ITEM 1.
BUSINESS.
Background
We are a Delaware limited partnership formed on October 10, 2006 to acquire, develop and operate, directly or indirectly through joint venture arrangements, a portfolio of commercial real estate consisting primarily of multi-tenant shopping centers and mixed-use developments throughout the Southern and Southwestern United States. Our investment strategy is to (1) sell approximately 40% of our properties when appropriate and re-invest the net sales proceeds into additional properties and (2) retain the remaining properties as income-producing assets during our entire operating period. At the end of our seven-year operating period, which expires on November 15, 2013, we will begin to sell our properties, wind down our operations and distribute the net proceeds from liquidation to our Partners, as defined below. Our principal office is located at 8 Greenway Plaza, Suite 1000, Houston, Texas 77046. Our telephone number is (713) 850-1400.
We commenced our principal operations on December 8, 2006 when we acquired our first interest in a property. On January 12, 2007, we accepted subscriptions for the minimum offering of $1.0 million pursuant to the terms of our Offering Memorandum dated November 15, 2006 (the “Offering Memorandum”) and issued our initial 40 units of limited partnership interest (the “Units”). We closed the Offering of Units on March 31, 2008 when we had received $49.7 million from the sale of 1,991 Units. We refer to the holders of our Units as Limited Partners.
On April 29, 2008 we filed a Form 10-12G with the SEC to register our Units pursuant to Section 12(g) of the Exchange Act. We are subject to the registration requirements of Section 12(g) of the Exchange Act because the aggregate value of our assets exceeds applicable thresholds and the Units are held of record by 500 or more persons. As a result of our obligations to register our securities with the SEC under the Exchange Act, we are subject to the requirements of the Exchange Act rules, including the filing of this Annual Report.
Our general partner is AmREIT Monthly Income & Growth IV Corporation, a Delaware corporation that we refer to as the General Partner. Our General Partner is a wholly-owned subsidiary of AmREIT, Inc., an SEC reporting, non-traded Maryland corporation that has elected to be taxed as a real estate investment trust (“AmREIT”). AmREIT and its predecessors have sponsored and advised 18 partnerships formed for the purpose of investing in properties during its 26-year history. Our General Partner has the exclusive right to manage our business and affairs on a day-to-day basis pursuant to our limited partnership agreement (“Partnership Agreement”). Our General Partner is responsible for all of our investment decisions, including decisions relating to the properties to be developed, the method and timing of financing or refinancing the properties, the selection of tenants, the terms of the leases, the method and timing of the sale of our properties and the reinvestment of net sales proceeds. Our General Partner utilizes the services of AmREIT and its affiliates in performing its duties under the Partnership Agreement. Our General Partner has contributed $1,000 to us for its general partner interest and has contributed $800,000 to us for 32 Units. We refer to our General Partner and our Limited Partners collectively as the Partners.
We issued Units in the Offering in reliance upon exemptions from the registration requirements of the Securities Act and state securities laws. As a result, our Limited Partners may not transfer the Units except pursuant to an effective registration statement or pursuant to an exemption from registration. The Units are not currently listed on a securities exchange and there currently is no established public trading market for the Units. We do not intend to list the Units at this time and have no plans to list the Units on an exchange in the future.
We directly own one property and have investments in five additional properties, all of which are located in Texas, through joint ventures with affiliates and non-affiliates. Five of the properties are multi-tenant retail properties and the sixth property consists of vacant land for development into a multi-tenant retail property. The five existing retail properties comprise approximately 1,273,000 rentable square feet. As of December 31, 2009, the five existing retail properties were 74% leased.
The following is a summary of the six properties in which we owned an interest as of December 31, 2009.
(1)
Annualized gross base rent represents base rents in place on leases with rent having commenced as of December 31, 2009 and does not reflect straight-line rent or other adjustments under generally accepted accounting principles.
(2)
Property is owned through a joint venture that is not consolidated in our financial statements.
(3)
Property is planned for redevelopment.
(4)
Property is vacant land and is planned for development.
(5)
Square footage for this property includes 27,000 square feet of undeveloped pad sites, and therefore, represents proposed leasable square footage.
See “Item 2. Properties” for a more detailed description of our investments in properties.
Investment Objectives
Our investment objectives are:
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to preserve and protect our Limited Partners’ capital contributions;
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to provide cash distributions to our Partners through the operation of our properties; and
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to add value to our properties in which we have invested during our operating period and to realize appreciation upon the ultimate sale of such properties.
Investment Strategy
We were formed to acquire, develop and operate a portfolio of commercial real estate consisting primarily of multi-tenant shopping centers and mixed-use developments. We will seek to maximize our income and capital growth during our operating period by (1) selling approximately 40% of our properties when appropriate and re-investing the net sales proceeds into additional properties (we refer to this process as Active Management), and (2) owning the remaining properties as income-producing assets during our entire operating period. Our operating period will continue until November 15, 2013. The operating period may be extended to November 15, 2015 only with the consent of the majority of Units held by our Limited Partners. At the end of our operating period, the General Partner will begin an orderly liquidation of our properties and will distribute the net proceeds from liquidation to our Partners. If our General Partner does not diligently pursue the liquidation of our properties at the end of our operating period, it will forfeit its $800,000 investment in Units.
Equity Allocation
As of December 31, 2009, approximately 20% to 30% of our portfolio was invested in existing commercial shopping centers, primarily multi-tenant properties, mixed-use properties and, to a lesser degree, single-tenant properties. Approximately 70% to 80% of our portfolio is invested in the development and redevelopment of commercial shopping centers, consisting primarily of multi-tenant and mixed-use developments and, to a lesser degree, single-tenant developments. However, if our General Partner determines that the risk/return profiles of the
development investment activities or the acquisition of existing retail centers dramatically improves or declines, our General Partner may reallocate our investment capital to account for changes in such profiles.
As we make additional investments, we will seek to avoid tenant concentration in one industry by pursuing properties with tenants representing a variety of industries. We will also seek to avoid tenant concentration by limiting the size and number of our properties held by a single tenant or brand. We intend to diversify our tenant base so that no single tenant or brand represents more than 15% of our overall gross revenues from our portfolio following the investment of all of the proceeds from the Offering.
Investments in Properties with Operating Histories
We have invested approximately 20% to 30% of our portfolio in existing shopping centers leased to high quality tenants, consisting primarily of multi-tenant centers, mixed-use properties and, on a selective basis, free standing single-tenant properties. Of the six properties in which we own an interest, Shadow Creek Ranch and Village on the Green represent our properties with operating histories. These investments are primarily shopping centers that are grocery-anchored, strip center, mixed-use or lifestyle properties whose tenants consist of national, regional and local retailers. Our grocery-anchored shopping centers are anchored by an established grocery store operator in the region. Our other shopping centers are typically leased to national and regional tenants, as well as a mix of local and value retailers. Our lifestyle centers are typically anchored by a combination of national and regional tenants that provide customer traffic and tenant draw for specialty and restaurant tenants that support the local consumer. We also own shopping centers that are leased to national drug stores, national restaurant chains, national value-oriented retail stores and other regional and local retailers.
The majority of our properties are either leased directly to or guaranteed by the lessee’s parent company, not just the operator of the individual location, and are in areas of substantial retail shopping traffic. Our strategy is to acquire properties that attract tenants that provide basic staples and convenience items to local customers. We believe that sales of these items are less sensitive to business cycle fluctuations than higher priced retail items.
Development and Redevelopment Properties
We have invested approximately 70% to 80% of our portfolio in development and redevelopment properties, either directly or indirectly through joint ventures. Of the six properties in which we own an interest, we have initiated plans to redevelop Woodlake Square and Woodlake Pointe. Cambridge Holcombe consists of vacant land located in the Texas Medical Center in Houston, Texas, and we are in the initial stages of planning this property’s development. During 2009, we completed the redevelopment of Casa Linda Plaza. The amount of equity committed to development and redevelopment projects is generally 25% to 100% of the total cost of the project, with the remaining costs being funded through lines of credit, construction financing or other property level mortgage financing. Throughout the development process, we work closely with local development partners.
We plan to develop Cambridge Holcombe, as well as redevelop Woodlake Square and Woodlake Pointe, and it is likely that these properties will become mixed-use developments which may include office, residential, entertainment and hospitality components. It is possible that our future investments will have mixed-use components as well. Our General Partner will analyze the market surrounding each mixed-use development to determine the optimal mix of retail to non-retail components. We seek to develop properties in locations that provide limited competition, quality demographics and strong market fundamentals. We intend to commence the leasing process before construction of a particular development property.
Our General Partner may hire a general contractor to provide construction and construction management services for each of our development and redevelopment projects. The general contractor will be entitled to fees for providing these services, and these fees may be paid on a fixed price basis or a cost plus basis. AmREIT Construction Company, an affiliate of our General Partner, has historically provided construction and construction management services for many of our development and redevelopment projects. During 2008, AmREIT Construction Company ceased providing these services. We may engage in the future AmREIT Realty Investment Corporation (“ARIC”), also an affiliate of our General Partner, for construction management services. In these cases, such services will be provided on terms and
conditions no less favorable to us than can be obtained from independent third parties for comparable services in the same location.
Each of our development and redevelopment projects has and will have a project manager assigned to ensure all necessary functions are performed. The project manager is responsible for coordinating all phases of the project, including the feasibility study of each project prior to the commencement of development and much of the pre-development work. Each development will also have a construction manager who is responsible for coordinating all the outsourced trades including architectural, engineering, environmental, and construction contractors. The construction manager will be an employee of ARIC in the event that ARIC is providing construction management services to a development project. The project and construction managers will be jointly responsible for the preparation and adherence to the development budgets. Capital inflows and outflows are carefully tracked and compared against budgets. Actual costs versus budget reports will be prepared on a monthly basis for review by various parties including the development team, management team and lenders. The project and construction managers will work in unison to ensure each project is built within budget and on a timely basis.
We may place our capital at-risk in certain situations to secure land our General Partner deems suitable for development. We will utilize methods such as purchase agreements and options to tie-up development properties. Such commitments may not necessarily result in the eventual acquisition of a land site, as we may elect to forfeit funds after completing our due diligence.
Location of Properties
We seek investments in properties located throughout the United States, with a primary focus on markets with increasing population growth and urban density. As a result of our General Partner’s experience in developing, acquiring and managing retail real estate in metropolitan Texas markets, each of the six properties in which we currently own an interest is located in Texas. The economies of the Texas metropolitan markets where we own properties will have a significant impact on our cash flow and the value of our properties. Although a downturn in the economies of these metropolitan areas could adversely affect our business, general retail and grocery anchored shopping centers that provide necessity-type items tend to be less sensitive to macroeconomic downturns.
Although we intend to invest only in properties in the United States, we are not prohibited from making investments in foreign countries that meet our investment criteria.
Investment Decisions
Our General Partner uses commercially reasonable efforts to present to us suitable investments consistent with our investment objectives and policies. In pursuing our investment objectives and making investment decisions for us, our General Partner considers relevant real estate property and financial factors, including the location of the property, its suitability for any development contemplated or in progress, its income-producing capacity, the prospects for long-range appreciation, liquidity and tax considerations. Moreover, to the extent feasible, our General Partner strives to select a diversified portfolio of properties in terms of type of property and industry of the tenants, although the number and mix of properties acquired will largely depend upon real estate and market conditions and other circumstances existing at the time properties are acquired.
Prior to acquiring a property, our General Partner undertakes an extensive site review. Our General Partner also typically undertakes a long-term viability and market value analysis, including an inspection of the property and surrounding area by an acquisition specialist and an assessment of market area demographics, consumer demand, traffic patterns, surrounding land use, accessibility, visibility, competition and parking. Our General Partner may also take additional actions to evaluate the property, including without limitation, the following:
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obtaining an independent appraisal of the property;
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obtaining an independent engineering report of the property’s mechanical, electrical and structural integrity (sale/leaseback properties only);
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conducting an investigation of title;
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evaluating both the current and potential alternative uses of the property; and
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obtaining an independent Phase I environmental site assessment.
Our General Partner is not required to obtain an appraisal in connection with an acquisition, although it is anticipated that if third-party financing is being provided by a commercial lender, such lender will obtain an independent appraisal.
Real Estate Fundamentals
Our General Partner believes that sound real estate fundamentals will allow us to attract the best tenants and produce the best results for our real estate portfolio. Our General Partner believes that factors such as corner locations, high automobile traffic counts, high populations, high household incomes and limited opportunities for competition produce favorable conditions for the success of the tenant and the retail property. Each of our current investment properties possesses these characteristics. Corner locations traditionally offer favorable access because these locations can access traffic in all directions. High traffic passing a retail property provides maximum exposure for retail tenants. A dense population base surrounding a retail property provides a large consumer base for a tenant’s business. Areas that have high household income have more disposable income that is affected less by economic cycles. Locations that have few opportunities for new retail properties offer a limited supply of space and thus have the best likelihood of growing rental rates. Although a shopping center seldom offers all of these factors, our General Partner will use these criteria to measure the quality and relative value of opportunities relative to others in evaluating each proposed real estate investment.
Our General Partner also believes that its ability to obtain locations near national commercial tenants such as Wal-Mart, Home Depot and Target, which are major traffic generators for other commercial tenants, should enable us to attract brand name, high quality tenants.
Tenant Quality and Monitoring
We seek to attract high quality tenants for our properties. A tenant will be considered “high quality” if at the time of leasing, the tenant has a regional or national presence, operating history of 10 or more years and a net worth in excess of $50 million. When available, our General Partner will rely on national credit rating agencies such as Standard & Poor’s to assist in such determination. If public data is not available, our General Partner will rely on its experience, its own credit analysis and resources provided by its lenders to qualify a prospective tenant.
If a tenant has a public debt rating, we will seek tenants that have: a debt rating by Moody’s of Baa3 or better or a credit rating by Standard & Poor’s of BBB- or better; or a guaranty for its payments under the lease by a guarantor with a debt rating by Moody’s of Baa3 or a credit rating by Standard & Poor’s of BBB or better.
Moody’s ratings are opinions of future relative creditworthiness incorporating an evaluation of franchise value, financial statement analysis and management quality. The rating given to a debt obligation describes the level of risk associated with receiving full and timely payment of principal and interest on that specific debt obligation and how that risk compares with that of all other debt obligations. The rating therefore measures the ability of a company to generate cash in the future. Standard & Poor’s assigns a credit rating both to companies as a whole and to each issuance or class of a company’s debt. A Standard & Poor’s credit rating of BBB-, which is the lowest investment grade rating given by Standard & Poor’s, is assigned to companies or issuances that exhibit adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the company to meet its financial commitments.
Net Leases
We typically enter into net leases with our tenants. “Net leases” are leases that typically require that tenants pay all or a majority of the operating expenses, including real estate taxes, special assessments and sales and use taxes,
utilities, insurance and building repairs related to the property, in addition to the lease payments. There are various forms of net leases, typically classified as triple net, double net and bondable. Triple net and bondable leases typically require the tenant to pay all costs associated with a property in addition to the base rent and percentage rent, if any. Double net leases typically hold the landlord responsible for the roof and structure of the building while the tenant is responsible for all remaining expenses associated with the real estate. Since each lease is an individually negotiated contract between two or more parties, each contract will have different obligations for both the landlord and tenant. Many large national tenants have standard lease forms that generally do not vary from property to property, and we will have limited ability to revise the terms of leases to those tenants.
Our properties have tenants with varying lease terms. We have acquired interests in properties under which the lease terms have partially run. We evaluate the lease term risk based on criteria such as whether the property is in an attractive location, difficult to replace or has other significant favorable real estate attributes. The leases for our properties generally require our tenants to pay a predetermined annual base rent. Some of these leases contain provisions that increase the amount of base rent payable at points during the lease term and/or percentage rent that can be calculated by a number of factors. In addition, these leases generally require that each tenant pay the cost of the liability insurance covering the property or provide such coverage. The third-party liability coverage will insure, among others, us, our General Partner, and any entity formed by us to hold the property. The leases for our properties generally require that each tenant obtain, at its own expense, property insurance naming the above parties as an insured party for fire and other casualty losses in an amount that generally equals the full replacement value of such property. Our tenants are generally required to obtain our General Partner’s approval of all such insurance.
Ownership Structure
For our investments where we are the sole owner, we generally acquire, directly or indirectly, fee simple interests in the property. We may also acquire leasehold interests in real property subject to long-term ground leases. Our General Partner and its affiliates may purchase future investments in their own names or in entities that they control, assume loans in connection with the purchase of properties and temporarily hold title to properties for the purpose of facilitating the acquisition of properties by us.
For our future investments, we may continue to acquire properties through joint ventures, or we may acquire, directly or indirectly, (1) fee simple interests in owned real property and (2) leasehold interests in real property subject to long-term ground leases. We may in the future acquire individual properties or portfolios of properties. Our General Partner and its affiliates may purchase properties in their own name or in entities that they control, assume loans in connection with the purchase of properties, and temporarily hold title to properties for the purpose of facilitating the acquisition of properties by us. Our General Partner and its affiliates may also borrow money or obtain financing and complete construction of properties.
For our future investments in development properties, we may enter into arrangements with the seller or developer, provided that the property is pre-leased to a high quality tenant. In these cases, we will be obligated to purchase the property at the completion of construction, provided that the construction conforms to definitive plans, specifications and costs approved in advance by our General Partner. We will receive a certificate of an architect, engineer or other appropriate party, stating that the property complies with all plans and specifications. If renovation or remodeling is required prior to the purchase of a property, our General Partner expects to pay a negotiated maximum amount upon completion.
We may enter into sale and leaseback transactions, under which we will purchase a property and lease the property back to the seller.
Joint Ventures
As of December 31, 2009, we owned interests in five properties through joint ventures with affiliates of our General Partner and non-affiliates. The joint ventures are structured as limited partnerships, in which we own interests. Each of these limited partnerships owns one of the five underlying properties. Each general partner is responsible for establishing policies and operating procedures with respect to the business and affairs of the underlying property. However, we and each of our joint venture partners must approve all significant decisions
involving the properties, including decisions involving acquisitions and dispositions of properties, refinancing, operational budgets and significant capital improvements.
We may invest in additional properties through joint ventures with third-party developers and real estate investors, including our General Partner, its affiliates and entities owned or managed by its affiliates. Such joint ventures may include investments in limited liability companies or other co-ownership arrangements whose purpose is the acquisition or improvement of the properties. Our General Partner and its affiliates may provide services to the joint venture, including, but not limited to, acquisition, development, management, leasing and/or real estate disposition services. Our current joint venture investments contain, and we will not enter in future joint venture investments unless they contain, the following features:
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our right either to approve significant decisions of the joint venture or to control operations of the joint venture, subject to the right of the joint venture partner to approve sales or refinancing;
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the total compensation paid by us and the joint venture to our General Partner and its affiliates in connection with a joint venture will not exceed the compensation which would be permissible under the Partnership Agreement if we owned 100% of the joint venture;
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no duplication of joint venture costs and expenses and our costs and expenses relating to the joint venture business, including organization and syndication expenses, acquisition and development costs; and
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any purchase, sale or financing transactions between the joint venture partner and our General Partner or its affiliates must be on terms, which are commercially reasonable and comparable to those relating to transactions between unrelated parties.
Our investments in Casa Linda Plaza, Woodlake Square, Woodlake Pointe and Shadow Creek Ranch were made through joint ventures with affiliates of our General Partner. For any future investment with our General Partner, its affiliate, or an entity owned or managed by an affiliate, our General Partner or the managing member, largest shareholder, general partner or other controlling or majority owner of the affiliate or such other entity may contribute capital to the joint venture on the same terms and conditions as us. Allocable profits in a joint venture will be calculated based on the sum of net sale proceeds from the sale of a property (after repayment of debt) plus reserves less capital contributions of each joint venture partner plus actual origination and carrying costs of the additional financing incurred in connection with such property. Distributions will be pro rata to the joint venture partners based on their aggregate capital contributions.
Our General Partner or its affiliate may form another partnership or other investment vehicle with essentially the same investment objectives as us and such entity may acquire properties through a joint venture. Such other entities may have as investors controlling persons or other former and current investors in programs sponsored by affiliates. The terms and conditions upon which persons become investors in such other entities may differ from our terms and conditions.
Disposition Policies
Operating Period Dispositions
During our operating period, our General Partner intends to hold our properties until such time as a sale or other disposition appears to be advantageous to achieve our investment objectives or until it appears that such objectives will not be met. We have not yet sold any of our investments in properties. Our General Partner anticipates an average holding period for Actively Managed properties of 12 to 48 months, recognizing that certain projects may have a shorter or longer holding period. When deciding whether to sell properties during our operating period, our General Partner will consider factors such as potential capital appreciation, cash flow, the availability of other attractive investment opportunities and federal income tax considerations.
Reinvestment of Net Sales Proceeds
During our operating period, our General Partner intends to reinvest the net sales proceeds generated from the sale of our Actively Managed properties. In making the determination of whether to reinvest the net proceeds from a particular sale, our General Partner will first determine whether we have adequate cash flow to support the anticipated monthly distribution to our Limited Partners. Second, our General Partner will determine if there are sufficient reserves to pay the special tax distribution to our Limited Partners at the end of the year.
Liquidation Period Dispositions
Our General Partner will in good faith actively market for sale all of our properties other than those in the development or redevelopment stage and commence an orderly Partnership liquidation on or before November 15, 2013. Properties in the development or redevelopment stage at the end of the operating period will be marketed for sale upon completion. The operating period may be extended to November 15, 2015 only with the consent of Limited Partners owning a majority of the outstanding Units. If our General Partner does not take all commercially reasonable efforts to diligently pursue the portfolio sale and liquidation on our behalf as described above, it shall forfeit its $800,000 investment in our Units.
Once our General Partner has marketed for sale all of our properties, it may take months or years for our General Partner to sell all of our properties and wind up our operations. In connection with the sale of a property, we may take purchase money obligations secured by a mortgage on the property as partial payment, thereby delaying any distribution of sale proceeds to our Limited Partners over the term to maturity of such obligations. The terms of payment to be accorded by us will be affected by custom in the area in which the property is located and the then-prevailing economic conditions.
AmREIT’s Purchase Rights
We have granted AmREIT a limited right of first refusal to purchase our wholly-owned properties that our General Partner determines are in our best interests to sell. For properties we own through a joint venture, we will grant AmREIT this right of first refusal, subject to the approval of our joint venture partners. If our General Partner determines that it is in our best interests to sell one of our properties, our General Partner will notify AmREIT of our desire to sell such property. AmREIT will then have 30 days to determine whether to pay the market value to acquire the property for itself. To determine the market value of a property, both AmREIT and we, at our own cost and expense, shall appoint a real estate appraiser with at least five years full-time commercial appraisal experience and who is a member of the Appraisal Institute (MAI designation). If either of us fails to appoint an appraiser, the single appraiser appointed shall be the sole appraiser and shall determine market value. Each appraiser shall conduct an independent appraisal of the property within 30 days after the two appraisers are appointed. If the appraised values are within five percent of each other, the market value of the property shall be the mean of the two appraisals. If the two appraisals are more than five percent apart, a third appraiser meeting the qualifications stated above and independent from each party shall be appointed by the existing appraisers. Each of the parties shall bear one-half of the cost of the third appraiser. Within 30 days after its selection, the third appraiser shall complete its appraisal of the property. Upon completion of the third appraisal, if the low appraisal and/or the high appraisal are/is more than five percent lower and/or higher than the middle appraisal, the low appraisal and/or the high appraisal shall be disregarded. If only one appraisal is disregarded, the remaining two appraisals shall be added together and their total divided by two, with the resulting quotient being the market value. If both the low appraisal and the high appraisal are disregarded as stated above, the middle appraisal shall be the market value. AmREIT will have 10 business days after the final determination of market value to elect to purchase the property.
If AmREIT agrees to pay the market value for a property, as determined above, we will sell the property to AmREIT. If AmREIT declines to acquire a property or fails to notify us of its intent to acquire a property within the requisite time periods, then we will market the property to third parties.
Marketing
Our General Partner believes that relationships and networking are the two primary components of marketing properties for sale. Our General Partner will use its in-house staff along with its relationships with key commercial brokers across the country to sell our properties.
Leverage
Our investments in Casa Linda Plaza, Woodlake Square, Woodlake Pointe and Shadow Creek Ranch were made by our contributing equity to joint ventures. The Casa Linda Plaza, Woodlake Square and Shadow Creek Ranch joint ventures used leverage to acquire their properties. Likewise, we acquired Village on the Green through a combination of equity and the assumption of debt in place at the time of acquisition. Our investment in Cambridge Holcombe was made by our contributing equity to a joint venture, which in turn, acquired Cambridge Holcombe using cash proceeds from our equity contribution and the equity contribution of our joint venture partner. We later financed a portion of this acquisition through the placement of debt with a third-party lender. For our future investments in properties with operating histories, we intend to continue to leverage our investments in these properties using traditional, commercial real estate lending sources, as underwritten by our General Partner and the lender.
We may finance the acquisition of future properties with new financing or assumption of existing indebtedness. We may incur secured or unsecured indebtedness at any time during our term. We may refinance a property after it has increased in value or when more favorable terms are available. Refinancing may permit us to retain such property and at the same time generate distributions to the Partners, enable us to engage in renovation or remodeling activities, or to make further acquisitions. We may incur debt for expenditures related to the properties, including to facilitate the sale or to pay for capital expenditures. There is no fixed limit on the term of any particular borrowing or the amount thereof. Generally, we may not incur indebtedness (or any refinancing thereof) to acquire or improve properties in an amount greater than 75% of our cash and cash equivalents plus the market value of our portfolio based on a cap rate approach applied to the net operating income of the property, with a target of 60% of the value of our assets. No assurance can be given as to the future availability of credit, the amount or terms thereof, or the restrictions that may be imposed on our future borrowings by lenders. The terms of our loans may require the properties to be held by special purpose entities whose controlling interest must be held by a corporation.
We may borrow money from AmREIT or its affiliates if our General Partner, in the exercise of its fiduciary duties, determines that the transaction is on terms that are fair and reasonable and no less favorable to us than comparable loans between unaffiliated parties.
Other Investments
We currently own interests in five properties through joint ventures. We may invest in other entities that own real estate, including in connection with joint ventures. We make these investments when our General Partner considers it more efficient to acquire an entity owning such real property rather than to acquire the properties directly. We have and may continue to acquire less than all of the ownership interests of such entities if our General Partner determines that such interests are undervalued and that a liquidation event in respect of such interests are expected within our operating period.
To the extent our General Partner determines it is in our best interest, due to the state of the real estate market, in order to diversify our investment portfolio or otherwise, our General Partner may make or invest in mortgage loans. We currently do not own any interests in mortgage loans. The criteria for investing in mortgage loans will be substantially the same as those involved in its investment in properties. Our Partnership Agreement limits our investment in mortgage loans to no more than 20% of the net proceeds from the Offering, unless the maximum allocation is increased by our General Partner with the consent of the Limited Partners owning a majority of the outstanding Units.
Our Partnership Agreement prohibits us from investing in securities of other issuers, except for permitted temporary investments pending utilization of our funds to acquire properties and except for investments in joint
ventures and similar co-ownership arrangements, unless otherwise agreed to by Limited Partners holding a majority of the outstanding Units.
Our General Partner invests our reserves and other available funds not committed to investments in properties in United States government securities, securities issued and fully guaranteed by United States government agencies, securities issued and fully guaranteed by states or municipalities, certificates of deposit and time or demand deposits in commercial banks, bankers’ acceptances, savings and loan association deposits or deposits in members of the Federal Home Loan Bank System, or money market instrument funds.
Conflicts of Interest
Our General Partner is subject to various conflicts of interest arising out of its relationship with us, the Limited Partners and AmREIT. Our General Partner and its affiliates have and will continue to try to balance our interests with their duties to other AmREIT-sponsored programs. However, to the extent that our General Partner or its affiliates take actions that are more favorable to other entities than to us, these actions could have a negative impact on our financial performance and, consequently, on distributions to our Limited Partners. Some of these conflicts are described below.
Limited Financial Resources
Our General Partner has no assets other than its general partner interest in us and its investment in our Units. In the event we have substantial capital needs, our General Partner will not have sufficient financial resources to satisfy these needs. In addition, AmREIT, the parent of our General Partner, has substantial financial obligations related to its properties and its interest in other programs and may not be able to provide us financial assistance in the event we have capital needs.
Interests in Other Real Estate Programs
AmREIT sponsors and manages real estate programs and ventures. The existing entities that our General Partner manages and which have similar investment objectives and may compete with us are AmREIT Income & Growth Fund, Ltd., AmREIT Monthly Income & Growth Fund, Ltd., AmREIT Monthly Income and Growth Fund II, Ltd., AmREIT Monthly Income and Growth Fund III, Ltd. and AmREIT, which we collectively refer to as the Similar AmREIT Programs. In addition to identifying, originating and effecting property acquisitions and development projects for us, our General Partner and its affiliates will continue to acquire and develop real estate for the account of other affiliated and unaffiliated investors. Conflicts of interest with our General Partner may arise in its allocating opportunities between us and other programs, particularly where our General Partner’s profit or loss interest in such other investment is different than our General Partner’s interest in the Partnership.
Conflicts of interest may also arise in connection with our General Partner’s responsibilities to us and the responsibilities of its affiliates to other entities. For example, conflicts of interest could arise in management’s allocation of its time and access to resources, such as financing, goods, material or labor, or in connection with its access to the leasing or resale markets, particularly during times these resources are scarce or in short supply. Conflicts could also result in the selection and marketing of projects if shortages of properties, materials or labor are insufficient causing market demands to require our General Partner’s management to allocate project opportunities between us and its affiliates.
Because the management of our General Partner manages other investment funds and entities with similar investment strategies, including AmREIT, competition for properties will create a conflict of interest. Management expects to manage this conflict by providing a pipeline of real estate projects and opportunities to support all of its activities. All potential development and acquisition opportunities will initially be presented to AmREIT. If AmREIT elects not to make the investment, our General Partner’s management will determine which of the entities that it advises, including us, would be most appropriate to make the proposed investment. To determine which entity should make the investment, management will first evaluate the investment objectives of each investment fund and determine if the opportunity is suitable for each fund. If the proposed investment is appropriate for more than one fund, management will then evaluate the portfolio of each fund, both in terms of geographic diversity and tenant
concentration, to determine if the investment is most suitable to one fund. If the geographic diversity and tenant concentration analysis is not determinative, management will allocate the property to the fund with uncommitted funds available for the longest period of time. Our General Partner’s management may also allow multiple investment funds to enter into joint ventures for the purchase or acquisition of a property.
Competition for Management Services
Our General Partner’s management is engaged in substantial activities apart from our business, including their duties to similar AmREIT programs. As such, they will devote only so much of their entire time to our affairs as is reasonably required in their judgment and they could have conflicts of interest in allocating their time between us and other entities. Our General Partner believes that it has sufficient staff to fully discharge its responsibilities to us.
Leasing Agents
Our General Partner retains the services of affiliated leasing agents to lease the properties in which we have invested. Because these leasing agents provide similar services to affiliates of our General Partner, including AmREIT, they face conflicts of interest if they are seeking to lease our properties and similar properties of its affiliates at the same time. In such an event, the affiliated leasing agent will seek to mitigate any potential conflict by presenting a potential tenant with all of the available properties, so that the potential tenant can select the property with the size, rent, location and other characteristics most suitable to its needs.
Properties
We rely on our General Partner and its affiliates in the selection, management and sale of the properties and do not have independent representation in this regard. Conflicts of interest could arise in connection with any interests affiliates of our General Partner may have in a particular property, including interests it may have as an affiliate of AmREIT in connection with any sale of a property to AmREIT, and those of the Limited Partners in operating the Partnership.
Sale of Properties
Our General Partner actively manages our Actively Managed properties during the operating period. During the operating period, our General Partner will sell our properties from time to time to third-party real estate investors. Our General Partner may receive compensation in the form of a brokerage commission for the work performed in the sale of the properties. Because there is potential for our General Partner to earn a brokerage commission on each property sale, there is a conflict of interest in that our General Partner may sell a property simply to earn a brokerage commission, even if it is not in our best interest or the best interest of the Limited Partners.
No Arm’s-Length Agreements
The compensation payable to our General Partner and its affiliates has not been determined by arm’s- length negotiations. Also, a significant portion of this compensation is payable irrespective of the quality of the services provided or our success or profitability. There is no assurance that the amounts or terms of such compensation will not exceed that which would be paid to unrelated persons under similar circumstances in arm’s-length transactions.
AmREIT’s Interests in Other Programs
AmREIT, our General Partner’s parent, engages for the account of others in other business ventures involving real estate development and investment. Moreover, AmREIT or its affiliates, including our General Partner, may in the future serve as management for the general partner of other companies or ventures, and acquire, develop and operate real estate-related activities in the same areas as ours for their own account. Neither we nor any Limited Partner will be entitled to any interest in such other ventures.
Transactions with Affiliates
We may, from time to time, sell some of our properties to AmREIT. As a result of the inherent conflict in such a sale, we will only sell a property to AmREIT if they agree to pay the market value or the amount of a bona fide final third-party offer for that property. See “Item 1. Business - Disposition Policies - AmREIT’s Purchase Rights” for a more detailed description of AmREIT’s rights. In addition, we may borrow money from AmREIT or its affiliates. Although our General Partner will only approve an affiliated borrowing transaction if, in the exercise of its fiduciary duties, it determines that the terms are fair and reasonable and no less favorable to us than comparable loans between unaffiliated third parties, our General Partner could face conflicts of interest in connection with such a transaction that may not be resolved in the best interests of our Limited Partners.
In the event our General Partner or its affiliates receive compensation from us for any additional services performed on our behalf, such services will only be provided on terms and conditions no less favorable to us than can be obtained from independent third parties for comparable services in the same location. Such services may include, but are not limited to, leasing coordination fees, construction and construction management fees, including in connection with renovation and remodeling, and tax appeal fees. The fees for such services, if provided by affiliates, will be separately itemized and retained in our records.
Affiliated Property Manager and Construction Manager
ARIC performs property management services for all of the properties in which we have an interest, other than Cambridge Holcombe, and may provide property management services for properties in which we acquire an interest in the future. ARIC is a wholly owned subsidiary of AmREIT and the officers of our General Partner are also officers of ARIC. As a result, we might not always have the benefit of independent property management to the same extent as if our General Partner and the property manager were unaffiliated. In addition, given that ARIC is an affiliate of our General Partner, our agreements with ARIC are not negotiated at arm’s-length, as they would between unrelated parties.
AmREIT Construction Company, an affiliate of our General Partner, has historically provided construction and construction management services for certain of our development and redevelopment projects. AmREIT Construction Company provided construction management services for the redevelopment of our Casa Linda Plaza property in 2009. AmREIT Construction Company has ceased providing these services; however, we may engage ARIC, also an affiliate of our General Partner, in the future for construction management services. As a result of us using AmREIT Construction Company for these services, we did not have the benefit of independent construction management to the same extent as if AmREIT Construction Company had been unaffiliated. Because ARIC is an affiliate of our General Partner, we do not have the benefit of arm’s-length negotiation of any contracts we enter into with ARIC that would apply between unrelated parties.
Lack of Separate Representation
Our legal counsel acts and may in the future act, as counsel to us, our General Partner, AmREIT and certain of our respective affiliates. There is a possibility that in the future, the interests of the various parties may become adverse, and under the Code of Professional Responsibility of the legal profession, our counsel may be precluded from representing any one or all of such parties. In the event that a dispute were to arise between us, our General Partner, AmREIT or any of our respective affiliates, separate counsel for such matters will be retained as and when appropriate.
Tax Matters Partner
Our General Partner serves as our tax matters partner and in the event of an audit of our federal income tax returns by the Internal Revenue Service (“IRS”) it is possible that the interests of our General Partner in such an audit could become inconsistent with or adverse to the interests of the Limited Partners. Our expenses in contesting any such audit may reduce the amount of cash available for distribution. Further, our General Partner, who is primarily responsible for contesting federal income tax adjustments proposed by the IRS, may be subject to various
conflicts of interest in connection with the negotiation and settlement of issues raised by the IRS in a federal income tax audit.
Employees
We have no employees. Our affairs are managed by our General Partner, and our General Partner and its affiliates provide services to us related to acquisitions, property management, accounting, investor relations and other administrative services. We are dependent upon our General Partner and its affiliates for these services.
See “Item 13. Certain Relationships and Related Transactions, and Director Independence” for discussion of our compensation arrangements.
Insurance
We believe that the properties in which we own an interest are adequately insured.
Competition
As we purchase properties for our portfolio, we are in competition with other potential buyers, including the Similar AmREIT Programs, for the same properties. As a result, we may either have to pay more to purchase the property than we would if there were no other potential acquirers or locate another property that meets our investment criteria. Although our existing retail properties have an average occupancy of 74% and we have acquired, and intend to continue to acquire, properties subject to existing leases, the leasing of real estate is highly competitive, and we may experience competition for tenants from owners and managers of competing projects. As a result, we may have to provide free rent, incur charges for tenant improvements, or offer other inducements, or we might not be able to timely lease the space, all of which may have an adverse impact on our results of operations. At the time we elect to dispose of our properties, we will also be in competition with sellers of similar properties to locate suitable purchasers for their properties.
Concentration of Credit Risk
As of December 31, 2009, we had approximately $31,000 invested in a government security money market account. Such amounts are readily convertible into cash for use in our operations.
We have geographic concentration in our property holdings. In particular, as of December 31, 2009, all of our properties were located in Texas. We have tenant concentration in our properties. Rental income generated from Borders represented 21% of our 2009 rental income. Borders’ lease expired in January 2010, and they have vacated their space. Accordingly, our 2010 forecasted cash flows, as addressed in Note 1 of the Consolidated Financial Statements, assume no rental income from Borders for the 2010 period. We expected this impending lease expiration when we acquired the property and believe that we will be able to recover its carrying value based on our property redevelopment plan. We are actively identifying potential lessees to occupy the premises as part of this plan. The closing of any new leases would be subject to the negotiation and execution of definitive lease agreements and the fulfillment of customary conditions. No assurance can be given that a new lease will be procured on the same terms as the Borders’ lease, or at all.
Compliance with Governmental Regulations
Under various federal and state environmental laws and regulations, as an owner or operator of real estate, we may be required to investigate and clean up certain hazardous or toxic substances, asbestos-containing materials, or petroleum product releases at our properties. We may also be held liable to a governmental entity or to third parties for property damage and for investigation and cleanup costs incurred by those parties in connection with the contamination. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. The presence of contamination or the failure to remediate contaminations at any of our properties may adversely affect our ability to sell or lease the properties or to borrow using the properties as collateral. We could also be liable under common law to third parties
for damages and injuries resulting from environmental contamination coming from our properties.
All of our properties are acquired subject to satisfactory Phase I environmental assessments, which generally involve the inspection of site conditions without invasive testing such as sampling or analysis of soil, groundwater or other media or conditions; or satisfactory Phase II environmental assessments, which generally involve the testing of soil, groundwater or other media and conditions. Our General Partner may determine that we will acquire a property in which a Phase I or Phase II environmental assessment indicates that a problem exists and has not been resolved at the time the property is acquired, provided that (A) the seller has (1) agreed in writing to indemnify us and/or (2) established an escrow account with predetermined funds greater than the estimated costs to remediate the problem; or (B) we have negotiated other comparable arrangements, including, without limitation, a reduction in the purchase price. We cannot be sure, however, that any seller will be able to pay under an indemnity we obtain or that the amount in escrow will be sufficient to pay all remediation costs. Further, we cannot be sure that all environmental liabilities have been identified or that no prior owner, operator or current occupant has created an environmental condition not known to us. Moreover, we cannot be sure that (1) future laws, ordinances or regulations will not impose any material environmental liability or (2) the current environmental condition of our properties will not be affected by tenants and occupants of the properties, by the condition of land or operations in the vicinity of the properties (such as the presence of underground storage tanks), or by third parties unrelated to us.
ITEM 1A.
ITEM 1A.
RISK FACTORS.
Not applicable.
ITEM 1B.
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM 2.
ITEM 2.
PROPERTIES.
Overview
During the period from October 10, 2006 (inception) through December 31, 2009, we acquired interests in six properties. We directly own one property and have investments in five properties through joint venture arrangements. We have included a description of the types of real estate in which we have invested and will invest, and a summary of our investment policies and limitations on investment and the competitive conditions in which we operate under “Item 1. Business” above. We believe our properties are suitable for their intended use and are adequately insured.
As of December 31, 2009, we owned interests in the following properties, all of which are located in Texas:
(1)
Annualized gross base rent represents base rents in place on leases with rent having commenced as of December 31, 2009 and does not reflect straight-line rent or other adjustments under generally accepted accounting principles.
(2)
Property is owned through a joint venture that is not consolidated in our financial statements.
(3)
Property is planned for redevelopment.
(4)
Property is vacant land and is planned for development.
(5)
Square footage for this property includes 27,000 square feet of undeveloped pad sites, and therefore, represents proposed leasable square footage.
Description of Our Real Estate Investments
Casa Linda Plaza
On December 8, 2006, through a joint venture arrangement with an affiliate of our General Partner, AmREIT Monthly Income & Growth Fund III, Ltd., we acquired a 50% interest in the Casa Linda Plaza property, a 324,569 square foot retail shopping center located in Dallas, Texas. Our joint venture partner owns the remaining 50% interest in the joint venture. The property was purchased from an unaffiliated third-party. We used proceeds from the Offering and obtained a 7-year mortgage loan from Morgan Stanley Mortgage Capital, Inc. to fund the acquisition of the Casa Linda Plaza property. The loan was in the amount of $38.0 million, bears an annual interest rate of 5.48% and is interest-only until maturity.
Albertson’s is the largest tenant occupying 59,561 square feet with a lease scheduled to expire in July 2016. Additional tenants are Petco, Starbucks, Wachovia, Chili’s, Blockbuster, T-Mobile, and Compass Bank. The property was originally built between 1946 and 1949. During 2008 and 2009, the Casa Linda Plaza property underwent a substantial renovation that has allowed the property to maintain its historical character and prominence in the community, while updating the property’s features. The renovation was completed in April 2009 at a cost of $7.1 million.
Woodlake Square
On August 31, 2007, through a joint venture arrangement with affiliates of our General Partner, AmREIT Monthly Income & Growth Fund III, Ltd. and ARIC, we acquired a 40% interest in the Woodlake Square property, a 205,522 square foot retail shopping center located in Houston, Texas. The property was purchased from an unaffiliated third party. We used proceeds from the Offering for our contributed equity and the joint venture obtained a 3-year mortgage loan from Frost Bank to fund the acquisition of the Woodlake Square property. The loan was in the amount of $23.8 million and is interest-only until maturity. The interest related to this debt is at a variable interest rate of LIBOR plus 1.35%. At December 31, 2009, the variable interest rate was 1.59%. In December, 2007, the property entered into an interest rate swap to hedge its position on the mortgage. As a result, the interest rate will remain fixed at 5.465% for the life of the loan.
In June 2008, we acquired an additional investment interest of 20% in the Woodlake Square property from an affiliated entity at its net book value. With the additional 20% investment, we own a 60% majority interest in this partnership. Our joint venture partners, AmREIT Monthly Income & Growth Fund III, Ltd. and ARIC, own the other 40% interest in the joint venture.
Randall’s, the largest tenant occupying 56,430 square feet, recently signed a new lease with a term of 25 years. Additional tenants are Walgreen’s, Jos. A. Bank Clothiers, Ragin Cajun, and Woodlake Children’s Center. We have initiated plans to redevelop Woodlake Square in an effort to make it a more functional retail property and more aesthetically appealing to potential tenants. Estimated redevelopment costs for Woodlake Square are $7.3 million, and we expect the redevelopment to be completed by April 2012.
Woodlake Pointe
On November 21, 2007, through a joint venture arrangement with affiliates of our General Partner, AmREIT Monthly Income & Growth Fund III, Ltd. and ARIC, we acquired a 40% interest in AmREIT Westheimer Gessner, LP, which owns the Woodlake Pointe property, a 82,120 square foot retail shopping center located in Houston, Texas. The property was purchased from an unaffiliated third party. We used proceeds from the Offering for our contributed equity and the joint venture paid cash for the acquisition of the Woodlake Pointe property.
In May 2008, through the same joint venture arrangement with affiliates of our General Partner, AmREIT Monthly Income and Growth Fund III, Ltd. and ARIC, we acquired a 60% interest in a tract of land adjacent to the Woodlake Pointe property. Our joint venture partners own the other 40% interest in the property. The acquisition is
accounted for as part of AmREIT Westheimer Gessner, L.P. We used proceeds from the Offering to finance the acquisition.
In June 2008, we acquired an additional investment interest of 20% in the Woodlake Pointe property from an affiliated entity at its net book value. With the additional 20% investment, we own a 60% majority interest in this partnership. Our joint venture partners, AmREIT Monthly Income & Growth Fund III, Ltd. and ARIC, own the other 40% interest in the joint venture.
Border’s is the single tenant occupying 41,060 square feet. Border’s lease expired in January 2010, and they have vacated their space. We are currently considering our redevelopment options on this property as we entertain expression of interest from several potential tenants.
Cambridge Holcombe
On December 31, 2007, we acquired a 50% interest in the Cambridge Holcombe property through a joint venture arrangement with an unaffiliated third party. This vacant land is located in the Texas Medical Center in Houston, Texas. Our joint venture partner owns the other 50% interest in the joint venture. The property was purchased from an unaffiliated third party. We used proceeds from the Offering for our contributed equity and the joint venture paid cash for the acquisition of the Cambridge Holcombe property. We are in the initial stages of planning this property’s development.
Shadow Creek Ranch
On February 29, 2008, through a joint venture arrangement with an unaffiliated third party and ARIC, we acquired a 10% interest in the Shadow Creek Ranch property, a 624,013 square foot retail shopping center located in Pearland, Texas. Our joint venture partners own the other 90% interest in the venture. The property was purchased from an unaffiliated third party. We used proceeds from the Offering and obtained a 7-year mortgage loan from Metropolitan Life Insurance Company to fund the acquisition of the Shadow Creek Ranch property. The loan was in the amount of $65.0 million and bears an annual interest rate of 5.48%.
The development of the Shadow Creek Ranch shopping center was completed in the first quarter of 2008. Approximately 27,000 square feet of land remains to be developed into pad sites next to the shopping center. The major tenants of the Shadow Creek Ranch property include H-E-B Grocery as the largest tenant occupying 150,615 square feet, Academy Sports & Outdoors, Ashley Furniture, and Hobby Lobby. We acquired this property with the expectation that it would provide a stable stream of rental income once it achieved lease-up.
Village on the Green
On March 25, 2008, through our wholly-owned special purpose entity, AmREIT VOG, LP, we purchased a 100% interest in the Village on the Green property, a 36,367 square foot retail shopping center located in San Antonio, Texas. The property was purchased from an unaffiliated third party. We used proceeds from the Offering and assumed a 10-year mortgage loan in the amount of $6.2 million that bears an annual interest rate of 5.52% to fund the acquisition of the Village on the Green property.
As of December 31, 2009, major tenants of the Village on the Green property include Paesano’s Restaurant as the largest tenant occupying 8,300 square feet, Theo & Herb Designer Shoes, Alamo Heights Pediatrics, and Rouse Dental Office. We acquired this property with the expectation that it would provide a stable stream of rental income. We currently do not have plans to renovate or redevelop the Village on the Green property.
Portfolio Information
The following table shows our five highest tenant industry concentrations for our property portfolio as of December 31, 2009:
The following table shows our tenants which occupy 10% or more of the rentable square feet for each property in which we own an interest and the lease expirations of such tenants as of December 31, 2009, assuming no exercise of renewal option or termination rights.
(1)
Borders’ lease expired in January 2010, and they have vacated their space. We expected this impending lease expiration when we acquired the property and believe that we will be able to recover its carrying value based on our property redevelopment plan. We are actively identifying potential lessees to occupy the premises as part of this plan. The closing of any new leases would be subject to the negotiation and execution of definitive lease agreements and the fulfillment of customary conditions. No assurance can be given that a new lease will be procured on the same terms as the Borders’ lease, or at all.
The following table shows lease expirations for our three consolidated properties as of December 31, 2009, during each of the next ten years and thereafter, assuming no exercise of renewal options or termination rights.
The following table shows lease expirations for our three non-consolidated properties as of December 31, 2009, during each of the next ten years and thereafter, assuming no exercise of renewal options or termination rights.
As of December 31, 2009, we have invested substantially all of the net proceeds of the Offering in real properties. We have approximately $469,000 in cash and cash equivalents to be used for capital expenditures on existing properties or for working capital. As of December 31, 2009, we have not disposed of any property.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS.
In the ordinary course of business, we may become subject to litigation or claims. Neither we nor our properties are the subject of any non-routine pending legal proceeding, nor are we aware of any proceeding that a governmental authority is contemplating against us.
ITEM 4.
ITEM 4.
RESERVED.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information and Holders
On November 15, 2006, we commenced the Offering. We closed the offering on March 31, 2008 and, as of that date, we had raised aggregate gross proceeds of approximately $49.7 million through the sale of 1,991 Units to 764 Limited Partners. As of March 5, 2010, we have 1,988 Units outstanding, held by 762 Limited Partners.
There is no established public trading market for our Units. As of December 31, 2009 none of the Units were subject to any outstanding options or warrants, and we had not issued any securities convertible into our Units. The Units, which are “restricted securities” as defined in Rule 144 promulgated by the SEC under the Securities Act, must be held indefinitely unless they are subsequently registered under the Securities Act and any applicable state securities laws or unless, upon the advice of counsel satisfactory to us, the Units are sold in a transaction that is exempt from the registration requirements of such laws. As of December 31, 2009, no Units were eligible for sale under Rule 144 or that we have agreed to register under the Securities Act for sale by Limited Partners and there were no Units that are being, or have been publicly proposed to be, publicly offered by us. No Units have been sold since we closed the Offering on March 31, 2008.
Distributions
The following table shows the distributions to our Limited Partners our General Partner has declared (including the total amount paid and the amount paid on a per Unit basis) from the last two fiscal years ended December 31, 2008 and December 31, 2009:
(1)
Distributions are paid 15 days in arrears. Distributions above, paid between January 2008 and July 2009 were declared between December 2007 and June 2009.
We have declared monthly distributions to our Limited Partners at a rate of 7.5% per annum from January 2007 through November 2008. Beginning in December 2008 through June 2009, we declared a distribution of 3.0% per annum on invested capital. We suspended all distribution payments in July 2009, and we do not plan to resume the payment of distributions until improvements in the real estate and liquidity markets warrant such payment. All distributions to date have been a return of capital. One of our primary business goals is to pay regular (monthly) distributions to our Limited Partners. The source of our distributions has been cash flows from operating activities as well as from our capital-raising activities. The funds we receive from operations that are available for distribution may be affected by a number of factors, including the following:
•
our operating and interest expenses;
•
the ability of tenants to meet their obligations under the leases associated with our properties;
•
our ability to keep the properties in which we have investments leased;
•
our ability to maintain or increase rental rates when renewing or replacing current leases;
•
capital expenditures and reserves for such expenditures;
•
the issuance of additional shares; and
•
financings and refinancings.
We qualified as a partnership for federal income tax purposes commencing with our taxable year ended December 31, 2006. For income tax purposes, distributions to our Limited Partners are characterized as ordinary income, capital gains, or as a return of a Limited Partner’s invested capital.
Since our inception, we have redeemed three Units. As of June 30, 2009, we have suspended all future redemptions of Units.
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA.
Not applicable.
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto. See also “Cautionary Note Regarding Forward Looking Statements” preceding “Item 1. Business.”
Overview
We are a Delaware limited partnership formed on October 10, 2006 to acquire, develop and operate, directly or indirectly through joint venture arrangements, a portfolio of commercial real estate consisting primarily of multi-tenant shopping centers and mixed-use developments throughout the Southern and Southwestern United States. We focus on properties characterized by high automobile traffic counts, high populations, high household incomes and limited opportunities for competition.
We have no employees and are managed by AmREIT Monthly Income & Growth IV Corporation, our General Partner, pursuant to our Partnership Agreement. Our General Partner is a wholly-owned subsidiary of AmREIT, Inc., an SEC reporting, non-traded Maryland corporation that has elected to be taxed as a real estate investment trust (“AmREIT”). Our General Partner has contributed $1,000 to us for its general partner interest and has contributed
$800,000 to us in exchange for Units. The remaining Units are held by other Limited Partners. We qualify as a partnership for federal income tax purposes.
We derive a substantial portion of our revenue from rental income from our properties, primarily from net leasing arrangement, where most of the operating expenses of the properties are absorbed by our tenants. As a result, our operating results and cash flows are primarily influenced by rental income from our properties and interest expense on our property acquisition indebtedness. Rental income accounted for 100% of our total revenue during the years ended December 31, 2009 and 2008. As of December 31, 2009, our properties had an average occupancy of 74%, and the average debt leverage ratio of the properties in which we have an investment was approximately 57%, with 77% of such debt carrying a fixed rate of interest.
We commenced our principal operations on December 8, 2006 when we acquired our first interest in a property. On January 12, 2007, we accepted subscriptions for the minimum offering of $1.0 million (the “Offering”) pursuant to the terms of our Offering Memorandum dated November 15, 2006 (the “Offering Memorandum”) and issued the initial 40 limited partnership units (the “Units”). We closed the offering on March 31, 2008 when we had received $49.7 million from the sale of 1,991 Units.
As of December 31, 2009, we directly owned one property comprising 36,000 square feet of gross leasable area and owned joint venture interests in five additional properties comprising 1,237,000 square feet of gross leasable area. As of December 31, 2009, we invested substantially all of the net proceeds of the Offering in real properties. We have approximately $469,000 in cash and cash equivalents that may be used for capital expenditures on existing properties or for working capital. All of our properties are located in highly populated, suburban communities in Texas.
Our Units were sold pursuant to exemptions from registration under the Securities Act of 1933, as amended (the “Securities Act”), and are not currently listed on a national exchange. These Units will be transferable only if we register them under applicable securities laws (such registration is not expected), or if they are transferred pursuant to an exemption under the Securities Act and applicable state securities laws. We do not anticipate that any public market for the Units will develop.
Selecting properties with high quality tenants and mitigating risk through diversifying our tenant base is at the forefront of our acquisition and leasing strategy. We believe our strategy of purchasing premier retail properties in high-traffic, highly-populated areas will produce stable earnings and growth opportunities in future years.
Given the current economic environment we decided to cease distributions beginning July 1, 2009. We will continue to monitor the real estate market to determine if it is in our Partners’ best interest to reinstate dividends at any point in the future. We believe the real estate market will rebound prior to our expected liquidation commencement date in November 2013; however, we will seek to postpone liquidation if we feel it is not in the best interests of the Partners at that time.
We continually monitor the sales trends and creditworthiness of our tenants. We do not expect store closings or bankruptcy reorganizations to have a material impact on our consolidated financial statements. The tenants with which we have concerns represent less than 10% of our current total portfolio annualized rental income.
Summary of Critical Accounting Policies
Our results of operations and financial condition, as reflected in the accompanying consolidated financial statements and related footnotes, are subject to management’s evaluation and interpretation of business conditions, retailer performance, changing capital market conditions and other factors, which could affect the ongoing viability of our tenants. Management believes the most critical accounting policies in this regard are revenue recognition, regular evaluation of whether the value of a real estate asset has been impaired, accounting for the investment in real estate assets, accounting for the investment in non-consolidated entities, allowance for uncollectible accounts, accounting for real estate acquisitions, and accounting for derivative financial instruments. We evaluate our assumptions and estimates on an ongoing basis. We base our estimates on historical experience as well as various other assumptions that we believe to be
reasonable under the circumstances. Actual results could vary from those estimates, perhaps in material adverse ways, and those estimates could be different under different assumptions or conditions.
Revenue Recognition
We lease space to tenants under agreements with varying terms. All of the leases are accounted for as operating leases and, although certain leases of the properties provide for tenant occupancy during periods for which no rent is due and/or increases or decreases in the minimum lease payments over the terms of the leases, revenue is recognized on a straight-line basis over the terms of the individual leases. In most cases, revenue recognition under a lease begins when the lessee takes possession of or controls the physical use of the leased asset. Generally, possession or control occurs on the lease commencement date. We have determined that we are the owner of any tenant improvements that we fund pursuant to the lease terms. In cases where significant tenant improvements are made prior to lease commencement, the leased asset is considered to be finished space, and revenue recognition therefore begins when the improvements are substantially complete.
Accrued rents are included in tenant receivables. Revenue from tenant reimbursements of taxes, maintenance expenses and insurance is recognized in the period the related expense is recorded. Additionally, certain of the lease agreements contain provisions that grant additional rents based on tenants’ sales volumes (contingent or percentage rent). We defer the recognition of contingent or percentage rental income until the specific targets as defined in lease agreements that trigger the contingent or percentage rental income are achieved. Cost recoveries from tenants are included in rental income in the period the related costs are incurred.
Valuation of Real Estate Assets
We continually monitor events and changes in circumstances that could indicate that the carrying amounts of our real estate assets, including accrued rental income, may not be recoverable through operations. When indicators of potential impairment are present that indicate that the carrying amounts of real estate and related intangible assets may not be recoverable, we assess the recoverability of the assets by determining whether the carrying value of the assets will be recovered through the undiscounted future operating cash flows expected from the use of the assets and their eventual disposition. If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its estimated fair value. Both the estimated undiscounted cash flow analysis and fair value determination are based upon various factors which require complex and subjective judgments to be made by management. Such assumptions include projecting lease-up periods, holding periods, cap rates, rental rates, operating expenses, lease terms, tenant creditworthiness, tenant improvement allowances, terminal sales value and certain macroeconomic factors among other assumptions to be made for each property. We have not recorded any impairment losses for the years ended December 31, 2009, 2008 or 2007.
Investment in Real Estate Assets
Land, buildings and improvements are recorded at cost. Expenditures related to the development of real estate are carried at cost which includes capitalized carrying charges, acquisition costs and development costs. Carrying charges, primarily interest, real estate taxes and loan acquisition costs, and direct and indirect development costs related to buildings under construction are capitalized as part of construction in progress. The capitalization of such costs ceases at the earlier of one year from the date of completion of major construction or when the property, or any completed portion, becomes available for occupancy.
We are required to make subjective assessments as to the useful lives of our depreciable assets. We consider the period of future benefit of the asset to determine the appropriate useful lives. These assessments, which are based on estimates, have a direct impact on net income. Depreciation is computed using the straight-line method over an estimated useful life of up to 36 years for buildings, up to 11 years for site improvements and over the life of lease for tenant improvements and intangible lease costs.
Investment in Non-consolidated Entities
As of December 31, 2009, we had ownership interests in five real estate properties through ownership interests in joint ventures. Although we exercise significant influence over the activities of these properties, we do not have a controlling financial interest in three of the five joint ventures. Accordingly, our joint venture interests in these three properties are reported under the equity method of accounting pursuant to U.S. generally accepted accounting principles. Certain of the significant accounting policies in this section are applicable specifically to property-level reporting and represent policies that are therefore primarily relevant at the investee entity level as of December 31, 2009.
We review our properties for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through operations. We determine whether an impairment in value occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the residual value of the property, with the carrying value of the individual property. If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its fair value. Both the estimated undiscounted cash flow analysis and fair value determination are based upon various factors which require complex and subjective judgments to be made by management. Such assumptions include projecting lease-up periods, holding periods, cap rates, rental rates, operating expenses, lease terms, tenant creditworthiness, tenant improvement allowances, terminal sales value and certain macroeconomic factors among other assumptions to be made for each property. We have not incurred any impairment losses since our inception.
Valuation of Receivables
We determine an appropriate allowance for the uncollectible portion of tenant receivables and accounts receivable based upon an analysis of balances outstanding, historical payment history, tenant credit worthiness, additional guarantees and other economic trends. Balances outstanding include base rents, tenant reimbursements and receivables attributed to the accrual of straight line rents. Additionally, we consider estimates of the expected recovery of pre-petition and post-petition claims with respect to tenants in bankruptcy in our assessment of the likelihood of collecting the related receivables.
Real Estate Acquisitions
We account for real estate acquisitions pursuant to Accounting Standards Codification (“ASC”) 805, Business Combinations. We expense acquisition costs associated with operating properties as incurred. We capitalize costs associated with pending acquisitions of raw land as incurred. Such costs are expensed if and when such land acquisition becomes no longer probable. Accordingly, we allocate the purchase price of the acquired properties to land, building and improvements, identifiable intangible assets and to the acquired liabilities based on their respective fair values. Identifiable intangibles include amounts allocated to acquired above and below market leases, the value of in-place leases and customer relationships, if any.
We determine fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends and specific market and economic conditions that may affect the property.
Factors considered by management in our analysis of determining the as-if-vacant property value include an estimate of carrying costs during the expected lease-up periods considering market conditions, and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and estimates of lost rentals at market rates during the expected lease-up periods, tenant demand and other economic conditions. Management also estimates costs to execute similar leases including leasing commissions, tenant improvements, legal and other related expenses. Intangibles related to above market leases and in-place lease value are recorded as acquired lease intangibles and are amortized as an adjustment to rental revenue or amortization expense, as appropriate, over the remaining terms of the underlying leases. Below market lease amortization includes fixed-rate
renewal periods. Any premiums or discounts on acquired out-of-market debt are amortized to interest expense over the remaining term of such debt.
Derivative Financial Instruments
We account for our derivative financial instruments pursuant to ASC 815, Derivatives and Hedging. ASC 815 requires that all derivative instruments, whether designated in hedging relationships or not, be recorded on the balance sheet at their fair value. Gains or losses resulting from changes in the values of those derivatives are accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. Our use of derivative financial instruments to date has been limited to the use of interest rate swaps to mitigate our interest rate risk on variable-rate debt. We have designated these interest rate swaps as cash flow hedges for financial reporting purposes.
ASC 815 requires that changes in fair value of derivatives that qualify as cash flow hedges be recognized in other comprehensive income (“OCI”) while the ineffective portion of the derivative’s change in fair value be recognized in the statement of operations as interest expense. Upon the settlement of a hedge, gains and losses associated with the transaction are recorded in OCI and amortized over the underlying term of the hedge transaction. We assess, both at inception of the hedge and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the cash flows of the hedged items. In assessing the hedge, we use standard market conventions and techniques such as discounted cash flow analysis, option pricing models and termination costs at each balance sheet date. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.
Recently Issued Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”), which amends the consolidation guidance applicable to variable interest entities. The amendments will significantly affect the overall consolidation analysis under FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities-an interpretation of ARB No. 51 and changes the way entities account for securitizations and special purpose entities as a result of the elimination of the QSPE concept in SFAS No. 166. SFAS No. 167 is effective as of the beginning of the first fiscal year that begins after November 15, 2009 and early adoption is prohibited. Management is currently evaluating the impact on our consolidated financial statements of adopting SFAS No. 167.
In June 2009, the FASB issued ASC 105, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (the “Codification”). This guidance is the single source of authoritative nongovernmental GAAP, superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force, and related accounting literature. ASC 105 reorganizes the thousands of GAAP pronouncements into roughly 90 accounting topics and displays them using a consistent structure. Also included is relevant SEC guidance organized using the same topical structure in separate sections. This guidance is effective for financial statements issued for reporting periods that end after September 15, 2009. We adopted the use of the Codification for the quarter ending September 30, 2009.
Factors Which May Influence Results of Operations
Rental Income
The amount of rental income generated by our properties depends principally on our ability to maintain the occupancy rates of currently leased space and to lease currently available space and space available from unscheduled lease terminations at levels not less than the existing rental rates. Negative trends in one or more of these factors could adversely affect our rental income in future periods.
Scheduled Lease Expirations
During 2010, 27.7% of the total square footage of our consolidated properties is scheduled to expire, and 5.6% of the total square footage of our non-consolidated properties is scheduled to expire. Our leasing strategy for 2010 focuses on negotiating renewals for leases scheduled to expire during the year and identifying new tenants or existing tenants seeking additional space to occupy the square footage for which we are unable to negotiate such renewals.
Borders’ lease expired in January 2010, and they have vacated their space. Borders was the single tenant on our Woodlake Pointe property as of December 31, 2009, and it represents 45.8% of the leased square footage of our consolidated properties that is scheduled to expire during 2010. We expected this impending lease expiration when we acquired the property and believe that we will be able to recover its carrying value based on our property redevelopment plan. We are actively identifying potential lessees to occupy the premises as part of this plan. The closing of any new leases would be subject to the negotiation and execution of definitive lease agreements and the fulfillment of customary conditions. No assurance can be given that a new lease will be procured on the same terms as the Borders’ lease, or at all.
Results of Operations
We commenced our principal operations on December 8, 2006 when we acquired our first interest in a property. On January 12, 2007 we accepted subscriptions for the minimum offering of $1.0 million pursuant to the terms of our Offering Memorandum and issued the initial 40 Units to investors. During 2007, we made investments in three joint ventures through which we obtained an ownership interest in three properties. During 2008, we acquired a direct interest in one property on March 25, 2008, made an investment in a joint venture through which we obtained an ownership interest in one property and made additional investments in two joint ventures through which we obtained additional ownership interests in two properties. As of December 31, 2009, our investments included a wholly-owned property comprised of approximately 36,000 square feet of gross leasable area, two properties in which we owned controlling interests comprised of approximately 288,000 square feet of gross leasable area and three properties in which we owned investment interests through joint ventures comprised of approximately 949,000 square feet of gross leasable area.
Until June 2008, we reported our interest in Woodlake Square and Woodlake Pointe under the equity method of accounting as we owned a 40% interest in each. With the additional 20% investment that we made in these properties during the second quarter of 2008, we began consolidating their financial position and the results of operations in the accompanying consolidated financial statements effective January 1, 2008. The ownership interests were acquired at their respective carrying values from ARIC, which still maintains a 10% interest in both partnerships.
Comparison of the year ended December 31, 2009 to the year ended December 31, 2008
Revenue. Revenue decreased approximately $300,000 to approximately $4.9 million during the year ended December 31, 2009 compared to approximately $5.2 million for the year ended December 31, 2008. The decrease was primarily due to decreased revenue from Woodlake Square due to tenant move outs related to lease expirations and reduced recoverable property expenses. As we are in the early stages of redeveloping this property, we have not aggressively pursued lease renewals related to lease expirations.
General and Administrative. General and administrative expenses decreased approximately $30,000 to approximately $79,000 during the year ended December 31, 2009 compared to approximately $109,000 for the year ended December 31, 2008. This decrease was primarily due to a decrease in marketing costs and Directors and Officers insurance costs over the prior year.
General and Administrative - Related Party. General and administrative - related party expenses paid to our affiliate increased approximately $205,000 to approximately $337,000 during the year ended December 31, 2009 compared to approximately $132,000 for the year ended December 31, 2008. This increase was due to an increase in the compensation pool and to an increase in the allocation of those costs during the period to better reflect the level of effort expended by our affiliate’s financial personnel in providing accounting and financial
reporting services to us.
Legal and Professional Fees. Legal and professional fees decreased approximately $197,000 to approximately $260,000 during the year ended December 31, 2009 compared to approximately $457,000 for the year ended December 31, 2008. The decrease in costs was primarily attributable a decrease in due diligence costs incurred related to potential transactions that ultimately were not closed.
Depreciation and Amortization Expense. Depreciation and amortization expense decreased approximately $400,000 to approximately $3.0 million during the year ended December 31, 2009 compared to approximately $3.4 million for the year ended December 31, 2008. This decrease was due to a decrease in intangible lease cost amortization on Woodlake Square due to these costs becoming fully amortized during the year. This decrease was partially offset by an increase in depreciation and amortization expense on Village on the Green since the property was acquired in March 2008.
Loss on Derivative. Loss on derivative of approximately $415,000 during the year ended December 31, 2008 represents the net change in fair value of our interest rate swap on the variable-rate loan secured by Woodlake Square. The interest rate swap was designated as a hedge on October 1, 2008. Therefore, changes in fair value prior to that date were recorded to income. The net change in fair value subsequent to October 1, 2008 is reported through accumulated other comprehensive income.
Interest and Other Income. Interest and other income decreased approximately $247,000 to approximately $16,000 during the year ended December 31, 2009 compared to approximately $263,000 for the year ended December 31, 2008. This decrease was primarily due to a lower balance of investable funds as these funds were withdrawn and invested in Shadow Creek Ranch, Woodlake Square, Woodlake Pointe, Village on the Green, and Casa Linda. We invest our excess cash in short-term investments until properties suitable for acquisition can be identified and acquired.
Interest Expense. Interest expense increased approximately $100,000 to approximately $1.8 million during the year ended December 31, 2009 compared to approximately $1.7 million for the year ended December 31, 2008. The increase in interest expense is related to the notes payable on Village on the Green, which we acquired in March 2008.
Interest Expense - Related Party. Interest expense - related party recorded during the year ended December 31, 2008 was related to a note payable that Woodlake Square had with an affiliated AmREIT entity. The note was paid in full during 2008.
Equity in Losses From Non-Consolidated Entities. Loss from non-consolidated entities increased approximately $400,000 to approximately $1.2 million for the year ended December 31, 2009 compared to approximately $795,000 for the year ended December 31, 2008. These amounts represent our ownership portion of our joint ventures’ net income or loss for the period. The increased loss is primarily attributable to Shadow Creek Ranch, which was acquired in February 2008, and Casa Linda, for which the redevelopment was completed in early 2009.
Net Loss Attributable to Non-controlling Interests. Net loss attributable to non-controlling interests decreased approximately $500,000 to approximately $590,000 during the year ended December 31, 2009 compared to $1.1 million for the year ended December 31, 2008. This was due to a decrease in net loss on Woodlake Square during the year ended December 31, 2009.
Comparison of the year ended December 31, 2008 to the year ended December 31, 2007
Revenue. Revenue increased to approximately $5.2 million during the year ended December 31, 2008 compared to $0 for the year ended December 31, 2007. This increase was due to rental income earned from Village on the Green (acquired March 2008), Woodlake Square (acquired interest in August 2007 and June 2008) and Woodlake Pointe (acquired interest in November 2007 and June 2008) during the year ended December 31, 2008.
General and Administrative. General and administrative expenses increased approximately $15,000 to approximately $109,000 during the year ended December 31, 2008 compared to approximately $94,000 for the year ended December 31, 2007. This increase was primarily due to additional marketing costs and Directors and Officers insurance costs incurred this year that were not incurred in the prior year.
General and Administrative - Related Party. General and administrative - related party expenses paid to our affiliate increased approximately $70,000 to approximately $132,000 during the year ended December 31, 2008 compared to approximately $62,000 for the year ended December 31, 2007. This increase is attributable to an increase in administrative cost reimbursements such as personnel and technology costs which are due to higher activity within the Partnership during the year ended December 31, 2008 as compared to the prior year.
Asset Management Fees - Related Party. Asset management fees - related party paid to our affiliate increased approximately $224,000 to approximately $428,000 during the year ended December 31, 2008 compared to approximately $204,000 for the year ended December 31, 2007. Asset management fees - related party have increased commensurate with the increase in assets under management as a result of our capital-raising efforts which we completed in March 2008.
Property Expense. Property expense increased to approximately $1.7 million during the year ended December 31, 2008 compared to $0 for the year ended December 31, 2007. This increase was due to property expenses incurred by Village on the Green (acquired March 2008), Woodlake Square (acquired interest in August 2007 and June 2008) and Woodlake Pointe (acquired interest in November 2007 and June 2008) during the year ended December 31, 2008.
Property Management Fees - Related Party. Property management fees - related party increased to approximately $186,000 during the year ended December 31, 2008 compared to $0 for the year ended December 31, 2007. This increase was due to property management fees incurred by Village on the Green (acquired March 2008), Woodlake Square (acquired interest in August 2007 and June 2008) and Woodlake Pointe (acquired interest in November 2007 and June 2008) during the year ended December 31, 2008.
Legal and Professional Fees. Legal and professional fees increased approximately $338,000 to approximately $457,000 during the year ended December 31, 2008 compared to approximately $119,000 for the year ended December 31, 2007. The additional costs are due to increased financial reporting requirements during 2008 associated with our filings with the SEC, and are due to due diligence costs incurred related to potential acquisitions that ultimately were not consummated.
Depreciation and Amortization Expense. Depreciation and amortization expense increased to approximately $3.4 million during the year ended December 31, 2008 compared to $0 for the year ended December 31, 2007. This increase was due to depreciation and amortization charges incurred by Village on the Green (acquired March 2008), Woodlake Square (acquired interest in August 2007 and June 2008) and Woodlake Pointe (acquired interest in November 2007 and June 2008) during the year ended December 31, 2008.
Loss on Derivative. Loss on derivative increased to approximately $415,000 during the year ended December 31, 2008 compared to $0 for the year ended December 31, 2007. The increase represents the net change during the period from January 1, 2008 through September 30, 2008 in fair value of the interest rate swap. Beginning on October 1, 2008, we designated the interest rate swap as a hedge for financial reporting purposes. Accordingly, gains or losses resulting from changes in the value of our derivatives subsequent to September 30, 2008 will be recorded as an adjustment to our partners’ capital. We entered into the swap in order to lock the interest at a fixed rate on our $23.8 million variable-rate mortgage loan on Woodlake Square.
Interest and Other Income. Interest and other income decreased approximately $260,000 to approximately $263,000 during the year ended December 31, 2008 compared to approximately $523,000 for the year ended December 31, 2007. This decrease was primarily due to earning less interest on a lower balance of investable funds as these funds were invested in Woodlake Square, Woodlake Pointe, and Village on the Green. We invest our excess cash in short-term investments or overnight funds until properties suitable for acquisition can be identified and acquired.
Interest Expense. Interest expense increased to approximately $1.7 million during the year ended December 31, 2008 compared to $0 for the year ended December 31, 2007. Interest expense incurred during the year ended December 31, 2008 is related to notes payable on Village on the Green (acquired in March 2008) and also to Woodlake Square (acquired interest in August 2007 and June 2008), which we began consolidating effective January 1, 2008. Woodlake Square is encumbered by a $23.8 million variable-rate note payable.
Interest Expense - Related Party. Interest expense - related party decreased approximately $77,000 to approximately $24,000 during the year ended December 31, 2008 compared to $101,000 for the year ended December 31, 2007. Interest expense for the year ended December 31, 2007 was incurred due to a note payable - related party that was established during December 2006 and was not repaid until the second quarter of 2007. Interest expense incurred during the year ended December 31, 2008 is related to a note payable by Woodlake Square which was acquired in August 2007.
Equity in Losses From Non-Consolidated Entities. Loss from non-consolidated entities decreased approximately $328,000 to approximately $795,000 for the year ended December 31, 2008 compared to approximately $1.1 million for the year ended December 31, 2007. These amounts represent our ownership portion of our joint ventures’ net income or loss for the period. The decreased loss is primarily attributable to our consolidation, effective January 1, 2008, of Woodlake Square as a result of our additional 20% investment during the second quarter of 2008. Woodlake Square’s operations were included in equity in losses from non-consolidated entities during the year ended December 31, 2007. The loss during 2008 is primarily attributable to the loss on the Casa Linda Plaza property due to its redevelopment.
Margin Tax Expense. Margin tax expense increased approximately $34,000 to approximately $38,000 during the year ended December 31, 2008 compared to $4,000 for the year ended December 31, 2007. This increase was due to increased taxable margin generated by Village on the Green (acquired March 2008), Woodlake Square (acquired interest in August 2007 and June 2008) and Woodlake Pointe (acquired interest in November 2007 and June 2008) during the year ended December 31, 2008.
Net Loss Attributable to Non-controlling Interests. Net loss attributable to non-controlling interests was approximately $1.1 million during the year ended December 31, 2008 compared to $0 for the year ended December 31, 2007. This is related to the 40% non-controlling interests in Woodlake Square and Woodlake Pointe, which was due to our consolidation, effective January 1, 2008, as a result of our additional 20% investment in each of these entities during the second quarter of 2008.
Liquidity and Capital Resources
We expect to meet our liquidity requirements through cash on-hand, net cash provided by distributions from joint ventures, proceeds from secured or unsecured financings from banks and other lenders, the selective and strategic sale of properties and net cash flows from operations. We expect that our primary uses of capital will be for investment in real estate properties and related improvements, the payment of operating expenses, including interest expense on any outstanding indebtedness, and the payment of distributions to our Partners. As we sell properties during our operating period, we plan to strategically reinvest the proceeds from such sales rather than distributing the proceeds to our Partners.
In June 2008, we began consolidating AmREIT Woodlake Square, LP and AmREIT Westheimer Gessner, LP into our results of operations effective January 1, 2008 as a result of the additional 20% interests that we acquired during the second quarter of 2008.
At December 31, 2009 and December 31, 2008, our cash and cash equivalents totaled approximately $469,000 and approximately $1.0 million, respectively. Cash flows provided by (used in) operating activities, investing activities and financing activities for the years ended December 31, 2009, 2008 and 2007 are as follows (in thousands):
Net cash flows provided by operating activities increased approximately $3.9 million to approximately $1.3 million for the year ended December 31, 2009 compared to net cash used in operating activities of approximately $2.6 million for the year ended December 31, 2008. This increase in operating cash inflows was primarily driven by a net increase in payables of $3.3 million coupled with a net decrease in receivables of approximately $700,000. In 2008, we reimbursed to an affiliate $1.3 million in earnest money and pre-acquisition costs incurred on our behalf related to the acquisitions of the Woodlake Square and Woodlake Pointe properties. In 2008, we also paid $685,000 in expenses that had accrued on the Woodlake Square property during the previous year. Additionally, we paid property taxes of $1.1 million during the 2008 period whereas we paid only $153,000 in property taxes during the 2009 period.
Net cash used in investing activities decreased approximately $15.8 million to approximately $691,000 for the year ended December 31, 2009 compared to approximately $16.5 million for the year ended December 31, 2008. This decrease in investing outflows was primarily due to a decrease in the acquisition of investment properties; we invested $805,000 in Casa Linda and $52,000 in Shadow Creek Ranch during 2009 compared to investing $2.8 million in Village on the Green, $2.5 million in Woodlake Square, $5.2 million in Woodlake Pointe, $4.8 million in Shadow Creek Ranch and $567,000 in Casa Linda during the 2008 period. In addition to the reduction of investing outflows, we received a net reimbursement of $1.2 million in earnest money deposits during 2009 compared to a net payment of $375,000 during 2008. The decrease in investing outflows was partially offset by a net increase in notes receivable - related party of $582,000.
Net cash flows used in financing activities increased approximately $1.5 million to approximately $1.2 million for the year ended December 31, 2009 compared to net cash flows provided by financing activities of approximately $293,000 for the year ended December 31, 2008. This decrease in financing inflows was primarily due to a reduction in contributions received of approximately $4.3 million, net of issuance costs, as the Offering was closed on March 31, 2008. The reduction in contributions received was partially offset by a decrease in distributions paid to investors of approximately $2.8 million.
As of December 31, 2009, Borders, Inc. (“Borders”) constituted our largest tenant as determined by base rents paid. Borders’ lease expired in January 2010, and Borders vacated its space. Accordingly, our 2010 forecasted cash flows, as addressed in Note 1 of the Consolidated Financial Statements, assume no rental income from Borders for the 2010 period. We expected this impending lease expiration when we acquired the property and believe that we will be able to recover its carrying value based on our property redevelopment plan. We are actively identifying potential lessees to occupy the premises as part of this plan. The closing of any new leases would be subject to the negotiation and execution of definitive lease agreements and the fulfillment of customary conditions. No assurance can be given that a new lease will be procured on the same terms as the Borders’ lease, or at all.
During the past two years, the United States has experienced an unprecedented business downturn, coupled with a substantial curtailment of available debt and equity financing. While we expect to generate sufficient cash flow from operations in 2010 to meet our contractual obligations, a significant additional deterioration in the national economy, the bankruptcy or insolvency of one or more of our large tenants could cause our 2010 cash resources to be insufficient to meet our obligations. If necessary, we have the ability to defer capital improvements and to defer payment of certain operating costs, including property taxes, until cash resources are available. Effective July 15, 2009, we suspended all distributions in an effort to conserve cash and to protect investors’ invested capital. As we have numerous projects that are mid-stream in redevelopment, we are conserving cash from operations to improve our ability to fund capital improvements, tenant improvements and leasing commissions, and
to meet our obligations, including debt service. We expect that the economy and real estate market will recover prior to our anticipated liquidation commencement date of November 15, 2013. However, if the economy remains in a protracted recession, we will seek to postpone liquidation if we believe such a liquidation is not in the best interest of the Partners at that time.
Projected cash sources and uses for the Partnership’s 2010 fiscal year indicate certain periods of cash shortfalls within the twelve month period; however, we believe that we will be able to generate sufficient liquidity to satisfy any cash shortfalls through (1) managing the timing of forecasted capital expenditures related to the lease-up of properties, (2) potential joint venture equity investments in existing non-consolidated entities (3) financings of unencumbered properties and (4) sales of certain of our investments in non-consolidated entities. However, no assurance can be given that we will be able to generate such liquidity. In the event that we are unable to generate sufficient liquidity, we may be forced to sell one or more properties at a time when it is disadvantageous to do so, potentially resulting in losses on disposition of those properties.
Contractual Obligations
As of December 31, 2009, we had the following contractual debt obligations (see also Note 6 of the Consolidated Financial Statements for further discussion regarding the specific terms of our debt) (in thousands):
(1)
Interest expense includes our interest obligations as of December 31, 2009 and does not assume the refinancing of any maturing debt.
Our $23.8 million variable-rate mortgage loan secured by the Woodlake Square property matures in September 2010. We expect to be able to refinance the Woodlake Square loan by September 2010, either with our existing lender or another lender. However, no assurance can be given that we will be able to obtain such financing. See Note 1 of the Consolidated Financial Statements for discussion of our forecasted 2010 cash flows and plans to generate sufficient liquidity to satisfy our obligations. We serve as the guarantor of debt in the amount of $68.3 million that is the primary obligation of our joint ventures.
Until we acquire properties, we invest all excess cash in short-term investments. This investment strategy allows us to offset a portion of the interest costs from our fixed-rate mortgage loans and provides us with the liquidity to acquire properties at such time as those suitable for acquisition are located.
We believe that inflation has a minimal effect on our income from operations. We expect that increases in store sales volumes due to inflation, as well as increases in the consumer price index, may contribute to capital appreciation of our properties. These factors, however, also may have an adverse impact on the operating margins of the tenants of the properties.
Indemnification of General Partner
Our Limited Partners, within the limits of their respective capital contributions and to the extent of their allocable portion of Partnership assets, agree to indemnify and hold our General Partner harmless from and against actual and reasonable third-party claims or lawsuits arising out of our activities and operations, except those instances in which our General Partner failed to adhere to its fiduciary obligations to us, or acted with gross negligence or willful or wanton misconduct. Amounts paid to indemnify our General Partner may be recouped to the extent such payments relate to a third-party claim or lawsuit arising out of a breach by our General Partner of its fiduciary obligations to us.
Conflicts of Interest
Our General Partner is a subsidiary of AmREIT, Inc., an SEC reporting, non-traded Maryland corporation that has elected to be taxed as a real estate investment trust. Affiliates of AmREIT act as sponsor, general partner or advisor to various private real estate programs. As such, there are conflicts of interest where AmREIT or its affiliates,
while serving in the capacity as sponsor, general partner or advisor for another AmREIT-sponsored program, may be in competition with us in connection with property acquisitions, property dispositions and property management. The compensation arrangements between affiliates of AmREIT and these other AmREIT real estate programs could influence our General Partner’s management of us. See “Item 1. Business - Conflicts of Interest.”
Off Balance Sheet Arrangements
We had no off balance sheet arrangements as of December 31, 2009.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our General Partner’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), our General Partner’s management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) of the Exchange Act) as of December 31, 2009. Based on that evaluation, our General Partner’s CEO and CFO concluded, that as of December 31, 2009, our disclosure controls and procedures were effective in causing material information relating to us to be recorded, processed, summarized and reported by management on a timely basis and to ensure the quality and timeliness of our public disclosures with SEC disclosure obligations.
Management’s Report on Internal Control over Financial Reporting
Our General Partner and its affiliates maintain a system of internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, which is a process designed under the supervision of the AmREIT principal executive officer and principal financial officer and effected by AmREIT’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that:
•
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
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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 AmREIT Monthly Income and Growth Fund IV, LP and its subsidiaries are being made only in accordance with authorizations of management and directors of our General Partner; and
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Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Our General Partner is responsible for establishing and maintaining adequate internal control over financial
reporting, and, with the participation of AmREIT’s CEO and CFO, conducted an evaluation of the effectiveness of AmREIT’s internal control over financial reporting as of December 31, 2009 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, we believe that our internal control over financial reporting is effective as of December 31, 2009.
This Annual Report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the company to provide only management’s report in this Annual Report.
Changes in Internal Controls
There has been no change to our internal control over financial reporting during the quarter ended December 31, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
We have no directors or executive officers. We are managed by our General Partner, AmREIT Monthly Income & Growth IV Corporation. Our General Partner does not have any employees and relies upon the personnel of AmREIT and its affiliates to perform services for us. Our Partnership Agreement provides that we will continue until December 31, 2026, unless sooner terminated.
The following table sets forth certain information regarding the officers and director of our General Partner, all of whom are officers of AmREIT and expected to make a significant contribution to us.
H. Kerr Taylor serves as the Chairman, President and CEO of our General Partner and is the sole director of our General Partner. He is the founder of AmREIT and serves as its Chairman of the Board, Chief Executive Officer and President. For over 24 years he has guided the growth of AmREIT and its predecessors. His primary responsibilities include overseeing strategic initiatives as well as building, mentoring and leading AmREIT’s team of professionals. Mr. Taylor has over 30 years of experience within the real estate industry, and has participated in over 300 transactions involving brokerage, development and management of premier real estate projects. He attended Trinity University, graduating with a Bachelor of Arts degree and then attended Southern Methodist University where he received his Masters Degree in Business Administration. Mr. Taylor also attended law school at South Texas College of Law where he received his Doctor of Jurisprudence. Mr. Taylor is chairman of the board of Pathways for Little Feet and serves as a board member of Life House, Inc., Uptown District and as an Elder of First Presbyterian Church. Mr. Taylor is a lifetime member of the International Council of Shopping Centers and Urban Land Institute and is a member of the Texas Bar Association.
Chad C. Braun serves as the Vice President, CFO, Secretary and Treasurer of the General Partner and as AmREIT’s Executive Vice President, Chief Financial Officer, Treasurer and Secretary. Mr. Braun is responsible for corporate finance, equity capital markets, debt structuring and placement, investor relations, accounting, SEC
reporting, and he oversees investment sponsorship and product creation. Mr. Braun has over 15 years of accounting, financial and real estate experience, and prior to joining AmREIT in 1999, he served as a manager in the real estate advisory services group at Ernst & Young LLP. He has provided extensive consulting and audit services, including financial statement audits, portfolio acquisition and disposition, portfolio management, merger integration and process improvement, financial analysis and capital markets and restructuring transactions, to a number of real estate investment trusts and private real estate companies. Mr. Braun graduated from Hardin Simmons University with a Bachelor of Business Administration degree in accounting and finance and subsequently earned the CPA designation and his Series 63, 7, 24 and 27 securities licenses. He is a member of the National Association of Real Estate Investment Trusts and the Texas Society of Certified Public Accountants.
Brett P. Treadwell serves as our General Partner’s Managing Vice President - Finance and he also serves in this position for AmREIT. Within AmREIT he is responsible for its financial reporting function as well as for assisting in the establishment and execution of AmREIT’s strategic financial initiatives. Mr. Treadwell’s responsibilities also include overall risk management and treasury management functions and SEC reporting as well as periodic internal reporting to management. Mr. Treadwell has over 18 years of accounting, financial and SEC reporting experience. Prior to joining AmREIT in August 2004, he served as a senior manager with PricewaterhouseCoopers LLP and was previously with Arthur Andersen LLP. Mr. Treadwell received a Bachelor of Business Administration degree from Baylor University and is a Certified Public Accountant.
Section 16(a) Beneficial Ownership Reporting Compliance
Based on a review of Forms 3, 4 and 5 furnished to us under Rule 16a-3(e) of the Exchange Act during the fiscal year ended December 31, 2009, we know of no reporting person that has failed to file on a timely basis, as disclosed in the above forms, report required by Section 16(a) of the Exchange Act during the fiscal year ended December 31, 2009.
Code of Ethics
We are managed by our General Partner, and we have no officers or employees to whom a Code of Ethics would apply.
ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION.
We are managed by our General Partner, and we have no directors, executive officers or employees to whom we pay compensation.
See “Item 13. Certain Relationships and Related Transactions, and Director Independence” below for the fees and expenses we pay to our General Partner and its affiliates.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDER MATTERS.
Securities Authorized for Issuance Under Equity Compensation Plans
We do not have any compensation plans under which we are authorized to issue equity securities.
Security Ownership of Certain Beneficial Owners and Management
We know of no person (including a “group” as that term is used in Section 13(d)(3) of the Exchange Act) who is the beneficial owner of more than five percent of our Units.
We have no officers or directors. Our General Partner owns our sole general partner interest. No person who is an officer of our General Partner as of the date of this filing owns any direct interest in the Partnership. AmREIT, the sole shareholder of our General Partner, has assigned the economic interest in 28.5% of our General
Partner to certain of its management team. The address of the officers of our General Partner is 8 Greenway Plaza, Suite 1000, Houston, Texas 77046.
As of March 5, 2010, there were 1,988 Units issued and outstanding owned by 762 investors.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Compensation Arrangements
Our General Partner and its affiliates received the payments and fees from us described below. These payments and fees were not negotiated and may be higher than payments and fees that would have resulted from an arm’s length transaction with an unrelated entity. In addition to the fees paid by us as described below, the non-consolidated entities in which we have an investment paid a total of $743,000 in property management, construction management and leasing fees to one of our affiliated entities for the fiscal year ended December 31, 2009. Our Casa Linda Plaza property paid a total of $6.2 million in construction fees to one of our affiliated entities during 2008 and 2009.
For the fiscal year ended
December 31,
Type and Recipient
Determination of Amount
incurred. These fees shall not exceed, for any single property, 6% of the project cost up to $10 million, 5% of the project cost between $10 million and $20 million, and 4% of the project cost in excess of $20 million. We will not pay both acquisition fees and development or redevelopment fees on the same property.
Property Management and Leasing Fees - Affiliates of the General Partner
Property management fees not to exceed 4% of the gross revenues (including, without limitation, base rent, percentage rent and expense reimbursement) received from multi-tenant or multi-pad properties, for providing management, operating, maintenance and other services required to maintain a property. Leasing fees not to exceed 4% of base rent on a lease renewal and not to exceed 6% of base rent on an initial lease; provided, however, on leases of over 10,000 square feet, leasing commissions may be paid on the basis of square footage, not to exceed $6.00 per square foot.
$ 252,612
$ 197,112
Reimbursement of Operating Expenses - General Partner
We reimburse the actual expenses incurred by our General Partner for performing acquisition, development, management and administrative functions for us, including construction and construction management fees for development and redevelopment projects.
$ 336,698
$ 131,675
Distributions During Operating Stage - General Partner
Our General Partner is entitled to distributions during our operating period.
$ 8,793
$ 36,909
Real Estate Brokerage Commissions - General Partner (1)
A fee not to exceed 6% of the sales price on co-brokered transactions and not to exceed 4% of the sales price on individually brokered transactions. Additionally, our General Partner and its affiliates will not be paid real estate brokerage commissions on the sale of a property if the property being sold has not generated an annual return of at least 8.5% per annum on the equity contributed to such property.
No amounts have been paid
No amounts have been paid
Liquidating Stage
Distributions of Net Cash Flow - General Partner
Our General Partner is entitled to distributions after our operating period.
No amounts have been paid
No amounts have been paid
(1)
The real estate brokerage commissions payable during the liquidation period will also be payable for Actively Managed properties sold during the operation period.
Joint Ventures with Affiliates
As of December 31, 2009, we had entered into four joint ventures with our affiliates.
In December 2006, we acquired a 50% interest in AmREIT Casa Linda, LP, which owns Casa Linda Plaza, a multi-tenant retail property located in Dallas, Texas. The remaining 50% is owned by AmREIT Monthly Income & Growth Fund III, Ltd., our affiliate.
In August 2007, we acquired a 40% interest in AmREIT Woodlake, LP, which owns Woodlake Square, a multi-tenant retail property located in Houston, Texas. In June 2008, we acquired an additional 20% investment interest in AmREIT Woodlake, LP from an affiliated entity at its net book value. Our affiliates, AmREIT Monthly Income & Growth Fund III, Ltd. and AmREIT Realty Investment Corporation, both own a 40% interest in AmREIT Woodlake, LP. We have consolidated AmREIT Woodlake, LP into our results of operations effective January 1, 2008 as a result of the additional 20% interest that we acquired in June 2008.
In November 2007, we acquired a 40% interest in AmREIT Westheimer Gessner, LP, which owns Woodlake Pointe, a multi-tenant retail property located in Houston, Texas. In May 2008, we acquired a 60% interest in an additional tract of land adjacent to Woodlake Pointe property. The acquisition is accounted for as part of AmREIT Westheimer Gessner, LP. In June 2008, we acquired an additional 20% investment interest in AmREIT Westheimer Gessner, LP from an affiliated entity at its net book value. Our affiliates, AmREIT Monthly Income & Growth Fund III, Ltd. and AmREIT Realty Investment Corporation, both own a 40% interest in AmREIT Westheimer Gessner, LP. We have consolidated AmREIT Westheimer Gessner, LP into our results of operations effective January 1, 2008 as a result of the additional 20% interest that we acquired in June 2008.
In February 2008, we acquired a 10% interest in Shadow Creek Holding Company LLC, which owns Shadow Creek Ranch, a multi-tenant retail property located in Pearland, Texas, for approximately $4.8 million. The remaining 90% is owned by an unaffiliated third party and AmREIT.
Directors
We have no directors and are managed by our General Partner. H. Kerr Taylor is the sole director of our General Partner.
AmREIT Realty Investment Corporation
AmREIT Realty Investment Corporation (“ARIC”) is a fully integrated real estate development and operating business which is wholly owned by AmREIT, the parent of our General Partner. ARIC employs a full complement of brokers and real estate professionals that provide development, acquisition, brokerage, leasing, construction management, asset and property management services to AmREIT affiliated entities and to third parties. ARIC serves as one of our property managers, and is responsible for managing and leasing some of our properties. We pay ARIC property management and leasing fees as described above. ARIC hires, directs and establishes policies for employees who will have direct responsibility for the operations of each property it manages, which may include but is not limited to on-site managers and building and maintenance personnel. Certain employees of the property manager may be employed on a part-time basis and may also be employed by our General Partner or its affiliates. ARIC also directs the purchase of equipment and supplies and supervises all maintenance activity. The management fees paid to ARIC includes, without additional expense to us, all of its general overhead costs.
AmREIT Construction Company
We have historically engaged AmREIT Construction Company, an affiliate of our General Partner, to provide construction and construction management services for our development and redevelopment projects. During 2008, AmREIT Construction Company ceased providing these services and completed all of its work in progress in 2009. We may engage in the future ARIC, also an affiliate of our General Partner, for construction management services.
In these cases, such services are provided on terms and conditions no less favorable to us than can be obtained from independent third parties for comparable services in the same location.
AmREIT Securities Company
AmREIT Securities Company is a member firm of Financial Industry Regulatory Authority, Inc., and a wholly owned subsidiary of AmREIT. AmREIT Securities Company was organized in 1999 for the purpose of participating in and facilitating the distribution of securities of AmREIT affiliated entities. As the dealer manager for our Offering of Units, AmREIT Securities Company provided certain sales, promotional and marketing services to us in connection with the distribution of the Units. We paid selling commission and marketing reimbursements to AmREIT Securities Company in connection with our offering, a portion of which was reallowed to participating broker-dealers. Chad Braun is the President, Secretary and Treasurer of AmREIT Securities Company and H. Kerr Taylor serves as its Chairman and the sole member of its board of directors. As of October 2008, AmREIT Securities Company is no longer operating as a broker-dealer. As AmREIT Securities Company has not provided capital-raising services to us since the closing of our Offering in 2006, we expect that the closing of the broker-dealer operation will have no impact on the Partnership.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES.
KPMG LLP, independent registered public accounting firm and certified public accountants, served as our independent accountants for the fiscal year ended December 31, 2009. The following is an explanation of the fees billed to us by Accountants for professional services rendered for the fiscal years ended December 31, 2009 and December 31, 2008.
Audit Fees
The aggregate fees billed to us for professional services related to the audit of our annual financial statements, review of financial statements included in our Forms 10-Q, or other services normally provided by KPMG LLP in connection with statutory and regulatory filings or engagements for the fiscal years ended December 31, 2009 and December 31, 2008 totaled $170,000 and $149,000, respectively. Included in these fees are $41,000 and $0 related to the audit of a significant subsidiary for the years ended December 31, 2009 and 2008, respectively. Also included in these fees are $19,000 and $0 related to the audit of our internal controls for the years ended December 31, 2009 and 2008, respectively.
Audit-Related Fees, Tax Fees and All Other Fees
The services that have been performed by KPMG have been limited to audit services. Accordingly, we have paid no audit-related fees, tax fees or other fees to KPMG for the fiscal years ended December 31, 2009 and 2008.
Audit Committee’s Pre-Approval Policies and Procedures
The Company does not have an independent audit committee. Our General Partner must approve any services to be performed by our independent auditors.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
1.
Financial Statements. The list of our financial statements filed as part of this Annual Report on Form 10-K is set forth on page.
2.
Financial Statement Schedules. The list of our financial statement schedules filed as part of this Annual Report on Form 10-K is set forth on page.
3.
Exhibits.
It is inappropriate for readers to assume the accuracy of, or rely upon any covenants, representations or warranties that may be contained in agreements or other documents filed as Exhibits to, or incorporated by reference in, this report. Any such covenants, representations or warranties may have been qualified or superseded by disclosures contained in separate schedules or exhibits not filed with or incorporated by reference in this report, may reflect the parties’ negotiated risk allocation in the particular transaction, may be qualified by materiality standards that differ from those applicable for securities law purposes, and may not be true as of the date of this report or any other date and may be subject to waivers by any or all of the parties. Where exhibits and schedules to agreements filed or incorporated by reference as Exhibits hereto are not included in these exhibits, such exhibits and schedules to agreements are not included or incorporated by reference herein.
The following exhibits are filed as part of or incorporated by reference in this Annual Report:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
AmREIT MONTHLY INCOME & GROWTH FUND IV, L.P. AND SUBSIDIARIES
FINANCIAL STATEMENTS:
Page
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2009 and December 31, 2008
Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007
Consolidated Statements of Partners’ Capital for the years ended December 31, 2009, 2008 and 2007
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007
Notes to Consolidated Financial Statements
FINANCIAL STATEMENT SCHEDULES:
Schedule III - Consolidated Real Estate Owned and Accumulated Depreciation for the year ended December 31, 2009
S-1
Report of Independent Registered Public Accounting Firm
S-2
Schedule IV - Financial Statements and Notes for AmREIT Casa Linda, LP
S-3
All other financial statement schedules are omitted as the required information is either inapplicable or is included in the financial statements or related notes.
Report of Independent Registered Public Accounting Firm
The Partners of AmREIT Monthly Income & Growth Fund IV, L.P.:
We have audited the accompanying consolidated balance sheet of AmREIT Monthly Income & Growth Fund IV, L.P. and subsidiaries (the “Partnership”) as of December 31, 2009 and 2008, and the related consolidated statements of operations, partners’ capital and cash flows for each of the years in the three-year period ended December 31, 2009. In connection with our audit of the consolidated financial statements, we have also audited the related financial statement schedule. These consolidated financial statements and the financial statement schedule are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes 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 Partnership’s internal control over financial reporting. As such, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AmREIT Monthly Income & Growth Fund IV, L.P. and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ KPMG LLP
Houston, Texas
March 10,
AmREIT MONTHLY INCOME & GROWTH FUND IV, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except unit data)
See Notes to Consolidated Financial Statements.
AmREIT MONTHLY INCOME & GROWTH FUND IV, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2009, 2008 and 2007
(in thousands, except for per unit data)
See Notes to Consolidated Financial Statements.
AmREIT MONTHLY INCOME & GROWTH FUND IV, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CAPITAL
For the years ended December 31, 2009, 2008 and 2007
(in thousands)
(1)
The allocation of net loss includes a curative allocation to increase the General Partner’s capital account by $43, $65 and $25 for the 2009, 2008 and 2007 periods. The cumulative curative allocation since inception of the Partnership is $133. The Partnership Agreement provides that no Partner shall be required to fund a deficit balance in their capital account.
See Notes to Consolidated Financial Statements.
AmREIT MONTHLY INCOME & GROWTH FUND IV, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2009, 2008 and 2007
(in thousands)
See Notes to Consolidated Financial Statements.
AmREIT MONTHLY INCOME & GROWTH FUND IV, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
1.
DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
AmREIT Monthly Income & Growth Fund IV, L.P., a Delaware limited partnership (hereinafter referred to as the “Partnership,” “MIG IV,” “we,” “us” or “our”), was formed on October 10, 2006 to acquire, develop and operate, directly or indirectly, a portfolio of commercial real estate consisting primarily of multi-tenant shopping centers and mixed-use developments. The General Partner of the Partnership is AmREIT Monthly Income & Growth IV Corporation, a Delaware corporation (the “General Partner”), which is a subsidiary of AmREIT, Inc., an SEC reporting, non-traded Maryland corporation that has elected to be taxed as a real estate investment trust (“AmREIT”). The General Partner maintains its principal place of business in Houston, Texas.
We commenced our principal operations on December 8, 2006 when we acquired our first interest in a property. On January 12, 2007, we raised the minimum offering of $1.0 million (the “Offering”) pursuant to the terms of our Offering Memorandum dated November 15, 2006 (the “Offering Memorandum”) and issued the initial 40 limited partnership units (the “Units”). We closed the offering on March 31, 2008 when we had received $49.7 million from the sale of 1,991 Units. As of December 31, 2009, our investments included a wholly-owned property comprising approximately 36,000 square feet of gross leasable area, two properties in which we own controlling interests comprising approximately 288,000 square feet of gross leasable area and three properties in which we own a non-controlling interest through joint ventures comprising approximately 949,000 square feet of gross leasable area.
Our Units were sold pursuant to exemptions from registration under the Securities Act of 1933, as amended (the “Securities Act”), and are not currently listed on a national exchange. These Units will be transferable only if we register them under applicable securities laws (such registration is not expected) or they are transferred pursuant to an exemption under the Securities Act and applicable state securities laws. We do not anticipate that any established public trading market for the Units will develop.
During the past two years, the United States has experienced an unprecedented business downturn, coupled with a substantial curtailment of available debt and equity financing. While we expect to generate sufficient cash flow from operations in 2010 to meet our contractual obligations, a significant additional deterioration in the national economy, the bankruptcy or insolvency of one or more of our large tenants could cause our 2010 cash resources to be insufficient to meet our obligations. If necessary, we have the ability to defer capital improvements and to defer payment of certain operating costs, including property taxes, until cash resources are available. Effective July 15, 2009, we suspended all distributions in an effort to conserve cash and to protect investors’ invested capital. As we have numerous projects that are mid-stream in redevelopment, we are conserving cash from operations to improve our ability to fund capital improvements, tenant improvements and leasing commissions, and to meet our obligations, including debt service.
Projected cash sources and uses for the Partnership’s 2010 fiscal year indicate certain periods of cash shortfalls within the twelve month period; however, we believe that we will be able to generate sufficient liquidity to satisfy any cash shortfalls through (1) managing the timing of forecasted capital expenditures related to the lease-up of properties, (2) potential joint venture equity investments in existing non-consolidated entities (3) financings of unencumbered properties and (4) sales of certain of our investments in non-consolidated entities. However, no assurance can be given that we will be able to generate such liquidity. In the event that we are unable to generate sufficient liquidity, we may be forced to sell one or more properties at a time when it is disadvantageous to do so, potentially resulting in losses on disposition of those properties. See Note 6 for discussion of our debt maturing in 2010.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Our financial records are maintained on the accrual basis of accounting whereby revenues are recognized when earned and expenses are recorded when incurred. The consolidated financial statements include our accounts as well as the accounts of any wholly- or majority-owned subsidiaries in which we have a controlling financial interest. Investments in joint ventures and partnerships in which we have the ability to exercise significant influence but do not exercise financial and operating control are accounted for using the equity method (see Note 4). The significant accounting policies of our non-consolidated entities are consistent with those of our subsidiaries in which we have a controlling financial interest. As applicable, we consolidate certain joint ventures and partnerships in which we own less than a 100% equity interest if the entity is a variable interest entity and we are the primary beneficiary (as defined in ASC 810, Consolidation). All significant inter-company accounts and transactions have been eliminated in consolidation.
Effective July 1, 2009, the Financial Accounting Standards Board (“FASB”) established the Accounting Standards Codification (“ASC”) as the primary source of authoritative Generally Accepted Accounting Principles (“GAAP”) recognized by the FASB to be applied to nongovernmental entities. Although the establishment of the ASC did not change current GAAP, it did change the way we refer to GAAP throughout this document to reflect the updated referencing convention.
REVENUE RECOGNITION
We lease space to tenants under agreements with varying terms. All of the leases are accounted for as operating leases and, although certain leases of the properties provide for tenant occupancy during periods for which no rent is due and/or increases or decreases in the minimum lease payments over the terms of the leases, revenue is recognized on a straight-line basis over the terms of the individual leases. In most cases, revenue recognition under a lease begins when the lessee takes possession of or controls the physical use of the leased asset. Generally, possession or control occurs on the lease commencement date. We have determined that we are the owner of any tenant improvements that we fund pursuant to the lease terms. In cases where significant tenant improvements are made prior to lease commencement, the leased asset is considered to be finished space, and revenue recognition therefore begins when the improvements are substantially complete.
Accrued rents are included in tenant receivables. Revenue from tenant reimbursements of taxes, maintenance expenses and insurance is recognized in the period the related expense is recorded. Additionally, certain of the lease agreements contain provisions that grant additional rents based on tenants’ sales volumes (contingent or percentage rent). Percentage rents are recognized when the tenants achieve the specified targets as defined in their lease agreements. No percentage rents were recognized during the years ended December 31, 2009, 2008 and 2007. We recognize lease termination fees in the period that the lease is terminated and collection of the fees is reasonably assured. Upon early lease termination, we provide for losses related to unrecovered intangibles and other assets. During the years ended December 31, 2009, 2008 and 2007, we recognized no lease termination fees.
REAL ESTATE INVESTMENTS
Development Properties - Land, buildings and improvements are recorded at cost. Expenditures related to the development of real estate are carried at cost which includes capitalized carrying charges, acquisition costs and development costs. Carrying charges, primarily interest, real estate taxes and loan acquisition costs, and direct and indirect development costs related to buildings under construction, are capitalized as part of construction in progress. The capitalization of such costs ceases at the earlier of one year from the date of completion of major construction or when the property, or any completed portion, becomes available for occupancy. We capitalize costs associated with pending acquisitions of raw land as incurred. Such costs are expensed if and when such land acquisition becomes no longer probable. During the years ended December 31, 2009, 2008 and 2007, interest and taxes in the amount of $246,000, $0 and $0, respectively, were capitalized on properties under development or redevelopment.
Acquired Properties and Acquired Lease Intangibles - We account for operating real estate acquisitions pursuant to ASC 805, Business Combinations, as we believe most operating real estate meets the definition of a “business” pursuant to this guidance. Accordingly, we allocate the purchase price of the acquired operating properties to land, building and improvements, identifiable intangible assets and acquired liabilities based on their respective fair values. Identifiable intangibles include amounts allocated to acquired above and below market leases, out of market debt, the value of in-place leases and customer relationship value, if any. We determine fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends and specific market and economic conditions that may affect the property. Factors considered by management in our analysis of determining the as-if-vacant property value include an estimate of carrying costs during the expected lease-up periods considering market conditions and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and estimates of lost rentals at market rates during the expected lease-up periods, tenant demand and other economic conditions. Management also estimates costs to execute similar leases including leasing commissions, tenant improvements, legal and other related expenses. Intangibles related to above (and below) market leases and in-place lease value are recorded as acquired lease intangibles (liabilities) and are amortized as an adjustment to rental income or amortization expense, as appropriate, over the remaining terms of the underlying leases. Below-market leases include fixed-rate renewal periods. Premiums or discounts on acquired above and below market debt are amortized to interest expense over the remaining term of such debt.
We expense acquisition costs associated with operating properties as incurred in accordance with ASC 805. Prior to the adoption of the guidance, such costs were capitalized and expensed if and when the acquisition became no longer probable. During the years ended December 31, 2009, 2008 and 2007, we expensed acquisition costs of $7,000, $169,000 and $15,000, respectively.
Depreciation - Depreciation is computed using the straight-line method over an estimated useful life of up to 36 years for buildings, up to 11 years for site improvements and over the term of lease for tenant improvements.
Properties Held for Sale - Properties will be classified as held for sale if we have decided to market the property for immediate sale in its present condition with the belief that the sale will be completed within one year. Properties held for sale will be carried at the lower of cost or fair value less cost to sell. Depreciation and amortization will be suspended during the held for sale period. At December 31, 2009 and 2008, we had no properties held for sale.
Impairment - We review our properties for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through operations. We determine whether an impairment in value occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the residual value of the property, with the carrying value of the individual property. If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its fair value. Both the estimated undiscounted cash flow analysis and fair value determination are based upon various factors which require complex and subjective judgments to be made by management. Such assumptions include projecting lease-up periods, holding periods, cap rates, rental rates, operating expenses, lease terms, tenant creditworthiness, tenant improvement allowances, terminal sales value and certain macroeconomic factors among other assumptions to be made for each property. We have not incurred any impairment losses since our inception.
INVESTMENTS IN NON-CONSOLIDATED ENTITIES
As of December 31, 2009, we have ownership interests in five real estate properties through ownership interests in joint ventures. Although we exercise significant influence over the activities of these properties, we do not have a controlling financial interest in three of the five joint ventures. Accordingly, our joint venture interests in these three properties are reported under the equity method of accounting pursuant to GAAP. Certain of the significant accounting policies in below are applicable specifically to property-level reporting and represent policies that are therefore primarily relevant at the investee entity level as of December 31, 2009.
The joint ventures lease space to tenants under agreements with varying terms. The majority of the leases are accounted for as operating leases with revenue being recognized on a straight-line basis over the terms of the individual leases. When our joint ventures acquire a property, the term of existing leases is considered to commence as of the acquisition date for the purposes of this calculation.
Accrued rents are included in tenant receivables. Revenue from tenant reimbursements of taxes, maintenance expenses and insurance is recognized in the period the related expense is recorded. Additionally, certain of the lease agreements contain provisions that grant additional rents based on tenants’ sales volumes (contingent or percentage rent). We defer the recognition of contingent or percentage rental income until the specific targets as defined in lease agreements that trigger the contingent or percentage rental income are achieved. Cost recoveries from tenants are included in rental income in the period the related costs are incurred.
ENVIRONMENTAL EXPOSURES
We are subject to numerous environmental laws and regulations as they apply to real estate, including those addressing chemicals used by the dry cleaning industry, the existence of asbestos in older shopping centers, and underground petroleum storage tanks. We believe that the tenants occupying our properties who currently operate dry cleaning plants or gas stations do so in accordance with current laws and regulations. We believe that the ultimate disposition of current known environmental matters will not have a material affect on our financial position, liquidity, or operations (see Note 12). However, we can give no assurance that existing environmental studies with respect to the shopping centers have revealed all potential environmental liabilities; that any previous owner, occupant or tenant did not create any material environmental condition not known to it; that the current environmental condition of the shopping centers will not be affected by tenants and occupants, by the condition of nearby properties, or by unrelated third parties; or that changes in applicable environmental laws and regulations or their interpretation will not result in additional environmental liability to the Partnership.
RECEIVABLES AND ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS
Tenant Receivables - Included in tenant receivables are base rents, tenant reimbursements and adjustments related to recording rents on a straight-line basis. An allowance for the uncollectible portion of accrued rents and accounts receivable is determined based upon customer credit-worthiness (including expected recovery of our claim with respect to any tenants in bankruptcy), historical bad debt levels, and current economic trends. Bad debt expenses and any related recoveries related to tenant receivables are included in property expense. As of December 31, 2009 and 2008, our allowance for uncollectible accounts related to our tenant receivables was $124,000 and $0, respectively.
Notes Receivable - Related Party- included in notes receivable related party are cash advances provided to certain of our affiliated investment entities primarily for their working capital needs. These cash advances are due upon demand.
DERIVATIVE FINANCIAL INSTRUMENTS
We account for our derivative financial instruments pursuant to ASC 815, Derivatives and Hedging. ASC 815 requires that all derivative instruments, whether designated in hedging relationships or not, be recorded on the balance sheet at their fair value. Gains or losses resulting from changes in the values of those derivatives are accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. Our use of derivative financial instruments to date has been limited to the use of interest rate swaps to mitigate our interest rate risk on variable-rate debt. We have designated these interest rate swaps as cash flow hedges for financial reporting purposes.
ASC 815 requires that changes in fair value of derivatives that qualify as cash flow hedges be recognized in other comprehensive income (“OCI”) while the ineffective portion of the derivative’s change in fair value be recognized in the statement of operations as interest expense. Upon the settlement of a hedge, gains and losses associated with the transaction are recorded in OCI and amortized over the underlying term of the hedge transaction. We assess, both at inception of the hedge and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the cash flows of the hedged items. In assessing the hedge, we use standard market conventions and techniques such as discounted cash flow analysis, option pricing models
and termination costs at each balance sheet date. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized. See Note 7 for further discussion regarding our derivative financial instruments.
DEFERRED COSTS
Deferred costs include deferred leasing costs and loan acquisition costs, net of amortization. Loan acquisition costs are incurred in obtaining financing and are amortized to interest expense over the term of the debt agreements using a method that approximates the effective interest method. Deferred leasing costs consist of external commissions associated with leasing our properties and are amortized to depreciation and amortization expense on a straight-line basis over the lease term. Accumulated amortization related to loan acquisition costs totaled $214,000 and $121,000 as of December 31, 2009 and 2008, respectively. Accumulated amortization related to leasing costs totaled $16,000 and $5,000 as of December 31, 2009 and 2008, respectively.
INCOME TAXES
Federal - No provision for U.S. federal income taxes is included in the accompanying consolidated financial statements. As a partnership, we are not subject to federal income tax, and the federal tax effect of our activities is passed through to our partners.
State - In May 2006, the State of Texas adopted House Bill 3, which modified the state’s franchise tax structure, replacing the previous tax based on capital or earned surplus with one based on margin (often referred to as the “Texas Margin Tax”) effective with franchise tax reports filed on or after January 1, 2007. The Texas Margin Tax is computed by applying the applicable tax rate (1% for the Partnership) to the profit margin, which, generally, will be determined for us as total revenue less a 30% standard deduction. Although House Bill 3 states that the Texas Margin Tax is not an income tax, the Partnership believes that ASC 740, Income Taxes, applies to the Texas Margin Tax. We have recorded margin tax provisions of approximately $20,000 and $38,000 for the Texas Margin Tax for the years ended December 31, 2009 and 2008, respectively.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
FAIR VALUE MEASUREMENTS
We account for assets and liabilities measured at fair value in accordance with ASC 820, Fair Value Measurements and Disclosures. ASC 820 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy). The three levels of inputs used to measure fair value are as follows:
•
Level 1 Inputs - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.
•
Level 2 Inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.
•
Level 3 Inputs - Unobservable inputs for the asset or liability, which are typically based on the Company’s own assumptions, as there is little, if any, related market activity.
Derivative Financial Instruments - In determining the fair value of our derivative instrument, we consider whether credit valuation adjustments are necessary to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation assumptions associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. However, as of December 31, 2009, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
The following table presents our assets and liabilities and related valuation inputs within the fair value hierarchy utilized to measure fair value as of December 31, 2009 (in thousands):
Notes Payable - As of December 31, 2009 and 2008, the carrying value of debt obligations associated with our consolidated entities was approximately $29.9 million and $30 million, respectively, $6.1 million of which represents a fixed-rate obligation with an estimated fair value of $5.7 million and $6.3 million, respectively, based on a discounted cash flow analysis using current market rates of interest. As of December 31, 2009 and 2008, the estimated fair value of our $23.8 million variable-rate obligation approximated $23.4 million and $23.2 million, respectively, based on a discounted cash flow analysis using current market rates of interest.
CONSOLIDATION OF VARIABLE INTEREST ENTITIES
In December 2003, the FASB reissued ASC 810 Consolidation. ASC 810 addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting rights. ASC 810 requires a variable interest entity to be consolidated by a company that is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. Disclosures are also required about variable interest entities in which a company has a significant variable interest but that it is not required to consolidate. As of December 31, 2009 and 2008, we had no investments in any entities that qualify as variable interest entities pursuant to ASC 810.
NEW ACCOUNTING STANDARDS
In June 2009, the FASB issued Statement No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”), which amends the consolidation guidance applicable to variable interest entities. The amendments will significantly affect the overall consolidation analysis under FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities-an interpretation of ARB No. 51 and changes the way entities account for securitizations and special purpose entities as a result of the elimination of the QSPE concept in SFAS No. 166. SFAS No. 167 is effective as of the beginning of the first fiscal year that begins after November 15, 2009 and early adoption is prohibited. The adoption of SFAS No. 167 is not expected to have a material impact on our consolidated financial statements.
In June 2009, the FASB issued ASC 105, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (the “Codification”). This guidance is the single source of authoritative nongovernmental GAAP, superseding existing FASB, American Institute of Certified Public Accountants, Emerging Issues Task Force, and related accounting literature. ASC 105 reorganizes the thousands of GAAP pronouncements into roughly 90 accounting topics and displays them using a consistent structure. Also included is relevant Securities and Exchange Commission guidance organized using the same topical structure in separate sections. This guidance is effective for financial statements issued for reporting periods that end after September 15, 2009. The Company adopted the use of the Codification for the quarter ending September 30, 2009.
CASH AND CASH EQUIVALENTS
We consider all highly-liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consist of demand deposits at commercial banks and money market funds.
INTEREST
Interest is charged to interest expense as it accrues. No interest has been capitalized since inception of the Partnership.
SEGMENT REPORTING
ASC 280, Segment Reporting, establishes standards for reporting financial and descriptive information about an enterprise’s reportable segments. We determined that we have one reportable segment with activities related to investing in real estate. Our investments in real estate generate rental revenue and other income through the leasing of multi-tenant retail properties, which comprised 100% of our total consolidated revenues for all periods presented. We evaluate operating performance on an individual property level. However, as each of our properties have similar economic characteristics, tenants and products and services, our properties have been aggregated into one reportable segment.
RECLASSIFICATIONS
Certain prior period amounts in the consolidated financial statements have been reclassified to conform to the presentation used in the current period consolidated financial statements.
3.
OPERATING LEASES
Our operating leases range from one month to twenty-five years and generally include one or more five year renewal options. A summary of minimum future base rentals to be received, exclusive of any renewals, under non-cancelable operating leases in existence at December 31, 2009 is as follows (in thousands):
Future minimum rental revenue excludes amounts that may be received from tenants for reimbursements of operating costs, real estate taxes and insurance. Expense reimbursements recognized as revenue totaled $1.1 million, $1.4 million and $0 during the years ended December 31, 2009, 2008 and 2007, respectively.
4.
INVESTMENTS IN NON-CONSOLIDATED ENTITIES
Since inception, we have made the following investments in three entities through which we own an interest in three properties:
•
In December 2006, we acquired a 50% interest in AmREIT Casa Linda, LP which owns Casa Linda Plaza, a multi-tenant retail property located in Dallas, Texas with a combined gross leasable area of approximately 325,000 square feet. The remaining 50% is owned by AmREIT Monthly Income & Growth Fund III, Ltd., an affiliated AmREIT entity.
•
In December 2007, we acquired a 50% interest in Cambridge & Holcombe, LP which owns 2.02 acres of raw land that may be developed, sold or contributed to a joint venture in the future. The property is located adjacent to the Texas Medical Center in Houston, Texas. The remaining 50% is owned by an unaffiliated third party.
•
In February 2008, we acquired a 10% interest in Shadow Creek Holding Company LLC which owns Shadow Creek Ranch, a multi-tenant retail property located in Pearland, Texas with a combined gross leasable area of approximately 624,000 square feet. The remaining 90% is owned by an unaffiliated third party (80%) and AmREIT (10%).
We report our investments in these three entities using the equity method of accounting due to our ability to exercise significant influence over them. Combined condensed financial information for our non-consolidated entities as of December 31, 2009 (at 100%) is summarized as follows:
5.
ACQUIRED LEASE INTANGIBLES
In accordance with ASC 805 we have identified and recorded the value of acquired lease intangibles at the property acquisition date. Such intangibles include the value of acquired in-place leases and above and below market leases. Acquired lease intangible assets (in-place leases and above-market leases) are amortized over the leases’ remaining terms, which range from two months to approximately thirteen years. The amortization expense related to in-place leases was approximately $1,385,000, $1,800,000 and $0 for the years ended December 31, 2009, 2008 and 2007, respectively. We recorded disposals related to in-place leases of $328,000, $41,000 and $0 for the years ended December 31, 2009, 2008 and 2007, respectively. The amortization of above-market leases, which was recorded as a reduction of rental income, was approximately $35,000, $53,000 and $0 during the years ended December 31, 2009, 2008 and 2007, respectively. Acquired lease intangible liabilities (below-market leases) are accreted over the leases’ remaining non-cancelable lease term plus any fixed rate renewal options, if applicable, which range from two months to approximately thirteen years. Accretion of below-market leases was approximately $441,000, $491,000 and $0 during the years ended December 31, 2009, 2008 and 2007, respectively. Such accretion is recorded as an increase to rental income. We recorded disposals of below-market leases of $41,000, $0 and $0 for the years ended December 31, 2009, 2008 and 2007, respectively, related to lease expirations.
Acquired in-place lease and above and below market lease values and their respective accumulated amortization are as follows (in thousands):
The estimated aggregate amortization amounts from acquired lease intangibles for each of the next five years are as follows (in thousands):
6.
NOTES PAYABLE
Our outstanding debt at December 31, 2009 consisted of two loans - a fixed-rate mortgage loan of $6.1 million secured by the Village on the Green property which matures in April 2017 and a variable-rate mortgage loan of $23.8 million secured by the Woodlake Square property which matures in September 2010, carries an interest rate of LIBOR plus 1.35% (1.59% at December 31, 2009), and requires monthly interest-only payments. We have entered into an interest rate swap agreement which fixes the interest rate at 5.465% on our $23.8 million variable-rate mortgage loan.
We expect to be able to refinance the Woodlake Square loan by September 2010, either with our existing lender or another lender. However, no assurance can be given that we will be able to obtain such financing. See Note 1 for discussion of our forecasted 2010 cash flows and plans to generate sufficient liquidity to satisfy our obligations.
Interest-only loans are generally due in full at maturity. Our mortgage loans are secured by real estate properties and may be prepaid but could be subject to a yield-maintenance premium or prepayment penalty. As of December 31, 2009, the weighted-average interest rate on our fixed-rate debt is 5.5%, and the weighted average remaining life of such debt is 7.27 years.
As of December 31, 2009, scheduled principal repayments on notes payable were as follows (in thousands):
We serve as guarantor on debt in the amount of $68.3 million that is the primary obligation of our joint ventures. The mortgage for one of our joint ventures in the amount of $23.8 million matures in the fourth quarter of 2010. Should that entity be unable to pay or refinance the mortgage, we would be liable for 25% of the balance. The remaining debt for our joint ventures matures between 2011 and 2015.
Notes Payable - Related Party - During 2009, we borrowed $230,000 from an affiliate of our General Partner. The note accrues interest monthly at LIBOR plus a spread of 3.5% with a floor of 5.0%, and is secured by our investment interest in the Woodlake Pointe and Woodlake Square properties.
7.
DERIVATIVE FINANCIAL INSTRUMENTS
We use derivative instruments primarily to manage exposures to interest rate risks. In order to manage the volatility relating to interest rate risk, we may enter into interest rate swaps from time to time. We do not use derivative financial instruments for trading or speculative purposes. In December 2007, Woodlake Square entered into an interest rate swap with a notional amount of $23.8 million and a fixed rate of 5.465% to hedge the interest rate risk on the $23.8 million variable-rate loan that was placed in conjunction with the 2007 acquisition of the Woodlake Square shopping center. The fair value of the swap was a liability of $678,000 at December 31, 2009. The swap settles monthly with an amount paid to or received from our counter-party upon settlement being recorded as an adjustment to interest expense. For the years ended December 31, 2009, 2008 and 2007, we paid $954,000, $231,000 and $0, respectively, related to this swap which is included in interest expense.
Valuations are not actual market prices for which an offer would be for unwinding any transactions but rather are calculated mathematical approximations of market values derived from proprietary models as of a given date. These valuations are calculated on a mid-market basis and do not include the bid/offered spread that would be reflected in an actual price quotation; therefore, actual price quotations for unwinding our transactions would be different. These valuations and models rely on certain assumptions regarding past, present, and future market conditions. These valuations, models and assumptions are subject to change at any time. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.
We have designated our interest rate swap as a hedge for financial reporting purposes, beginning on October 1, 2008. Accordingly, gains or losses resulting from changes in the value of our derivates subsequent to September 30, 2008 will be recorded as an adjustment to our partners’ capital. Prior to October 1, 2008, we had recorded a $415,000 loss on derivative in our consolidated statement of operations which represented the change in value of this derivative during the nine months ended September 30, 2008. The $579,000 decrease in fair value of the derivative liability during the year ended December 31, 2009 has been recorded in partners’ capital as an increase to other comprehensive gain. We could be exposed to losses in the event of nonperformance by the counter-parties.
8.
CONCENTRATIONS
As of December 31, 2009, each of our three consolidated properties individually comprises greater than 10% of our consolidated total assets. Consistent with our strategy of investing in areas that we know well, two of our three properties are located in the Houston metropolitan area. These Houston properties represent 80% and 82% of our rental income for the years ended December 31, 2009 and 2008, respectively. Houston is Texas’ largest city and the fourth largest city in the United States.
Following are the base rents generated by our top tenants during the years ended December 31, 2009, 2008 and 2007 (in thousands):
As of December 31, 2009, Borders, Inc. (“Borders”) constituted our largest tenant as determined by base rents paid. Borders’ lease expired in January 2010, and Borders vacated its space. Accordingly, our 2010 forecasted cash flows, as addressed in Note 1, assume no rental income from Borders for the 2010 period. We expected this impending lease expiration when we acquired the property and believe that we will be able to recover its carrying value based on our property redevelopment plan. We are actively identifying potential lessees to occupy the premises as part of this plan. The closing of any new leases would be subject to the negotiation and execution of definitive lease agreements and the fulfillment of customary conditions. No assurance can be given that a new lease will be procured on the same terms as the Borders’ lease, or at all.
9.
PARTNERS’ CAPITAL AND MINORITY INTEREST
The General Partner invested $800,000 as a limited partner and $1,000 as a general partner in MIG IV. We began raising capital in December 2006. We closed the offering on March 31, 2008 when we had raised approximately $49.7 million. The General Partner’s $800,000 investment represents a 1.6% limited partner interest in the Partnership.
Limited Optional Redemption - Our Units were sold pursuant to exemptions from registration under the Securities Act of 1933 and are not currently listed on a national exchange or otherwise traded in an organized securities market. These Units may be transferred only with the consent of the General Partner after the delivery of required documents, and in any event, only if we register the offer and sale of the Units under applicable securities laws or if an exemption from such registration is available. We do not expect to register the offer and sale of Units. Moreover, we do not anticipate that any public market for the Units will develop. In order to provide limited partners with the possibility of liquidity, at any time after November 15, 2009 and prior to November 15, 2013, limited partners who have held their Units for at least three years may receive the benefit of interim liquidity by presenting all of those Units to the Partnership for redemption. At that time, we may, at our sole election and subject to the conditions and limitations described below, redeem the Units presented for cash to the extent that we have sufficient funds available to us to fund such redemption. The redemption price to be paid will be 92% of the limited partner’s unreturned invested capital. At no time during a 12-month period, however, may the number of Units redeemed by us exceed 2% of the number of Units outstanding at the beginning of that 12-month period. During the year ended December 31, 2009, we received five redemption requests, three of which were denied in the aggregate amount of $253,000 and two of which were granted in the amount of $62,000, despite the restriction on redemptions until November 15, 2009. During the year ended December 31, 2008, we received one redemption request in the aggregate amount of $46,000, which was denied. We received no redemption requests during the year ended December 31, 2007. All redemption requests that have been granted represent a return of capital. We suspended the optional redemption program during the second quarter of 2009 due to macroeconomic conditions and the need to preserve cash.
Distributions - During the operating stage of the Partnership, net cash flow, as defined, will be distributed 99% to the limited partners and 1% to the General Partner. We paid a distribution of 7.5% per annum on invested capital through December 2008. Beginning in January 2009 through June 2009, we paid a distribution of 3.0% per annum on invested capital. Effective July 15, 2009 we suspended payment of all distributions and we do not plan to resume the payment of distributions until improvements in the real estate and liquidity markets warrant such payment. All distributions to date have been a return of capital. During the liquidation stage of the Partnership (anticipated to commence in November 2013, unless extended), net cash flow, as defined, will be distributed among the limited partners and the General Partner in the following manner:
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First - 100% to the Limited Partners (in proportion to their unreturned actual invested capital) until such time as the Limited Partners have received cumulative distributions from all sources equal to 100% of their actual invested capital (calculated using the actual purchase price per unit);
•
Second - 100% to the General Partner until it has received cumulative distributions from all sources equal to 100% of its actual invested capital of $1,000;
•
Third - 1% to the General Partner and 99% to the limited partners on a per unit basis until such time as the limited partners have received cumulative distributions from all sources equal to 8.5% per annum, cumulative, uncompounded return on their unreturned deemed capital contributions (which will be equal to (i) the product of $25,000 per unit (regardless of the purchase price paid for a unit) multiplied by the number of units owned by a partner, reduced by (ii) the aggregate amount of any distributions received that constitute a return of capital contributions);
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Fourth - 100% to the General Partner until it has received cumulative distributions from all sources (other than with respect to the Units it purchased) in an amount equal to 40% of the net cash flow paid to date to the Limited Partners in excess of their actual invested capital; and
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Thereafter - 60% to the limited partners on a per unit basis and 40% to the General Partner.
Non-controlling Interests - Non-controlling interests represent a 40% ownership interest that two of our affiliates have in two real estate partnerships that we consolidate as a result of our 60% controlling financial interest in such partnerships.
10.
RELATED PARTY TRANSACTIONS
Certain of our affiliates received fees and compensation during the organizational stage of the Partnership, including securities commissions and due diligence reimbursements, marketing reimbursements and reimbursement of organizational and offering expenses. In the event that these companies are unable to provide us with the respective services, we would be required to find alternative providers of these services. The following table summarizes the amount of such compensation paid to our affiliates during the years ended December 31, 2009, 2008 and 2007:
We have no employees or offices. Additionally, certain of our affiliates receive fees and compensation during the operating stage of the Partnership, including compensation for providing services to us in the areas of asset management, development and acquisitions, property management and leasing, financing, brokerage and administration. We reimburse our General Partner for an allocation of salary and other overhead costs. The following table summarizes the amount of such compensation paid to our affiliates during the years ended December 31, 2009, 2008 and 2007:
In addition to the above fees paid by us, the non-consolidated entities in which we have an investment paid a total of $743,000, $385,000 and $236,000 in property management, construction management and leasing fees to one of our affiliated entities for the years ended December 31, 2009, 2008 and 2007. Our Casa Linda Plaza property paid a total of $6.2 million in construction fees to one of our affiliated entities during 2008 and 2009.
11.
REAL ESTATE ACQUISITIONS AND DISPOSITIONS
In March 2008, we acquired Village on the Green, a multi-tenant retail property located in San Antonio, Texas with a gross leasable area of approximately 36,000 square feet. The acquisition was accounted for as a purchase and the results of its operations are included in the accompanying consolidated financial statements from the date of acquisition.
In November 2007, we acquired a 40% interest in AmREIT Westheimer Gessner, LP which owns Woodlake Pointe, a multi-tenant retail property located in Houston, Texas with a combined gross leasable area of approximately 82,000 square feet. In June 2008, we acquired an additional 20% investment interest in AmREIT Westheimer Gessner, LP from an affiliated entity at its net book value. Until June 2008, we reported our interest in AmREIT Westheimer Gessner, LP under the equity method of accounting as we owned a 40% interest in the partnership. With the additional 20% investment, we own a 60% controlling interest in this partnership, and we began including its financial position and operations in our consolidated financial statements beginning with our financial statements for the quarter ended June 30, 2008 and effective as of January 1, 2008. On May 30, 2008, AmREIT Westheimer Gessner, LP acquired an additional tract of land adjacent to Woodlake Pointe. The results of operations are included in the accompanying consolidated financial statements from the date of acquisition.
In August 2007, we acquired a 40% interest in AmREIT Woodlake, LP which owns Woodlake Square, a multi-tenant retail property located in Houston, Texas with a combined gross leasable area of approximately 206,000 square feet. In June 2008, we acquired an additional investment interest of 20% in AmREIT Woodlake, LP from an affiliated entity at its net book value. Until June 2008, we reported our interest in AmREIT Woodlake, LP under the equity method of accounting as we owned a 40% interest in the partnership. With the additional 20% investment, we own a 60% controlling interest in this partnership, and we began including its financial position and operations in our consolidated financial statements beginning with our financial statements for the quarter ended June 30, 2008 and effective as of January 1, 2008.
See Note 4 for a discussion of our investment activity since our inception with respect to our non-consolidated entities.
12.
COMMITMENTS AND CONTINGENCIES
Litigation - In the ordinary course of business, we may become subject to litigation or claims. There are no material pending legal proceedings known to be contemplated against us.
Environmental matters - In connection with the ownership and operation of real estate, we may be potentially liable for costs and damages related to environmental matters. We have not been notified by any governmental authority of any non-compliance, liability or other claim.
In conjunction with our acquisition of the Woodlake Square shopping center in August 2007, we identified environmental exposures caused by businesses that operated on the property prior to our ownership. We recorded an
asset retirement obligation of $700,000 on the acquisition date related to these exposures. In conjunction with the acquisition, the seller placed $700,000 in escrow which approximated the estimated remediation costs on the acquisition date. During 2009, we reassessed our environmental exposure at the site and now believe that the estimated costs to remediate the site will be approximately $530,000. Accordingly, we have reduced the asset retirement obligation by $170,000 and released a corresponding amount to the seller pursuant to the terms of the escrow agreement. As of December 31, 2009, we had a remaining asset retirement obligation related to this matter of $530,000. We believe that these matters will not have a material adverse effect on our consolidated financial position or results of operations, and we are aware of no other environmental exposures.
13.
SUBSEQUENT EVENTS
In May 2009, the FASB issued ASC 855, Subsequent Events, which we adopted in the second quarter of 2009. We have evaluated all events or transactions through March 10, 2010. During this period, we did not have any material subsequent events that impacted our consolidated financial statements.
MIG IV Schedule III
AmREIT MONTHLY INCOME & GROWTH FUND IV, L.P. AND SUBSIDIARIES
SCHEDULE III - Consolidated Real Estate Owned and Accumulated Depreciation
For the year ended December 31, 2009
Activity within real estate and accumulated depreciation during the three years ended December 31, 2009 are as follows:
Note A - MIG IV acquired 40% investment interests in Woodlake Square and Woodlake Pointe during 2007; thus, the operations of these properties were accounted for using the equity method of accounting. In June 2008, MIG IV acquired an additional investment interest of 20% in the two properties and began consolidating their results of operations, effective January 1, 2008.
S-1
Report of Independent Registered Public Accounting Firm
The Partners of AmREIT Casa Linda, L.P.:
We have audited the accompanying balance sheets of AmREIT Casa Linda, L.P. (the “Partnership”) as of December 31, 2009 and 2008, and the related statements of operations, partners’ capital and cash flows for each of the years in the three-year period ended December 31, 2009. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes 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 Company’s internal control over financial reporting. As such, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AmREIT Casa Linda, L.P. as of December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
KPMG LLP
Houston, Texas
March 10, 2010
S-2
SCHEDULE IV - FINANCIAL STATEMENTS AND NOTES FOR AmREIT CASA LINDA, L.P.
AmREIT CASA LINDA, L.P.
BALANCE SHEETS
December 31, 2009 and December 31, 2008
(in thousands)
See Notes to Financial Statements.
S-3
AmREIT CASA LINDA, L.P.
STATEMENTS OF OPERATIONS
For the years ended December 31, 2009, 2008 and 2007
(in thousands)
See Notes to Financial Statements.
S-4
AmREIT CASA LINDA, L.P.
STATEMENTS OF PARTNERS’ CAPITAL
For the years ended December 31, 2009, 2008 and 2007
(in thousands)
(1)
The allocation of net loss includes a curative allocation to increase the GP capital account by $17, $12 and $17 for the years ended December 31, 2009, 2008 and 2007, respectively, as the partnership agreement provides that no partner shall be required to fund a deficit balance in their capital account. The cumulative curative allocation since inception of the Partnership is $47.
See Notes to Financial Statements.
S-5
AmREIT CASA LINDA, L.P.
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2009, 2008 and 2007
(in thousands)
Supplemental schedule of non-cash transactions:
During the year ended December 31, 2009, $75,000 of accounts payable to our limited partners was reclassified to equity contributions from limited partners.
During the year ended December 31, 2009, $420,000 of notes payable to one of our limited partners was reclassified to equity contributions from limited partners.
During the year ended December 31, 2009, we financed $145,000 of improvements to real estate through notes payable-related party.
See Notes to Financial Statements.
S-6
AmREIT CASA LINDA, L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 2009, 2008 and 2007
1.
DESCRIPTION OF BUSINESS
AmREIT Casa Linda, L.P., a Texas limited partnership (the “Partnership”), was formed on December 8, 2006 to acquire Casa Linda, (the “Property”) a multi-tenant retail property located in Dallas, Texas with a combined gross leasable area of 324,569 square feet. During the year ended December 31, 2009, the property completed a substantial renovation that will allow it to maintain its historical character and prominence in the community, while updating the property’s features. This renovation was completed in April 2009 at a cost of $7.1 million. The General Partner of the Partnership is AmREIT Casa Linda GP, Inc. The General Partner maintains its principal place of business in Houston, Texas.
The limited partners of the Partnership are AmREIT Monthly Income & Growth Fund III, Ltd. (“MIG III”) and AmREIT Monthly Income & Growth Fund IV, L.P. (“MIG IV”). Distributions are split between the partners in accordance with each partner’s ownership percentage. We have contracted with AmREIT Realty Investment Corporation (“ARIC”) to provide property management and leasing services. ARIC is a wholly-owned subsidiary of AmREIT, a Maryland corporation that has elected to be taxed as a real estate investment trust, and is an affiliate of MIG III and MIG IV.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Our financial records are maintained on the accrual basis of accounting whereby revenues are recognized when earned and expenses are recorded when incurred. Effective July 1, 2009, the Financial Accounting Standards Board (“FASB”) established the Accounting Standards Codification (“ASC”) as the primary source of authoritative Generally Accepted Accounting Principles (“GAAP”) recognized by the FASB to be applied to nongovernmental entities. Although the establishment of ASC did not change current GAAP, it did change the way we refer to GAAP throughout this document to reflect the updated referencing convention.
REVENUE RECOGNITION
We lease space to tenants under agreements with varying terms. All of the leases are accounted for as operating leases and although certain leases of the properties provide for tenant occupancy during periods for which no rent is due and/or increases or decreases in the minimum lease payments over the terms of the leases, revenue is recognized on a straight-line basis over the terms of the individual leases. In most cases, revenue recognition under a lease begins when the lessee takes possession of or controls the physical use of the leased asset. Generally, this occurs on the lease commencement date. In all cases, we have determined that we are the owner of any tenant improvements that we fund pursuant to the lease terms. In cases where tenant improvements are made prior to lease commencement, the leased asset is considered to be finished space, and revenue recognition therefore begins when the improvements are substantially complete. Accrued rents are included in tenant receivables. Revenue from tenant reimbursements of taxes, maintenance expenses and insurance is recognized in the period the related expense is recorded. Additionally, certain of the lease agreements contain provisions that grant additional rents based on tenants’ sales volumes (contingent or percentage rent). Percentage rents are recognized when the tenants achieve the specified targets as defined in their lease agreements. During the years ended December 31, 2009, 2008 and 2007, we recognized percentage rents of $5,000, $35,000 and $26,000, respectively. We recognize lease termination fees in the period that the lease is terminated and collection of the fees is reasonably assured. Upon early lease termination we provide for losses related to unrecovered intangibles and other assets. During the years ended December 31, 2009, 2008 and 2007, we recognized no lease termination fees.
REAL ESTATE INVESTMENTS
Redevelopment - Land, buildings and improvements are recorded at cost. Expenditures related to the redevelopment of real estate are carried at cost which includes capitalized carrying charges and redevelopment costs. Carrying charges, primarily interest, real estate taxes and loan acquisition costs, and direct and indirect development costs related to buildings under construction, are capitalized to building improvements.
Acquired Properties and Acquired Lease Intangibles - We account for real estate acquisitions pursuant to ASC 805 Business Combinations. Accordingly, we allocate the purchase price of the acquired properties to land, building and improvements, identifiable intangible assets and acquired liabilities based on their respective fair values.
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Identifiable intangibles include amounts allocated to acquired above and below-market leases, the value of in-place leases and customer relationship value, if any. We determine fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends and specific market and economic conditions that may affect the property. Factors considered by management in our analysis of determining the as-if-vacant property value include an estimate of carrying costs during the expected lease-up periods considering market conditions and costs to execute similar leases. In estimating carrying costs, management includes real estate taxes, insurance and estimates of lost rentals at market rates during the expected lease-up periods, tenant demand and other economic conditions. Management also estimates costs to execute similar leases including leasing commissions, tenant improvements, legal and other related expenses. Intangibles related to above-market and in-place leases are recorded as intangible lease costs, and intangibles related to below-market leases are recorded as below-market leases. Amortization of above and below-market leases and in-place leases recorded as an adjustment to rental revenue or amortization expense, as appropriate, over the remaining terms of the underlying leases. Premiums or discounts on acquired above and below market debt are amortized to interest expense over the remaining term of such debt.
Depreciation - Depreciation is computed using the straight-line method over an estimated useful life of up to 39 years for buildings, up to 20 years for site improvements and over the term of lease for tenant improvements.
Impairment - We review the property for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets, including accrued rental income, may not be recoverable through operations. We determine whether an impairment in value occurred by comparing the estimated future cash flows (undiscounted and without interest charges), including the residual value of the property, with the carrying value of the individual property. If impairment is indicated, a loss will be recorded for the amount by which the carrying value of the asset exceeds its fair value. Both the estimated undiscounted cash flow analysis and fair value determination are based upon various factors which require complex and subjective judgments to be made by management. Such assumptions include projecting lease-up periods, holding periods, cap rates, rental rates, operating expenses, lease terms, tenant creditworthiness, tenant improvement allowances, terminal sales value and certain macroeconomic factors among other assumptions to be made for each property. We have not incurred any impairment losses since our inception.
ENVIRONMENTAL EXPOSURES
We are subject to numerous environmental laws and regulations as they apply to real estate pertaining to chemicals used by the dry cleaning industry, the existence of asbestos in older shopping centers, and underground petroleum storage tanks. We believe that the tenants who currently operate dry cleaning plants or gas stations do so in accordance with current laws and regulations. We believe that the ultimate disposition of currently known environmental matters will not have a material affect on our financial position, liquidity, or operations (see Note 8). However, we can give no assurance that existing environmental studies with respect to the shopping centers have revealed all potential environmental liabilities; that any previous owner, occupant or tenant did not create any material environmental condition not known to it; that the current environmental condition of the shopping center will not be affected by tenants and occupants, by the condition of nearby properties, or by unrelated third parties; or that changes in applicable environmental laws and regulations or their interpretation will not result in additional environmental liability to the Partnership.
RECEIVABLES AND ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS
Tenant Receivables - Included in tenant receivables are base rents, tenant reimbursements and receivables attributable to recording rents on a straight-line basis. An allowance for the uncollectible portion of accrued rents and accounts receivable is determined based upon customer credit-worthiness (including expected recovery of our claim with respect to any tenants in bankruptcy), historical bad debt levels, and current economic trends. Bad debt expenses and any related recoveries related to tenant receivables are included in property expense. As of December 31, 2009 and 2008, our allowance for uncollectible accounts related to our tenant receivables was $67,000 and $25,000, respectively.
DEFERRED COSTS
Deferred costs include loan acquisition costs and deferred leasing costs, net of amortization. Loan acquisition costs are incurred in obtaining financing and are amortized to interest expense over the term of the debt agreements.
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Deferred leasing costs consist of external commissions associated with leasing our properties and are amortized to depreciation and amortization expense over the lease term. Accumulated amortization related to loan acquisition costs as of December 31, 2009 and 2008 totaled $190,000 and $128,000, respectively. Accumulated amortization related to leasing costs as of December 31, 2009 and 2008 totaled $89,000 and $35,000, respectively.
INCOME TAXES
Federal - No provision for U.S. federal income taxes is included in the accompanying financial statements. As a partnership, we are not subject to federal income tax, and the federal tax effect of our activities is passed through to our partners.
State - In May 2006, the State of Texas adopted House Bill 3, which modified the state’s franchise tax structure, replacing the previous tax based on capital or earned surplus with one based on margin (often referred to as the “Texas Margin Tax”) effective with franchise tax reports filed on or after January 1, 2007. The Texas Margin Tax is computed by applying the applicable tax rate (1% for the Partnership) to the profit margin, which, generally, will be determined for us as total revenue less a 30% standard deduction. Although House Bill 3 states that the Texas Margin Tax is not an income tax, the Partnership believes that ASC 740 Income Taxes, applies to the Texas Margin Tax. The Texas Margin Tax accrued as of December 31, 2009 and 2008 totaled $31,000 and $33,000, respectively.
USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Our financial instruments consist primarily of cash and cash equivalents, tenant receivables, note payable, notes payable - related party, accounts payable and accrued liabilities, and accounts payable-related party. The carrying value of all but the notes payable are representative of their respective fair values due to the short-term nature of these instruments.
In determining the fair value of our debt instruments, we determine the appropriate Treasury Bill Rate based on the remaining time to maturity for each of the debt instruments. We then add the appropriate yield spread to the Treasury Bill Rate. The yield spread is a risk premium estimated by investors to account for credit risk involved in debt financing. The spread is typically estimated based on the property type and loan-to-value ratio of the debt instrument. The result is an estimate of the market interest rate a typical investor would expect to receive given the underlying subject asset (property type) and remaining time to maturity. Based on these estimates, the fair value of notes payable was $37.1 million and $38.8 million at December 31, 2009 and 2008, respectively.
NEWACCOUNTING STANDARDS
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) (“SFAS No. 167”), which amends the consolidation guidance applicable to variable interest entities. The amendments will significantly affect the overall consolidation analysis under FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities-an interpretation of ARB No. 51 and changes the way entities account for securitizations and special purpose entities as a result of the elimination of the Qualified Special Purpose Entity (“QSPE”) concept in SFAS No.166. SFAS No. 167 is effective as of the beginning of the first fiscal year that begins after November 15, 2009 and early adoption is prohibited. We believe the consolidation requirements of SFAS No. 167 will not have an impact on our financial statements as we do not have any investments that would be considered variable interest entities.
In June 2009, the FASB issued ASC 105, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, which became the single source of authoritative nongovernmental U.S. generally accepted accounting principles, superseding existing FASB, American Institute of Certified Public Accountants, EITF, and related accounting literature. ASC 105 reorganizes the thousands of GAAP pronouncements
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into roughly 90 accounting topics and displays them using a consistent structure. Also included is relevant SEC guidance organized using the same topical structure in separate sections. ASC 105 is effective for all quarterly and annual reporting periods ending after September 15, 2009. We adopted the provisions of ASC 105 in 2009. Such adoption only changed the way we refer to GAAP to reflect the updated referencing convention and did not have an impact on our financial statements.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, we consider all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consist of demand deposits at commercial banks.
INTEREST
Interest is charged to interest expense as it accrues. No interest has been capitalized since inception of the Partnership.
3.
OPERATING LEASES
Our operating leases generally range from one month to twelve years and generally include one or more five year renewal options. A summary of minimum future base rentals to be received, exclusive of any renewals, under non-cancelable operating leases in existence at December 31, 2009 is as follows:
Future minimum rental revenue excludes amounts that may be received from tenants for reimbursements of operating costs, real estate taxes and insurance. Expense reimbursements recognized as revenue totaled $1.1 million, $1.1 million and $1.3 million during the years ended December 31, 2009, 2008 and 2007, respectively.
4.
ACQUIRED LEASE INTANGIBLES
In accordance with ASC 805, Business Combinations, we have identified and recorded the value of acquired lease intangibles at the property acquisition date. Such intangibles include the value of acquired in-place leases and above and below-market leases. Acquired lease intangible assets (in-place leases and above-market leases) are amortized over the leases’ remaining terms, which range from one month to approximately fourteen years. The amortization of above-market leases is recorded as a reduction of rental income and the amortization of in-place leases is recorded as depreciation and amortization expense. The amortization expense related to in-place leases was approximately $428,000, $701,000 and $1.1 million during the years ended December 31, 2009, 2008 and 2007, respectively. The amortization of above-market leases, which was recorded as a reduction of rental income, was approximately $188,000, $165,000 and $173,000 during the years ended December 31, 2009, 2008 and 2007, respectively. Acquired lease intangible liabilities (below-market leases) are accreted over the leases’ remaining non-cancelable lease term plus any fixed rate renewal options, if applicable, which range from one month to approximately five years. Accretion of below-market leases was approximately $303,000, $527,000 and $653,000 during the years ended December 31, 2009, 2008 and 2007, respectively. Such accretion is recorded as an increase to rental income.
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Acquired in-place lease and above and below-market lease values and their respective accumulated amortization are as follows (in thousands):
The estimated aggregate amortization amounts from acquired lease intangibles for each of the next five years are as follows (in thousands):
5.
NOTES PAYABLE
Our outstanding debt at December 31, 2009 and 2008 consisted entirely of a $38.0 million fixed-rate mortgage loan, which requires monthly interest-only payments and matures in January 2014. Our mortgage loan is secured by certain real estate properties and may be prepaid, but is subject to a yield-maintenance premium or prepayment penalty. Our mortgage loan is fully guaranteed by our limited partners, MIG III and MIG IV.
As of December 31, 2009, the interest rate on our fixed-rate debt is 5.5%, and the remaining life is 4 years. Scheduled principal repayments on our note payable for the next 5 years are as follows (in thousands):
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6.
CONCENTRATIONS
As of December 31, 2009, Casa Linda consisted of 61 tenants; none of which comprised more than 10% of our total base rent. Following are the base rents generated by our top five tenants during the years ended December 31, 2009, 2008 and 2007 (in thousands):
7.
RELATED PARTY TRANSACTIONS
We have no employees or offices. We rely on our General Partner to manage our business and affairs. Our General Partner utilizes the services of AmREIT and its affiliates in performing its duties to us. These services primarily include the supervision of the management, leasing of the Property, construction management related to the redevelopment of the Property and brokerage commissions related to disposition of the property. As a result, we are dependent upon AmREIT and its affiliates. In the event that these companies are unable to provide us with the respective services, we would be required to find alternative providers of these services. During the years ended December 31, 2009, 2008 and 2007, we incurred property management and leasing fees of $443,000, $330,000 and $207,000, respectively. Our managing member and its affiliates receive fees primarily for providing services to us in the areas of property management and leasing. We have incurred $382,000 in construction management fees and $6.2 million in construction fees since the redevelopment began in April 2008. These fees have been capitalized to building.
8.
COMMITMENTS AND CONTINGENCIES
Litigation - In the ordinary course of business, we may become subject to litigation or claims. There are no material pending legal proceedings known to be contemplated against us.
Environmental matters - In connection with the ownership and operation of real estate, we may be potentially liable for costs and damages related to environmental matters. We have not been notified by any governmental authority of any non-compliance, liability or other claim.
In conjunction with our acquisition of Casa Linda in December 2006, we identified an environmental exposure caused by a dry cleaning business that operated on the property prior to our ownership. We estimate that our obligation related to remediation of this exposure will be approximately $800,000. Such amount has been placed in escrow and represents the deductible amount under an environmental insurance policy that we placed on the property upon acquisition. We have recorded an asset retirement obligation for $800,000 and capitalized those estimated costs to Land in our accompanying balance sheet. We believe that this matter will not have an adverse effect on our financial position or results of operations, and we are aware of no other environmental exposures.
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SUBSEQUENT EVENTS
In May 2009, the FASB issued ASC 855, Subsequent Events, which we adopted in the second quarter of 2009. We have evaluated all events or transactions through March 10, 2010. During this period, we did not have any material subsequent events that impacted our consolidated financial statements.
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