Item 1. Business
History
Our company, FSP 50 South Tenth Street Corp., which individually or together with its subsidiary, we refer to as the “Company”, “we” or “our”, is a Delaware corporation formed to purchase, own and operate a twelve-story multi-tenant office and retail building containing approximately 498,768 square feet of rentable space located in downtown Minneapolis, Minnesota, which we refer to as the Property. The Company operates in a manner intended to qualify as a real estate investment trust, or REIT, for federal income tax purposes.
The Company was organized initially in September 2006 by FSP Investments LLC (member, FINRA and SIPC), a wholly-owned subsidiary of Franklin Street Properties Corp., which we refer to as Franklin Street (NYSE MKT: FSP). FSP Investments LLC acted as a real estate investment firm and broker/dealer with respect to (a) the organization of the Company, (b) the acquisition of the Property by the Company and (c) the sale of equity interests in the Company.
The Company purchased the Property from an unaffiliated third party for $127,000,000 on November 8, 2006. The purchase price, which was determined by arm’s-length negotiations, was financed entirely by a loan from Franklin Street collateralized by a first mortgage, which we refer to as the Acquisition Mortgage Loan.
Franklin Street holds the sole share of the Company’s common stock, $.01 par value per share, which we refer to as the Common Stock. Between November 2006 and January 2007, FSP Investments LLC completed the sale on a best efforts basis of 700 shares of preferred stock, $.01 par value per share, which we refer to as the Preferred Stock. We sold the Preferred Stock for an aggregate consideration of $70,000,000 in a private placement offering to 627 “accredited investors” within the meaning of Regulation D under the Securities Act of 1933. Between November 13, 2006 and January 9, 2007, the Company held six investor closings, at each of which shares of Preferred Stock were sold and funds were received. Funds from each individual closing were used to repay a portion of the Acquisition Mortgage Loan from Franklin Street and associated fees as well as other expenses payable to Franklin Street’s wholly-owned subsidiary, FSP Investments LLC. On December 21, 2006, the Company obtained a permanent first mortgage loan in the original principal amount of $76,200,000 from Bank of America, N.A., which we refer to as the BofA Loan, which was repaid in its entirety on December 29, 2011. The Acquisition Mortgage Loan was repaid in its entirety on December 26, 2006 from the proceeds of the sale of equity interests in the Company and from the proceeds of the Permanent Mortgage Loan. Total interest and loan fees incurred on the Acquisition Mortgage Loan payable to Franklin Street were approximately $4,961,000 in 2006. The use of proceeds received from the offering of Preferred Stock and the Permanent Mortgage Loan and affiliates receiving payments therefrom are set forth in the table below:
(1)The Operating/Capital Reserve proceeds were retained by the Company for operating and capital uses.
(2)Organizational, Offering and Other Expenditures were paid for various expenses, including legal, accounting, appraisal, engineering and organizational expenses allocable to the offering, incurred in connection with the organization and syndication of the Company.
(3)Selling Commissions were paid to FSP Investments LLC, as Selling Agent.
(4)The Purchase Price of the Property was $127,000,000 and was financed by the Acquisition Mortgage Loan, which was repaid from proceeds of the offering and the Permanent Mortgage Loan.
(5)The Loan Fee Paid to Franklin Street was a fee (or points) of $4,025,000 paid to Franklin Street to obtain the Acquisition Mortgage Loan to purchase the Property. The Acquisition Mortgage Loan was
in the original principal amount equal to the purchase price of the Property, had a term of two years, and was prepayable at any time without premium or penalty and carried an interest rate equal to the rate payable by Franklin Street on borrowings under its line of credit with its bank.
(6)The Acquisition Fee was paid for services in connection with identifying and acquiring the Property.
Transactions between the Company and Franklin Street and/or its affiliates were entered into without the benefit of arm’s-length bargaining and involved conflicts of interest. Although Franklin Street has sponsored the syndication of other REITs similar to the Company and has in the past acquired some of those REITs, Franklin Street is under no obligation to acquire or to offer to acquire the Company or the outstanding shares of Preferred Stock, and any acquisition transaction would need to be approved by the Company’s stockholders and the boards of directors of Franklin Street and the Company. Please see “Part III, Item 13. Certain Relationships and Related Transactions, and Director Independence”.
Our Business
Our sole business is to own and operate the Property and we do not intend to invest in or purchase any additional properties. We derive rental revenue from income paid to us by the tenants of the Property. Asset, investor and property management services are provided by third parties.
FSP 50 South Tenth Street LLC, a wholly-owned subsidiary of the Company, leases a portion of the Property from the Company and is the lessor for tenants occupying the portion of the Property controlled by a master lease. This arrangement has no economic effect on the Company's operations and exists only because the Company acquired the Property with a master lease in place.
The Property was completed in 2001 and is currently leased to office and retail tenants with staggered lease expirations but, as described below, has a large office component that is effectively leased to Target Corporation (NYSE: TGT), which we refer to as Target, through March 31, 2030. The Property is located directly across the street from the designated world headquarters of Target and is connected to a corporately-owned two-level Target retail store and sits above an approximately 850-stall, three-level parking garage that is owned and managed by the City of Minneapolis.
The Property also has street level retail space and is part of a larger area that we refer to as the Project that covers a full city block in Minneapolis, Minnesota. The Project is comprised of our Property, the Target retail store and the parking garage. The three owners of the Project, the Company, Target and the City of Minneapolis, share expenses and responsibilities for maintenance of the Project under the terms of a Reciprocal Easement and Operation Agreement (REOA), which is administered by Ryan Companies US, Inc., which we refer to as Ryan. The three owners of the Project also share certain common areas and access to four skyway bridges that connect the Project to other buildings, including Target’s world headquarters across the street, and the greater Minneapolis skyway system. Ryan also serves as our property manager. For the year ended December 31, 2012, total expenses allocable to the three owners pursuant to the REOA were $0.65 million, of which $307,000 or 47.3% was allocated to us as common area expenses. These common area expenses are typically recovered through tenant leases.
The Property primarily has office and retail space, which collectively was approximately 98.8% occupied as of December 31, 2012. There is approximately 449,233 rentable square feet, which we refer to as RSF, of office space, approximately 36,415 RSF of retail space and approximately 13,120 RSF of storage space. Oracle America, Inc., which we refer to as Oracle America, leases approximately 242,107 RSF of office space through March 31, 2014. Oracle America subleases all of its office space to Target. In addition, Target directly leases approximately 130,908 RSF of office space through March 31, 2030.
On February 29, 2012, the Company and Target entered into a new Office Lease Agreement, which we refer to as the Target Lease, whereby Target extended and expanded its lease of space at the Property, effectively leasing 100% of the Property’s office space (449,233 RSF) through March 31, 2030 with no early termination rights. The office space that is subject to the Target Lease becomes part of the leased premises at different times that are tied to the expiration dates of existing leases at the Property. However, in the event that any office space that is currently leased by an existing tenant becomes available prior to its scheduled expiration date, Target is required to accept delivery of such office space on the earlier of (i) the date three months after the Company provides written notice of the availability of such office space to Target or (ii) the originally scheduled commencement date for such office space. The initial leased premises contain an aggregate of 259,344 RSF, are located on floors 7-11 and a portion of floor 4 and have a commencement date of April 1, 2014. The balance of space contains an aggregate of 189,889 RSF and has become or will become part of the leased premises pursuant to the following put arrangement:
Floor: Put Premises
RSF: Space
Components: Put Premises
Commencement Dates:
Floor 4 14,506 RSF Suite 440 and 450 April 1, 2012
Floor 3 71,875 RSF Suite 300 April 1, 2012
Floor 5 26,269 RSF Suite 500 April 1, 2014
Floor 5 16,707 RSF Suites 570, 560, 530 and 520 May 1, 2016
Floor 4 17,550 RSF Suites 490, 470 and 460 July 1, 2016
Floor 6 26,911 RSF Suites 680, 660, 620, 600 and 670 January 1, 2017
Floor 6 16,071 RSF Suites 610, 640 and 650 March 1, 2017
Total: 189,889 RSF
Target also has the right to extend the term of the Target Lease beyond March 31, 2030 for a minimum of 225,000 RSF for two consecutive additional periods of five years each at prevailing market rental rates upon delivery of prior written notice and satisfaction of certain other customary conditions.
Rent is comprised of base rent and Target’s share of basic operating costs. Base rent increases each year. There is no “free-rent” or reduced rent period. In lieu of any further tenant improvement allowance, abatement of rent or any other lease concessions, the Company was required to pay Target a tenant incentive payment in the amount of $23,950,000. In addition, the Company was required to pay brokerage fees relating to the consummation of the Target Lease in the amount of $6,688,000.
On February 29, 2012, the Company and Ryan entered into a Lease Termination Agreement, which we refer to as the Lease Termination Agreement, whereby the parties agreed to terminate Ryan’s lease with the Company effective March 31, 2012. Effective April 1, 2012, Target directly leased 100% of Ryan’s former space at the Property pursuant to the above-described put arrangement. Prior to execution of the Lease Termination Agreement, Ryan’s lease at the Property had been scheduled to terminate on July 31, 2015.
FSP Property Management LLC, a wholly-owned subsidiary of Franklin Street, provides the Company with asset management and financial reporting services, which include but are not limited to, selecting and supervising a local property management company and local leasing brokers, approving lease transactions, managing debt compliance, evaluating performance of the asset, and recommending appropriate stockholder distributions to the Board of Directors of the Company. The asset management agreement between the Company and FSP Property Management LLC requires the Company to pay FSP Property Management LLC a monthly fee equal to one percent (1%) of the gross revenues of the Property. The asset management agreement between the Company and FSP Property Management LLC may be terminated by the Company without cause at any time, upon at least thirty (30) days written notice.
FSP Investments LLC, a wholly-owned subsidiary of Franklin Street, provides investor services to the holders of the Company’s Preferred Stock. The investor services agreement between the Company and FSP Investments LLC requires the Company to pay a monthly service fee of $500 and to reimburse FSP Investments LLC for its reasonable out-of-pocket expenses. The investor services agreement may be terminated by either party with thirty (30) days written notice or immediately upon the occurrence of certain events of default specified in the investor services agreement.
Ryan provides the Company with local, on-site property management and building maintenance services and periodic financial, operating and budget reports relating to the operation of the Property for review by FSP Property Management LLC. Ryan is a third-party service provider that is not related to or affiliated with Franklin Street. The management agreement between the Company and Ryan requires the Company to pay Ryan a monthly fee equal to three percent (3%) of the net operating receipts collected in the preceding month. The management agreement between the Company and Ryan may be terminated by the Company without cause at any time, upon at least thirty (30) days written notice.
Investment Objectives
The Company’s objectives are to (i) obtain cash available to pay dividends through rental receipts from operations of the Property, (ii) have that cash increase over time as a result of rental rate step increases in existing leases, (iii) have our rental revenue potentially increase over time if rental rates increase for new leases, (iv) provide increased equity in the Property as a result of appreciation in market value, and (v) preserve and protect the capital invested by the holders of our Preferred Stock. We cannot be sure of meeting our objectives.
Our policy is not to make loans to other persons, not to invest in the securities of other issuers for the purpose of exercising control, not to underwrite the securities of other issuers, not to offer securities in exchange for property and not to purchase or otherwise reacquire our securities. These policies may be changed by our directors without a vote of the holders of our Preferred Stock.
We have issued 700 shares of Preferred Stock in the offering described above. The Company’s Amended and Restated Certificate of Incorporation, or charter, authorizes the Company to issue up to 1,540 shares of Preferred Stock. In the event that the Company elects, in its sole and absolute discretion, to reduce the principal amount of the Permanent Mortgage Loan, the Company will have the right, without the consent of any holder of shares of our Preferred Stock, to issue up to 840 additional shares of Preferred Stock. We expect that any such issuance would be in an offering exempt from registration under the Securities Act. No additional shares of Preferred Stock are authorized by our charter, and authorization of any increase in the number of authorized shares or the creation of any new series or class of stock would require the affirmative vote of the holders of 66.67% of the outstanding shares of Preferred Stock.
We intend to dispose of the Property at such time that our directors determine that we have achieved our investment objectives. We do not intend to reinvest the proceeds and would distribute cash proceeds to shareholders following such disposition. We also do not intend to list our shares of Preferred Stock on an exchange and therefore do not expect any trading market to develop in such shares.
BofA Loan
The Property was subject to a $76,200,000 mortgage loan, which we refer to as the BofA Loan, with Bank of America, N.A. The BofA Loan was repaid in full on December 29, 2011. The BofA Loan originally closed on December 21, 2006, had a January 1, 2012 maturity date and was secured by, among other items, a first mortgage lien on the Property. Interest on the BofA Loan was fixed at 5.287% per annum and the Company was obligated to make monthly payments of interest only until the maturity date, at which time the principal amount of the BofA Loan, together with any accrued but unpaid interest, was due and payable in full. Interest expense paid for the year ended December 31, 2011 was $4,085,000. The BofA Loan was nonrecourse to the Company. The documentation evidencing and securing the BofA Loan contained customary representations and warranties, as well as customary events of default and affirmative and negative covenants. The Company was in compliance with the BofA Loan covenants on December 29, 2011, the date that the BofA Loan was repaid in full.
Bridge Loan
On December 29, 2011, we executed and delivered a promissory note to Franklin Street that evidenced a loan for up to $106,200,000, which we refer to as the Bridge Loan. On July 27, 2012, we repaid the Bridge Loan in its entirety from the proceeds of the Term Loan (as defined below). The Bridge Loan included a term loan component, which we refer to as the Term Loan Component, in the amount of $76,200,000, all of which was funded on December 29, 2011 and used to repay the BofA Loan in the same amount in full. We paid Franklin Street a Term Loan Component fee in the amount of $762,000 on December 29, 2011. The Bridge Loan also included a revolving line of credit component that could not at any time exceed $30,000,000, which we refer to as the Revolving Line Component. The proceeds of the Revolving Line Component of the Bridge Loan were to be used for lender-approved tenant improvement costs, leasing commissions and other incentives necessary to lease space at the Property.
The Bridge Loan was evidenced by a loan agreement dated December 29, 2011 by and between the Company and Franklin Street. Pursuant to the loan agreement, we could borrow, repay and reborrow Revolving Line Component funds in the form of revolving advances from time to time so long as no event of default existed and certain other customary conditions were satisfied, provided, however, that the aggregate principal amount of all revolving advances outstanding at any time could in no event exceed $30,000,000. On March 4, 2012, we requested and Franklin Street funded a revolving advance in the amount of $30,000,000. We were required to pay Franklin Street a fee in an amount equal to 1.00% of each revolving advance. As of December 31, 2012, the revolving advance fees paid to Franklin Street were $300,000.
As of December 31, 2012, costs and fees paid associated with the Bridge Loan, including the $762,000 Term Loan Component fee, the $300,000 Revolving Line Component fee and a $520,000 exit fee paid to Franklin Street, were $1,582,000 and have been fully amortized and are included in interest expense in the Company’s Consolidated Statement of Operations for the year ended December 31, 2012.
We were obligated to pay interest only on the outstanding principal amount of the Term Loan Component and any revolving advances under the Revolving Line Component at the fixed rate of 6.51% per annum. The outstanding principal amount of the Bridge Loan, together with any accrued but unpaid interest, was due and payable on December 31, 2013. The Bridge Loan could be prepaid in whole or in part at any time without premium or penalty. Any partial payment had to be in an amount at least equal to $100,000. At the time of any prepayment and upon payment of the unpaid principal balance on the maturity date, the Company was required to pay Franklin Street an exit fee in an amount equal to 0.49% of such prepayment or payment of the unpaid principal balance. Interest expense paid for the year ended December 31, 2012 was $3,647,000.
The promissory note and the loan agreement were secured by a combination mortgage, security agreement and fixture filing dated December 29, 2011 from the Company in favor of Franklin Street, an environmental indemnification agreement dated December 29, 2011 from the Company in favor of Franklin Street, and an assignment of leases and rents dated December 29, 2011 from the Company in favor of Franklin Street. The mortgage constituted a lien against the Property and was recorded in the Office of the Hennepin County Registrar of Titles. The loan documents that evidenced and secured the Bridge Loan contained customary representations and warranties, as well as customary events of default and affirmative and negative covenants. We were in compliance with Bridge Loan covenants on July 27, 2012, the date that the Bridge Loan was repaid in full.
Term Loan
On July 27, 2012, we entered into a new $106,200,000 secured credit facility, which we refer to as the Term Loan, providing for the extension of credit to the Company by Bank of America, N.A., which we refer to as BofA, and RBS Citizens, National Association, which we refer to as RBS Citizens. The Term Loan was structured as a purchase by BofA and RBS Citizens of the Bridge Loan from Franklin Street. Accordingly, in connection with the closing of the Term Loan, the loan documents evidencing and securing the Bridge Loan were amended and restated. More specifically, on July 27, 2012, we executed and delivered an Amended and Restated Promissory Note, which we refer to as the BofA Note, to BofA in the principal amount of $60,000,000 and an Amended and Restated Promissory Note, which we refer to as the RBS Citizens Note, to RBS Citizens in the principal amount of $46,200,000. All of the proceeds of the Term Loan were funded on July 27, 2012 and used to repay the Bridge Loan in its entirety. BofA is the Term Loan’s administrative agent and Merrill Lynch, Pierce, Fenner & Smith Incorporated is the Term Loan’s sole lead arranger and sole book manager.
The Term Loan is evidenced by a Loan Agreement dated July 27, 2012 by and among the Company, BofA and RBS Citizens, which we refer to as the Loan Agreement. So long as there is no default, the Company is obligated to pay interest only on the outstanding principal amount of the Term Loan at a variable rate equal to 30-day LIBOR plus 2.00%. The outstanding principal amount of the Term Loan, together with any accrued but unpaid interest, is due and payable on July 27, 2017. Subject to payment by the Company of certain yield maintenance and redeployment costs, the Term Loan may be prepaid in whole or in part at any time. Any partial payment must be in an amount at least equal to $100,000.
Although the interest rate on the Term Loan is variable, under the Loan Agreement the Company was required to fix the 30-day LIBOR interest rate by entering into an interest rate swap agreement with BofA. On July 27, 2012, the Company entered into an ISDA Master Agreement with BofA that fixed the 30-day LIBOR interest rate on the Term Loan at 0.87% per annum for the term of the Term Loan. Accordingly, when combined with the required 2.00% spread over 30-day LIBOR interest rate, the all-in interest rate on the Term Loan is 2.87% per annum. Total interest expense on the Term Loan for the year ended December 31, 2012 was $1,336,000.
The BofA Note, the RBS Citizens Note and the Loan Agreement are secured by an Amended and Restated Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated July 27, 2012 from the Company in favor of BofA as administrative agent for itself and other lenders, which we refer to as the Mortgage, an Environmental Indemnification and Release Agreement dated July 27, 2012 from the Company in favor of BofA as administrative agent for itself and other lenders, a Collateral Assignment of Interest Rate Protection Agreement dated July 27, 2012 from the Company in favor of BofA as administrative agent for itself and other lenders, and an Assignment and Subordination of Management Agreement dated July 27, 2012 by and among the Company, BofA as administrative agent for itself and other lenders and Ryan. The Mortgage constitutes a lien against the Property and has been recorded in the Office of the Hennepin County Registrar of Titles. The documents evidencing and securing the Term Loan contain customary representations and warranties, as well as customary events of default and affirmative and negative covenants. The Company was in compliance with the Term Loan covenants as of December 31, 2012.
Revolving Line of Credit
While a line of credit is not expected to be needed, the Company may, without the consent of any holder of shares of our Preferred Stock but subject to any required lender consents, obtain a revolving line of credit of up to $46,200,000 on commercially reasonable terms to be used for capital improvements, operating expenses, working capital requirements or to refinance the Company’s debt and fund other Company purposes, if needed. As of December 31, 2012, the Company had neither sought nor obtained a revolving line of credit.
Competition
The Property is located in the downtown area of Minneapolis, Minnesota. The Property may encounter substantial competition from the other office buildings which are or may become available in the general area in which the Property is located and which may be priced at rental levels lower than those for space in the Property or which may otherwise be more attractive to tenants. In order to maintain or increase rental revenues following the expiration of our leases, the Property must be competitive, in regard to cost and amenities, with other buildings of similar use near our location. Some of our competitors may have significantly more resources than we do and may be able to offer more attractive rental rates or services. On the other hand, some of our competitors may be smaller or have lower fixed overhead costs, less cash or other resources that make them willing or able to accept lower rents in order to maintain a certain occupancy level. If there is not currently significant existing property competition, our competitors may decide to enter the market and build new buildings to compete with our Property. Our competition is not only with other developers, but also with property users who choose to own their building. In addition, larger market forces beyond our control, such as general economic conditions, may increase competition among landlords for quality tenants and individual decisions beyond our control. We cannot predict which competitive factors will be relevant to prospective future tenants at this time.
Management believes that the position of the Property within Minneapolis’ office and retail markets is strong. In order to further improve the Property’s position in Minneapolis’ office and retail markets, throughout 2012, management evaluated the Property’s operations for both greater efficiency and for more active and proactive sustainability practices. The Property is Energy Star® certified and, on November 1, 2010, earned LEED® Gold certification from the U.S. Green Building Council in the Leadership in Energy and Environmental Design for Existing Buildings: Operations and Maintenance.
Employees
We had no employees as of December 31, 2012.
Available Information
We are subject to the informational requirements of the Securities Exchange Act of 1934, and, in accordance therewith, we file reports and other information with the Securities and Exchange Commission (SEC). This Annual Report on Form 10-K and other reports and other information we file can be inspected and copied at the SEC Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 on official business days during the hours of 10:00 am to 3:00 pm. Such reports, proxy and information statements, if any, and other information about issuers that file electronically with the SEC may also be obtained from the web site that the SEC maintains at http://www.sec.gov. Further information about the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
We will make available and voluntarily provide, free of charge upon written request at the address on the cover of this Annual Report on Form 10-K, a copy of our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the SEC. We do not maintain a website.
Item 1A.
Item 1A. Risk Factors
Not applicable.
Item 1B.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2.
Item 2. Properties
Set forth below is information regarding the Property as of December 31, 2012 and such other date(s) as may be specified:
1.Excludes subtenants.
2.Oracle America leases approximately 242,107 square feet of space (approximately 50% of the Property’s rentable space) through March 2014. Oracle America subleases its office space to Target through March 2014.
We acquired the Property on November 8, 2006. In the opinion of our management, the Property is adequately covered by insurance. The Property is currently encumbered by the Term Loan described above in “Item 1. Business - Term Loan.” Other than normal tenant improvements or replacements of equipment in the ordinary course of ongoing operations, there are no present plans for the improvement or development of any portion of the Property. Below is certain information with respect to the Property’s significant tenants and leases.
The Property was completed in 2001 and is currently leased to office and retail tenants with staggered lease expirations but, as described below, has a large office component that is effectively leased to Target Corporation (NYSE: TGT), which we refer to as Target, through March 31, 2030. The Property is located directly across the street from the designated world headquarters of Target and is connected to a corporately-owned two-level Target retail store and sits above an approximately 850-stall, three-level parking garage that is owned and managed by the City of Minneapolis.
The Property also has street level retail space and is part of a larger area that we refer to as the Project that covers a full city block in Minneapolis, Minnesota. The Project is comprised of our Property, the Target retail store and the parking garage. The three owners of the Project, the Company, Target and the City of Minneapolis, share expenses and responsibilities for maintenance of the Project under the terms of a Reciprocal Easement and Operation Agreement (REOA), which is administered by Ryan Companies US, Inc., which we refer to as Ryan. The three owners of the Project also share certain common areas and access to four skyway bridges that connect the Project to other buildings, including Target’s world headquarters across the street, and the greater Minneapolis skyway system. Ryan also serves as our property manager. For the year ended December 31, 2012, total expenses allocable to the three owners pursuant to the REOA were $0.65 million, of which $307,000 or 47.3% was allocated to us as common area expenses. These common area expenses are typically recovered through tenant leases.
The Property primarily has office and retail space, which collectively was approximately 98.8% occupied as of December 31, 2012. There is approximately 449,233 rentable square feet, which we refer to as RSF, of office space, approximately 36,415 RSF of retail space and approximately 13,120 RSF of storage space. Oracle America, Inc., which we refer to as Oracle America, leases approximately 242,107 RSF of office space through March 31, 2014. Oracle America subleases all of its office space to Target. In addition, Target directly leases approximately 130,908 RSF of office space through March 31, 2030.
On February 29, 2012, the Company and Target entered into a new Office Lease Agreement, which we refer to as the Target Lease, whereby Target extended and expanded its lease of space at the Property, effectively leasing 100% of the Property’s office space (449,233 RSF) through March 31, 2030 with no early termination rights. The office space that is subject to the Target Lease becomes part of the leased premises at different times that are tied to the expiration dates of existing leases at the Property. However, in the event that any office space that is currently leased by an existing tenant becomes available prior to its scheduled expiration date, Target is required to accept delivery of such office space on the earlier of (i) the date three months after the Company provides written notice of the availability of such office space to Target or (ii) the originally scheduled commencement date for such office space. The initial leased premises contain an aggregate of 259,344 RSF, are located on floors 7-11 and a portion of floor 4 and have a commencement date of April 1, 2014. The balance of space contains an aggregate of 189,889 RSF and has become or will become part of the leased premises pursuant to the following put arrangement:
Floor: Put Premises
RSF: Space
Components: Put Premises
Commencement Dates:
Floor 4 14,506 RSF Suite 440 and 450 April 1, 2012
Floor 3 71,875 RSF Suite 300 April 1, 2012
Floor 5 26,269 RSF Suite 500 April 1, 2014
Floor 5 16,707 RSF Suites 570, 560, 530 and 520 May 1, 2016
Floor 4 17,550 RSF Suites 490, 470 and 460 July 1, 2016
Floor 6 26,911 RSF Suites 680, 660, 620, 600 and 670 January 1, 2017
Floor 6 16,071 RSF Suites 610, 640 and 650 March 1, 2017
Total: 189,889 RSF
	
Target also has the right to extend the term of the Target Lease beyond March 31, 2030 for a minimum of 225,000 RSF for two consecutive additional periods of five years each at prevailing market rental rates upon delivery of prior written notice and satisfaction of certain other customary conditions.
Rent is comprised of base rent and Target’s share of basic operating costs. Base rent increases each year. There is no “free-rent” or reduced rent period. In lieu of any further tenant improvement allowance, abatement of rent or any other lease concessions, the Company was required to pay Target a tenant incentive payment in the amount of $23,950,000. In addition, the Company was required to pay brokerage fees relating to the consummation of the Target Lease in the amount of $6,688,000.
On February 29, 2012, the Company and Ryan entered into a Lease Termination Agreement, which we refer to as the Lease Termination Agreement, whereby the parties agreed to terminate Ryan’s lease with the Company effective March 31, 2012. Effective April 1, 2012, Target directly leased 100% of Ryan’s former space at the Property pursuant to the above-described put arrangement. Prior to execution of the Lease Termination Agreement, Ryan’s lease at the Property had been scheduled to terminate on July 31, 2015.
Additional Operating Data
Additional information regarding the amount of the Property’s annual real estate taxes and insurance can be found in the Statements of Operations that are included with this Form 10-K. Additional information regarding the Property’s Federal tax basis, rate, method and life claimed for purposes of depreciation can be found in the Notes to Consolidated Financial Statements that are included with this Annual Report on Form 10-K.
Item 3.
Item 3. Legal Proceedings
There are no material legal proceedings to which the Company is a party. The Company from time to time may be involved in lawsuits including, but not limited to, lawsuits relating to the real property it owns for liability for slips and falls, damage to automobiles in the parking garage, minor theft or similar matters. The Company expects that most of these suits will be covered by insurance, subject to customary deductions. In addition, in the ordinary course of business, the Company may become involved in litigation to collect rents or other income due to it from tenants.
Item 4.
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
There is no established public trading market for the Company’s Common Stock or Preferred Stock.
As of February 28, 2013, Franklin Street was the sole holder of record of the Common Stock and there were 634 holders of record of the Preferred Stock. This computation is based upon the number of record holders reflected in our corporate records. The final sale of Preferred Stock occurred on January 9, 2007 and following that date no further distributions have been or will be declared on the Common Stock. The last Common Stock dividend was declared on December 27, 2006 and was paid in December 2006.
Set forth below are the distributions made to Preferred Stockholders in respect of each quarter from the last two fiscal years. Distributions are determined based on the Company’s Board of Directors’ review of cash available for distribution and distribution requirements necessary for the Company to continue to qualify as a real estate investment trust. We cannot guarantee the future payment of dividends or the amount of any such dividends. See the Notes to Consolidated Financial Statements that are included with this Annual Report on Form 10-K for additional information.
Distributions
paid to
Quarter Preferred
Ended Stockholders
March 31, 2011 $1,225,000
June 30, 2011 1,225,000
September 30, 2011 1,225,000
December 31, 2011 -
March 31, 2012 $-
June 30, 2012 500,500
September 30, 2012 500,500
December 31, 2012 766,500
The following schedule summarizes tax components of the distributions paid for the years ended December 31:
The Company does not have an equity compensation plan or any outstanding stock options or other securities convertible into the Company’s Common Stock.
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 should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. Historical results and percentage relationships set forth in the consolidated financial statements, including trends which might appear, should not be taken as necessarily indicative of future operations. The following discussion and other parts of this Annual Report on Form 10-K may also contain forward-looking statements based on current judgments and current knowledge of management, which are subject to certain risks, trends and uncertainties that could cause actual results to differ materially from those indicated in such forward looking statements. Accordingly, readers are cautioned not to place undue reliance on forward-looking statements. Investors are cautioned that our forward-looking statements involve risks and uncertainty, including without limitation, economic conditions in United States and in the market where we own the Property, disruptions in the debt markets, risks of a lessening of demand for the type of real estate owned by us, the financial performance of Target Corporation (NYSE: TGT), which we refer to as Target, changes in government regulations and regulatory uncertainty, uncertainty about government fiscal policy, geopolitical events, and expenditures that cannot be anticipated such as utility rate and usage increases, unanticipated repairs, additional staffing, insurance increases and real estate tax valuation reassessments. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We may not update any of the forward-looking statements after the date this Annual Report on Form 10-K is filed to conform them to actual results or to changes in our expectations that occur after such date, other than as required by law.
Overview
FSP 50 South Tenth Street Corp., which we refer to as the Company, is a Delaware corporation formed to purchase, own and operate a twelve-story multi-tenant office and retail building containing approximately 498,768 square feet of rentable space located in downtown Minneapolis, Minnesota, which we refer to as the Property.
Franklin Street Properties Corp., which we refer to as Franklin Street, is the sole holder of our one share of common stock, $.01 par value per share, which we refer to as the Common Stock, that is issued and outstanding. Between November 2006 and January 2007, FSP Investments LLC (member FINRA and SIPC), a wholly-owned subsidiary of Franklin Street, completed the sale on a best efforts basis of 700 shares of our preferred stock, $.01 par value per share, which we refer to as the Preferred Stock. FSP Investments LLC sold the Preferred Stock in a private placement offering to “accredited investors” within the meaning of Regulation D under the Securities Act of 1933. Since the completion of the placement of the Preferred Stock in January 2007, Franklin Street has not been entitled to share in any earnings or dividend related to the Common Stock.
We operate in one business segment, which is real estate operations, and own a single property. Our real estate operations involve real estate rental operations, leasing services and property management services. The main factor that affects our real estate operations is the broad economic market conditions in the United States and, more specifically, the economic conditions in Minneapolis, Minnesota. These market conditions affect the occupancy levels and the rent levels on both a national and local level. We have no influence on national or local market conditions.
Trends and Uncertainties
Economic Conditions
The economy in the United States is continuing to experience a period of limited economic growth, including historically high levels of unemployment, which directly affects the demand for office space, our primary income producing asset. The broad economic conditions in the United States are affected by numerous factors, including but not limited to, inflation and employment levels, energy prices, slow growth and/or recessionary concerns, uncertainty about government fiscal policy, changes in currency exchange rates, geopolitical events, the regulatory environment and the availability of debt and interest rate fluctuations. Current and future economic factors may negatively affect real estate values, occupancy levels and property income. At this time, we cannot predict the extent or duration of any negative impact current or future economic factors will have on our business.
Real Estate Operations
The Property was completed in 2001 and is currently leased to office and retail tenants with staggered lease expirations but, as described below, has a large office component that is effectively leased to Target through March 31, 2030. The Property is located directly across the street from the designated world headquarters of Target and is connected to a corporately-owned two-level Target retail store and sits above an approximately 850-stall, three-level parking garage that is owned and managed by the City of Minneapolis.
The Property also has street level retail space and is part of a larger area that we refer to as the Project that covers a full city block in Minneapolis, Minnesota. The Project is comprised of our Property, the Target retail store and the parking garage. The three owners of the Project, the Company, Target and the City of Minneapolis, share expenses and responsibilities for maintenance of the Project under the terms of a Reciprocal Easement and Operation Agreement (REOA), which is administered by Ryan Companies US, Inc., which we refer to as Ryan. The three owners of the Project also share certain common areas and access to four skyway bridges that connect the Project to other buildings, including Target’s world headquarters across the street, and the greater Minneapolis skyway system. Ryan also serves as our property manager. These common area expenses are typically recovered through tenant leases.
The Property primarily has office and retail space, which collectively was approximately 98.8% occupied as of December 31, 2012. There are approximately 449,233 rentable square feet, which we refer to as RSF, of office space, approximately 36,415 RSF of retail space and approximately 13,120 RSF of storage space. Oracle America, Inc., which we refer to as Oracle America, leases approximately 242,107 RSF of office space through March 31, 2014. Oracle America subleases all of its office space to Target. In addition, Target directly leases approximately 130,908 RSF of office space through March 31, 2030.
On February 29, 2012, the Company and Target entered into a new Office Lease Agreement, which we refer to as the Target Lease, whereby Target extended and expanded its lease of space at the Property, effectively leasing 100% of the Property’s office space (449,233 RSF) through March 31, 2030 with no early termination rights. The office space that is subject to the Target Lease will become part of the leased premises at different times that are tied to the expiration dates of existing leases at the Property. However, in the event that any office space that is currently leased by an existing tenant becomes available prior to its scheduled expiration date, Target is required to accept delivery of such office space on the earlier of (i) the date three months after the Company provides written notice of the availability of such office space to Target or (ii) the originally scheduled commencement date for such office space. The initial leased premises contain an aggregate of 259,344 RSF, are located on floors 7-11 and a portion of floor 4 and have a commencement date of April 1, 2014. The balance of space contains an aggregate of 189,889 RSF and will become part of the leased premises pursuant to the following put arrangement:
Floor: Put Premises
RSF: Space
Components: Put Premises
Commencement Dates:
Floor 4 14,506 RSF Suite 440 and 450 April 1, 2012
Floor 3 71,875 RSF Suite 300 April 1, 2012
Floor 5 26,269 RSF Suite 500 April 1, 2014
Floor 5 16,707 RSF Suites 570, 560, 530 and 520 May 1, 2016
Floor 4 17,550 RSF Suites 490, 470 and 460 July 1, 2016
Floor 6 26,911 RSF Suites 680, 660, 620, 600 and 670 January 1, 2017
Floor 6 16,071 RSF Suites 610, 640 and 650 March 1, 2017
Total: 189,889 RSF
Target also has the right to extend the term of the Target Lease beyond March 31, 2030 for a minimum of 225,000 RSF for two consecutive additional periods of five years each at prevailing market rental rates upon delivery of prior written notice and satisfaction of certain other customary conditions.
Rent is comprised of base rent and Target’s share of basic operating costs. Base rent increases each year. There is no “free-rent” or reduced rent period. In lieu of any further tenant improvement allowance, abatement of rent or any other lease concessions, the Company was required to pay Target a tenant incentive payment in the amount of $23,950,000. In addition, the Company was required to pay brokerage fees relating to the consummation of the Target Lease in the amount of $6,688,000.
On February 29, 2012, the Company and Ryan entered into a Lease Termination Agreement, which we refer to as the Lease Termination Agreement, whereby the parties agreed to terminate Ryan’s lease with the Company effective March 31, 2012. Effective April 1, 2012, Target directly leased 100% of Ryan’s former space at the Property pursuant to the above-described put arrangement. Prior to execution of the Lease Termination Agreement, Ryan’s lease at the Property had been scheduled to terminate on July 31, 2015.
Management believes that the position of the Property within Minneapolis’ office and retail markets is strong. In order to further improve the Property’s position in Minneapolis’ office and retail markets, throughout 2012, management evaluated the Property’s operations for both greater efficiency and for more active and proactive sustainability practices. The Property is Energy Star® certified and, on November 1, 2010, earned LEED® Gold certification from the U.S. Green Building Council in the Leadership in Energy and Environmental Design for Existing Buildings: Operations and Maintenance.
It is difficult for management to predict what will happen to occupancy or rents after the expiration or earlier termination of existing leases at our Property because the need for space and the price tenants are willing to pay are tied to both the local economy and to the larger trends in the national economy, such as job growth, interest rates, the availability of credit and corporate earnings, which in turn are tied to even larger macroeconomic and political factors, such as recessionary concerns, volatility in energy pricing and the risk of terrorism. In addition to the difficulty of predicting macroeconomic factors, it is difficult to predict how our local market or tenants will suffer or benefit from changes in the larger economy. In addition, because the Property is in a single geographical market, these macroeconomic trends may have a different effect on the Property and on its tenants, many of which operate on a national level. Although we cannot predict how long it would take to lease vacant space at the Property or what the terms and conditions of any new leases would be, we would expect to sign new leases at then current market rates, which may be below the expiring rates.
The potential for any of our tenants to default on its lease or to seek the protection of bankruptcy laws exists. If any of our tenants defaults on its lease, we may experience delays in enforcing our rights as a landlord and may incur substantial costs in protecting our investment. In addition, at any time, a tenant may seek the protection of bankruptcy laws, which could result in the rejection and termination of such tenant’s lease and thereby cause a reduction in cash available for distribution to our stockholders. Bankruptcy or a material adverse change in the financial condition of a material tenant would likely have a material adverse effect on our results of operations.
BofA Loan
The Property was subject to a $76,200,000 mortgage loan, which we refer to as the BofA Loan, with Bank of America, N.A. The BofA Loan was repaid in full on December 29, 2011. The BofA Loan originally closed on December 21, 2006, had a January 1, 2012 maturity date and was secured by, among other items, a first mortgage lien on the Property. Interest on the BofA Loan was fixed at 5.287% per annum and the Company was obligated to make monthly payments of interest only until the maturity date, at which time the principal amount of the BofA Loan, together with any accrued but unpaid interest, was due and payable in full. Interest expense paid for the year ended December 31, 2011 was $4,085,000. The BofA Loan was nonrecourse to the Company. The documentation evidencing and securing the BofA Loan contained customary representations and warranties, as well as customary events of default and affirmative and negative covenants. The Company was in compliance with BofA Loan covenants on December 29, 2011, the date that the BofA Loan was repaid in full.
Bridge Loan
On December 29, 2011, we executed and delivered a promissory note to Franklin Street that evidenced a loan for up to $106,200,000, which we refer to as the Bridge Loan. On July 27, 2012, we repaid the Bridge Loan in its entirety from the proceeds of the Term Loan (as defined below). The Bridge Loan included a term loan component, which we refer to as the Term Loan Component, in the amount of $76,200,000, all of which was funded on December 29, 2011 and used to repay the BofA Loan in the same amount in full. We paid Franklin Street a Term Loan Component fee in the amount of $762,000 on December 29, 2011. The Bridge Loan also included a revolving line of credit component that could not at any time exceed $30,000,000, which we refer to as the Revolving Line Component. The proceeds of the Revolving Line Component of the Bridge Loan were to be used for lender-approved tenant improvement costs, leasing commissions and other incentives necessary to lease space at the Property.
The Bridge Loan was evidenced by a loan agreement dated December 29, 2011 by and between the Company and Franklin Street. Pursuant to the loan agreement, we could borrow, repay and reborrow Revolving Line Component funds in the form of revolving advances from time to time so long as no event of default existed and certain other customary conditions were satisfied, provided, however, that the aggregate principal amount of all revolving advances outstanding at any time could in no event exceed $30,000,000. On March 4, 2012, we requested and Franklin Street funded a revolving advance in the amount of $30,000,000. We were required to pay Franklin Street a fee in an amount equal to 1.00% of each revolving advance. As of December 31, 2012, the revolving advance fees paid to Franklin Street were $300,000.
As of December 31, 2012, costs and fees paid associated with the Bridge Loan, including the $762,000 Term Loan Component fee, the $300,000 Revolving Line Component fee and a $520,000 exit fee paid to Franklin Street, were $1,582,000 and have been fully amortized and are included in interest expense in the Company’s Consolidated Statement of Operations for the year ended December 31, 2012.
We were obligated to pay interest only on the outstanding principal amount of the Term Loan Component and any revolving advances under the Revolving Line Component at the fixed rate of 6.51% per annum. The outstanding principal amount of the Bridge Loan, together with any accrued but unpaid interest, was due and payable on December 31, 2013. The Bridge Loan could be prepaid in whole or in part at any time without premium or penalty. Any partial payment had to be in an amount at least equal to $100,000. At the time of any prepayment and upon payment of the unpaid principal balance on the maturity date, the Company was required to pay Franklin Street an exit fee in an amount equal to 0.49% of such prepayment or payment of the unpaid principal balance. Interest expense paid for the year ended December 31, 2012 was $3,647,000.
The promissory note and the loan agreement were secured by a combination mortgage, security agreement and fixture filing dated December 29, 2011 from the Company in favor of Franklin Street, an environmental indemnification agreement dated December 29, 2011 from the Company in favor of Franklin Street, and an assignment of leases and rents dated December 29, 2011 from the Company in favor of Franklin Street. The mortgage constituted a lien against the Property and was recorded in of the Office of the Hennepin County Registrar of Titles. The loan documents that evidenced and secured the Bridge Loan contained customary representations and warranties, as well as customary events of default and affirmative and negative covenants. We were in compliance with Bridge Loan covenants on July 27, 2012, the date that the Bridge Loan was repaid in full.
Term Loan
On July 27, 2012, we entered into a new $106,200,000 secured credit facility, which we refer to as the Term Loan, providing for the extension of credit to the Company by Bank of America, N.A., which we refer to as BofA, and RBS Citizens, National Association, which we refer to as RBS Citizens. The Term Loan was structured as a purchase by BofA and RBS Citizens of the Bridge Loan from Franklin Street. Accordingly, in connection with the closing of the Term Loan, the loan documents evidencing and securing the Bridge Loan were amended and restated. More specifically, on July 27, 2012, we executed and delivered an Amended and Restated Promissory Note, which we refer to as the BofA Note, to BofA in the principal amount of $60,000,000 and an Amended and Restated Promissory Note, which we refer to as the RBS Citizens Note, to RBS Citizens in the principal amount of $46,200,000. All of the proceeds of the Term Loan were funded on July 27, 2012 and used to repay the Bridge Loan in its entirety. BofA is the Term Loan’s administrative agent and Merrill Lynch, Pierce, Fenner & Smith Incorporated is the Term Loan’s sole lead arranger and sole book manager.
The Term Loan is evidenced by a Loan Agreement dated July 27, 2012 by and among the Company, BofA and RBS Citizens, which we refer to as the Loan Agreement. So long as there is no default, the Company is obligated to pay interest only on the outstanding principal amount of the Term Loan at a variable rate equal to 30-day LIBOR plus 2.00%. The outstanding principal amount of the Term Loan, together with any accrued but unpaid interest, is due and payable on July 27, 2017. Subject to payment by the Company of certain yield maintenance and redeployment costs, the Term Loan may be prepaid in whole or in part at any time. Any partial payment must be in an amount at least equal to $100,000.
Although the interest rate on the Term Loan is variable, under the Loan Agreement the Company was required to fix the 30-day LIBOR interest rate by entering into an interest rate swap agreement with BofA. On July 27, 2012, the Company entered into an ISDA Master Agreement with BofA that fixed the 30-day LIBOR interest rate on the Term Loan at 0.87% per annum for the term of the Term Loan. Accordingly, when combined with the required 2.00% spread over 30-day LIBOR interest rate, the all-in interest rate on the Term Loan is 2.87% per annum. Total interest expense on the Term Loan for the year ended December 31, 2012 was $1,336,000.
The BofA Note, the RBS Citizens Note and the Loan Agreement are secured by an Amended and Restated Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated July 27, 2012 from the Company in favor of BofA as administrative agent for itself and other lenders, which we refer to as the Mortgage, an Environmental Indemnification and Release Agreement dated July 27, 2012 from the Company in favor of BofA as administrative agent for itself and other lenders, a Collateral Assignment of Interest Rate Protection Agreement dated July 27, 2012 from the Company in favor of BofA as administrative agent for itself and other lenders, and an Assignment and Subordination of Management Agreement dated July 27, 2012 by and among the Company, BofA as administrative agent for itself and other lenders and Ryan. The Mortgage constitutes a lien against the Property and has been recorded in the Office of the Hennepin County Registrar of Titles. The documents evidencing and securing the Term Loan contain customary representations and warranties, as well as customary events of default and affirmative and negative covenants. The Company was in compliance with the Term Loan covenants as of December 31, 2012.
Building Reserves
The Term Loan requires the Company to maintain a cash balance that increases from $5,000,000 to $6,000,000. As of December 31, 2012, the Company’s measure of cash reserves beyond operating needs was approximately $6,400,000. Not only does the Company need to continue to maintain the cash balance required by the Term Loan, but it also believes that it is necessary and prudent to build reserves in light of the potential needs for ongoing leasing costs of the Property’s retail space and capital expenditures not covered by existing tenant lease obligations. Accordingly, the Company anticipates that until it believes that such reserve levels are established, the Company’s level of dividends on its Preferred Stock will be somewhat reduced from average levels of the past five years. The Company is estimating dividend distributions from operations for the balance of 2013 as follows:
(1)Estimated yield is calculated on the original issue price of a share of Preferred Stock of $100,000.
Dividend amounts and cash reserves will be constantly evaluated for levels that best balance current shareholder distributions and required/prudent property capital needs and adjusted as deemed appropriate. Although we believe that these estimates of dividend distributions are reasonable, neither the Company nor management can guarantee future dividend levels. The Company’s Board of Directors is ultimately responsible for making (or not making) a dividend declaration.
Revolving Line of Credit
While a line of credit is not expected to be needed, we may, without the consent of any holder of shares of our Preferred Stock but subject to any required lender consents, obtain a revolving line of credit of up to $46,200,000 on commercially reasonable terms to be used for capital improvements, operating expenses, working capital requirements or to refinance the Company’s debt and fund other Company purposes, if needed. As of December 31, 2012, we had neither sought nor obtained a revolving line of credit.
Possible Future Capital Transaction
We do not intend to borrow any additional money at this time but have the right to obtain the revolving line of credit described above. There can be no assurance that the Company will be able to sell or refinance the Property upon the maturity of the Term Loan or that the proceeds received from such sale or refinancing, or cash raised from the issuance of up to an additional 840 shares of Preferred Stock or the use of our revolving line of credit will be sufficient to repay the Term Loan at that time. In light of the Target Lease, we believe that our financial options could be numerous and we intend to monitor the Property’s performance and market conditions and evaluate future opportunities for the Property, including a possible sale of the Property. Of course, any sale of the Property would be subject to a number of conditions, including approval by our directors and the holders of a majority of the shares of Preferred Stock.
Critical Accounting Policies and Estimates
We have certain critical accounting policies that are subject to judgments and estimates by our management and uncertainties of outcome that affect the application of these policies. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. On an ongoing basis, we evaluate our estimates. In the event estimates or assumptions prove to be different from actual results, adjustments are made in subsequent periods to reflect more current information. The accounting policies that we believe are most critical to the understanding of our financial position and results of operations, and that require significant management estimates and judgments, are discussed below.
Critical accounting policies are those that have the most impact on the reporting of our financial condition and results of operations and those requiring significant judgments and estimates. We believe that our judgments and estimates are consistently applied and produce financial information that fairly presents our results of operations. These policies affect our:
·recognition of rental income and depreciation and amortization expense; and
·assessment of the carrying values and impairments of long-lived assets.
Depreciation and Amortization
We compute depreciation expense using the straight-line method over estimated useful lives of up to 39 years for the building and improvements, and up to 15 years for personal property. The allocated cost of land is not depreciated. The value of above or below-market leases are amortized over the remaining non-cancelable periods of the lease as an adjustment to rental income. The value of in-place leases, exclusive of the value of above-market and below-market in-place leases, is also amortized over the remaining non-cancelable periods of the respective leases. If a lease is terminated prior to its stated expiration, all unamortized amounts relating to that lease would be written off. Inappropriate allocation of acquisition costs, or incorrect estimates of useful lives, could result in depreciation and amortization expenses which do not appropriately reflect the allocation of our capital expenditures over future periods, as is required by generally accepted accounting principles.
Impairment
We periodically evaluate the Property for impairment indicators. These indicators may include declining tenant occupancy, weak or declining tenant profitability, cash flow or liquidity, our decision to dispose of an asset before the end of its estimated useful life or legislative, economic or market changes that permanently reduce the value of our investment. If indicators of impairment are present, we evaluate the carrying value of the Property by comparing it to its expected future undiscounted cash flows. If the sum of these expected future cash flows is less than the carrying value, we reduce the net carrying value of the Property to the present value of these expected future cash flows. This analysis requires us to judge whether indicators of impairment exist and to estimate likely future cash flows. If we misjudge or estimate incorrectly or if future tenant profitability, market or industry factors differ from our expectations, we may record an impairment charge which is inappropriate or fail to record a charge when we should have done so, or the amount of such charges may be inaccurate.
Lease Classification
Each time we enter into a new lease or materially modify an existing lease we evaluate whether it is appropriately classified as a capital lease or as an operating lease. The classification of a lease as capital or operating affects the carrying value of a property, as well as our recognition of rental payments as revenue. These evaluations require us to make estimates of, among other things, the remaining useful life and market value of a property, discount rates and future cash flows. Incorrect assumptions or estimates may result in misclassification of our leases.
Results of Operations
Comparison of the year ended December 31, 2012 to the year ended December 31, 2011
Revenue
Total revenue decreased $0.9 million to $15.0 million for the year ended December 31, 2012, as compared to $15.9 million for the year ended December 31, 2011. This decrease was primarily attributable to the amortization of lease acquisition costs of $1.0 million, which was offset by an increase in rental revenue of $0.1 million.
Expenses
Total expenses increased approximately $3.5 million to $18.3 million for the year ended December 31, 2012, as compared to $14.8 million for the year ended December 31, 2011. This increase was primarily attributable to an increase in interest expense of $2.8 million, an increase in depreciation and amortization of $0.6 million and an increase in rental operating expense of $0.1 million.
Liquidity and Capital Resources
Cash and cash equivalents increased approximately $0.2 million to $9.7 million at December 31, 2012, as compared to $9.5 million for the year ended December 31, 2011. Cash provided by financing activities was $26.7 million and was offset by cash used for operating activities of $26.5 million.
As of December 31, 2012, the Term Loan was outstanding in the principal amount of $106.2 million.
Management believes that existing cash and cash equivalents as of December 31, 2012 of $9.7 million and cash anticipated to be generated internally by operations will be sufficient to meet working capital requirements, distributions and anticipated capital expenditures for at least the next 12 months.
Operating Activities
The cash used for operating activities of $26.6 million for the year ended December 31, 2012 was primarily attributable to a net loss of approximately $3.3 million, payment of deferred leasing costs of $6.8 million, the tenant incentive payment of $24 million and uses arising from other current accounts of $0.1 million, which was partially offset by the add back of $5.8 million of depreciation and amortization, $1.0 million of amortization of lease acquisition costs as well as an increase in accounts payable and accrued liabilities of $0.8 million.
Investing Activities
The cash used for investing activities for the year ended December 31, 2012 of $17,000 was attributable to the purchase of real estate assets.
Financing Activities
The cash provided by financing activities of $26.7 million for the year ended December 31, 2012 was attributable to the $30 million proceeds from the March 4, 2012 revolving advance under the loan payable - affiliate and the $106.2 million proceeds from the July 27, 2012 loan payable, which was partially offset by the $106.2 million principal payment on the loan payable - affiliate and the $1.5 million payments of deferred financing costs and a $1.8 million dividend payment.
Sources and Uses of Funds
Our principal demands on liquidity are cash for operations, interest on debt payments and distributions to equity holders. As of December 31, 2012, we had approximately $2.3 million in accrued liabilities and $106.2 million in long-term debt in the form of the Term Loan. In the near term, liquidity is generated by cash from operations.
Secured Debt
For descriptions of the Company’s past and current secured debt, please refer to (i) Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Trends and Uncertainties - BofA Loan”, (ii) Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Trends and Uncertainties - Bridge Loan”, and (iii) Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Trends and Uncertainties - Term Loan”.
Contingencies
We may be subject to various legal proceedings and claims that arise in the ordinary course of our business. Although occasional adverse decisions or settlements may occur, we believe that the final disposition of such matters will not have a material adverse effect on our financial position or results of operations.
Related Party Transactions
Asset Management Agreement
We have in the past engaged in and currently engage in transactions with a related party, Franklin Street and its subsidiaries FSP Investments LLC and FSP Property Management LLC, which we collectively refer to as FSP. We expect to continue to have related party transactions with FSP in the form of management fees paid to FSP to manage the Company on behalf of our stockholders. FSP Property Management LLC currently provides the Company with asset management and financial reporting services. The asset management agreement between the Company and FSP Property Management LLC requires the Company to pay FSP Property Management LLC a monthly fee equal to one percent (1%) of the gross revenues of the Property. The asset management agreement between the Company and FSP Property Management LLC may be terminated by either party without cause at any time, upon at least thirty (30) days written notice, effective at the end of the notice period. For the years ended December 31, 2012 and 2011, management fees paid were $160,000 and $158,000, respectively.
Bridge Loan
For a description of the Bridge Loan from Franklin Street to the Company, please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Trends and Uncertainties - Bridge Loan”.
Investor Services Agreement
On August 14, 2012, we entered into an Investor Services Agreement, which we refer to as the FSPI Agreement, with FSP Investments LLC for the provision of investor services to holders of our Preferred Stock. FSP Investments LLC is a wholly-owned subsidiary of Franklin Street, which is the sole holder of our one share of Common Stock that is issued and outstanding. FSP Investments LLC acted as a real estate investment firm and broker/dealer with respect to (a) our organization, (b) our acquisition of the Property and (c) the sale of our equity interests. The FSPI Agreement requires us to pay a monthly service fee of $500 for services performed under the FSPI Agreement, and to reimburse FSP Investments LLC for its reasonable out-of-pocket expenses incurred in connection with the FSPI Agreement. The FSPI Agreement may be terminated by either party with thirty days written notice or immediately upon certain events of default set forth in the FSPI Agreement. For the year ended December 31, 2012 and 2011, investor services fees paid were approximately $3,000 and $0, respectively.
Ownership of Common Stock
Franklin Street is the sole holder of the Company’s one share of Common Stock that is issued and outstanding. Subsequent to the completion of the private placement of the Preferred Stock in January 2007, Franklin Street has not been entitled to share in any earnings or any dividend as a result of its ownership of the Common Stock of the Company.
Rental Income Commitments
Our commercial real estate operations consist of the leasing of the Property. Approximate future minimum rental income under non-cancelable operating leases as of December 31, 2012 is as follows:
Off-Balance Sheet Arrangements
The Company is not party to any off-balance sheet arrangements other than property management commitments. The Company is a party to a management agreement with Ryan, an unaffiliated third party management company, to provide property management services, and is party to an asset management agreement with an affiliate, FSP Property Management LLC, to provide asset management and financial reporting services. The management agreement between the Company and Ryan requires the Company to pay Ryan a monthly fee equal to three percent (3%) of the net operating receipts collected in the preceding month. The management agreement between the Company and Ryan may be terminated by the Company without cause at any time, upon at least thirty (30) days written notice. The agreement with FSP Property Management LLC may be terminated by either party without cause at any time, upon at least thirty (30) days written notice. The asset management agreement between the Company and FSP Property Management LLC requires the Company to pay FSP Property Management LLC a monthly fee equal to one percent (1%) of the gross revenues of the Property.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Not applicable.
Item 8.
Item 8. Financial Statements and Supplementary Data
The information required by this item is included elsewhere herein and incorporated herein by reference. Reference is made to the Index to Consolidated Financial Statements in Item 15 of Part IV.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2012. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of December 31, 2012, our principal executive officer and principal financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Management’s Annual Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officer and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
• Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2012. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
Based on our assessment, management concluded that, as of December 31, 2012, the Company’s internal control over financial reporting is effective based on those criteria.
This annual report is not required to include an attestation report of the Company's registered public accounting firm regarding internal control over financial reporting. This report shall not be deemed to be filed for the purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section.
Changes in Internal Control Over Financial Reporting
No change in our internal control over financial reporting occurred during the year 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
Not applicable.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Directors and Executive Officers
Information regarding the executive officers and directors of the Company as of February 28, 2013 is set forth below. The biographies of each of the directors below contain information regarding the person’s service as a director, business experience, director positions held currently or at any time during the last five years, information regarding involvement in certain legal or administrative proceedings, if applicable, and the experiences, qualifications, attributes or skills that caused our Board of Directors to determine that the person should serve as a director of the Company. In addition, all of our directors bring to our Board executive leadership experience derived from their service as executives of a public company and specifically as an executive of Franklin Street, as well as other key attributes that are important to an effective board: integrity, candor, analytical skills, the willingness to engage management and each other in a constructive and collaborative fashion. In addition, we have included information about each nominee’s specific experience, qualifications, attributes, or skills that led the board to conclude that he or she should serve as a director of the Company, in light of our business and structure.
George J. Carter, age 64, is President and a director of the Company. Since 1996 he has also been President and Chief Executive Officer and a director of Franklin Street and is responsible for all aspects of the business of Franklin Street and its affiliates, with special emphasis on the evaluation, acquisition and structuring of real estate investments. From 1992 through 1996 he was President of Boston Financial Securities, Inc., or Boston Financial. Prior to joining Boston Financial, Mr. Carter was owner and developer of Gloucester Dry Dock, a commercial shipyard in Gloucester, Massachusetts. From 1979 to 1988, Mr. Carter served as Managing Director in charge of marketing at First Winthrop Corporation, a national real estate and investment banking firm headquartered in Boston, Massachusetts. Prior to that, he held a number of positions in the brokerage industry including those with Merrill Lynch & Co. and Loeb Rhodes & Co. Mr. Carter is a graduate of the University of Miami (B.S.). Mr. Carter is a FINRA General Securities Principal (Series 24) and holds a FINRA Series 7 general securities license and a FINRA Series 79, Investment Banker Registration license.
Barbara J. Fournier, age 57, is the Vice President, Chief Operating Officer, Treasurer and Secretary and a director of the Company. Since 1996, she has also been Chief Operating Officer, Treasurer and Secretary and a director of Franklin Street. In 2008, Ms. Fournier became an Executive Vice President of Franklin Street. Ms. Fournier has as her primary responsibility, together with George J. Carter, the management of all operating business affairs of Franklin Street and its affiliates. From 1993 through 1996, she was Director of Operations for the private placement division of Boston Financial. Prior to joining Boston Financial, Ms. Fournier served as Director of Operations for Schuparra Securities Corp. and as the Sales Administrator for Weston Financial Group. From 1979 through 1986, Ms. Fournier worked at First Winthrop Corporation in administrative and management capacities, including Office Manager, Securities Operations and Partnership Administration. Ms. Fournier attended Northeastern University and the New York Institute of Finance. Ms. Fournier is a member of the NYSE MKT Listed Company Council. Ms. Fournier participates in corporate governance-related continuing education sessions offered by the NYSE affiliate, Corporate Board Member. Ms. Fournier is a FINRA General Securities Principal (Series 24). She also holds other FINRA supervisory licenses including Series 4 and Series 53, and a FINRA Series 7 general securities license, a FINRA Series 99, Operations Professional license and a FINRA Series 79, Investment Banker Registration license.
Janet Prier Notopoulos, age 65, is a Vice President and a director of the Company. In addition, she is President of FSP Property Management LLC and an Executive Vice President and a director of Franklin Street and has as her primary responsibility the oversight of the management of the real estate assets of Franklin Street and its affiliates. Prior to joining Franklin Street in 1997, Ms. Notopoulos was a real estate and marketing consultant for various clients. From 1975 to 1983, she was Vice President of North Coast Properties, Inc., a Boston real estate investment company. Between 1969 and 1973, she was a real estate paralegal at Goodwin, Procter & Hoar. Ms. Notopoulos is a graduate of Wellesley College (B.A.) and the Harvard School of Business Administration (M.B.A).
Jeffrey B. Carter, age 41, is a Vice President and a director of the Company, and is George J. Carter's son. In addition, he is an Executive Vice President and Chief Investment Officer of Franklin Street. Prior to joining Franklin Street in 1998, Mr. Carter worked in Trust Administration for Northern Trust Bank in Miami, Florida. Mr. Carter is a graduate of Arizona State University (B.A.) and The George Washington University (M.A.). Mr. Carter holds a FINRA Series 7 general securities license and a FINRA Series 79, Investment Banker Registration license.
Each of our directors holds office from the time of his or her election until the next annual meeting and until a successor is elected and qualified, or until such director’s earlier death, resignation or removal. Each of the above persons has been associated with us in the positions described above since our inception in 2006. Each of them is an employee of Franklin Street, which is the sole owner of the Common Stock. Each of our officers serves in that capacity at the request of Franklin Street.
Each of our directors also serve as directors of FSP Galleria North Corp. and FSP 303 East Wacker Drive Corp., which are public reporting companies sponsored by Franklin Street. In their capacities as directors of FSP Galleria North Corp. and FSP 303 East Wacker Drive Corp., each holds office from the time of his or her election until the next annual meeting and until a successor is elected and qualified, or until such director's earlier death, resignation or removal.
Sections 16(a) Beneficial Ownership Reporting Compliance
Based solely on its review of copies of reports filed by the directors and executive officers of the Company pursuant to Section 16(a) of the Exchange Act, the Company believes that during 2012 all filings required to be made by its reporting persons were timely made in accordance with the requirements of the Exchange Act.
Corporate Governance
Our board of directors does not have standing compensation, nominating and corporate governance or audit committees. Our officers are compensated by Franklin Street in connection with their employment by Franklin Street and serve as our executive officers at Franklin Street’s request. Our directors are officers of Franklin Street and we do not consider it necessary to establish a nominating committee or a policy for reviewing nominees recommended by stockholders. We do not have a director who qualifies as an “audit committee financial expert” under the regulations of the SEC. We have not adopted a code of business conduct or code of ethics for our executive officers because all of our officers are officers of Franklin Street and are governed by Franklin Street’s code of business conduct and ethics.
Item 11.
Item 11. Executive Compensation
Each of the executive officers of the Company is compensated by Franklin Street in connection with his or her employment by Franklin Street and serves as an executive officer of the Company at Franklin Street’s request without compensation. Franklin Street is subject to the informational requirements of the Exchange Act, and, in accordance therewith, files reports and other information with the Securities and Exchange Commission (SEC). Franklin Street’s common stock is traded on the NYSE MKT under the symbol “FSP”.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following tables set forth the beneficial ownership of the Company’s Common Stock and Preferred Stock as of February 28, 2013 by each holder who beneficially owns more than five percent of the Company’s Common Stock or Preferred Stock, by each director, by each of the Company’s executive officers and by all current directors and executive officers as a group. To the Company’s knowledge, no person or group, other than as set forth below, beneficially owns more than five percent of the Company’s Common Stock or Preferred Stock.
Common Stock Number of Shares
Percentage of
Beneficially
Outstanding
Name of Holder Owned
Common Stock
Franklin Street Properties Corp. (1)
100%
George J. Carter(2) -
0%
Barbara J. Fournier(2) -
0%
Janet P. Notopoulos(2) -
0%
Jeffrey B. Carter(2) -
0%
All Directors and Executive Officers as a Group
(consisting of 4 persons)(2) -
0%
Preferred Stock Number of Shares
Percentage of
Beneficially
Outstanding
Name of Holder Owned
Preferred Stock
George J. Carter(2) -
0%
Barbara J. Fournier(2) -
0%
Janet P. Notopoulos(2) -
0%
Jeffrey B. Carter(2) -
0%
All Directors and Executive Officers as a Group
(consisting of 4 persons) (2) -
0%
(1)The address of Franklin Street Properties Corp. is 401 Edgewater Place, Wakefield, Massachusetts 01880.
(2)Each of the Executive Officers is employed by Franklin Street Properties Corp. Franklin Street Properties Corp. owns 100% of the issued and outstanding Common Stock of the Company.
Equity Compensation Plan Information
The Company does not have any equity compensation plans.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Certain Relationships and Related Transactions
George J. Carter, Barbara J. Fournier, Janet P. Notopoulos and Jeffrey B. Carter, each of whom is an executive officer and a director of the Company, are executive officers of Franklin Street Properties Corp. (“Franklin Street”) and, except for Jeffrey B. Carter, are directors of Franklin Street. Jeffrey B. Carter is George J. Carter’s son. None of such persons received any remuneration from the Company for their services.
Asset Management Agreement
We have in the past engaged in and currently engage in transactions with a related party, Franklin Street and its subsidiaries FSP Investments LLC and FSP Property Management LLC (collectively “FSP”). We expect to continue to have related party transactions with FSP in the form of management fees paid to FSP to manage the Company on behalf of our stockholders. FSP Property Management LLC currently provides the Company with asset management and financial reporting services. The asset management agreement between the Company and FSP Property Management LLC requires the Company to pay FSP Property Management LLC a monthly fee equal to one percent (1%) of the gross revenues of the Property. The asset management agreement between the Company and FSP Property Management LLC may be terminated by either party without cause at any time, upon at least thirty (30) days written notice, effective at the end of the notice period. For the years ended December 31, 2012 and 2011, management fees paid were $160,000 and $158,000, respectively.
Bridge Loan
For a description of the Bridge Loan from Franklin Street to the Company, please refer to Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Trends and Uncertainties - Bridge Loan”.
Investor Services Agreement
On August 14, 2012, we entered into an Investor Services Agreement (the “FSPI Agreement”) with FSP Investments LLC for the provision of investor services to holders of our Preferred Stock. FSP Investments LLC is a wholly-owned subsidiary of Franklin Street, which is the sole holder of our one share of Common Stock that is issued and outstanding. FSP Investments LLC acted as a real estate investment firm and broker/dealer with respect to (a) our organization, (b) our acquisition of the Property and (c) the sale of our equity interests. The FSPI Agreement requires us to pay a monthly service fee of $500 for services performed under the FSPI Agreement, and to reimburse FSP Investments LLC for its reasonable out-of-pocket expenses incurred in connection with the FSPI Agreement. The FSPI Agreement may be terminated by either party with thirty days written notice or immediately upon certain events of default set forth in the FSPI Agreement. For the year ended December 31, 2012 and 2011, investor services fees paid were approximately $3,000 and $0, respectively.
Ownership of Common Stock
Franklin Street is the sole holder of the Company’s one share of Common Stock that is issued and outstanding. Subsequent to the completion of the private placement of the Preferred Stock in January 2007, Franklin Street has not been entitled to share in any earnings or any dividend as a result of its ownership of the Common Stock of the Company.
Director Independence
Our securities are not listed on a national securities exchange or in an inter-dealer quotation system. None of our directors qualifies as “independent” under the standards of the NYSE MKT, where Franklin Street is listed.
Item 14.
Item 14. Principal Accounting Fees and Services
Independent Auditor Fees and Other Matters
The following tables summarize the aggregate fees billed by the Company’s independent registered public accounting firm, Braver PC, for audit services for each of the last two fiscal years and for other services rendered to the Company in each of the last two fiscal years.
Fee Category
Audit Fees (1) $64,050 $64,050
Audit-Related Fees (2)
Tax fees (3) $5,250 $5,250
All Other Fees (4)
Total Fees $69,300 $69,300
(1)Audit fees consist of fees for the audit of our financial statements, the review of the interim financial statements included in our quarterly reports on Form 10-Q, and other professional services provided in connection with statutory and regulatory filings or engagements.
(2)Audit-related fees consist of fees for assurance and related services that are reasonably related to the performance of the audit and the review of our financial statements and which are not reported under “Audit Fees”.
(3)Tax fees consist of fees for tax compliance, tax advice and tax planning services. Tax compliance services, which relate to the preparation of tax returns, claims for refunds and tax payment-planning services, accounted for $5,250 of the total tax fees incurred in 2012 and 2011.
(4)The Company was not billed by its independent registered public accounting firm in 2012 or 2011 for any other fees.
Pre-Approval Policy and Procedures
The Company has not adopted policies and procedures relating to the pre-approval of audit and non-audit services that are to be performed by the Company’s independent registered public accounting firm.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules
(a)The following documents are filed as part of this report.
1.Financial Statements: The Financial Statements listed in the accompanying Index to Consolidated Financial Statements are filed as part of this Annual Report on Form 10-K.
2.Financial Statement Schedule: The Financial Statement Schedule listed on the accompanying Index to Consolidated Financial Statements is filed as part of this Annual Report on Form 10-K.
3.Exhibits: The Exhibits listed in the Exhibit Index are filed as part of this Annual Report on Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf as of March 12, 2013 by the undersigned, thereunto duly authorized.
FSP 50 South Tenth Street Corp.
By:/s/ George J. Carter
George J. Carter
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title Date
/s/ George J. Carter
President and Director March 12, 2013
George J. Carter
(Principal Executive Officer)
/s/ Barbara J. Fournier
Vice President, Chief Operating Officer, March 12, 2013
Barbara J. Fournier
Treasurer, Secretary and Director
(Principal Financial Officer and Principal
Accounting Officer)
/s/ Janet P. Notopoulos
Director, Vice President March 12, 2013
Janet P. Notopoulos
/s/ Jeffrey B. Carter
Director, Vice President March 12, 2013
Jeffrey B. Carter
EXHIBIT INDEX
Exhibit No. Description
3.1 Amended and Restated Certificate of Incorporation, incorporated herein by reference to Exhibit 3.1 to FSP 50 South Tenth Street Corp.’s Registration Statement on Form 10, as amended (File No. 000-52551)
3.2 By-Laws, incorporated herein by reference to Exhibit 3.2 to FSP 50 South Tenth Street Corp.’s Registration Statement on Form 10, as amended (File No. 000-52551)
10.1 Amended and Restated Promissory Note, dated July 27, 2012, from FSP 50 South Tenth Street Corp. in favor of Bank of America, N.A, incorporated herein by reference to Exhibit 10.1 to FSP 50 South Tenth Street Corp.’s Current Report on Form 8-K filed on July 27, 2012 (File No. 000-52551)
10.2 Amended and Restated Promissory Note, dated July 27, 2012, from FSP 50 South Tenth Street Corp. in favor of RBS Citizens, National Association, incorporated herein by reference to Exhibit 10.2 to FSP 50 South Tenth Street Corp.’s Current Report on Form 8-K filed on July 27, 2012 (File No. 000-52551)
10.3 Loan Agreement, dated July 27, 2012, among FSP 50 South Tenth Street Corp., Bank of America, N.A. and RBS Citizens, National Association, incorporated herein by reference to Exhibit 10.3 to FSP 50 South Tenth Street Corp.’s Current Report on Form 8-K filed on July 27, 2012 (File No. 000-52551)
10.4 ISDA Master Agreement, dated July 27, 2012, between FSP 50 South Tenth Street Corp. and Bank of America, N.A., together with the schedule relating thereto, incorporated herein by reference to Exhibit 10.4 to FSP 50 South Tenth Street Corp.’s Current Report on Form 8-K filed on July 27, 2012 (File No. 000-52551)
10.5 Amended and Restated Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing, dated July 27, 2012, from FSP 50 South Tenth Street Corp. in favor of Bank of America, N.A., as administrative agent for itself and other lenders, incorporated herein by reference to Exhibit 10.5 to FSP 50 South Tenth Street Corp.’s Current Report on Form 8-K filed on July 27, 2012 (File No. 000-52551)
10.6 Environmental Indemnification and Release Agreement, dated July 27, 2012, from FSP 50 South Tenth Street Corp. in favor of Bank of America, N.A., as administrative agent for itself and other lenders, incorporated herein by reference to Exhibit 10.6 to FSP 50 South Tenth Street Corp.’s Current Report on Form 8-K filed on July 27, 2012 (File No. 000-52551)
10.7 Collateral Assignment of Interest Rate Protection Agreement, dated July 27, 2012, from FSP 50 South Tenth Street Corp. in favor of Bank of America, N.A., as administrative agent for itself and other lenders, incorporated herein by reference to Exhibit 10.7 to FSP 50 South Tenth Street Corp.’s Current Report on Form 8-K filed on July 27, 2012 (File No. 000-52551)
10.8 Assignment and Subordination of Management Agreement, dated July 27, 2012, among FSP 50 South Tenth Street Corp., Bank of America, N.A., as administrative agent for itself and other lenders, and Ryan Companies US, Inc. , incorporated herein by reference to Exhibit 10.8 to FSP 50 South Tenth Street Corp.’s Current Report on Form 8-K filed on July 27, 2012 (File No. 000-52551)
10.9 Office Lease Agreement between FSP 50 South Tenth Street Corp. and Target Corporation dated effective February 29, 2012, incorporated herein by reference to Exhibit 10.1 to FSP 50 South Tenth Street Corp.’s Current Report on Form 8-K filed on March 1, 2012 (File No. 000-52551)
10.10 Oracle America Lease, as amended, incorporated herein by reference to Exhibit 10.2 to FSP 50 South Tenth Street Corp.’s Registration Statement on Form 10, as amended (File No. 000-52551)
10.11 Asset Management Agreement, incorporated herein by reference to Exhibit 10.3 to FSP 50 South Tenth Street Corp.’s Registration Statement on Form 10, as amended (File No. 000-52551)
10.12 Investor Services Agreement dated August 14, 2012 by and between FSP 50 South Tenth Street Corp. and FSP Investments LLC., incorporated herein by reference to Exhibit 10.1 to FSP 50 South Tenth Street Corp.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, filed on August 14, 2012 (File No. 000-52551)
10.13 Management Agreement, incorporated herein by reference to Exhibit 10.4 to FSP 50 South Tenth Street Corp.’s Registration Statement on Form 10, as amended (File No. 000-52551)
10.14 Voting Agreement, incorporated herein by reference to Exhibit 10.5 to FSP 50 South Tenth Street Corp.’s Registration Statement on Form 10, as amended (File No. 000-52551)
21.1 Subsidiaries of the Registrant, incorporated herein by reference to Exhibit 21.1 to FSP 50 South Tenth Street Corp.’s Registration Statement on Form 10, as amended (File No. 000-52551)
31.1* Certification of FSP 50 South Tenth Street Corp.'s principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2* Certification of FSP 50 South Tenth Street Corp.'s principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1* Certification of FSP 50 South Tenth Street Corp.'s principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2* Certification of FSP 50 South Tenth Street Corp.'s principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101** The following materials from FSP 50 South Tenth Street Corp.’s Annual Report on Form 10-K for the year ended December 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Cash Flows; and (iv) the Notes to Consolidated Financial Statements
* Filed herewith.
** XBRL (eXtensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these Sections.
FSP 50 South Tenth Street Corp.
Index to Consolidated Financial Statements
Page
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2012 and 2011
Consolidated Statements of Operations for the years ended December 31, 2012 and 2011
Consolidated Statements of Other Comprehensive Income (Loss) for the years ended December 31, 2012 and 2011
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2011 and 2012
Consolidated Statements of Cash Flows for the years ended December 31, 2012 and 2011
Notes to Consolidated Financial Statements
Financial Statement Schedule - Schedule III
[LETTERHEAD OF BRAVER PC]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders
FSP 50 South Tenth Street Corp.
Wakefield, Massachusetts
We have audited the accompanying consolidated balance sheets of FSP 50 South Tenth Street Corp. as of December 31, 2012 and 2011, and the related consolidated statements of operations, other comprehensive income (loss), changes in stockholders’ equity and cash flows for the years then ended. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These consolidated financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes 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 FSP 50 South Tenth Street Corp. as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Braver PC
Needham, Massachusetts
March 12, 2013
FSP 50 South Tenth Street Corp.
Consolidated Balance Sheets
See accompanying notes to consolidated financial statements.
FSP 50 South Tenth Street Corp.
Consolidated Statements of Operations
See accompanying notes to consolidated financial statements.
FSP 50 South Tenth Street Corp.
Consolidated Statements of Other Comprehensive Income (Loss)
See accompanying notes to consolidated financial statements.
FSP 50 South Tenth Street Corp.
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 2011 and
See accompanying notes to consolidated financial statements.
FSP 50 South Tenth Street Corp.
Consolidated Statements of Cash Flows
See accompanying notes to consolidated financial statements.
FSP 50 South Tenth Street Corp.
Notes to Consolidated Financial Statements
1. Organization
FSP 50 South Tenth Street Corp. (the “Company”) was organized on September 12, 2006 as a corporation under the laws of the State of Delaware to purchase, own and operate a twelve-story multi-tenant office and retail building containing approximately 498,768 rentable square feet of space located in downtown Minneapolis, Minnesota (the “Property”). The Company acquired the Property on November 8, 2006. Franklin Street Properties Corp. (“Franklin Street”) (NYSE MKT: FSP) holds the sole share of the Company’s common stock, $.01 par value per share (the “Common Stock”). Between November 2006 and January 2007, FSP Investments LLC (member, FINRA and SIPC), a wholly-owned subsidiary of Franklin Street, completed the sale on a best efforts basis of 700 shares of the Company’s preferred stock, $.01 par value per share (the “Preferred Stock”). FSP Investments LLC sold the Preferred Stock in a private placement offering to “accredited investors” within the meaning of Regulation D under the Securities Act of 1933.
All references to the Company refer to FSP 50 South Tenth Street Corp. and its consolidated subsidiary, collectively, unless the context otherwise requires.
2. Summary of Significant Accounting Policies
BASIS OF PRESENTATION
The accompanying consolidated financial statements include all of the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.
ESTIMATES AND ASSUMPTIONS
The Company prepares its consolidated financial statements and related notes in conformity with accounting principles generally accepted in the United States of America (“GAAP”). These principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
REAL ESTATE AND DEPRECIATION
Real estate assets are stated at the lower of cost or fair value, as appropriate, less accumulated depreciation.
Costs related to property acquisition and improvements are capitalized. Typical capital items include new roofs, site improvements, various exterior building improvements and major interior renovations.
Routine replacements and ordinary maintenance and repairs that do not extend the life of the asset are expensed as incurred. Funding for repairs and maintenance items typically is provided by cash flows from operating activities.
Depreciation is computed using the straight-line method over the assets' estimated useful lives as follows:
Category Years
Building - Commercial
Building Improvements 15-39
The Company reviews the Property to determine if the carrying amount will be recovered from future cash flows if certain indicators of impairment are identified at the Property. The evaluation of anticipated cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results in future periods. When indicators of impairment are present and the sum of the undiscounted future cash flows is less than the carrying value of such asset, an impairment loss is recorded equal to the difference between the asset’s current carrying value and its fair value based on discounting its estimated future cash flows. At December 31, 2012 and 2011, no impairment charges were recorded.
Depreciation expense of $2,659,000 and $2,632,000 is included in Depreciation and Amortization in the Company’s Consolidated Statements of Operations for the years ended December 31, 2012 and 2011, respectively.
FSP 50 South Tenth Street Corp.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
ACQUIRED REAL ESTATE LEASES
The acquired real estate leases represent the estimated value of legal and leasing costs related to acquired leases that were included in the purchase price when the Company acquired the Property. The Company subsequently amortizes these costs on a straight-line basis over the remaining lives of the related leases. Amortization expense of $980,000 and $703,000 is included in Depreciation and Amortization in the Company’s Consolidated Statements of Operations for the years ended December 31, 2012 and 2011, respectively.
Acquired real estate lease costs included in the purchase price of the Property were $6,447,000. Detail of the remaining acquired real estate leases are as follows:
The estimated annual amortization expense for the three years succeeding December 31, 2012 is as follows:
(in thousands)
$503
$177
$34
ACQUIRED FAVORABLE REAL ESTATE LEASES
Acquired favorable real estate leases represent the value related to the leases when the lease payments due under a tenant’s lease exceed the market rate of the lease at the date the Property was acquired. The Company reports this value separately from its investment in real estate. The Company subsequently amortizes this amount on a straight-line basis over the remaining life of the tenant’s lease. Amortization of $432,000 and $402,000 is shown as a reduction of rental income in the Company’s Consolidated Statements of Operations for the years ended December 31, 2012 and 2011, respectively.
The acquired favorable real estate leases included in the purchase price of the property were $3,198,000. Detail of the remaining acquired favorable real estate leases are as follows:
The estimated annual amortization expense for the two years succeeding December 31, 2012 is as follows:
(in thousands)
$311
$81
FSP 50 South Tenth Street Corp.
Notes to Consolidated Financial Statements
2.	Summary of Significant Accounting Policies (continued)
ACQUIRED UNFAVORABLE REAL ESTATE LEASES
Acquired unfavorable real estate leases represent the value relating to leases with rents below the market rate at the time of property acquisition. Amortization is computed using the straight-line method over the lives of the leases assumed. Amortization of $140,000 and $175,000 is included with rental revenue in the Company’s Consolidated Statements of Operations for the years ended December 31, 2012 and 2011, respectively.
The acquired unfavorable real estate leases included in the purchase price of the property were $1,482,000. Detail of the remaining acquired unfavorable real estate leases are as follows:
The estimated annual amortization expense for the three years succeeding December 31, 2012 is as follows:
(in thousands)
$140
$140
$71
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an initial maturity of three months or less to be cash equivalents. The Company has set aside funded reserves of $5,866,000 and $6,666,000 at December 31, 2012 and 2011, respectively, in anticipation of future capital needs of the Property. These funds typically are used for the payment of real estate assets and deferred leasing commissions; however, there is no legal restriction on their use and they may be used for any Company purpose.
CONCENTRATION OF CREDIT RISKS
Cash, cash equivalents and short-term investments are financial instruments that potentially subject the Company to a concentration of credit risk. The Company maintains its cash balances and short-term investments principally in banks which the Company believes to be creditworthy. The Company periodically assesses the financial condition of these banks and believes that the risk of loss is minimal. Cash balances held with various financial institutions frequently exceed the insurance limit of $250,000 provided by the Federal Deposit Insurance Corporation.
For the years ended December 31, 2012 and 2011, rental income was derived from various tenants. As such, future receipts are dependent upon the financial strength of the lessees and their ability to perform under the lease agreements.
The following tenants represent greater than 10% of rental revenue as of December 31:
On February 29, 2012, the Company and Target entered into a new Office Lease Agreement (the “Target Lease”) whereby Target extended and expanded its lease of space at the Property, effectively leasing 100% of the Property’s office space through March 31, 2030 with no early termination rights.
FSP 50 South Tenth Street Corp.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
FINANCIAL INSTRUMENTS
The Company estimates that the carrying value of cash and cash equivalents, loan payable, and loan payable - affiliate approximate their fair values based on their short-term maturity and prevailing interest rates.
STEP RENT RECEIVABLE
Certain leases provide for fixed rental increases over the life of the lease. Rental revenue is recognized on the straight-line basis over the related lease term; however, billings by the Company are based on required minimum rentals in accordance with the lease agreements. Step rent receivable, which is the cumulative revenue recognized in excess of amounts billed by the Company, is $986,000 and $771,000 at December 31, 2012 and 2011, respectively.
TENANT RENT RECEIVABLE
Tenant rent receivable is reported at the amount the Company expects to collect on balances outstanding at year-end. The Company provides an allowance for doubtful accounts based on its estimate of a tenant’s ability to make future rent payments. The computation of this allowance is based in part on the tenants’ payment history and current credit status. Management monitors outstanding balances and relationships and concluded that an allowance of $0 and $51,000 as of December 31, 2012 and 2011, respectively, was sufficient.
DEFERRED LEASING COSTS
Deferred leasing commissions represent direct and incremental external leasing costs incurred in the leasing of commercial space. These costs are capitalized and are amortized on a straight-line basis over the terms of the related lease agreements. Deferred leasing costs of $6,846,000 and $17,000 were incurred during the years ended December 31, 2012 and 2011, respectively. Amortization expense was $362,000 and $74,000 for the years ended December 31, 2012 and 2011, respectively.
LEASE ACQUISITION COSTS
The lease acquisition costs represent incentive payments made in the leasing of commercial space. On February 29, 2012, the Company and Target Corporation (“Target”) entered into a new Office Lease Agreement and in lieu of any tenant improvement allowance, abatement of rent or any other lease concessions, the Company paid Target a tenant incentive payment in the amount of $23,950,000. These costs are capitalized and amortized into revenue on a straight-line basis over the term of the lease agreement. Amortization of $998,000 is included as a reduction of rental income in the Company’s Consolidated Statements of Operations for the year ended December 31, 2012.
REVENUE RECOGNITION
The Company has retained substantially all of the risks and benefits of ownership of the Company's commercial property and accounts for its leases as operating leases. Rental income from the leases, which may include rent concessions (including free rent) and scheduled increases in rental rates during the lease term, is recognized on a straight-line basis. Any lease incentives are recorded as deferred rent and amortized as reductions to rental income over the lease term on a straight-line basis. The Company does not have any percentage rent arrangements with its commercial property tenants. Reimbursable costs are included in rental income in the year earned.
FSP 50 South Tenth Street Corp.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
REVENUE RECOGNITION (continued)
A schedule showing the components of rental revenue is shown below.
INTEREST INCOME
Interest income is recognized when the earnings process is complete.
INCOME TAXES
The Company has elected to be taxed as a Real Estate Investment Trust (“REIT”) under the Internal Revenue Code of 1986, as amended. As a REIT, the Company generally is entitled to a tax deduction for dividends paid to its stockholders, thereby effectively subjecting the distributed net income of the Company to taxation at the stockholder level only. The Company must comply with a variety of restrictions to maintain its status as a REIT. These restrictions include the type of income it can earn, the type of assets it can hold, the number of stockholders it can have and the concentration of their ownership, and the amount of the Company’s taxable income that must be distributed annually.
NET INCOME PER SHARE
Basic net income per share of Preferred Stock is computed by dividing net income by the weighted average number of shares of Preferred Stock outstanding during the period. Diluted net income per share of Preferred Stock reflects the potential dilution that could occur if securities or other contracts to issue shares were exercised or converted into shares. There were no potential dilutive shares outstanding at December 31, 2012 and 2011. Subsequent to the completion of the offering shares of Preferred Stock, the holders of Common Stock are not entitled to share in any income nor in any related dividend.
DERIVATIVE INSTRUMENTS
The Company recognizes derivatives on the Consolidated Balance Sheets at fair value. Derivatives that do not qualify, or are not designated as hedge relationships, must be adjusted to fair value through income. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the Consolidated Balance Sheets as either an asset or liability. To the extent hedges are effective, a corresponding amount, adjusted for swap payments, is recorded in accumulated other comprehensive income (loss) within stockholders’ equity. Amounts are then reclassified from accumulated other comprehensive income (loss) to the Consolidated Statements of Operations in the period or periods the hedged forecasted transaction affects earnings. Ineffectiveness, if any, is recorded in the Consolidated Statements of Operations. The Company periodically reviews the effectiveness of each hedging transaction, which involves estimating future cash flows, at least quarterly. Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Fair values of derivatives are subject to significant variability based on changes in interest rates. The results of such variability could be a significant increase or decrease in our derivative assets, derivative liabilities, book equity, and/or earnings.
FSP 50 South Tenth Street Corp.
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (continued)
FAIR VALUE MEASUREMENTS
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There is also an established fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value. Financial assets and liabilities recorded on the Consolidated Balance Sheets at fair value are categorized based on the inputs to the valuation techniques as follows:
Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which is typically based on an entity’s own assumptions, as there is little, if any, related market activity or information. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. These inputs were considered and applied to the Company’s outstanding derivative, and Level 2 inputs were used to value the interest rate swap.
RECENT ACCOUNTING STANDARDS
In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2011-05, Presentation of Comprehensive Income. This standard eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity and instead requires the components of other comprehensive income to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This standard is intended to enhance comparability between entities that report under GAAP and to provide a more consistent method of presenting non-owner transactions that affect an entity’s equity. This standard is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company has adopted this update for the years ending December 31, 2012 and 2011.
SUBSEQUENT EVENTS
In preparing these consolidated financial statements the Company evaluated events that occurred through the date of issuance of these financial statements for potential recognition or disclosure.
3. Loans Payable
BofA Loan
The Property was subject to a $76,200,000 mortgage loan (the “BofA Loan”) with Bank of America, N.A. The BofA Loan was repaid in full on December 29, 2011. The BofA Loan originally closed on December 21, 2006, had a January 1, 2012 maturity date and was secured by, among other items, a first mortgage lien on the Property. Interest on the BofA Loan was fixed at 5.287% per annum and the Company was obligated to make monthly payments of interest only until the maturity date, at which time the principal amount of the BofA Loan, together with any accrued but unpaid interest, was due and payable in full. Interest expense paid for the year ended December 31, 2011 was $4,085,000. The BofA Loan was nonrecourse to the Company. The documentation evidencing and securing the BofA Loan contained customary representations and warranties, as well as customary events of default and affirmative and negative covenants. The Company was in compliance with BofA Loan covenants on December 29, 2011, the date that the BofA Loan was repaid in full.
FSP 50 South Tenth Street Corp.
Notes to Consolidated Financial Statements
3. Loans Payable (continued)
Bridge Loan
On December 29, 2011, the Company executed and delivered a promissory note to Franklin Street that evidenced a loan for up to $106,200,000 (the “Bridge Loan”). On July 27, 2012, the Company repaid the Bridge Loan in its entirety from the proceeds of the Term Loan (as defined below). Please refer to Note 7 below for a detailed description of the Bridge Loan.
Term Loan
On July 27, 2012, the Company entered into a new $106,200,000 secured credit facility (the “Term Loan”) providing for the extension of credit to the Company by Bank of America, N.A. (“BofA”) and RBS Citizens, National Association (“RBS Citizens”). The Term Loan was structured as a purchase by BofA and RBS Citizens of the Bridge Loan from Franklin Street. Accordingly, in connection with the closing of the Term Loan, the loan documents evidencing and securing the Bridge Loan were amended and restated. More specifically, on July 27, 2012, the Company executed and delivered an Amended and Restated Promissory Note (the “BofA Note”) to BofA in the principal amount of $60,000,000 and an Amended and Restated Promissory Note (the “RBS Citizens Note”) to RBS Citizens in the principal amount of $46,200,000. All of the proceeds of the Term Loan were funded on July 27, 2012 and used to repay the Bridge Loan in its entirety. BofA is the Term Loan’s administrative agent and Merrill Lynch, Pierce, Fenner & Smith Incorporated is the Term Loan’s sole lead arranger and sole book manager.
The Term Loan is evidenced by a Loan Agreement dated July 27, 2012 by and among the Company, BofA and RBS Citizens (the “Loan Agreement”). So long as there is no default, the Company is obligated to pay interest only on the outstanding principal amount of the Term Loan at a variable rate equal to 30-day LIBOR plus 2.00%. The outstanding principal amount of the Term Loan, together with any accrued but unpaid interest, is due and payable on July 27, 2017. Subject to payment by the Company of certain yield maintenance and redeployment costs, the Term Loan may be prepaid in whole or in part at any time. Any partial payment must be in an amount at least equal to $100,000.
Although the interest rate on the Term Loan is variable, under the Loan Agreement the Company was required to fix the 30-day LIBOR interest rate by entering into an interest rate swap agreement with BofA. On July 27, 2012, the Company entered into an ISDA Master Agreement with BofA that fixed the 30-day LIBOR interest rate on the Term Loan at 0.87% per annum for the term of the Term Loan. Accordingly, when combined with the required 2.00% spread over 30-day LIBOR interest rate, the all-in interest rate on the Term Loan is 2.87% per annum. Total interest expense on the Term Loan for the year ended December 31, 2012 was $1,336,000.
The BofA Note, the RBS Citizens Note and the Loan Agreement are secured by an Amended and Restated Mortgage, Assignment of Leases and Rents, Security Agreement and Fixture Filing dated July 27, 2012 from the Company in favor of BofA as administrative agent for itself and other lenders (the “Mortgage”), an Environmental Indemnification and Release Agreement dated July 27, 2012 from the Company in favor of BofA as administrative agent for itself and other lenders, a Collateral Assignment of Interest Rate Protection Agreement dated July 27, 2012 from the Company in favor of BofA as administrative agent for itself and other lenders, and an Assignment and Subordination of Management Agreement dated July 27, 2012 by and among the Company, BofA as administrative agent for itself and other lenders and Ryan Companies US, Inc. The Mortgage constitutes a lien against the Property and has been recorded in the Office of the Hennepin County Registrar of Titles. The documents evidencing and securing the Term Loan contain customary representations and warranties, as well as customary events of default and affirmative and negative covenants. The Company was in compliance with the Term Loan covenants as of December 31, 2012.
4. Financial Instruments: Derivatives and Hedging
On July 27, 2012, the Company fixed the 30-day LIBOR interest rate for the five year term of the Term Loan at 0.87% per annum pursuant to an interest rate swap agreement.
FSP 50 South Tenth Street Corp.
Notes to Consolidated Financial Statements
4. Financial Instruments: Derivatives and Hedging (continued)
The interest swap agreement qualifies as a cash flow hedge and has been recognized on the Consolidated Balance Sheets at fair value. If a derivative qualifies as a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in other comprehensive loss until the hedged item is recognized in earnings. The ineffective portion of a derivative’s change in fair value will be immediately recognized in earnings, which may increase or decrease reported net income (loss) and stockholders’ equity prospectively, depending on future levels of interest rates and other variables affecting the fair values of derivative instruments and hedged items, but will have no effect on cash flows.
The following table summarizes the notional and fair value of our derivative financial instrument at December 31, 2012. The notional value is an indication of the extent of our involvement in these instruments at that time, but does not represent exposure to credit, interest rate or market risks (in thousands).
As of December 31, 2012, the derivative instrument was reported as an obligation at its fair value of approximately $1,024,000. This is included in other liabilities: derivative termination value on the Consolidated Balance Sheet at December 31, 2012. Offsetting adjustments are represented as deferred gains or losses on derivative financial instruments in accumulated other comprehensive loss of $1,024,000.
The Company was hedging exposure to variability in future cash flows for forecasted transactions in addition to anticipated future interest payments on existing debt.
5. Income Taxes
The Company files as a REIT under Sections 856-860 of the Internal Revenue Code of 1986, as amended. In order to qualify as a REIT, the Company is required to distribute at least 90% of its taxable income to stockholders and to meet certain asset and income tests as well as certain other requirements. The Company will generally not be liable for federal income taxes, provided it satisfies these requirements. Even as a qualified REIT, the Company is subject to certain state and local taxes on its income and property.
The Company adopted an accounting pronouncement related to uncertainty in income taxes effective January 1, 2007, which did not result in recording a liability, nor was any accrued interest and penalties recognized with the adoption. Accrued interest and penalties will be recorded as income tax expense, if the Company records a liability in the future. The Company’s effective tax rate was not affected by the adoption. The Company files income tax returns in the U.S. federal jurisdiction and the State of Minnesota jurisdiction. The statute of limitations for the Company’s income tax returns is generally three years and as such, the Company’s returns that remain subject to examination would be from 2009 and thereafter.
For the period ended December 31, 2006 and for the year ended December 31, 2012, the Company incurred a net operating loss for income tax purposes of approximately $4,166,000 and $3,087,000 that can be carried forward until it expires in the year 2026 and 2032, respectively.
At December 31, 2012, the Company’s net tax basis of its real estate assets was $106,131,000.
FSP 50 South Tenth Street Corp.
Notes to Consolidated Financial Statements
5. Income Taxes (continued)
The following schedule reconciles net income (loss) to taxable income (loss) subject to dividend requirements, which are calculated annually:
The following schedule summarizes the tax components of the distributions paid for the year ended December 31,:
6. Capital Stock
PREFERRED STOCK
Generally, each holder of shares of Preferred Stock is entitled to receive ratably all dividends, if any, declared by the Board of Directors out of funds legally available. The right to receive dividends is non-cumulative, and no right to dividends shall accrue by reason of the fact that no dividend has been declared in any prior year. Each holder of shares of Preferred Stock will be entitled to receive, to the extent that funds are available therefore, $100,000 per share of Preferred Stock, before any payment to the holder of Common Stock, out of distributions to stockholders upon liquidation, dissolution or the winding up of the Company; the balance of any such funds available for distribution will be distributed among the holders of shares of Preferred Stock and the holder of Common Stock, pro rata based on the number of shares held by each; provided, however, that for these purposes, one share of Common Stock will be deemed to equal one-tenth of a share of Preferred Stock.
In addition to certain rights to remove and replace directors, the holders of a majority of the then outstanding shares of Preferred Stock shall have the further right to approve or disapprove a proposed sale of the Property, the merger of the Company with any other entity and amendments to the corporate charter. A vote of the holders of not less than 66.67% of then outstanding shares of Preferred Stock is required for the issuance of any additional shares of capital stock other than the remaining 840 shares of authorized but unissued Preferred Stock. Holders of shares of Preferred Stock have no redemption or conversion rights.
COMMON STOCK
Franklin Street is the sole holder of the Company’s Common Stock. Franklin Street has the right to vote to elect the directors of the Company and to vote on all matters, subject to the voting rights of the Preferred Stock set forth above. Subsequent to the completion of the offering of the shares of Preferred Stock in January 2007, Franklin Street, as the holder of Common Stock, was not entitled to share in any earnings nor any related dividend.
FSP 50 South Tenth Street Corp.
Notes to Consolidated Financial Statements
7. Related Party Transactions
Asset Management Agreement
The Company has in the past engaged in and currently engages in transactions with a related party, Franklin Street, and its subsidiaries FSP Investments LLC and FSP Property Management LLC (collectively “FSP”). The Company expects to continue to have related party transactions with FSP in the form of management fees paid to FSP to manage the Company on behalf of its stockholders. FSP Property Management LLC currently provides the Company with asset management and financial reporting services. The asset management agreement between the Company and FSP Property Management LLC requires the Company to pay FSP Property Management LLC a monthly fee equal to one percent (1%) of the gross revenues of the Property. The asset management agreement between the Company and FSP Property Management LLC may be terminated by either party without cause at any time, upon at least thirty (30) days written notice, effective at the end of the notice period. For the years ended December 31, 2012 and 2011, management fees paid were $160,000 and $158,000, respectively.
Bridge Loan
On December 29, 2011, the Company executed and delivered a promissory note to Franklin Street that evidenced a loan for up to $106,200,000 (the “Bridge Loan”). On July 27, 2012, the Company repaid the Bridge Loan in its entirety from the proceeds of the Term Loan. The Bridge Loan included a term loan component (the “Term Loan Component”) in the amount of $76,200,000, all of which was funded on December 29, 2011 and used to repay the BofA Loan in the same amount in full. The Company paid Franklin Street a Term Loan Component fee in the amount of $762,000 on December 29, 2011. The Bridge Loan also included a revolving line of credit component that could not at any time exceed $30,000,000 (the “Revolving Line Component”). The proceeds of the Revolving Line Component of the Bridge Loan were to be used for lender-approved tenant improvement costs, leasing commissions and other incentives necessary to lease space at the Property.
The Bridge Loan was evidenced by a loan agreement dated December 29, 2011 by and between the Company and Franklin Street. Pursuant to the loan agreement, the Company could borrow, repay and reborrow Revolving Line Component funds in the form of revolving advances from time to time so long as no event of default existed and certain other customary conditions were satisfied, provided, however, that the aggregate principal amount of all revolving advances outstanding at any time could in no event exceed $30,000,000. On March 4, 2012, the Company requested and Franklin Street funded a revolving advance in the amount of $30,000,000. The Company was required to pay Franklin Street a fee in an amount equal to 1.00% of each revolving advance. As of December 31, 2012, the revolving advance fees paid to Franklin Street were $300,000.
As of December 31, 2012, costs and fees paid associated with the Bridge Loan, including the $762,000 Term Loan Component fee, the $300,000 Revolving Line Component fee and a $520,000 exit fee paid to Franklin Street, were $1,582,000 and had been fully amortized and included in interest expense in the Company’s Statement of Operations for the year ended December 31, 2012.
The Company was obligated to pay interest only on the outstanding principal amount of the Term Loan Component and any revolving advances under the Revolving Line Component at the fixed rate of 6.51% per annum. The outstanding principal amount of the Bridge Loan, together with any accrued but unpaid interest, was due and payable on December 31, 2013. The Bridge Loan could be prepaid in whole or in part at any time without premium or penalty. Any partial payment had to be in an amount at least equal to $100,000. At the time of any prepayment and upon payment of the unpaid principal balance on the maturity date, the Company was required to pay Franklin Street an exit fee in an amount equal to 0.49% of such prepayment or payment of the unpaid principal balance. Interest expense paid for the year ended December 31, 2012 was $3,647,000.
The promissory note and the loan agreement were secured by a combination mortgage, security agreement and fixture filing dated December 29, 2011 from the Company in favor of Franklin Street, an environmental indemnification agreement dated December 29, 2011 from the Company in favor of Franklin Street, and an assignment of leases and rents dated December 29, 2011 from the Company in favor of Franklin Street. The mortgage constituted a lien against the Property and was recorded in the Office of the Hennepin County Registrar of Titles. The loan documents that evidenced and secured the Bridge Loan contained customary representations and warranties, as well as customary events of default and affirmative and negative covenants. The Company was in compliance with the Bridge Loan covenants on July 27, 2012, the date that the Bridge Loan was repaid in full.
FSP 50 South Tenth Street Corp.
Notes to Consolidated Financial Statements
7. Related Party Transactions (continued)
Investor Services Agreement
On August 14, 2012, the Company entered into an Investor Services Agreement (the “FSPI Agreement”) with FSP Investments LLC for the provision of investor services to holders of the Company’s preferred stock. FSP Investments LLC is a wholly-owned subsidiary of Franklin Street, which is the sole holder of the Company’s one share of Common Stock that is issued and outstanding. FSP Investments LLC acted as a real estate investment firm and broker/dealer with respect to (a) the Company’s organization, (b) the Company’s acquisition of the Property and (c) the sale of the Company’s equity interests. The FSPI Agreement requires the Company to pay a monthly service fee of $500 for services performed under the FSPI Agreement, and to reimburse FSP Investments LLC for its reasonable out-of-pocket expenses incurred in connection with the FSPI Agreement. The FSPI Agreement may be terminated by either party with thirty days written notice or immediately upon certain events of default set forth in the FSPI Agreement. For the years ended December 31, 2012 and 2011, investor services fees paid were approximately $3,000 and $0, respectively.
Ownership of Common Stock
Franklin Street is the sole holder of the Company’s one share of Common Stock that is issued and outstanding. Subsequent to the completion of the placement of the Preferred Stock in January 2007, Franklin Street has not been entitled to share in earnings or any dividend related to the Common Stock.
8. Commitments and Contingencies
The Company, as lessor, has minimum future rentals due under non-cancelable operating leases as follows:
Year Ending
(in thousands) December 31,
Amount
$ 9,016
8,143
7,731
7,801
8,018
Thereafter
109,770
$ 150,479
In addition, the lessees are liable for real estate taxes and certain operating expenses of the Property.
Upon acquiring the commercial rental property on November 8, 2006, the Company was assigned the lease agreements between the seller of the Property and the existing tenants.
9. Segment Reporting
The Company operates in one industry segment - real estate ownership of commercial property. As of December 31, 2012 and 2011, the Company owned and operated a twelve-story multi-tenant office and retail building in that one segment.
FSP 50 South Tenth Street Corp.
Notes to Consolidated Financial Statements
10. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the components shown below:
11. Subsequent Event
The Company’s board of directors declared a cash distribution of $1,290 per preferred share on January 25, 2013 to the holders of record of the Preferred Stock on February 8, 2013, payable on March 1, 2013.
SCHEDULE III
FSP 50 South Tenth Street Corp.
Real Estate and Accumulated Depreciation
December 31, 2012
(1)The aggregate cost for Federal Income Tax purposes is $128,427.
FSP 50 South Tenth Street Corp.
The following table summarizes the changes in the Company’s real estate investments and accumulated depreciation: