pay off the loan in full and leave the remaining acre on the Cambridge & Holcombe site unencumbered.
Strategic Plan
We believe that the retail real estate market is likely to remain at depressed levels during 2013 when compared to pre-recession levels; however, it is difficult to determine the breadth and duration of the unfavorable financial conditions and how such conditions may affect our tenants and the valuation of our assets. To navigate these challenging market conditions, we and our General Partner have created a strategic plan to maximize the potential value of our real estate portfolio in anticipation of the liquidation period that is scheduled to commence in November 2013. The components of this strategic plan are as follows:
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Complete our development and redevelopment projects with a goal to stabilize these projects during 2013. We believe that completing our development and redevelopment projects, including their lease-up and stabilization, will allow us to maximize the potential value and return on these properties upon sale. Our investments in Cambridge & Holcombe and Woodlake Pointe represent our assets currently under development and redevelopment. See Note 4 for further discussion of redevelopment plans at each of these properties.
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Continue to operate our projects in a first-class manner with a goal to generate operating cash flow in order to re-commence distributions in 2014. We believe that upon stabilization of our development and redevelopment properties, coupled with continued and disciplined management of our operating properties, we will generate sufficient liquidity that could allow us to re-commence distributions to our Limited Partners; however, this will most likely occur during the liquidation phase as we begin to sell our real estate assets. If the real estate market has not sufficiently recovered prior to our liquidation period commencement date of November 15, 2013, and our General Partner believes that extending the operating period would be in the best interest of our Limited Partners, we may seek approval from the Limited Partners to postpone the liquidation commencement date.
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Sell our properties opportunistically, likely beginning in 2014, after the market has had a chance to recover. Once a property is marketed for sale, it may take several months, or even longer, to receive offers and complete due diligence by both parties. Our General Partner will in good faith begin to review market sales opportunities for our operating properties at the conclusion of our operating period, but retail property valuations may continue to be depressed, and accordingly, attractive sales opportunities may not exist in the near term. When deciding whether or when to sell properties, our General Partner will consider many factors including, but not limited to the potential appreciation of the property value as well as the timing of cash flows. During the liquidation period, we expect to distribute the net proceeds, if any, generated from property sales to our Limited Partners unless the General Partner has identified attractive acquisition opportunities and obtained a majority vote of the Limited Partners to re-invest such proceeds.
Although we believe that our strategic plan maximizes the potential value of our properties and is in the best interest of our Limited Partners, no assurances can be given that this strategy will be successful, and it is possible that investors may not recover all of their original investment. We currently do not expect to distribute net sales proceeds or any net cash flows from operations to our Limited Partners until we enter the liquidation phase. If the real estate market has not sufficiently recovered prior to our liquidation period commencement date of November 2013, we may seek to postpone liquidation if our General Partner believes it is in the best interests of our Limited Partners at that time.
Additionally, the above steps may not be sufficient to meet all of our cash flow needs, and we could incur individual setbacks and possibly significant losses. Deterioration in the United States economy or the bankruptcy or insolvency of one or more of our significant tenants could cause us not to have enough cash to meet our current plans, which could further negatively impact our future financial condition or results of operations. Notwithstanding the strategic plan and the liquidity initiatives described above, we still may incur cash shortfalls if we are required to perform under certain guarantees of our joint ventures or are unable to refinance certain debt as it comes due, which could result in lender repossession of one or more properties owned by us and/or our joint ventures or the forced to sale of one or more properties at a time when it is disadvantageous to do so, potentially resulting in losses on the disposition of those properties.
2.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Our financial records are maintained on the accrual basis of accounting whereby revenues are recognized when earned and expenses are recorded when incurred. The consolidated financial statements include our accounts as well as the accounts of any wholly- or majority-owned subsidiaries in which we have a controlling financial interest. Investments in joint ventures and partnerships in which we have the ability to exercise significant influence but do not exercise financial and operating control are accounted for using the equity method. See Note 4. The significant accounting policies of our non-consolidated entities are consistent with those of our subsidiaries in which we have a controlling financial interest. As of December 31, 2012, we do not have any interests in variable interest entities. All significant inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
We consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consist of demand deposits at commercial banks and money market funds.
Revenue Recognition
Rental income from operating leases - We lease space to tenants under agreements with varying terms. Our leases are accounted for as operating leases, and, although certain leases of the properties provide for tenant occupancy during periods for which no rent is due and/or for increases or decreases in the minimum lease payments over the terms of the leases, revenue is recognized on a straight-line basis over the terms of the individual leases. Revenue recognition under a lease begins when the lessee takes possession of or controls the physical use of the leased asset. Generally, possession or control occurs on the lease commencement date. In all cases, we have determined that we are the owner of any tenant improvements that we fund pursuant to the lease terms. In cases where significant tenant improvements are made prior to lease commencement, the leased asset is considered to be the finished space, and revenue recognition therefore begins when the improvements are substantially complete. Revenue from tenant reimbursements of taxes, maintenance expenses and insurance is recognized in the period the related expense is recorded. Accrued rents are included in tenant and accounts receivable, net.
Receivables and Allowance for Uncollectible Accounts
Tenant and Accounts Receivables, net - Included in tenant and accounts receivables are base rents, tenant reimbursements and adjustments related to recording rents on a straight-line basis. An allowance for the uncollectible portion of accrued rents and accounts receivable is determined based upon customer credit-worthiness (including expected recovery of our claim with respect to any tenants in bankruptcy), historical bad debt levels, and current economic trends. Bad debt expenses and any related recoveries related to tenant receivables are included in property expense. As of December 31, 2012 and December 31, 2011, our allowance for uncollectible accounts related to our tenant receivables was $32,000 and $140,000, respectively.
Accounts Receivable - Related Party - Included in accounts receivable - related party are short-term cash advances provided to certain of our affiliated investment entities primarily for their working capital needs. These cash advances are due upon demand.
Development Properties
Expenditures related to the development of real estate are capitalized as part of construction in progress, which includes carrying charges, primarily interest, real estate taxes and loan acquisition costs, and direct and indirect development costs related to buildings under construction. The capitalization of such costs ceases at the earlier of one year from the date of completion of major construction or when the property, or any completed portion, becomes available for occupancy. We capitalize costs associated with pending acquisitions of raw land once the acquisition of the property is determined to be probable. During the years ended December 31, 2012, 2011 and 2010, interest and property taxes in the amount of $348,000, $267,000, and $297,000, respectively, were capitalized on properties under development or redevelopment.
Depreciation
Depreciation is computed using the straight-line method over an estimated useful life of up to 39 years for buildings, up to 11 years for site improvements and over the term of the lease for tenant improvements. We re-evaluate the useful lives of our buildings and improvements as warranted by changing conditions at our properties. As part of this re-evaluation, we may also consider whether such changing conditions indicate a potential impairment, and we perform an impairment analysis, as necessary, at the property level. In the case of a property redevelopment, we reassess the useful lives of specific buildings or other improvements to be demolished as part of that redevelopment once the redevelopment is probable of occurring. During 2010, we re-evaluated the useful lives of certain buildings within our Woodlake Square retail center as a result of our decision to redevelop the property and demolish certain buildings. As a result of this change in estimate, depreciation expense was $6.2 million higher in 2010 during the period in which we consolidated the Woodlake Square property than it otherwise would have been.
Impairment
We review our properties for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets, including acquired lease intangibles and accrued rental income, may not be recoverable through operations. We determine whether an impairment in value has occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the residual value of the property, with the carrying value of the individual property. If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its fair value. Both the estimated undiscounted cash flow analysis and fair value determination are based upon various factors that require complex and subjective judgments to be made by management. Such assumptions include projecting lease-up periods, holding periods, cap rates, rental rates, operating expenses, lease terms, tenant creditworthiness, tenant improvement allowances, terminal sales value and certain macroeconomic factors among other assumptions to be made for each property. For our multi-building retail centers, we consider the entire retail center as the asset group for purposes of our impairment analysis. We review our investments in non-consolidated entities for impairment based on a similar review of the properties held by the investee entity. As further discussed in Note 11, we recorded impairments on our Woodlake Square and Cambridge & Holcombe properties in 2010.
Deferred Costs
Deferred costs include deferred leasing costs and loan acquisition costs, net of amortization. Loan acquisition costs are incurred in obtaining financing and are amortized to interest expense over the term of the debt agreements using a method that approximates the effective interest method. Deferred leasing costs consist of external commissions associated with leasing our properties and are amortized to depreciation and amortization expense on a straight-line basis over the lease term. If a lease is terminated early, or if a loan is repaid prior to maturity, the unamortized costs will be expensed. Accumulated amortization related to loan acquisition costs totaled $39,000 and $16,000 as of December 31, 2012 and 2011, respectively. Accumulated amortization related to leasing costs totaled $57,000 and $34,000 as of December 31, 2012 and 2011, respectively.
Income Taxes
No provision for U.S. federal income taxes is included in the accompanying consolidated financial statements. As a partnership, we are not subject to federal income tax, and the federal tax effect of our activities is passed through to our partners. We are, however, subject to taxation under the Texas Margin Tax, which is computed by applying the applicable tax rate (1% for the Partnership) to the profit margin, which, generally, will be determined for us as total revenue less a 30% standard deduction. For the years ended December 31, 2012, 2011 and 2010 we recorded $7,000, ($4,000) and $16,000, respectively for margin tax expense (benefit).
Fair Value Measurements
GAAP emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. GAAP requires the use of observable market data, when available, in making fair value measurements. Observable inputs are inputs that the market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of ours. When market data inputs are unobservable, we utilize inputs that we believe reflect our best estimate of the assumptions market participants would use in pricing the asset or liability. When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement. As a basis for considering market participant assumptions in fair value measurements, GAAP establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs that are classified within Level 3 of the hierarchy). The three levels of inputs used to measure fair value are as follows:
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Level 1 Inputs - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Partnership has the ability to access.
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Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.
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Level 3 Inputs - Unobservable inputs for the asset or liability, which are typically based on the Partnership’s own assumptions, as there is little, if any, related market activity.
Recurring Fair Value Measurements and Financial Instruments - Our consolidated financial instruments consist of cash and cash equivalents, tenant and accounts receivable, accounts receivable - related party, notes payable, notes payable - related party, accounts payable and other liabilities and accounts payable - related party. The carrying values of all of the financial instruments, except for our notes payable are representative of the fair values due to the short-term nature of the instruments. See Note 6 for fair value disclosures of our notes payable.
In determining the fair value of our debt instruments, we determine the appropriate Treasury Bill Rate based on the remaining time to maturity for each of the debt instruments. We then add the appropriate yield spread to the Treasury Bill Rate. The yield spread is a risk premium estimated by investors to account for credit risk involved in debt financing. The spread is typically estimated based on the property type and loan-to-value ratio of the debt instrument. The result is an estimate of the market interest rate a typical investor would expect to receive given the underlying subject asset (property type) and remaining time to maturity. We estimated the market rate for our fixed-rate debt to be approximately 3.6%, and we estimated that our variable-rate debt fair value approximates its carrying value as of December 31, 2012, respectively. We believe the fair value of our notes payable is classified in Level 2 of the fair value hierarchy. As of December 31, 2012 and 2011, the carrying value of debt obligations associated with our consolidated entities was approximately $12.1 million and $6.2 million, respectively, with an estimated fair value of $12.6 million and $6.7 million, respectively.
Non-Recurring Fair Value Measurements, Impairment - We determine whether an impairment in value occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the residual value of the property, with the carrying value of the individual property. If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its fair value. Both the estimated undiscounted cash flow analysis and fair value determination are based upon various factors that require complex and subjective judgments to be made by management. Such assumptions include projecting lease-up periods, holding periods, cap rates, rental rates, operating expenses, lease terms, tenant creditworthiness, tenant improvement allowances, terminal sales value and certain macroeconomic factors among other assumptions to be made for each property. For our multi-building retail centers, we consider the entire retail center as the asset group for purposes of our impairment analysis. We review our investments in non-consolidated entities for impairment based on a similar review of the properties held by the investee entity. As further discussed in Note 11, we recorded impairments on our Woodlake Square and Cambridge Holcombe properties during the year ended December 31, 2010. We did not record any impairments for the years ended December 31, 2012 and 2011. We have determined that our impairments are non-recurring fair value measurements that fall within Level 3 of the fair value hierarchy.
Interest
Interest is charged to interest expense as it accrues.
Segments
We determined that we have one reportable segment with activities related to investing in real estate. Our investments in real estate generate rental revenue and other income through the leasing of multi-tenant retail properties, which comprised 100% of our total consolidated revenues for all periods presented. We evaluate operating performance on an individual property level. However, as all of our properties have similar economic characteristics, tenants, products and services, our properties have been aggregated into one reportable segment.
Subsequent Events
Except as disclosed in Note 6 related to $860,000 in additional loans obtained from AmREIT and in Note 11 related to the sale of a portion of the land and a single tenant building at our Woodlake Pointe property, we did not have any material subsequent events as of the date of this filing that impacted our consolidated financial statements.
3.
OPERATING LEASES
Our operating leases range from one month to twenty-five years and generally include one or more five year renewal options. A summary of minimum future base rentals to be received, exclusive of any renewals, under non-cancelable operating leases in existence at December 31, 2012 is as follows (in thousands):
Future minimum rental revenue excludes amounts that may be received from tenants for reimbursements of operating costs, real estate taxes and insurance. Expense reimbursements recognized as revenue totaled $398,000, $258,000 and $606,000 during the years ended December 31, 2012, 2011 and 2010, respectively.
4.
INVESTMENT IN NON-CONSOLIDATED ENTITIES
We have investments in four non-consolidated entities through which we own an interest in four properties that we report under the equity method of accounting due to our ability to exercise significant influence over them.
Casa Linda - In December 2006, we acquired a 50% interest in AmREIT Casa Linda, LP which owns Casa Linda Plaza, a multi-tenant retail property located in Dallas, Texas with a combined GLA of approximately 325,000 square feet. The remaining 50% is owned by MIG III. The property is secured by a $38.0 million, seven-year mortgage loan that matures January 2014. The loan bears an annual interest rate of 5.48% and is interest-only until maturity. During 2012, we and MIG III initiated a lease-up strategy that includes certain tenant build-out and site improvements to support a refinance of the property’s mortgage. The joint venture has made progress with signing new leases, but additional improvements and vacancy lease-up are needed. The joint venture will likely require a one-year extension of the loan to complete this strategy so that we can later accomplish a long-term refinance of the property. We believe we will be successful in obtaining a one-year extension based on our preliminary discussions with the lending agent; however, no assurances can be given that we will be successful in obtaining the extension. We do not guarantee this debt and our risk of loss is limited to our investment balance in the Casa Linda joint venture of $2.7 million as of December 31, 2012. We expect that our portion of these costs (50% to be incurred as part of this strategy is approximately $1.5 million. We expect to fund our capital requirements from proceeds received from the sale of a portion of the land and a single tenant building at Woodlake Pointe as further described below.
Cambridge & Holcombe - In December 2007, we acquired a 50% interest in Cambridge & Holcombe, LP which owns 2.02 acres of raw land that may be developed, sold or contributed to a joint venture in the future. The property is located adjacent to the Texas Medical Center in Houston, Texas. The remaining 50% is owned by an unaffiliated third party. During 2010, we recorded an impairment of approximately $2.6 million on this investment which has been recorded our share of an impairment loss at the property level as a component of equity in losses from non-consolidated subsidiaries in our consolidated statements of operations. During 2011, the joint venture the $8.1 million mortgage loan owed by our Cambridge & Holcombe joint venture matured unpaid. During 2011, we executed a forbearance agreement with the lender, which extended the maturity of the note and deferred a portion of the interest payments through March 27, 2012. On April 26, 2012, we successfully extended this debt until March 27, 2013 in exchange for a 10% principal reduction on the note and payment of accrued interest. Our portion of this payment (50%) was $536,000, which was funded through a loan from AmREIT. The joint venture has entered into a contract to sell one acre of the property to a third party, subject to a due diligence period that expired in December 2012. Pursuant to the sales contract, the third party has deposited $325,000 into a non-refundable escrow account. The third party has the ability to extend closing the sale for up to an additional nine months with a $25,000 non-refundable payment for each month they extend. Based on preliminary discussions with the lender, we expect to extend the loan until September 2014 with the assignment of the aforementioned sales contract as additional security and a joint and several guaranty by us and our joint venture partner of 60% of the loan balance. We expect proceeds from the sale should be sufficient to pay off the loan in full and leave the remaining acre on the Cambridge & Holcombe site unencumbered.
Shadow Creek Ranch - In February 2008, we acquired a 10% interest in Shadow Creek Holding Company LLC which owns Shadow Creek Ranch, a multi-tenant retail property located in Pearland, Texas with a combined GLA of approximately 624,000 square feet. The remaining 90% is owned by an unaffiliated third party (80%) and AmREIT (10%). We used proceeds from the Offering and obtained a 7-year mortgage loan from Metropolitan Life Insurance Company to fund our investment in the Shadow Creek Ranch property. The loan was in the amount of $65.0 million and bears an annual interest rate of 5.48% until its maturity in March 2015. As of December 31, 2012 and 2011, the amount owed under the loan was $63.4 million and $64.3 million, respectively. We guarantee up to $20.0 million of the loan balance.
Woodlake Square - Between June 2008 and July 2010, we owned a 60% interest in AmREIT Woodlake, LP (Woodlake LP) which owns Woodlake Square, a grocery-anchored, multi-tenant retail property located at the corner of Westheimer and Gessner in Houston, Texas with a combined GLA of approximately 206,000 square feet. As further discussed in Note 11, we and our affiliated entities sold a 90% interest in Woodlake LP to a third-party institutional partner. We ultimately retained a net 6% interest in the new property owner (“VIF II/AmREIT Woodlake, LP”) through our 60% controlling interest in the managing member of the new property owner, and the remaining 94% is owned by the third-party institutional partner (90%), ARIC (1%) and by MIG III (3%), an affiliated AmREIT entity.
Redevelopment of the property began in July 2010 and was completed in April 2011. As of December 31, 2012, VIF II/AmREIT Woodlake L.P had incurred approximately $6.8 million in redevelopment costs with a total expected cost of approximately $8.3 million, including additional tenant improvements and leasing costs. On February 23, 2012, the joint venture sold a parcel of land that resulted in a gain of approximately $437,000. Our 6% share of this gain (approximately $26,000) is included in our equity in losses from non-consolidated entities on our consolidated statement of operations.
Combined condensed financial information for our non-consolidated entities as of December 31, 2012 and 2011 (at 100%) is summarized as follows:
5.
ACQUIRED LEASE INTANGIBLES
We have identified and recorded the value of acquired lease intangibles at the property acquisition date. Such intangibles include the value of acquired in-place leases and above and below market leases. Acquired lease intangible assets (in-place leases and above-market leases) are amortized over the leases’ remaining terms, which range from one year to seven years. Acquired lease intangible liabilities (below-market leases) are accreted over the leases’ remaining non-cancelable lease term, plus any fixed-rate renewal options, if any, which range from one year to seven years. The amortization of above-market leases is recorded as a reduction of rental income, and the amortization of in-place leases is recorded to amortization expense.
Acquired in-place lease and above and below market lease values and their respective accumulated amortization as of December 31, 2012 and 2011 are as follows (in thousands):
The table below details our acquired lease intangible activity for the years ended December 31, 2012 and 2011, respectively (in thousands):
The estimated aggregate amortization amounts from acquired lease intangibles for each of the next five years are as follows (in thousands):
6.
NOTES PAYABLE
Our outstanding debt due to unrelated third parties at December 31, 2012 consisted of a fixed-rate mortgage loan of $5.9 million secured by the Village on the Green property and a variable-rate $6.2 million construction loan secured by our Woodlake Pointe property. As of December 31, 2012, the weighted-average remaining life of such debt is 4.3 years.
As of December 31, 2012, scheduled principal repayments on notes payable were as follows (in thousands):
The Village on the Green note payable is a fixed rate mortgage loan that bears interest at 5.5% and matures in April 2017. It may be prepaid, but is subject to a yield-maintenance premium or prepayment penalty.
Our Woodlake Pointe construction loan was obtained in November 2011 and allows for a total of $6.7 million in construction draws to fund the redevelopment of Woodlake Pointe. The variable rate loan bears interest at the prime rate, 3.25% at December 31, 2012, and matures in May 2018.
We serve as the guarantor of debt in the amount of $39.8 million that is the primary obligation of our non-consolidated joint ventures. Included in this amount is $3.6 million that relates to our Cambridge & Holcombe joint venture that matures in March 2013. See Note 4 for a further discussion of the joint venture’s plans to repay this debt. The remaining debt for which we serve as guarantor matures in 2014 and 2015. We have not accrued any liability with respect to these guarantees as we believe it is unlikely we would be required to perform and, therefore, the fair value of any obligation would be insignificant.
Notes Payable - Related Party - As of December 31, 2012 and 2011, the balance of our notes payable - related party was $3.7 million and $2.0 million, respectively. During 2012, we made the following additional borrowings: (1) $176,000 primarily to fund the payment of real estate taxes during the first quarter of 2012 (2) $580,000 primarily to fund the principal reduction and payment of accrued interest on our Cambridge & Holcombe mortgage loan during the second quarter of 2012 and (3) $136,000 for additional working capital needs and to fund capital expenditures at Casa Linda during the third quarter of 2012. The note accrues interest monthly at LIBOR plus a spread of 3.5% with a floor of 5.0% and is secured by our investment interest in the Woodlake Pointe property. During the first quarter of 2013, we borrowed an additional $860,000 primarily to fund the payment of property taxes and to fund tenant improvements and leasing commissions for our lease-up strategy at Casa Linda.
7.
DERIVATIVE FINANCIAL INSTRUMENTS
We use derivative instruments primarily to manage exposures to interest rate risks. In order to manage the volatility relating to interest rate risk, we may enter into interest rate swaps from time to time. We do not use derivative financial instruments for trading or speculative purposes. The impact of derivative accounting is immaterial to our consolidated financial statements. GAAP requires that changes in fair value of derivatives that qualify as cash flow hedges be recognized in OCI while the ineffective portion of the derivative’s change in fair value be recognized in the statement of operations as interest expense. Upon the settlement of a hedge, gains and losses associated with the transaction are recorded in OCI and amortized over the underlying term of the hedge transaction. We assess, both at inception of the hedge and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the cash flows of the hedged items. In assessing the fair value of the hedge, we use standard market conventions and techniques such as discounted cash flow analysis, option pricing models and termination costs at each balance sheet date. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.
In December 2007, Woodlake Square entered into an interest rate swap with a notional amount of $23.8 million and a fixed rate of 5.465% to hedge the interest rate risk on the $23.8 million variable-rate loan that was placed in conjunction with the 2007 acquisition of the Woodlake Square shopping center. The swap settled monthly with an amount paid to or received from our counterparty upon settlement being recorded as an adjustment to interest expense. We designated our interest rate swap as a hedge for financial reporting purposes. Accordingly, gains or losses resulting from changes in the value of our derivatives have been recorded as an adjustment to our partners’ capital through AOCI. In conjunction with the refinancing of the underlying mortgage during 2010, we terminated this hedge. Accordingly, we reclassified into earnings the gain that had been deferred in accumulated other comprehensive income to appropriately offset the earnings impact of the remaining hedged forecasted interest payments and recognized the remainder as a result of the fact that some of the hedged forecasted transactions were probable not to occur. As such, we recorded $260,000 as a reduction of interest expense in July 2010. For the years ended December 31, 2012, 2011 and 2010, we paid $0, $0 and $461,000, respectively, related to this swap which is included in interest expense.
8.
CONCENTRATIONS
As of December 31, 2012 and December 31, 2011, each of our two consolidated properties individually comprised greater than 10% of our consolidated total assets. Consistent with our strategy of investing in areas that we know well, both properties are located in Texas metropolitan areas. These Texas properties represent 100% of our rental income for each of the years ended December 31, 2012, 2011 and 2010.
The following table details the base rents generated by our top five tenants during the years ended December 31, 2012, 2011 and 2010 (in thousands):
9.
PARTNERS’ CAPITAL AND NON-CONTROLLING INTEREST
Distributions -We suspended all distribution payments in July 2009 and do not anticipate reinstating distributions until we have stabilized our properties and we generate liquidity that could allow us to re-commence distributions. See Note 1. All distributions to date have been a return of capital. During our liquidation stage (anticipated to commence in November 2013, unless extended), net cash flow, as defined, will be distributed among the limited partners and the General Partner in the following manner:
•
First - 100% to the Limited Partners (in proportion to their unreturned actual invested capital) until such time as the Limited Partners have received cumulative distributions from all sources equal to 100% of their actual invested capital (calculated using the actual purchase price per Unit);
•
Second - 100% to the General Partner until it has received cumulative distributions from all sources equal to 100% of its actual invested capital of $1,000;
•
Third - 1% to the General Partner and 99% to the Limited Partners on a per Unit basis until such time as the limited partners have received cumulative distributions from all sources equal to 8.5% per annum, cumulative, uncompounded return on their unreturned deemed capital contributions (which will be equal to (i) the product of $25,000 per Unit (regardless of the purchase price paid for a Unit) multiplied by the number of Units owned by a partner, reduced by (ii) the aggregate amount of any distributions received that constitute a return of capital contributions);
•
Fourth - 100% to the General Partner until it has received cumulative distributions from all sources (other than with respect to the Units it purchased) in an amount equal to 40% of the net cash flow paid to date to the Limited Partners in excess of their actual invested capital; and
•
Thereafter - 60% to the Limited Partners on a per Unit basis and 40% to the General Partner.
Non-controlling Interest - Non-controlling interests includes a 40% ownership interest that our affiliates have in our Woodlake Pointe property that we consolidate as a result of our 60% controlling financial interest in such partnership.
10.
RELATED PARTY TRANSACTIONS
We have no employees or offices. Additionally, certain of our affiliates receive fees and compensation during the operating stage of the Partnership, including compensation for providing services to us in the areas of asset management, development and acquisitions, property management and leasing, financing, brokerage and administration. We reimburse our General Partner for an allocation of salary and other overhead costs. The following table summarizes the amount of such compensation paid to our affiliates during the years ended December 31, 2012, 2011 and 2010:
Type of service
Service Description & Compensation
Asset Management
A fee equal to 1.0% of net invested capital under management for accounting related services, investor relations, facilitating the deployment of capital, and other services provided by our General Partner to us.
$
153,552
$
340,333
$
430,407
Acquisition
A fee not to exceed, for any single acquisition, 3% of the contract purchase price up to $20 million, and 2% of the contract purchase price in excess of $20 million.
-
-
-
In addition to the above fees incurred by us, the non-consolidated entities in which we have investments paid a total of $1.2 million, $1.2 million, and $978,000 in property management and leasing fees to one of our affiliated entities for the years ended December 31, 2012, 2011 and 2010, respectively. See also Note 4 regarding investments in non-consolidated entities.
11.
REAL ESTATE DISPOSITIONS
Woodlake Pointe - On March 15, 2013, our Woodlake Pointe joint venture entered into a letter of intent to sell a portion of the land and a single tenant building at our Woodlake Pointe property for $12.0 million to an unrelated third party. The land and building are secured by a $6.2 million loan that will be repaid in full with proceeds from the sale. The sale is expected to close in the second quarter of 2013, and our portion of the net cash proceeds (60%) is approximately $3.1 million. We plan to use the proceeds to fund the Casa Linda lease-up strategy and for working capital needs.
Woodlake Square - In July 2010, we and our affiliated joint venture partners on our Woodlake Square property, MIG III and ARIC, entered into a joint venture agreement with a third party on our Woodlake Square property. As part of this transaction, we and our affiliates sold 90% of our interest in the property and retained a 10% ownership interest, which carries a promoted interest in cash flows once an 11.65% preferred return threshold is met on the project. Prior to the transaction, we owned a 60% interest in the property, and we own a 6% interest, post-transaction. We recorded an impairment of approximately $618,000 on the transaction which has been recorded as impairment in our consolidated statements of operations for the year ended December 31, 2010. The sale generated cash proceeds of approximately $3.4 million (our share was approximately $2.0 million). We, our affiliated partners, and our third party joint venture partner are responsible for funding our pro rata amount of the redevelopment costs on the project, which are currently estimated to be approximately $8.3 million. As part of the transaction, the $23.8 million loan on the property was paid in full at closing. The new entity in which we now own a 6% interest, VIF II/AmREIT Woodlake L.P., is the borrower on a $20.9 million loan, which has a 3-year term with two one-year extension options, provided certain conditions are met. We, along with our affiliate, MIG III, are joint and several repayment guarantors on the loan. As a result of our reduced ownership interest and decision-making ability, we deconsolidated this property as of the date of the transaction and began accounting for the property under the equity method of accounting.
See Note 4 for a discussion of our investment activity since our inception with respect to our non-consolidated entities.
12.
COMMITMENTS AND CONTINGENCIES
Litigation - In the ordinary course of business, we may become subject to litigation or claims. There are no material pending legal proceedings known to be contemplated against us.
Environmental matters - In connection with the ownership and operation of real estate, we may be potentially liable for costs and damages related to environmental matters. We have not been notified by any governmental authority of any non-compliance, liability or other claim.
AmREIT MONTHLY INCOME & GROWTH FUND IV, L.P. AND SUBSIDIARIES
SCHEDULE III - Consolidated Real Estate Owned and Accumulated Depreciation
For the year ended December 31, 2012
Activity within real estate and accumulated depreciation during the three years ended December 31, 2012 are as follows:
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