UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K/A
(Amendment No. 2)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2008
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
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Commission file number 1-8122
GRUBB & ELLIS
COMPANY
(Exact name of registrant as
specified in its charter)
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Delaware
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94-1424307
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(State or other jurisdiction of
incorporation or organization)
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(IRS Employer
Identification No.)
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1551
North Tustin Avenue, Suite 300, Santa Ana, California
92705
(Address of principal executive offices) (Zip Code)
(714) 667-8252
(Registrant’s telephone number, including area
code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class
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Name of each exchange on which registered
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Common Stock
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act: None
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Indicate
by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
Yes
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No
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Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes
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No
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Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes
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No
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein and will not be contained, to the best
of registrant’s knowledge, in its definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
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Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files).
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Yes
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No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting company)
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Indicate
by check mark whether the registrant is a shell company (as
defined in
Rule 12b-2
of the Exchange
Act). Yes
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No
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The aggregate market value of voting common stock held by
non-affiliates of the registrant as of June 30, 2008 was
approximately $138,632,960 based on the last sales price on
June 30, 2008 on the New York Stock Exchange of $3.85 per
share for the registrant’s common stock.
The number of shares outstanding of the registrant’s common
stock as of May 15, 2009 was 65,265,828 shares.
EXPLANATORY
NOTE
This Amendment No. 2 to our Annual Report on
Form 10-K
for the year ended December 31, 2008 (the “Second
Amended
10-K”),
amends our Annual Report on
Form 10-K
for the year ended December 31, 2008, filed with the
Securities and Exchange Commission on May 27, 2009 (the
“Original
10-K”),
as amended on June 1, 2009 (the Original
10-K
as
amended, (the “Amended
10-K”).
This Second Amended
10-K
amends
the Amended
10-K
solely
for the purpose of (i) including the opinion of PKF, an
independent registered public accounting firm with respect to
their audit of Grubb & Ellis Securities, Inc., a
wholly-owned subsidiary of the Company and (ii) clarifying
certain disclosures with respect to our previously disclosed
material weaknesses in internal controls over financial
reporting, management’s remediation initiatives with
respect to such material weaknesses, and changes in internal
control over financial reporting.
This Second Amended
10-K
does
not reflect events occurring after the filing of the Original
10-K
(including, without limitation, the consummation of our
recapitalization plan and our private placement of 12%
Cumulative Participating Perpetual Convertible Preferred Stock,
as disclosed on our Current Reports on
Form 8-K
filed with the Securities and Exchange Commission on
October 26, 2009 and November 12, 2009) and does
not modify or update the disclosure in the Original
10-K,
other
than the amendments noted above, the filing of consents of our
independent registered public accounting firms, and the filing
of certifications of our principal executive officer and
principal financial officer pursuant to
Rule 13a-14
of the Securities Exchange Act of 1934 and Section 906 of
the Sarbanes-Oxley Act of 2002.
GRUBB &
ELLIS COMPANY
FORM 10-K/A
(Amendment No. 2)
TABLE OF
CONTENTS
i
GRUBB &
ELLIS COMPANY
PART I
The filing of this Annual Report on
Form 10-K
(“Report”) was delayed due to the need to restate
certain of the Company’s financial statements which is
discussed below in this Item 1 under the sub-headings
“Restatement of Certain Financial Information and Special
Investigation.”
General
Grubb & Ellis Company (“the Company” or
“Grubb & Ellis”), a Delaware corporation
founded 50 years ago in Northern California, is one of the
country’s largest and most respected commercial real estate
services and investment management firms. On December 7,
2007, the Company effected a stock merger (the
“Merger”) with NNN Realty Advisors, Inc.
(“NNN”), a real estate asset management company and
nationally recognized sponsor of public non-traded real estate
investment trusts (“REITs”), as well as a sponsor of
tax deferred
tenant-in-common
(“TIC”) 1031 property exchanges and other investment
programs. Upon the closing of the Merger, a change of control
occurred. The former stockholders of NNN acquired approximately
60% of the Company’s issued and outstanding common stock.
With 127 owned and affiliate offices worldwide (54 owned and
approximately 73 affiliates) and more than 6,000 professionals,
including a brokerage sales force of more than 1,800 brokers,
the Company offers property owners, corporate occupants and
program investors comprehensive integrated real estate
solutions, including transactions, management, consulting and
investment advisory services supported by proprietary market
research and extensive local market expertise.
In certain instances throughout this Report phrases such as
“legacy Grubb & Ellis” or similar
descriptions are used to reference, when appropriate,
Grubb & Ellis prior to the Merger. Similarly, in
certain instances throughout this Report the term NNN,
“legacy NNN” or similar phrases are used to reference,
when appropriate, NNN Realty Advisors, Inc. prior to the Merger.
Business
Segment Reporting
The Company currently reports its revenue by three operating
business segments in accordance with the provisions of Statement
of Financial Accounting Standards (“SFAS”)
No. 131,
Disclosures about Segments of an Enterprise and
Related Information
: Investment Management, which includes
providing acquisition, financing and disposition services with
respect to its programs, asset management services related to
its programs, and dealer-manager services by its securities
broker-dealer, which facilitates capital raising transactions
for its TIC, REIT and other investment programs; Transaction
Services, which comprises its real estate brokerage operations;
and Management Services, which includes property management,
corporate facilities management, project management, client
accounting, business services and engineering services for
unrelated third parties and the properties owned by the programs
it sponsors. Additional information on these business segments
can be found in Note 18 of Notes to Consolidated Financial
Statements in Item 8 of this Report. Subsequent to the
Merger, the legacy NNN reportable segments were realigned into a
single operating and reportable segment called Investment
Management. This realignment had no impact on the Company’s
consolidated balance sheet, results of operations or cash flows.
For the year ended December 31, 2008, the Company had
revenues of approximately $611.8 million and loss from
continuing operations of approximately $279.5 million.
Restatement
of Certain Financial Information and Special
Investigation
On March 16, 2009, management and the Audit Committee of
the Board of Directors of the Company concluded that the
Company’s previously issued audited financial statements
for each of the fiscal years ended December 31, 2006 and
2007, the unaudited interim financial statements for each of the
quarters ended March 31, June 30 and September 30,
2008 and selected financial data derived from the Company’s
previously issued audited financial statements for the fiscal
years ended December 31, 2005 and 2004 included in the
Company’s securities filings thereafter should be restated.
The Audit Committee reached this conclusion after consulting
with and upon the recommendation of management. The Audit
Committee and management have discussed this conclusion with
Ernst & Young LLP (“EY”), the Company’s
independent registered public accounting firm, and management
has discussed this conclusion with Deloitte & Touche
LLP (“D&T”), the independent registered public
accounting firm for NNN prior to the Merger.
As a consequence, (i) the Company’s consolidated
balance sheets as of December 31, 2006 and
December 31, 2007, and for each of the quarters ended
March 31, June 30, and September 30, 2008;
(ii) the Company’s related consolidated statements of
operations, stockholders’ equity and cash flows for each of
the fiscal years ended December 31, 2004, December 31,
2005, December 31, 2006 and December 31, 2007 and for
each of the quarters ended March 31, June 30 and
September 30, 2008 and 2007, and the footnotes thereto;
(iii) the related report of EY, with respect to the fiscal
year ended December 31, 2007; and (iv) the related
reports of D&T, with respect to the fiscal years ended
December 31, 2004, December 31, 2005 and
December 31, 2006, should no longer be relied upon. The
restatement of the Company’s financial statements is based
upon a review of the accounting treatment of certain
transactions entered into by NNN with respect to certain
tenant-in-common
investment programs (“TIC Programs”) sponsored by NNN
prior to the Merger. During this review, the Company discovered
that NNN had recognized fee revenue in 2004, 2005, 2006 and 2007
and the Company had recognized fee revenue in the three interim
periods in 2008 in advance of the period in which such fee
revenue should have been recognized.
After considering management’s recommendation and
consulting with EY, the Audit Committee has determined that NNN
incorrectly recognized fee revenue under Statement of Financial
Accounting Standards Statement No. 66,
Accounting for
Sales of Real Estate
, and Statement of Position
92-1,
Accounting for Real Estate Syndication Income
, in 2005,
2006 and 2007 and the three interim periods in 2008 in
connection with certain TIC Programs in which NNN had various
forms of continuing involvement after the close of the sale of
the investments in the TIC Programs to third-parties. As a
result of the recognition by NNN of the applicable fee revenue
in the wrong accounting period, the Company reduced retained
earnings as of January 1, 2006 by approximately
$8.7 million; increased revenues in 2006 by approximately
$518,000; and increased revenues in 2007 by approximately
$251,000.
The Audit Committee also has determined, after considering
management’s recommendation and consulting with EY, that
because NNN had various forms of continuing involvement after
the close of the sale of the investments in the TIC Programs to
third-parties, certain entities involved in the TIC Programs
were variable interest entities in which the Company was the
primary beneficiary and therefore are required to be
consolidated in accordance with FIN 46(R),
Consolidation
of Variable Interest Entities an Interpretation of ARB 51
.
The restatement also will reflect the consolidation of these
entities.
The determination to restate the Company’s financial
statements was prompted by the Audit Committee being made aware
in mid-December 2008 of the existence of a letter agreement,
wherein a former executive of NNN caused NNN to agree to provide
certain investors with a right to exchange their investment in
certain TIC Programs for an investment in a different TIC
Program (the “Exchange Letter”). As a consequence, the
Board of Directors formed a special committee (the “Special
Committee”) to investigate the facts and circumstances
surrounding the Exchange Letter and to determine whether there
were any other similar agreements that might impact the
Company’s previously issued financial statements. The
Special Committee retained independent outside counsel, Manatt
Phelps & Phillips, LLP (“Manatt”), to assist
it with this investigation. In connection therewith, the Special
Committee asked management to review the accounting treatment
regarding the Exchange Letter and any other letter agreements
that might be identified in the course of the special
investigation. In the course of the special investigation, the
Audit Committee and management became aware of additional letter
agreements authorized by former executives of NNN (collectively,
the “Additional Letters”), some providing for a right
of exchange similar to that contained in the Exchange Letter and
others in which NNN committed to provide certain investors in
certain TIC Programs a specified rate of return. Manatt has
concluded its investigation and advised the Board of Directors
that it did not uncover in the
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course of its investigation any other letter agreements similar
to the Exchange Letter and the Additional Letters. In connection
with the restatement of certain of the Company’s financial
statements as described herein and in Item 8, Note 3
to the consolidated financial statements, management of the
Company re-evaluated the effectiveness of its disclosure
controls and procedures both prior and subsequent to the Merger.
As a result of this re-evaluation, management determined that
there was a control deficiency that constituted a material
weakness in the Company’s internal controls prior to the
Merger that was not adequately remediated as of
December 31, 2008. Accordingly, additional enhancements to
the control environment have been implemented in 2009 to ensure
that controls related to these material weaknesses are
strengthened and will operate effectively.
Transaction
Services
Grubb & Ellis has a track record of over 50 years
of proven performance in the commercial real estate industry and
is one of the largest real estate brokerage firms in the
country, offering clients the experience of thousands of
successful transactions and the expertise that comes from a
nationwide platform. By focusing on the overall business
objectives of its clients, Grubb & Ellis utilizes its
research capabilities, extensive properties database and expert
negotiation skills to create, buy, sell and lease opportunities
for both users and owners of commercial real estate. With a
comprehensive approach to transactions, Grubb & Ellis
offers a full suite of services to clients, from site selection
and sale negotiations to needs analysis, occupancy projections,
prospect qualification, pricing recommendations, long-term value
consultation, tenant representation and consulting services. As
one of the most active and largest commercial real estate
brokerages in the United States, Grubb & Ellis’
traditional real estate services provide added value to the
Company’s real estate investment programs by offering a
comprehensive market view and local area expertise. This
powerful business combination allows the Company to identify
attractive investment properties and quickly acquire them for
the benefit of its program investors. In addition, select
brokers have the opportunity to cross-sell product through the
Company’s Investment Management platform.
The Company actively engages its brokerage force in the
execution of its marketing strategy. Regional and metro-area
managing directors, who are responsible for operations in each
major market, facilitate the development of brokers. Through the
Company’s specialty practice groups, known as
“Specialty Councils,” key personnel share information
regarding local, regional and national industry trends and
participate in national marketing activities, including trade
shows and seminars. This ongoing dialogue among brokers serves
to increase their level of expertise as well as their network of
relationships, and is supplemented by other more formal
education, including recently expanded training programs
offering sales and motivational training and cross-functional
networking and business development opportunities.
In some local markets where the Company does not have owned
offices, it has affiliation agreements with independent real
estate service providers that conduct business under the
Grubb & Ellis brand. The Company’s affiliation
agreements provide for exclusive mutual referrals in their
respective markets, generating referral fees. The Company’s
affiliation agreements are generally multi-year contracts.
Through its affiliate offices, the Company has access to more
than 1,000 brokers with local market research capabilities.
The Company’s Corporate Services Group provides
comprehensive coordination of all required real estate related
services to help realize the needs of clients’ real estate
portfolios and to maximize their business objectives. These
services include consulting services, lease administration,
strategic planning, project management, account management and
international services. As of December 31, 2008,
Grubb & Ellis had in excess of 1,800 brokers at its
owned and affiliate offices, of which 814 brokers were at its
owned offices, down from 927 at December 31, 2007.
Approximately 67% and 33% of the Company’s Transaction
Services revenue were from leasing and sale transactions,
respectively, during 2008.
Management
Services
Grubb & Ellis delivers integrated property, facility,
asset, construction, business and engineering management
services to a host of corporate and institutional clients. The
Company offers customized programs that focus on cost-efficient
operations and tenant retention.
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The Company manages a comprehensive range of properties
including headquarters, facilities and class A office space
for major corporations, including many Fortune
500 companies. Grubb & Ellis’ skills extend
to management of industrial, manufacturing and warehousing
facilities as well as data centers, retail outlets and
multi-family properties for real estate users and investors.
Additionally, Grubb & Ellis provides consulting
services, including site selection, feasibility studies, exit
strategies, market forecasts, appraisals, strategic planning and
research services.
The Company is committed to providing unparalleled client
service. In addition to expanding the scope of products and
services offered, it is also focused on ensuring that it can
support client relationships with
best-in-class
service. During 2008, the Company continued to expand the number
of client service relationship managers, which provide a single
point of contact to corporate clients with multi-service needs.
Grubb & Ellis Management Services, the Company’s
Management Services subsidiary, was recognized as Microsoft
Corporation’s top vendor of 2007 from among more than
15,000 vendors. In addition, in 2008 Grubb & Ellis
secured significant new management services contracts from Kraft
Foods, Sharp Healthcare and Red Mountain West. The Company also
secured significant contract renewals with Ingersoll Rand and
Qwest Communications. At December 31, 2008,
Grubb & Ellis managed approximately 231.0 million
square feet, of which 184.1 million were from third parties
and 46.9 million related to its investment management
programs.
Investment
Management
The Company and its subsidiaries are leading sponsors of real
estate investment programs that provide individuals and
institutions the opportunity to invest in a broad range of real
estate investment vehicles, including tax-deferred 1031 TIC
exchanges, public non-traded REITs and real estate investment
funds. During the year ended, more than $984.3 million in
investor equity was raised for these investment programs; the
Company has more than $6.8 billion of assets under
management related to the various programs that it sponsors. The
Company has completed transaction acquisition and disposition
volume totaling approximately $11.9 billion on behalf of
more than 55,000 program investors since 1998.
Investment management products are distributed through the
Company’s broker-dealer subsidiary, Grubb & Ellis
Securities Inc. (“GBE Securities”) (formerly NNN
Capital Corp.). GBE Securities is registered with the Securities
and Exchange Commission (the “SEC”), the Financial
Industry Regulatory Authority (“FINRA”) and all
50 states. GBE Securities has agreements with an extensive
network of broker dealers with approximately 219 selling
relationships providing access to over 38,000 licensed
registered representatives as of December 31, 2008. Part of
the Company’s strategy is to expand its network of
broker-dealers to increase the amount of equity that it raises
in its various investment programs.
Grubb & Ellis Realty Investors, LLC (“GERI”)
(formerly Triple Net Properties, LLC), a subsidiary of the
Company, is a recognized market leader in the securitized TIC
industry as measured by total equity raised according to
published reports of OMNI Research and Consulting LLC
(“OMNI”). This product strategy allows investors to
fractionally own large, institutional-quality real estate assets
with the added advantage of qualifying for deferred tax benefits
on real estate capital gains. The Company currently sponsors
more than 150 TIC Programs and has taken more than 50 programs
full cycle (from acquisition through disposition). The Company
raised $176.9 million of TIC equity in 2008.
Public non-traded REITs are registered with the SEC but are not
listed on any of the securities exchanges like a traded REIT.
According to the published Stanger Report, Winter 2009, by
Robert A. Stanger and Co., an independent financial advisor,
approximately $10.3 billion was raised in this sector in
2008. The Company sponsors two demographically focused programs
that are actively raising capital, Grubb & Ellis
Healthcare REIT, Inc. and Grubb & Ellis Apartment
REIT, Inc. which raised $592.7 million in combined capital
in 2008.
In February 2008, the Company launched its Private Client
Management program for high net worth investors. This platform
provides comprehensive real estate investment and advisory
services to high net worth investors, offering qualified
individuals, entities and corporations, the opportunity to
benefit from the potential advantages of real estate investment
through a passive, sole-ownership vehicle that delivers
discretion to the investor. Private Client Management is open to
all qualified investors seeking to build or expand their
4
commercial real estate portfolio, whether their investment
objectives are tax-deferred 1031 exchange driven or not. The
Company raised more than $193 million of equity through
Private Client Management in 2008.
In 2008, the Company started a family of U.S. and global
open end mutual funds that focus on real estate securities and
manage private investment funds exclusively for qualified
investors through its 51% ownership in Grubb & Ellis
Alesco Global Advisors, LLC (“Alesco”). The Company,
through its subsidiary, Alesco, serves as the general partner
and investment advisor to six hedge fund limited partnerships,
five of which are required to be consolidated: Grubb &
Ellis AGA Realty Income Fund, LP, AGA Strategic Realty Fund,
L.P., AGA Global Realty Fund LP and AGA Realty Income
Partners LP, and one mutual fund which is required to be
consolidated, Grubb & Ellis Realty Income Fund. Alesco
currently has $2.3 million of investment funds under
management.
Through its multi-family platform, the Company provides
investment management services for TIC and REIT apartment
products and currently manages in excess of 13,000 apartment
units through Grubb & Ellis Residential Management,
Inc., the Company’s multi-family management services
subsidiary.
Our
Opportunity
The Company seamlessly integrates its traditional transaction
and management services with the innovative investment programs
of GERI. All functions of the new Company work together to
provide comprehensive service to clients and program investors.
Teamed with a forward-looking investment strategy that seeks to
capitalize on the nation’s changing demographics, the
Company’s various service offerings support its investment
programs to provide clients and program investors with a full
array of solutions for multiple needs. The proprietary research
and demographic investing strategy of the Company establishes a
foundation upon which its investment programs are based. The
real estate brokerage network of the Company offers keen insight
into the available pool of assets nationwide, in order to
maximize acquisition opportunities for program investors. The
professional property and asset management services of the
Company drive value to each of the investment programs from
acquisition through ultimate disposition. The Company’s
management believes that it has the vision, discipline and
strategy to deliver innovative solutions across the full
spectrum of commercial real estate, whether it is a need for
space, strategic planning or a real estate investment product
that meets specific return criteria.
The Company re-branded its investment programs as
Grubb & Ellis subsequent to the Merger to capitalize
on the strength of the brand name. Its TIC Programs are
sponsored by GERI, its REIT investment programs are now
Grubb & Ellis Healthcare REIT, Inc. and
Grubb & Ellis Apartment REIT, Inc. and its FINRA
registered broker-dealer is now Grubb & Ellis
Securities, Inc. As part of the Company’s strategic plan,
management has identified more than $20.0 million of
expense synergies, on an annualized basis, a portion of which
has been invested in enhancing the management team with the
addition of several executives in key operational and management
roles.
Secured
Credit Facility
On August 5, 2008, the Company amended (the “First
Letter Amendment) its $75.0 million senior secured
revolving credit facility revising certain terms of that certain
Second Amended and Restated Credit Agreement dated as of
December 7, 2007 (the “Credit Facility” or
“Line of Credit”) by and among the Company, the
guarantors named therein, the financial institutions identified
therein as lender parties, Deutsche Bank Securities Inc., as
sole book-running manager and sole lead arranger and Deutsche
Bank Trust Company Americas, as the initial swing line
bank, the initial issuer of Letters of Credit (as defined
therein) and administrative agent for the lender parties named
therein.
The First Letter Amendment, among other things, provided the
Company with an extension from September 30, 2008 to
March 31, 2009 to dispose of the three real estate assets
that the Company had previously acquired on behalf of
Grubb & Ellis Realty Advisors, Inc.
(“GERA”). Additionally, the First Letter Amendment
also, among other things, modified select debt covenants in
order to provide greater flexibility to facilitate the
Company’s TIC Programs. The modifications made to the debt
covenants permit the Company and its Restricted Subsidiaries (as
defined in the Credit Facility) to incur certain contingent
obligations with
5
respect to any guarantee of primary obligations of certain
tenant-in-common
syndications effected by the Company or its Restricted
Subsidiaries that comply with requirements set forth in the
Credit Facility.
On November 4, 2008, the Company further amended (the
“Second Letter Amendment”) its Credit Facility as of
September 30, 2008. The Second Letter Amendment, among
other things, a) reduced the amount available under the
Credit Facility from $75,000,000 to $50,000,000 by providing
that no advances or letters of credit would be made available to
the Company after September 30, 2008 until such time as
borrowings are reduced to less than $50,000,000;
b) provided that 100% of any net cash proceeds from the
sale of certain real estate assets that must be sold by the
Company would permanently reduce the Revolving Credit
Commitments (as defined in the Credit Facility), provided that
the Revolving Credit Commitments shall not be reduced to less
than $50,000,000 by reason of the operation of such asset sales;
and c) modified the interest rate incurred on borrowings by
increasing the applicable margins by 100 basis points and
by providing for an interest rate floor for any prime rate
related borrowings.
Additionally, the Second Letter Amendment, among other things,
reduced the limit on guarantees of primary obligations from
$125,000,000 to $50,000,000, modified select financial covenants
to reflect the impact of the current economic environment on the
Company’s financial performance, amended certain
restrictions on payments by deleting any dividend/share
repurchase limitations and modified the reporting requirements
of the Company with respect to real property owned or held.
As of September 30, 2008, the Company was not in compliance
with certain of its financial covenants related to earnings
before taxes, interest, depreciation or amortization, or EBITDA.
As a result, part of the Second Letter Amendment included a
provision to modify selected covenants. The Debt/EBITDA Ratio
(as defined in the Credit Facility) for the quarters ending
September 30, 2008 and December 31, 2008 were amended
from 3.75:1.00 to 5.50:1.00, while the Debt/EBITDA Ratio for the
quarters ending March 31, 2009 and thereafter remain at
3.50:1.00. The Interest Coverage Ratio (as defined in the Credit
Facility) for the quarters ending September 30, 2008,
December 31, 2008 and March 31, 2009 were amended from
3.50:1.00 to 3.25:1.00, while the Interest Coverage Ratio for
the quarters ended June 30, 2009 and September 30,
2009 remained unchanged at 3.50:1.00 and for the quarters ended
December 31, 2009 and thereafter remained unchanged at
4.00:1.00. The Recourse Debt/Core EBITDA Ratio (as defined in
the Credit Facility) for the quarters ending September 30,
2008 and December 31, 2008 were amended from 2.25:1.00 to
4.25:1.00, while the Recourse Debt/Core EBITDA Ratio for the
quarters thereafter remained unchanged at 2.25:1.00. The Core
EBITDA (as defined in the Credit Facility) to be maintained by
the Company at all times was reduced from $60.0 million to
$30.0 million and the Minimum Liquidity to be maintained by
the Company at all times was reduced from $25.0 million to
$15.0 million. The Company was not in compliance with
certain debt covenants as of December 31, 2008, all of
which were effectively cured as of such date by the entering
into the Third Amendment to the Credit Facility, as described
below. As a consequence of the forgoing, and certain provisions
of the Third Amendment to the Credit Facility, the
$63.0 million outstanding under the Line of Credit has been
classified as a current liability as of December 31, 2008.
Revised
Credit Facility
On May 20, 2009, the Company further amended its Credit
Facility by entering into a Third Amended and Restated Credit
Agreement dated as of May 18, 2009 (the “Third
Amendment”). The Third Amendment, among other things,
bifurcates the existing credit facility into two revolving
credit facilities, (i) a $38,000,000 Revolving Credit A
Facility (the “Revolving Credit A Facility” or
“Revolving A Credit Advances”) which is deemed fully
funded as of the date of the Third Amendment and (ii) a
$29,289,245 Revolving Credit B Facility (the “Revolving
Credit B Facility”), comprised of revolving credit advances
in the aggregate of $25,000,000 which are deemed fully funded as
of the date of the Third Amendment and letters of credit
advances in the aggregate amount of $4,289,245 which are issued
and outstanding as of the date of the Third Amendment. The Third
Amendment requires the Company to draw down $4,289,245 under the
Revolving Credit B Facility on the date of the Third Amendment
and deposit such funds in a cash collateral account to cash
collateralize outstanding letters of credit under the Credit
Facility and eliminates the swingline features of the Credit
Facility and the Company’s ability to cause the lenders to
issue any additional letters of credit. In addition, the Third
Amendment also changes the termination date of the Credit
Facility from December 7,
6
2010 to March 31, 2010, subject to extension or early
termination as described below, and modifies the interest rate
incurred on borrowings by initially increasing the applicable
margin by 450 basis points (or to 7.00% on prime rate loans
and 8.00% on LIBOR based loans). The Third Amendment also
eliminated specific financial covenants, and in its place, the
Company is required to comply with an approved budget, that has
been agreed to by the Company and the lenders, subject to agreed
upon variances (“the Approved Budget”). The Company is
also required under the Third Amendment, to effect a
recapitalization plan (the “Recapitalization Plan”),
on or before September 30, 2009 and in connection therewith
to effect a prepayment of at least seventy two (72%) percent of
the Revolving Credit A Advances (the “Partial
Prepayment”). In the event the Company fails to effect the
Recapitalization Plan and in connection therewith to effect a
Partial Prepayment, the (i) lenders will have the right
commencing on October 1, 2009, to exercise warrants, for
nominal consideration (the “Warrants”), to purchase
common stock of the Company equal to 15% of the common stock of
the Company on a fully diluted basis as of such date, subject to
adjustment, (ii) the applicable margin automatically
increases to 11% on prime rate loans and increases to 12% on
LIBOR based loans, (iii) the Company shall be required to
amortize an aggregate of $10 million of the Revolving
Credit A Facility in three (3) equal installments on the
first business day of each of the last three (3) months of
2009, (iv) the Company is obligated to submit a revised
budget by October 1, 2009, (v) the Credit Facility
will terminate on January 15, 2010, and (vi) no
further advances may be drawn under the Credit Facility.
In the event that Company effects the Recapitalization Plan and
in connection therewith effects a Partial Prepayment on or prior
to September 30, 2009, the Warrants automatically will
expire and not become exercisable, the applicable margin will
automatically be reduced to 3% on prime rate loans and 4% on
LIBOR based loans and the Company shall have the right, subject
to the requisite approval of the lenders, to seek an extension
of the Credit Facility to January 5, 2011, provided the
Company also pays a fee of .25% of the then outstanding
commitments under the Credit Facility.
As a result of the Third Amendment the Company is required to
prepay outstanding Revolving Credit A Advances (and to the
extent the Revolving Credit A Facility shall be reduced to zero,
prepay outstanding Revolving Credit B Advances) in an amount
equal to 100% (or, after the Revolving Credit A Advances are
reduced by at least the Partial Prepayment amount, in an amount
equal to 50%) of Net Cash Proceeds (as defined in the Credit
Agreement) from:
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conversions of Investments (as defined in the Credit Agreement),
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the refund of any taxes or the sale of equity interests by the
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the issuance of debt securities, or
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any other transaction or event occurring outside the ordinary
course of business of the Company or its subsidiaries;
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provided, however
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received from the sale of the certain real property assets shall
be used to prepay outstanding Revolving Credit B Advances and to
the extent Revolving Credit B Advances shall be reduced to zero,
to prepay outstanding Revolving Credit A Advances, (b) the
Company shall prepay outstanding Revolving Credit B Advances in
an amount equal to 100% of the Net Cash Proceeds from the sale
of the Danbury Corporate Center in Danbury Connecticut (the
“Danbury Property”) unless the Company is then not in
compliance with the Recapitalization Plan in which event
Revolving Credit A Advances shall be prepaid first and
(c) the Company’s 2008 tax refund was used to prepay
outstanding Revolving Credit B Advances upon the closing of the
Third Amendment.
The Third Amendment requires the Company to (a) sell the
Danbury Property by June 1, 2009, unless such date is
extended with the applicable approval of the lenders and
(b) use its commercially reasonable best efforts to sell
four other commercial properties, including the two other GERA
Properties (as defined below), by September 30, 2009.
7
Certain
Real Estate Held for Sale
During the first half of 2007, the Company acquired three
commercial properties — the Danbury Property in
Danbury, Connecticut, Abrams Center in Dallas, Texas and 6400
Shafer Court in Rosemont, Illinois — for an aggregate
contract price of $122.2 million, along with acquisition
costs of approximately $1.3 million, and assumed
obligations of approximately $542,000. The Company acquired the
three properties pursuant to its warehousing strategy to
accumulate these assets with the intention to hold them for
future sale to GERA, the Company’s affiliated publicly
traded special purpose acquisition company formed by the Company
in September 2005. The Company funded its equity position in
these acquisitions primarily with borrowings from its Credit
Facility.
Simultaneously with the acquisition of the third property in
June 2007, the Company closed two non-recourse mortgage loan
financings with Wachovia Bank, National Association in an
aggregate amount of $120.5 million. The proceeds of the
mortgage loans were used to finance the purchase of this third
property, to fund certain required reserves for all three
properties, to pay the lender’s fees and costs and to repay
certain amounts borrowed by the Company through its Credit
Facility with respect to the first two properties purchased.
As a result of GERA failing to obtain the requisite consents of
its stockholders in February 2008 to approve the acquisition of
the three commercial office properties from the Company, GERA
was unable to effect a business combination within the
proscribed deadline of March 3, 2008 in accordance with its
charter and was required to liquidate. Consequently, pursuant to
a proxy statement filed by GERA with the SEC on March 24,
2008, at a special meeting of GERA’s stockholders held on
April 14, 2008, the stockholders approved the dissolution
and plan of liquidation of GERA. In the first quarter of 2008
the Company wrote-off its investment in GERA of approximately
$5.8 million, including its stock and warrant purchases,
operating advances and third party costs. The Company also paid
third-party legal, accounting, printing and other costs (other
than monies paid to stockholders of GERA on liquidation)
associated with the dissolution and liquidation of GERA. In
addition, the various exclusive service agreements that the
Company had previously entered into with GERA for transaction
services, property and facilities management, and project
management, were no longer of any force or effect.
As of September 30, 2008, the Company initiated a plan to
sell five properties it classified as real estate held for
investment in its financial statements as of September 30,
2008. These five properties are comprised of the three
commercial properties that were initially intended to be
transferred to GERA as discussed above (the “GERA
Properties”) and two other properties that the Company
previously acquired with the intention of transferring to a
strategic office fund that ultimately was never launched. As of
December 31, 2008, the Company had a covenant within its
Credit Facility that required the sale of the GERA Properties
before March 31, 2009. The downturn in the global capital
markets significantly lessened the probability that the Company
would be able to achieve relief from this covenant through
amendment or other financial resolutions by March 31, 2009.
Pursuant to SFAS No. 144,
Accounting for the
Impairment or Disposal of Long-Lived Assets,
the Company
assessed the value of the assets. In addition, the Company
reviewed the valuation of its other owned properties and real
estate investments. This valuation review resulted in the
Company recognizing an impairment charge of approximately
$90.4 million against the carrying value of the properties
and real estate investments during the year ended
December 31, 2008.
On October 31, 2008, the Company entered into that certain
Agreement for the Purchase and Sale of Real Property and Escrow
Instructions to effect the sale of the Danbury Property located
at 39 Old Ridgebury Road, Danbury, Connecticut, to an
unaffiliated entity for a purchase price of $76 million.
This agreement was amended and restated in its entirety by that
certain Danbury Merger Agreement dated as of January 23,
2009, as amended by the First Amendment to Danbury Merger
Agreement dated as of January 23, 2009 (the “First
Danbury Amendment”), which reduced the purchase price to
$73.5 million. In accordance with the terms of the Danbury
Merger Agreement, as amended by the First Danbury Amendment, the
Company received one half of the buyer’s deposits in an
amount of $3.125 million from the buyer upon the execution
of the Danbury Merger Agreement, which released deposit remains
subject to the terms of the Danbury Merger Agreement and the
remaining $3.125 million of deposits continued to be held
in escrow pending the closing. On May 19,
8
2009, the Company and the buyer entered into the Second
Amendment to the Danbury Merger Agreement (the “Second
Danbury Amendment”) pursuant to which the remaining
$3.125 million of deposits held in escrow were released to
the Company (and remain subject to the terms of the Danbury
Merger Agreement, as amended) and the purchase price was reduced
to $72.4 million. In accordance with the Second Danbury
Amendment, the closing of the sale of the property, is expected
to occur on or before June 1, 2009.
The Third Amendment to the Credit Facility requires the Company
to (a) sell the Danbury Property by June 1, 2009,
unless such date is extended with the applicable approval of the
lenders and (b) use its best efforts to sell the four other
commercial properties, including the two other GERA Properties,
by September 30, 2009.
Industry
and Competition
The U.S. commercial real estate services industry is large
and highly fragmented, with thousands of companies providing
asset management, investment management and brokerage services.
In recent years the industry has experienced substantial
consolidation, a trend that is expected to continue.
The top 25 brokerage companies collectively completed nearly
$1.2 trillion in investment sales and leasing transactions
globally in 2007, according to the latest available survey
published by National Real Estate Investor, which is the most
recent available survey. The Company ranked 13th in this
survey, including transactions in its affiliate offices.
Within the management services business, according to a recent
survey published in 2008 by National Real Estate Investor, the
top 25 companies in the industry manage over
8.3 billion square feet of commercial property. The Company
ranks as the seventh largest property management company in this
survey with 265.6 million square feet under management at
year end 2007, including property under management in its
affiliate offices. The largest company in the survey had
1.9 billion square feet under management.
The Company competes in a variety of service businesses within
the commercial real estate industry. Each of these business
areas is highly competitive on a national as well as local
level. The Company faces competition not only from other
regional and national service providers, but also from global
real estate providers, boutique real estate advisory firms and
appraisal firms. Although many of the Company’s competitors
are local or regional firms that are substantially smaller than
the Company, some competitors are substantially larger than the
Company on a local, regional, national
and/or
international basis. The Company’s significant competitors
include CB Richard Ellis, Jones Lang LaSalle and
Cushman & Wakefield, all of which have global
platforms. The Company believes that it needs such a platform in
order to effectively compete for the business of large
multi-national corporations that are increasingly seeking a
single real estate services provider.
The Company believes there are only limited barriers to entry in
its investment management business. Its programs face
competition generally from REITs, institutional pension plans
and other public and private real estate companies and private
real estate investors for the acquisition of properties and for
raising capital to create programs to make these acquisitions.
It also competes against other real estate companies who may be
chosen by a broker-dealer as an investment platform instead of
the Company and with other broker-dealers and other properties
for viable tenants for its programs’ properties. Finally,
GBE Securities faces competition from institutions that provide
or arrange for other types of financing through private or
public offerings of equity or debt and from traditional bank
financings. While there can be no assurances that the Company
will be able to continue to compete effectively, maintain
current fee levels or margins, or maintain or increase its
market share, based on its competitive strengths, the Company
believes that it can operate successfully in the future in this
highly competitive industry. The ability to do so, however,
depends upon the Company’s ability to, among other things,
successfully manage through the current, unprecedented
disruption and dislocation of the credit markets and the
weakening national and global economics. Specifically, as our
business involves the acquisition, disposition, and financing of
commercial properties, many of such activities are dependent,
either directly or indirectly, and in whole or in part, with the
availability and cost of credit. The disruption in the global
capital market which began in 2008 has adversely affected our
businesses and will continue to do so until such time as credit
is once again available at reasonable costs. In addition, the
health of real estate
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investment and leasing markets is dependent on the level of
economic activity on a regional and local basis. The significant
slowdown in overall economic activity in 2008 has adversely
affected many sectors of our business and will continue to do so
until economic conditions change.
Environmental
Regulation
Federal, state and local laws and regulations impose
environmental zoning restrictions, use controls, disclosure
obligations and other restrictions that impact the management,
development, use,
and/or
sale
of real estate. Such laws and regulations tend to discourage
sales and leasing activities, as well as the willingness of
mortgage lenders to provide financing, with respect to some
properties. If transactions in which the Company is involved are
delayed or abandoned as a result of these restrictions, the
brokerage business could be adversely affected. In addition, a
failure by the Company to disclose known environmental concerns
in connection with a real estate transaction may subject the
Company to liability to a buyer or lessee of property.
The Company generally undertakes a third-party Phase I
investigation of potential environmental risks when evaluating
an acquisition for a sponsored program. A Phase I investigation
is an investigation for the presence or likely presence of
hazardous substances or petroleum products under conditions that
indicate an existing release, a post release or a material
threat of a release. A Phase I investigation does not typically
include any sampling. The Company’s programs may acquire a
property with environmental contamination, subject to a
determination of the level of risk and potential cost of
remediation.
Various environmental laws and regulations also can impose
liability for the costs of investigating or remediation of
hazardous or toxic substances at sites currently or formerly
owned or operated by a party, or at off-site locations to which
such party sent wastes for disposal. As a property manager, the
Company could be held liable as an operator for any such
contamination, even if the original activity was legal and the
Company had no knowledge of, or did not cause, the release or
contamination. Further, because liability under some of these
laws is joint and several, the Company could be held responsible
for more than its share, or even all, of the costs for such
contaminated site if the other responsible parties are unable to
pay. The Company could also incur liability for property damage
or personal injury claims alleged to result from environmental
contamination, or from asbestos-containing materials or
lead-based paint present at the properties that it manages.
Insurance for such matters may not always be available, or
sufficient to cover the Company’s losses. Certain
requirements governing the removal or encapsulation of
asbestos-containing materials, as well as recently enacted local
ordinances obligating property managers to inspect for and
remove lead-based paint in certain buildings, could increase the
Company’s costs of legal compliance and potentially subject
the Company to violations or claims. Although such costs have
not had a material impact on the Company’s financial
results or competitive position in 2008, the enactment of
additional regulations, or more stringent enforcement of
existing regulations, could cause the Company to incur
significant costs in the future,
and/or
adversely impact the brokerage and management services
businesses. See Note 20 of Notes to Consolidated Financial
Statements in Item 8 of this Report for additional
information.
Seasonality
Notwithstanding the Company’s expanded business platform as
a consequence of the Merger, a substantial portion of the
Company’s revenues are derived from brokerage transaction
services, which are seasonal in nature. As a consequence, the
Company’s revenue stream and the related commission expense
are also subject to seasonal fluctuations. However, the
Company’s non-variable operating expenses, which are
treated as expenses when incurred during the year, are
relatively constant in total dollars on a quarterly basis. The
Company has typically experienced its lowest quarterly revenue
from transaction services in the quarter ending March 31 of each
year with higher and more consistent revenue in the quarters
ending June 30 and September 30. The quarter ending
December 31 has historically provided the highest quarterly
level of revenue due to increased activity caused by the desire
of clients to complete transactions by calendar year-end.
Transaction services revenue represented 39.3% of the
$611.8 million in total revenue for 2008.
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Regulation
Transaction
and Property Management Services
The Company and its brokers, salespersons and, in some
instances, property managers are regulated by the states in
which it does business. These regulations may include licensing
procedures, prescribed professional responsibilities and
anti-fraud provisions. The Company’s activities are also
subject to various local, state, national and international
jurisdictions’ fair advertising, trade, housing and real
estate settlement laws and regulations and are affected bylaws
and regulations relating to real estate and real estate finance
and development. Because the size and scope of real estate sales
transactions have increased significantly during the past
several years, both the difficulty of ensuring compliance with
the numerous state statutory requirements and licensing regimes
and the possible liability resulting from non-compliance have
increased.
Dealer-Manager
Services
The securities industry is subject to extensive regulation under
federal and state law. Broker-dealers are subject to regulations
covering all aspects of the securities business. In general,
broker-dealers are required to register with the SEC and to be
members of FINRA or the New York Stock Exchange
(“NYSE”). As a member of FINRA, GBE Securities’
broker-dealer business is subject to the requirements of the
Securities Exchange Act of 1934 as amended (the “Exchange
Act”) and the rules promulgated thereunder relating to
broker-dealers and to the Rules of Fair Practice of FINRA. These
regulations establish, among other things, the minimum net
capital requirements for GBE Securities’ broker-dealer
business. Such business is also subject to regulation under
various state laws in all 50 states and the District of
Columbia, including registration requirements.
Service
Marks
The Company has registered trade names and service marks for the
“Grubb & Ellis” name and logo and certain
other trade names. The “Grubb & Ellis” brand
name is considered an important asset of the Company, and the
Company actively defends and enforces such trade names and
service marks.
Real
Estate Markets
The Company’s business is highly dependent on the
commercial real estate markets, which in turn are impacted by
numerous factors, including but not limited to the general
economy, availability and terms of credit and demand for real
estate in local markets. Changes in one or more of these factors
could either favorably or unfavorably impact the volume of
transactions, demand for real estate investments and prices or
lease terms for real estate. Consequently, the Company’s
revenue from transaction services, investment management
operations and property management fees, operating results, cash
flow and financial condition are impacted by these factors,
among others.
The
Merger
Upon the closing of the Merger, which occurred on
December 7, 2007, the 43,779,740 shares of common
stock of NNN that were issued and outstanding immediately prior
to the Merger were automatically converted into
38,526,171 shares of common stock of the Company, and the
2,249,850 NNN restricted stock and stock options that were
issued and outstanding immediately prior to the Merger were
automatically converted into 1,979,868 shares of restricted
stock and stock options of the Company. The shares of the
Company’s common stock issued in connection with the Merger
were registered under the Securities Act of 1933, as amended
(the “Securities Act”), and the Company’s common
stock, including the shares of common stock issued pursuant to
the Merger, continue to trade on the NYSE under the symbol
“GBE.”
Unless otherwise indicated, all pre-merger NNN share data has
been adjusted to reflect the conversion as a result of the
Merger (see Note 10 of Notes to Consolidated Financial
Statements in Item 8 of this Report for additional
information).
Subsequent to the closing of the Merger, in December 2007, the
Company relocated its headquarters from Chicago, Illinois to
Santa Ana, California, changed its fiscal year from June 30 to
December 31, and
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appointed EY as its independent registered public accounting
firm to audit financial statements of the Company going forward.
Employees
As of December 31, 2008, the Company had approximately
5,000 employees including more than 800 transaction
professionals working in 54 owned offices. Nearly
2,600 employees serve as property and facilities management
staff at the Company’s client-owned properties and the
Company’s clients reimburse the Company fully for their
salaries and benefits. The Company considers its relationship
with its employees to be good and has not experienced any
interruptions of its operations as a result of labor
disagreements.
Availability
of this Report
The Company’s internet address is
www.grubb-ellis.com
. On the Investor Relations page on
this web site, the Company posts its Annual Reports on
Form 10-K,
its Quarterly Reports on
Form 10-Q,
its Current Reports on
Form 8-K
and its proxy statements as soon as reasonably practicable after
it files them electronically with the SEC. All such filings on
the Investor Relations web page are available to be viewed free
of charge. Information contained on our website is not part of
this Report on
Form 10-K
or our other filings with the SEC. We assume no obligation to
update or revise any forward-looking statements in the Annual
Report on
Form 10-K,
whether as a result of new information, future events or
otherwise, unless we are required to do so by law.
In addition, a copy of this Report on
Form 10-K
is available without charge by contacting Investor Relations,
Grubb & Ellis Company, 1551 North Tustin Avenue,
Suite 300, Santa Ana, California 92705.
Risks
Related to the Company’s Business in General
We
currently have restricted borrowing capacity under our senior
secured credit facility, our senior secured credit facility
imposes operating restrictions and covenants which the Company
may be unable to maintain compliance with in future periods, and
in an event of default, all of our borrowings would become
immediately due and payable.
Our Credit Facility imposes, and any further amendment or
refinancing thereof, may impose, operating and other
restrictions on the Company and many of its subsidiaries. These
restrictions will affect, and in many respects will limit or
prohibit, our ability and our guarantor subsidiaries’
abilities to:
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incur or guarantee additional indebtedness;
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create liens;
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make investments;
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transfer or sell assets, including the stock of subsidiaries;
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enter into mergers or consolidations;
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enter into transactions with affiliates;
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issue shares of preferred stock;
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enter into sale/leaseback transactions; and
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pay dividends or make distributions on capital stock or redeem
or repurchase capital stock.
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As a condition to entering into the Third Amendment to the
Credit Facility the lenders thereunder required the Company to
submit for lender pre-approval the Approved Budget and the
Recapitalization Plan. The Third Amendment eliminated specific
financial covenants; however, the Third Amendment imposes
restrictions on the Company’s ability to operate outside of
the Approved Budget, subject to a permitted negative cumulative
cash flow variance equal to the greater of (a) 15%
cumulative negative variance between actual and projected cash
flow in the Approved Budget for the applicable period and
(b) a $1,500,000 cumulative negative variance
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between actual and projected cash flow in the Approved Budget
for the applicable period (the “Permitted Variance”);
provided, however, that the Company’s failure to comply
with the Permitted Variance, as a consequence of general
economic conditions or otherwise, in any week shall not
constitute an Event of Default unless such noncompliance has
occurred for three consecutive calendar weeks. In addition the
Third Amendment also requires the Company to implement the
Recapitalization Plan and complete each step provided in the
Recapitalization Plan by the dates set for such completion.
In the event the Company fails to effect the Recapitalization
Plan and in connection therewith to effect a Partial Prepayment
on or before September 30, 2009, the (i) lenders will
have the right commencing on October 1, 2009, to exercise
the Warrants, for nominal consideration, to purchase common
stock of the Company equal to 15% of the common stock of the
Company on a fully diluted basis as of such date, subject to
adjustment, (ii) the applicable margin automatically
increases to 11% on prime rate loans and increases to 12% on
LIBOR based loans, (iii) the Company shall be required to
amortize an aggregate of $10 million of the Revolving
Credit A Facility in three (3) equal installments on the
first business day of each of the last three (3) months of
2009, (iv) the Company is obligated to submit a revised
budget by October 1, 2009, (v) the Credit Facility
will terminate on January 15, 2010, and (vi) no
further advances may be drawn under the Credit Facility. In the
event that the Credit Facility terminates on January 15,
2010, the Company will be required to repay the Credit Facility
in its entirety at that time, and there can be no assurances
that the Company will have access to alternative funding
sources, or if such sources are available to the Company, that
they will be on favorable terms and conditions to the Company.
In addition, the Company is required to prepay outstanding
Revolving Credit A Advances (and to the extent the Revolving
Credit A Facility shall be reduced to zero, prepay outstanding
Revolving Credit B Advances) in an amount equal to 100% (or,
after the Revolving Credit A Advances are reduced by at least
the Partial Prepayment amount, in an amount equal to 50%) of Net
Cash Proceeds (as defined in the Credit Agreement) from:
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the refund of any taxes or the sale of equity interests by the
Company or its subsidiaries,
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any other transaction or event occurring outside the ordinary
course of business of the Company or its subsidiaries;
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provided, however
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received from the sale of the certain real property assets shall
be used to prepay outstanding Revolving Credit B Advances and to
the extent Revolving Credit B Advances shall be reduced to zero,
to prepay outstanding Revolving Credit A Advances, (b) the
Company shall prepay outstanding Revolving Credit B Advances in
an amount equal to 100% of the Net Cash Proceeds from the sale
of the Danbury Property unless the Company is then not in
compliance with the Recapitalization Plan in which event
Revolving Credit A Advances shall be prepaid first and
(c) the Company’s 2008 tax refund was used to prepay
outstanding Revolving Credit B Advances upon the closing of the
Third Amendment.
The Company’s ability to comply with these covenants may be
affected by many events beyond its control and the
Company’s future operating results may not allow the
Company to comply with the covenants, or in the event of a
default, to remedy that default. There can be no assurance that
the Company will continue to comply in future periods.
The Company’s failure to comply with these covenants or to
comply with the other restrictions contained in its Credit
Facility could result in a default, which could cause such
indebtedness under its existing Credit Facility to become
immediately due and payable. If the Company is unable to repay
outstanding borrowings when due, the lenders under the Credit
Facility will have the right to proceed against the collateral
granted to the lenders to secure the debt, which is
substantially all of the assets of the Company. In the event
that the Company is in default of its existing Credit Facility,
the Company may seek to explore a variety of options,
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including but not limited to accessing alternative debt or
equity capital or effective asset sales, although there can be
no assurances that any such alternatives will be available to
the Company, or, if available to the Company, on terms and
conditions favorable to the Company.
The restrictions contained in our Credit Facility could also
limit our ability to plan for or react to market conditions or
meet capital needs and adversely affect our ability to finance
ongoing operations, acquisitions and investments.
Based upon the Third Amendment to the Credit Facility, the
Company did not have any further ability to borrow under the
Credit Facility as of the date of the Third Amendment, as the
Credit Facility was fully drawn. The Company may only borrow
under the Revolving Credit B Facility to the extent that it
repays outstanding Revolving Credit B Advances thereunder and
such advances are used to pay expenses in compliance with the
Approved Budget or to fund Permitted Cash Reserves (as
defined in the Credit Facility).
The
ongoing downturn in the general economy and the real estate
market has negatively impacted and could continue to negatively
impact the Company’s business and financial
results.
Periods of economic slowdown or recession, significantly reduced
access to credit, declining employment levels, decreasing demand
for real estate, declining real estate values or the perception
that any of these events may occur, can reduce transaction
volumes or demand for services for each of our business lines.
The current recession and the downturn in the real estate market
have resulted in and may continue to result in:
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a decline in acquisition, disposition and leasing activity;
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a decline in the supply of capital invested in commercial real
estate;
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a decline in fees collected from investment management programs,
which are dependent upon demand for investment in commercial
real estate; and
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a decline in the value of real estate and in rental rates, which
would cause the Company to realize lower revenue from:
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property management fees, which in certain cases are calculated
as a percentage of the revenue of the property under
management; and
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commissions or fees derived from property valuation, sales and
leasing, which are typically based on the value, sale price or
lease revenue commitment, respectively.
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The declining real estate market in the United States, the
availability and cost of credit, increased unemployment,
volatile oil prices, declining consumer confidence and the
instability of United States banking and financial institutions,
have contributed to increased volatility, an overall economic
slowdown and diminished expectations for the economy and markets
going forward. The fragile state of the credit markets, the fear
of a global recession for an extended period and the current
economic environment have impacted real estate services and
investment management firms like ours through reduced
transaction volumes, falling transaction values, lower real
estate valuations, liquidity restrictions, market volatility,
and the loss of confidence. As a consequence, similar to other
real estate services and investment management firms, our stock
price has declined significantly.
These negative economic conditions have caused a reduced demand
for overall amount of sale and leasing activity in the
commercial real estate industry and the demand for our
transaction and management services and investment management
services. Our revenues and profitability depend upon on the
overall demand for our services from our clients. As a result of
the economic conditions in 2008, we were not in compliance with
certain of our financial covenants under our Credit Facility as
of September 30, 2008. In November 2008, the applicable
financial covenants were amended for certain periods in the
Second Letter Amendment to the Credit Facility effective as of
September 30, 2008. We were not in compliance with certain
debt covenants as of December 31, 2008, all of which were
effectively cured as of such date by the Third Amendment. As a
consequence of the foregoing and certain provisions of the Third
Amendment, the $63.0 million outstanding under the Credit
Facility has been classified as a current liability as of
December 31, 2008.
14
The Third Amendment restricts our ability to operate outside of
the Approved Budget without the permission of the requisite
majority of lenders. In addition, we are required to remit Net
Cash Proceeds from the sale of assets including real estate
assets to repay advances under the Credit Facility and pursue
additional sources of capital in accordance with the
Recapitalization Plan. All of these demands put the
Company’s liquidity and financial resources at risk.
Due the economic downturn, it may take us longer to dispose of
real estate assets and investments and the selling prices may be
lower than originally anticipated. If this occurs, fees from
transaction services will be reduced. In addition, the
performance of certain properties in the investment management
portfolio may be negatively impacted, which would likewise
affect our fees. As a result, the carrying value of certain of
our real estate investments may become impaired and we could
record losses as a result of such impairment or we could
experience reduced profitability related to declines in real
estate values. As of September 30, 2008, the Company
initiated a plan to sell the properties it classified as real
estate held for investment in its financial statements as of
September 30, 2008. As of December 31, 2008, the
Company’s Credit Facility included a covenant which
required the sale of certain of these assets before
March 31, 2009. The downturn in the global credit markets
significantly lessened the probability that the Company would be
able to achieve relief from this covenant through amendment or
other financial resolutions as of March 31, 2009. Pursuant
to SFAS No. 144,
Accounting for the Impairment or
Disposal of Long-Lived Assets,
the Company assessed the
value of the assets. In addition, the Company reviewed the
valuation of its other owned properties and real estate
investments. This valuation review resulted in the Company
recognizing an impairment charge of approximately
$90.4 million against the carrying value of the properties
and real estate investments during the year ended
December 31, 2008. The Third Amendment to the Credit
Facility requires the Company to (a) sell the Danbury
Property by June 1, 2009, unless such date is extended with
the applicable approval of the lenders and (b) use its
commercially reasonable best efforts to sell the four other
commercial properties, including the two other GERA Properties,
by September 30, 2009. In order to satisfy the covenants in
our Credit Agreement, we may be forced to reduce the purchase
price of these properties in order to sell the properties which
may result in further impairment.
We are not able to predict the severity or duration of the
current adverse economic environment or the disruption in the
financial markets. The real estate market tends to be cyclical
and related to the condition of the overall economy and to the
perceptions of investors, developers and other market
participants as to the economic outlook. The ongoing downturn in
the general economy and the real estate market has negatively
impacted and could continue to negatively impact the
Company’s business and results of operations.
The
ongoing adverse developments in the credit markets and the risk
of continued market deterioration have adversely affected the
Company’s revenues, expenses and operating results and may
continue to do so.
Our business lines are sensitive to credit cost and availability
as well as market place liquidity. In addition, the revenues in
all our businesses are dependent to some extent on overall
volume of activity and pricing in the commercial real estate
market. In 2008, the credit markets experienced an unprecedented
level of disruption and uncertainty. This disruption and
uncertainty has reduced the availability and significantly
increased the cost of most sources of funding. In certain cases,
sources of funding have been eliminated.
Disruptions in the credit markets have adversely affected, and
may continue to adversely affect, our business of providing
services to owners, purchasers, sellers, investors and occupants
of real estate in connection with acquisitions, dispositions and
leasing of real property. If our clients are unable to obtain
credit on favorable terms, there will be fewer completed
acquisitions, dispositions and leases of property. In addition,
if purchasers of real estate are not able to obtain favorable
financing resulting in a lack of disposition opportunities for
funds whom we act as advisor, our fee revenues will decline and
we may also experience losses on real estate held for investment.
The recent decline in real estate values and the inability to
obtain financing has either eliminated or severely reduced the
availability of the Company’s historical funding sources
for its investment management programs, and to the extent credit
remains available for these programs, it is currently more
expensive. The Company may not be able to continue to access
sources of funding for its investment management programs
15
or, if available to the Company, the Company may not be able to
do so on favorable terms. Any decision by lenders to make
additional funds available to the Company in the future for its
investment management programs will depend upon a number of
factors, such as industry and market trends in our business, the
lenders’ own resources and policies concerning loans and
investments, and the relative attractiveness of alternative
investment or lending opportunities.
The depth and duration of the current credit market and
liquidity disruptions are impossible to predict. In fact, the
magnitude of the recent credit market disruption has exceeded
the expectations of most if not all market participants. This
uncertainty limits the Company’s ability to develop future
business plans and the Company believes that it limits the
ability of other participants in the credit markets and the real
estate markets to do so as well. This uncertainty may lead
market participants to act more conservatively than in recent
history, which may continue to depress demand and pricing in our
markets.
If the
Company fails to meet its payment or other obligations under its
senior secured credit facility, then the lenders under such
credit facility could foreclose on, and acquire control of,
substantially all of its assets.
Any material downturn in the Company’s revenue or increase
in its costs and expenses could impair its ability to meet its
debt obligations. The Company’s lenders under the senior
secured Credit Facility have a lien on substantially all of the
Company’s assets and the assets of the Company’s
subsidiaries including their respective accounts receivable,
cash, general intangibles, investment property and future
acquired material property. If the Company fails to meet its
payment or other obligations under the Credit Facility, the
lenders under such Credit Facility will be entitled to foreclose
on substantially all of the assets of the Company and the
Company’s subsidiaries and liquidate these assets.
We
experienced additional, unanticipated costs and may have
additional risk and further costs as a result of the restatement
of our financial statements.
As a result of the restatement of certain audited and unaudited
financial data, and the special investigation in connection
therewith, we incurred substantial, additional unanticipated
costs for accounting and legal fees. The restatement and special
investigation was also time-consuming and affected
management’s attention and resources. Further, there are no
assurances that we will not become involved in legal proceedings
in the future in relation to these restatements. In connection
with any such potential proceedings, any incurred expenses not
covered by available insurance or any adverse resolution could
have a material adverse effect on the Company. Any such future
legal proceedings could also be time-consuming and distract our
management from the conduct of our business.
The
Company may not be able to obtain additional financing when the
Company needs it or on acceptable terms, and any such financing,
or the failure to obtain financing, may adversely affect the
market price of the Company’s common stock.
There can be no assurance that the anticipated cash flow from
operations will be sufficient to meet all of the Company’s
cash requirements. The Company intends to continue to make
investments to support the Company’s business growth and
may require additional funds to respond to business challenges.
Accordingly, the Company may need to complete additional equity
or debt financings to secure additional funds. The Company
cannot assure you that further equity or debt financing will be
available on acceptable terms, if at all. If the market price of
the Company’s common stock does not increase significantly
the Company will have limited ability to address financing needs
through an equity offering or such equity financing may result
in significant dilution to existing stockholders. In addition,
the terms of any debt financing may restrict the Company’s
financial and operating flexibility. The Company’s
inability to obtain any needed financing, or the terms on which
it may be available, could have a material adverse effect on the
Company’s business.
16
We
have received a notice from the New York Stock Exchange
(“NYSE”) that we did not meet its continued listing
requirements. If we are unable to rectify this non-compliance in
accordance with NYSE rules, our common stock will be delisted
from trading on the NYSE, which could have a material adverse
effect on the liquidity and value of our common
stock.
On February 20, 2009, we received notification from NYSE
Regulation, Inc. that we were not in compliance with the
NYSE’s continued listing standard requiring that the
average closing price of our common stock be above $1.00 per
share over a 30 consecutive
trading-day
period. Under the NYSE’s rules, we normally would have six
months, or until August 20, 2009, for our share price and
average share price to comply with the share price standard.
However, on February 26, 2009, the NYSE temporarily
suspended the application of its continued listing criteria
relating to a minimum average trading price of $1.00 until
June 30, 2009. Companies currently below the $1.00 minimum
level that do not regain compliance during the suspension period
recommence their compliance period upon reinstitution of the
share price standard and thereupon receive the remaining balance
of their compliance period. If the share price and average share
price of our common stock do not regain compliance with the
$1.00 requirement during the suspension period, under the
NYSE’s temporary rulemaking we will have until on or about
December 20, 2009, in which to comply with the share price
standard.
If we are unable to regain compliance with the NYSE’s
continued listing standard within the required time frame, our
common stock will be delisted from the NYSE. As a result, we
likely would have our common stock quoted on the
Over-the-Counter Bulletin Board (“OTC BB”) in
order to have our common stock continue to be traded on a public
market. Securities that trade on the OTC BB generally have less
liquidity and greater volatility than securities that trade on
the NYSE. Delisting from the NYSE also may preclude us from
using certain state securities law exemptions, which could make
it more difficult and expensive for us to raise capital in the
future and more difficult for us to provide compensation
packages sufficient to attract and retain top talent. In
addition, because issuers whose securities trade on the OTC BB
are not subject to the corporate governance and other standards
imposed by the NYSE, and such issuers receive less news and
analyst coverage, our reputation may suffer, which could result
in a decrease in the trading price of our shares. The delisting
of our common stock from the NYSE, therefore, could
significantly disrupt the ability of investors to trade our
common stock and could have a material adverse effect on the
value and liquidity of our common stock.
The
Company is in a highly competitive business with numerous
competitors, some of which may have greater financial and
operational resources than it does.
The Company competes in a variety of service disciplines within
the commercial real estate industry. Each of these business
areas is highly competitive on a national as well as on a
regional and local level. The Company faces competition not only
from other national real estate service providers, but also from
global real estate service providers, boutique real estate
advisory firms, consulting and appraisal firms. Depending on the
product or service, the Company also faces competition from
other real estate service providers, institutional lenders,
insurance companies, investment banking firms, investment
managers and accounting firms, some of which may have greater
financial resources than the Company does. The Company is also
subject to competition from other large national firms and from
multi-national firms that have similar service competencies to
it. Although many of the Company’s competitors are local or
regional firms that are substantially smaller than it, some of
its competitors are substantially larger than it on a local,
regional, national or international basis. In general, there can
be no assurance that the Company will be able to continue to
compete effectively with respect to any of its business lines or
on an overall basis, or to maintain current fee levels or
margins, or maintain or increase its market share.
The
TIC business in general, from which the Company has historically
generated significant revenues, materially contracted in
2008.
The Company has historically generated significant revenues from
fees earned through the transaction structuring and property
management of its TIC Programs. In 2008, however, with the
nationwide decline in real estate values and the global credit
crises, the TIC industry contracted significantly. According to
the research of OMNI, approximately $3.7 billion of TIC
equity was raised in 2006. In 2008, the amount of TIC
17
equity raised declined by approximately 66% to
$1.24 billion. Moreover, OMNI has indicated that based on
the current year-to-date activity through the first part of
2009, should the current trends remain constant throughout the
entire calendar year, the TIC industry would raise approximately
$300.0 million in 2009, an approximately 90% decline from
2006. As the Company has historically generated a significant
amount of revenue from its TIC operations, the rapid and steep
decline in this industry may have a material, adverse effect on
the Company’s business and results of operations if it is
unable to generate revenues in its other business segments, of
which there can be no assurances, to make up for the loss of
TIC-related revenues.
As a
service-oriented company, the Company depends on key personnel,
and the loss of its current personnel or its failure to hire and
retain additional personnel could harm its
business.
The Company depends on its ability to attract and retain highly
skilled personnel. The Company believes that its future success
in developing its business and maintaining a competitive
position will depend in large part on its ability to identify,
recruit, hire, train, retain and motivate highly skilled
executive, managerial, sales, marketing and customer service
personnel. Competition for these personnel is intense, and the
Company may not be able to successfully recruit, assimilate or
retain sufficiently qualified personnel. Since July 2008, the
Company has been conducting a search to identify and hire a
Chief Executive Officer. Shortly after the resignation of the
Company’s Chief Executive Officer in July 2008, the Company
appointed an interim Chief Executive Officer. As of the date of
filing this
Form 10-K,
the Company has not yet identified and hired a permanent Chief
Executive Officer. The Company’s ability to attract new
employees may be limited by certain restrictions in its senior
secured credit facility, including limitations on cash bonus
payments to new hires and may only make cash payments that
exceed those limits if it receives approval from the
administrative agent, which cannot be guaranteed. We use equity
incentives to attract and retain our key personnel. In 2008, and
the first quarter of 2009, our stock price declined
significantly, resulting in the decline in value of previously
provided equity awards, which may result in an increase risk of
loss of key personnel. The performance of our stock may also
diminish our ability to offer attractive incentive awards to new
hires. The Company’s failure to recruit and retain
necessary executive, managerial, sales, marketing and customer
service personnel could harm its business and its ability to
obtain new customers.
The
Company plans to expand its business to include international
operations that could subject it to social, political and
economic risks of doing business in foreign
countries.
Although the Company does not currently conduct significant
business outside the United States, the Company intends to
expand its business to include international operations. There
can be no assurance that the Company will be able to
successfully expand its business in international markets.
Current global economic conditions may restrict, limit or delay
the Company’s ability to expand its business into
international markets or make such expansion less economically
feasible. If the Company expands into international markets,
circumstances and developments related to international
operations that could negatively affect the Company’s
business or results of operations include, but are not limited
to, the following factors:
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lack of substantial experience operating in international
markets;
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lack of recognition of the Grubb & Ellis brand name in
international markets;
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difficulties and costs of staffing and managing international
operations;
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currency restrictions, which may prevent the transfer of capital
and profits to the United States;
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diverse foreign currency fluctuations;
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changes in regulatory requirements;
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potentially adverse tax consequences;
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the responsibility of complying with multiple and potentially
conflicting laws;
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the impact of regional or country-specific business cycles and
economic instability;
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the geographic, time zone, language and cultural differences
among personnel in different areas of the world;
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political instability; and
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foreign ownership restrictions with respect to operations in
certain countries.
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Additionally, the Company may establish joint ventures with
foreign entities for the provision of brokerage services abroad,
which may involve the purchase or sale of the Company’s
equity securities or the equity securities of the joint venture
participant(s). In these joint ventures, the Company may not
have the right or power to direct the management and policies of
the joint venture and other participants may take action
contrary to the Company’s instructions or requests and
against the Company’s policies and objectives. In addition,
the other participants may become bankrupt or have economic or
other business interests or goals that are inconsistent with the
Company. If a joint venture participant acts contrary to the
Company’s interest, then it could have a material adverse
effect on the Company’s business and results of operations.
Failure
to manage any future growth effectively may have a material
adverse effect on the Company’s financial condition and
results of operations.
Management will need to successfully manage any future growth
effectively. The Company has pursued an aggressive expansion
strategy in the transaction services business. The integration
and additional growth may place a significant strain upon
management, administrative, operational and financial
infrastructure. The Company’s ability to grow also depends
upon its ability to successfully hire, train, supervise and
manage additional executive officers and new employees, obtain
financing for its capital needs, expand its systems effectively,
allocate its human resources optimally, maintain clear lines of
communication between its transactional and management functions
and its finance and accounting functions, and manage the
pressures on its management and administrative, operational and
financial infrastructure. Additionally, managing future growth
may be difficult due to the new geographic locations and
business lines of the Company. There can be no assurance that
the Company will be able to accurately anticipate and respond to
the changing demands it will face as it integrates and continues
to expand its operations, and it may not be able to manage
growth effectively or to achieve growth at all. Any failure to
manage the future growth effectively could have a material
adverse effect on the Company’s business, financial
condition and results of operations.
Risks
Related to the Company’s Transaction Services and
Management Services Business
The
Company’s quarterly operating results are likely to
fluctuate due to the seasonal nature of its business and may
fail to meet expectations, which may cause the price of its
securities to decline.
Historically, the majority of legacy Grubb & Ellis
revenue has been derived from the transaction services that it
provides. Such services are typically subject to seasonal
fluctuations. Legacy Grubb & Ellis typically
experienced its lowest quarterly revenue in the quarter ending
March 31 of each year with higher and more consistent revenue in
the quarters ending June 30 and September 30. The quarter
ending December 31 has historically provided the highest
quarterly level of revenue due to increased activity caused by
the desire of clients to complete transactions by calendar
year-end. However, the Company’s non-variable operating
expenses, which are treated as expenses when incurred during the
year, are relatively constant in total dollars on a quarterly
basis. As a result, since a high proportion of these operating
expenses are fixed, declines in revenue could disproportionately
affect the Company’s operating results in a quarter. In
addition, the Company’s quarterly operating results have
fluctuated in the past and will likely continue to fluctuate in
the future. If the Company’s quarterly operating results
fail to meet expectations, the price of the Company’s
securities could fluctuate or decline significantly.
If the
properties that the Company manages fail to perform, then its
business and results of operations could be
harmed.
The Company’s success partially depends upon the
performance of the properties it manages. The Company could be
adversely affected by the nonperformance of, or the
deteriorating financial condition of, certain of its clients.
The revenue the Company generates from its property management
business is generally a percentage of aggregate rent collections
from the properties. The performance of these properties will
19
depend upon the following factors, among others, many of which
are partially or completely outside of the Company’s
control:
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the Company’s ability to attract and retain creditworthy
tenants;
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the magnitude of defaults by tenants under their respective
leases;
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the Company’s ability to control operating expenses;
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governmental regulations, local rent control or stabilization
ordinances which are in, or may be put into, effect;
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various uninsurable risks;
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financial condition of certain clients;
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financial conditions prevailing generally and in the areas in
which these properties are located;
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the nature and extent of competitive properties; and
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the general real estate market.
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These or other factors may negatively impact the properties that
the Company manages, which could have a material adverse effect
on its business and results of operations.
If the
Company fails to comply with laws and regulations applicable to
real estate brokerage and mortgage transactions and other
business lines, then it may incur significant financial
penalties.
Due to the broad geographic scope of the Company’s
operations and the real estate services performed, the Company
is subject to numerous federal, state and local laws and
regulations specific to the services performed. For example, the
brokerage of real estate sales and leasing transactions requires
the Company to maintain brokerage licenses in each state in
which it operates. If the Company fails to maintain its licenses
or conduct brokerage activities without a license or violate any
of the regulations applicable to our licenses, then it may be
required to pay fines (including treble damages in certain
states) or return commissions received or have our licenses
suspended or revoked. In addition, because the size and scope of
real estate sales transactions have increased significantly
during the past several years, both the difficulty of ensuring
compliance with the numerous state licensing regimes and the
possible loss resulting from non-compliance have increased.
Furthermore, the laws and regulations applicable to the
Company’s business, both in the United States and in
foreign countries, also may change in ways that increase the
costs of compliance. The failure to comply with both foreign and
domestic regulations could result in significant financial
penalties which could have a material adverse effect on the
Company’s business and results of operations.
The
Company may have liabilities in connection with real estate
brokerage and property and facilities management
activities.
As a licensed real estate broker, the Company and its licensed
employees and independent contractors that work for it are
subject to statutory due diligence, disclosure and
standard-of-care obligations. Failure to fulfill these
obligations could subject the Company or its employees to
litigation from parties who purchased, sold or leased properties
that the Company or they brokered or managed. The Company could
become subject to claims by participants in real estate sales,
as well as building owners and companies for whom we provide
management services, claiming that the Company did not fulfill
its statutory obligations as a broker.
In addition, in the Company’s property and facilities
management businesses, it hires and supervises third-party
contractors to provide construction and engineering services for
its managed properties. While the Company’s role is limited
to that of a supervisor, the Company may be subject to claims
for construction defects or other similar actions. Adverse
outcomes of property and facilities management litigation could
have a material adverse effect on the Company’s business,
financial condition and results of operations.
20
Environmental
regulations may adversely impact the Company’s business
and/or cause the Company to incur costs for cleanup of hazardous
substances or wastes or other environmental
liabilities.
Federal, state and local laws and regulations impose various
environmental zoning restrictions, use controls, and disclosure
obligations which impact the management, development, use,
and/or
sale
of real estate. Such laws and regulations tend to discourage
sales and leasing activities, as well as mortgage lending
availability, with respect to some properties. A decrease or
delay in such transactions may adversely affect the results of
operations and financial condition of the Company’s real
estate brokerage business. In addition, a failure by the Company
to disclose environmental concerns in connection with a real
estate transaction may subject it to liability to a buyer or
lessee of property.
In addition, in its role as a property manager, the Company
could incur liability under environmental laws for the
investigation or remediation of hazardous or toxic substances or
wastes at properties it currently or formerly managed, or at
off-site locations where wastes from such properties were
disposed. Such liability can be imposed without regard for the
lawfulness of the original disposal activity, or the
Company’s knowledge of, or fault for, the release or
contamination. Further, liability under some of these laws may
be joint and several, meaning that one liable party could be
held responsible for all costs related to a contaminated site.
The Company could also be held liable for property damage or
personal injury claims alleged to result from environmental
contamination, or from asbestos-containing materials or
lead-based paint present at the properties it manages. Insurance
for such matters may not be available or sufficient.
Certain requirements governing the removal or encapsulation of
asbestos-containing materials, as well as recently enacted local
ordinances obligating property managers to inspect for and
remove lead-based paint in certain buildings, could increase the
Company’s costs of legal compliance and potentially subject
it to violations or claims. Although such costs have not had a
material impact on its financial results or competitive position
during fiscal year 2006, 2007 or 2008, the enactment of
additional regulations, or more stringent enforcement of
existing regulations, could cause it to incur significant costs
in the future,
and/or
adversely impact its brokerage and management services
businesses.
Risks
Related to the Company’s Investment Management and
Broker-Dealer Business
Declines
in asset value and reductions in distributions in investment
programs could adversely affect the Company business, as it
could cause harm to the Company’s reputation, cause the
loss of management contracts and third-party broker-dealer
selling agreements, limit the Company’s ability to sign
future third-party broker-dealer selling agreements and
potentially expose the Company to legal liability.
The current market value of many of the properties owned through
the Company’s investment programs have recently decreased
as a result of the overall decline in the economy and commercial
real estate generally. In addition, there have been reductions
in distributions in numerous investment programs in 2008, in
certain instances to a zero percent distribution rate.
Significant declines in value and reductions in distributions in
the investment programs sponsored by the Company could adversely
affect the Company’s reputation and the Company’s
ability to attract investors for future investment programs. In
addition, significant declines in value and reductions in
distributions could cause the Company to lose asset and property
management contracts for its investment management programs,
cause the Company to lose third-party broker-dealer selling
agreements for existing investment programs, including its
REITs, and limit the Company’s ability to sign future
third-party broker-dealer agreements. The loss of value may be
significant enough to cause certain investment programs to go
into foreclosure or result in a complete loss of equity for
program investors. Significant losses in asset value and
investor equity and reductions in distributions increases the
risk of claims or legal actions by program investors. Any such
legal liability could result in further damage to the
Company’s reputation, loss of third-party broker-dealer
selling agreements and incurrence of legal expenses.
The
Company currently provides its Investment Management services
primarily to its programs. Its revenue depends on the number of
its programs, on the price of the properties acquired or
disposed of by these programs, and on the revenue generated by
the properties under its management.
The Company derives fees for Investment Management services
based on a percentage of the price of the properties acquired or
disposed of by its programs and for management services based on
a percentage of the
21
rental amounts of the properties in its programs. The Company is
responsible for the management of all of the properties owned by
its programs, but as of December 31, 2008 it had
subcontracted the property management of approximately 18.0% of
its programs’ office, medical office and healthcare related
facilities and retail properties (based on square footage) and
30.3% of its programs’ multi-family apartment units to
third parties. For REITs, investment decisions are controlled by
the Board of Directors of REITs that are independent of the
Company. Investment decisions of these Boards affect the fees
earned by the Company. As a result, if any of the Company’s
programs are unsuccessful, both its Transaction Services and
Investment Management services fees will be reduced, if any are
paid at all. In addition, failures of the Company’s
programs to provide competitive investment returns could
significantly impair its ability to market future programs. The
Company’s inability to spread risk among a large number of
programs could cause it to be over-reliant on a limited number
of programs for its revenues. There can be no assurance that the
Company will maintain current levels of transaction and
management services for its programs’ properties.
The
Company may be unable to grow its programs, which would cause it
to fail to satisfy its business strategy.
A significant element of the Company business strategy is the
growth in the number of its programs. The consummation of any
future program will be subject to raising adequate capital for
the investment, identifying appropriate assets for acquisition
and effectively and efficiently closing the transactions. There
can be no assurance that the Company will be able to identify
and invest in additional properties or will be able to raise
adequate capital for new programs in the future. If the Company
is unable to consummate new programs in the future, it will not
be able to continue to grow the revenue it receives from either
transaction or management services.
The
inability to access investors for the Company’s programs
through broker-dealers or other intermediaries could have a
material adverse effect on its business.
The Company’s ability to source capital for its programs
depends significantly on access to the client base of securities
broker-dealers and other financial investment intermediaries
that may offer competing investment products. The Company
believes that its future success in developing its business and
maintaining a competitive position will depend in large part on
its ability to continue to maintain these relationships as well
as finding additional securities broker-dealers to facilitate
offerings by its programs or to find investors for the
Company’s REITs, TIC Programs and other investment
programs. The Company cannot be sure that it will continue to
gain access to these channels. In addition, competition for
capital is intense and the Company may not be able to obtain the
capital required to complete a program. The inability to have
this access could have a material adverse effect on its business
and results of operations.
The
termination of any of the Company’s broker-dealer
relationships, especially given the limited number of key
broker-dealers, could have a material adverse effect on its
business.
The Company’s securities programs are sold through
third-party broker-dealers who are members of its selling group.
While the Company has established relationships with its selling
group, it is required to enter into a new agreement with each
member of the selling group for each new program it offers. In
addition, the Company’s programs may be removed from a
selling broker-dealer’s approved program list at any time
for any reason. The Company cannot assure you of the continued
participation of existing members of its selling group nor can
the Company make an assurance that its selling group will
expand. While the Company continues to diversify and add new
investment channels for its programs, a significant portion of
the growth in recent years in the number of TIC Programs it
sponsors and in its REITs has been as a result of capital raised
by a relatively limited number of broker-dealers. Loss of any of
these key broker-dealer relationships, or the failure to develop
new relationships to cover the Company’s expanding business
through new investment channels, could have a material adverse
effect on its business and results of operations.
Misconduct
by third-party selling broker-dealers or the Company’s
sales force, could have a material adverse effect on its
business.
The Company relies on selling broker-dealers and the
Company’s sales force to properly offer its securities
programs to customers in compliance with its selling agreements
and with applicable regulatory requirements.
22
While these persons are responsible for their activities as
registered broker-dealers, their actions may nonetheless result
in complaints or legal or regulatory action against the Company.
A
significant amount of the Company’s revenue has
historically been derived from fees earned through the
transaction structuring and property management of its TIC
Programs, which programs rely primarily on Section 1031 of
the Internal Revenue Code to provide for deferral of capital
gains taxes to make these programs attractive. A change in this
tax code section or a complete revocation of this section as it
relates specifically to TICs could materially impact these
programs.
Section 1031 of the Internal Revenue Code provides for the
deferral of capital gains taxes which would ordinarily arise
from the sale of real estate through a tax-deferred exchange of
property, which defers the recognition of capital gains tax
until such time as the replacement property is sold in a taxable
transaction. These transactions are referred to as 1031
exchanges. In 2002, the Internal Revenue Service, or IRS, issued
advance ruling guidelines outlining the requirements for
properly structured TIC arrangements, which the Company believes
validate the TIC structure generally and as it employs it.
However, as recently as May 2006, the Senate Finance Committee
proposed a bill in the negotiations over the budget
reconciliation tax-cutting package to modify Section 1031
treatment for TICs as a way to raise additional tax revenue. The
proposal was unsuccessful, but the Company cannot assure you
that in the future there will not be attempts to limit or
disallow the tax deferral benefits for TIC transactions. For the
year ended December 31, 2008, approximately 1.4% of the
Company’s total revenue was derived from TIC acquisition
fees, although this amount is declining due to a significant
contraction in the industry in 2008 (see Risk Factor above,
“The TIC business in general, from which the Company has
historically generated significant revenues, materially
contracted in 2008”) If the Company were no longer able to
structure TIC Programs as 1031 exchanges for its investors, it
could lose a significant amount of revenue in the future, which
might materially affect its results of operations. Moreover, any
attempt to limit or disallow the tax deferral benefits of the
1031 exchange generally would have a material adverse effect on
the real estate industry generally and on the Company’s
business and results of operations.
A
significant amount of the Company’s programs are structured
to provide favorable tax treatment to investors or REITs. If a
program fails to satisfy the requirements necessary to permit
this favorable tax treatment, the Company could be subject to
claims by investors and its reputation for structuring these
transactions would be negatively affected, which would have an
adverse effect on its financial condition and results of
operations.
The Company structures TIC Programs and public non-traded REITs
to provide favorable tax treatment to investors. For example,
its TIC investors are able to defer the recognition of gain on
sale of investment or business property if they enter into a
1031 exchange. Similarly, qualified REITs generally are not
subject to federal income tax at corporate rates, which permits
REITs to make larger distributions to investors (
i.e.
without reduction for federal income tax imposed at the
corporate level). If the Company fails to properly structure a
TIC transaction or if a REIT fails to satisfy the complex
requirements for qualification and taxation as a REIT under the
Internal Revenue Code, the Company could be subject to claims by
investors as a result of additional tax they may be required to
pay or because they are unable to receive the distributions they
expected at the time they made their investment. In addition,
any failure to satisfy applicable tax regulations in structuring
its programs would negatively affect the Company’s
reputation, which would in turn affect its ability to earn
additional fees from new programs. Claims by investors could
lead to losses and any reduction in the Company’s fees
would have a material adverse effect on its revenues.
Any
future co-investment activities the Company undertakes could
subject it to real estate investment risks which could lead to
the need for substantial capital contributions, which may impact
its cash flows and financial condition and, if it is unable to
make them, could damage its reputation and result in adverse
consequences to its holdings.
The Company may from time to time invest its capital in certain
real estate investments with other real estate firms or with
institutional investors such as pension plans. Any co-investment
will generally require the Company to make initial capital
contributions, and some co-investment entities may request
additional capital from the Company and its subsidiaries holding
investments in those assets. These contributions could
23
adversely impact the Company’s cash flows and financial
condition. Moreover, the failure to provide these contributions
could have adverse consequences to the Company’s interests
in these investments. These adverse consequences could include
damage to the Company’s reputation with its co-investment
partners as well as dilution of ownership and the necessity of
obtaining alternative funding from other sources that may be on
disadvantageous terms, if available at all.
Geographic
concentration of program properties may expose the
Company’s programs to regional economic downturns that
could adversely impact their operations and, as a result, the
fees the Company is able to generate from them, including fees
on disposition of the properties as the Company may be limited
in its ability to dispose of properties in a challenging real
estate market.
The Company’s programs generally focus on acquiring assets
satisfying particular investment criteria, such as type or
quality of tenants. There is generally no or little focus on the
geographic location of a particular property. The Company cannot
guarantee, however, that its programs will have, or will be able
to maintain, a significant amount of geographic diversity.
Although the Company’s property programs are located in
31 states, a majority of these properties (by square
footage) are located in Texas, California, Florida and North
Carolina. Geographic concentration of properties exposes the
Company’s programs to economic downturns in the areas where
the properties are located. A regional recession or other major,
localized economic disruption in a region, such as earthquakes
and hurricanes, in any of these areas could adversely affect the
Company’s programs’ ability to generate or increase
their operating revenues, attract new tenants or dispose of
unproductive properties. Any reduction in program revenues would
effectively reduce the fees the Company generates from them,
which would adversely affect the Company’s results of
operations and financial condition.
The
failure of Triple Net Properties, LLC, recently renamed
Grubb & Ellis Realty Investors, LLC (“GERI”)
and Triple Net Properties Realty, Inc. (“Realty”),
subsidiaries of the Company acquired in the Merger, to hold
certain required real estate licenses may subject Realty and the
Company to penalties, such as fines, restitution payments and
termination of management agreements, and to the suspension or
revocation of certain broker licenses.
Although Realty was required to have real estate licenses in
states in which it acted as a broker for NNN’s investment
programs and received real estate commissions prior to 2007,
Realty did not hold a license in certain of those states when it
earned fees for those services. In addition, almost all of
GERI’s revenue was based on an arrangement with Realty to
share fees from NNN’s programs. GERI did not hold a real
estate license in any state, although most states in which
properties of NNN’s programs were located may have required
GERI to hold a license in order to share fees. As a result,
Realty and the Company may be subject to penalties, such as
fines (which could be a multiple of the amount received),
restitution payments and termination of management agreements,
and to the suspension or revocation of certain of Realty’s
real estate broker licenses.
If
third-party managers providing property management services for
the Company’s programs’ office, medical office and
healthcare related facilities, retail and multi-family
properties are negligent in their performance of, or default on,
their management obligations, the tenants may not renew their
leases or the Company may become subject to unforeseen
liabilities. If this occurs, it could have an adverse effect on
the Company’s financial condition and operating
results.
The Company has entered into agreements with third-party
management companies to provide property management services for
a significant number of the Company’s programs’
properties, and the Company expects to enter into similar
third-party management agreements with respect to properties the
Company’s programs acquire in the future. The Company does
not supervise these third-party managers and their personnel on
a day-to-day basis and the Company cannot assure you that they
will manage the Company’s programs’ properties in a
manner that is consistent with their obligations under the
Company’s agreements, that they will not be negligent in
their performance or engage in other criminal or fraudulent
activity, or that these managers will not otherwise default on
their management obligations to the Company. If any of the
foregoing occurs, the relationships with the Company’s
programs’ tenants could be damaged, which may cause the
tenants not to renew their leases, and the Company could incur
liabilities resulting from loss or injury to
24
the properties or to persons at the properties. If the Company
is unable to lease the properties or the Company become subject
to significant liabilities as a result of third-party management
performance issues, the Company’s operating results and
financial condition could be substantially harmed.
The
Company or its new programs may be required to incur future
indebtedness to raise sufficient funds to purchase
properties.
One of the Company’s business strategies is to develop new
programs. The development of a new program requires the
identification and subsequent acquisition of properties when the
opportunity arises. In some instances, in order to effectively
and efficiently complete a program, the Company may provide
deposits for the acquisition of property or actually purchase
the property and warehouse it temporarily for the program. If
the Company does not have cash on hand available to pay these
deposits or fund an acquisition, the Company or the
Company’s programs may be required to incur additional
indebtedness, which indebtedness may not be available on
acceptable terms. If the Company incurs substantial debt, the
Company could lose its interests in any properties that have
been provided as collateral for any secured borrowing, or the
Company could lose its assets if the debt is recourse to it. In
addition, the Company’s cash flow from operations may not
be sufficient to repay these obligations upon their maturity,
making it necessary for the Company to raise additional capital
or dispose of some of its assets. The Company cannot assure you
that it will be able to borrow additional debt on satisfactory
terms, or at all. The Third Amendment to the Credit Agreement
includes a restrictive covenant which prohibits the Company from
incurring such indebtedness unless consistent with the Approved
Budget without the consent of the requisite majority of lenders.
The
Company may be required to repay loans the Company guaranteed
that were used to finance properties acquired by the
Company’s programs.
From time to time the Company has provided guarantees of loans
for properties under management. As of December 31, 2008,
there were 151 properties under management with loan guarantees
of approximately $3.5 billion in total principal
outstanding with terms ranging from 1 to 10 years, secured
by properties with a total aggregate purchase price of
approximately $4.8 billion as of December 31, 2008.
The Company’s guarantees consisted of the following as of
December 31, 2008. In addition, the consolidated variable
interest entities (“VIEs”) and unconsolidated VIEs are
jointly and severally liable on the non-recourse mortgage debt
related to the interests in the Company’s TIC investments
totaling $277.8 million and $385.3 million as of
December 31, 2008, respectively.
|
|
|
|
|
|
|
(In thousands)
|
|
December 31,
2008
|
|
|
|
|
Non-recourse/carve-out guarantees of debt of properties under
management(1)
|
|
$
|
3,414,433
|
|
|
Non-recourse/carve-out guarantees of the Company’s debt(1)
|
|
$
|
107,000
|
|
|
Guarantees of the Company’s mezzanine debt
|
|
$
|
—
|
|
|
Recourse guarantees of debt of properties under management
|
|
$
|
42,426
|
|
|
Recourse guarantees of the Company’s debt
|
|
$
|
10,000
|
|
|
|
|
|
|
(1)
|
|
A “non-recourse/carve-out” guaranty imposes personal
liability on the guarantor in the event the borrower engages in
certain acts prohibited by the loan documents.
|
As property values and performance decline, the risk of exposure
under these guarantees increases. Management evaluates these
guarantees to determine if the guarantee meets the criteria
required to record a liability in accordance with Financial
Accounting Standards Board (“FASB”) Financial
Interpretation No. 45,
Guarantor’s Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others
(“FIN No. 45”). As of December 31,
2008, the Company recorded a liability of $9.1 million
related to recourse guarantees of debt of properties under
management which matured in January and April 2009. Any other
such liabilities were insignificant as of December 31, 2008
and 2007. The Third Amendment to the Credit Facility includes a
restrictive covenant which prohibits the Company from providing
any additional guarantees unless consistent with the Approved
Budget without the consent of the requisite majority of lenders.
25
The
revenue streams from the Company’s management services may
be subject to limitation or cancellation.
The agreements under which the Company provides advisory and
management services to public non-traded REITs may generally be
terminated by each REIT following a notice period, with or
without cause. The Company cannot assure you that these
agreements will not be terminated and the board of directors and
management of Grubb & Ellis Healthcare REIT has
informed the Company that it does not intend to renew its
Advisory Agreement with the Grubb & Ellis Healthcare
REIT Advisor, LLC, a subsidiary of the Company, upon the
termination of the Advisory Agreement on September 20,
2009. In addition, if the Company has a significant amount of
TIC Programs selling their properties or public non-traded REITs
liquidating in the same period, the Company’s revenues
would decrease unless it is able to find replacement programs to
generate new fees. The Company is currently in the process of
liquidating two of its public non-traded REITs and, as a result,
the Company’s management fees from these REITs have been
reduced due to the number of properties that have been sold. Any
decrease in the Company’s fees, as a result of termination
of a contract or customary close out or liquidation of a
program, could have a material adverse effect on the
Company’s business, results of operations and financial
condition.
Future
pressures to lower, waive or credit back the Company’s fees
could reduce the Company’s revenue and
profitability.
The Company has on occasion waived or credited its fees for real
estate acquisitions and financings for the Company’s TIC
Programs to improve projected investment returns and attract TIC
investors. There has also been a trend toward lower fees in some
segments of the third-party asset management business, and fees
paid for the management of properties in the Company’s TIC
Programs or public non-traded REITs could follow these trends.
In order for the Company to maintain its fee structure in a
competitive environment, the Company must be able to provide
clients with investment returns and service that will encourage
them to be willing to pay such fees. The Company cannot assure
you that it will be able to maintain its current fee structures.
Fee reductions on existing or future new business could have a
material adverse impact on the Company’s revenue and
profitability.
Regulatory
uncertainties related to the Company’s broker-dealer
services could harm the Company’s business.
The securities industry in the United States is subject to
extensive regulation under both federal and state laws.
Broker-dealers are subject to regulations covering all aspects
of the securities business. The SEC, FINRA, and other
self-regulatory organizations and state securities commissions
can censure, fine, issue
cease-and-desist
orders to, suspend or expel a broker-dealer or any of its
officers or employees. The ability to comply with applicable
laws and rules is largely dependent on an internal system to
ensure compliance, as well as the ability to attract and retain
qualified compliance personnel. The Company could be subject to
disciplinary or other actions in the future due to claimed
noncompliance with these securities regulations, which could
have a material adverse effect on the Company’s operations
and profitability.
The
Company depends upon its programs’ tenants to pay rent, and
their inability to pay rent may substantially reduce certain
fees the Company receives which are based on gross rental
amounts.
The Company’s programs are subject to varying degrees of
risk that generally arise from the ownership of real estate. For
example, the income the Company is able to generate from
management fees is derived from the gross rental income on the
properties in its programs. The rental income depends upon the
ability of the tenants of the Company’s programs’
properties to generate enough income to make their lease
payments to the Company. Changes beyond the Company’s
control may adversely affect the tenants’ ability to make
lease payments or could require them to terminate their leases.
Either an inability to make lease payments or a termination of
one or more leases could reduce the management fees the Company
receives. These changes include, among others, the following:
|
|
|
|
|
|
•
|
downturns in national or regional economic conditions where the
Company’s programs’ properties are located, which
generally will negatively impact the demand and rental rates;
|
26
|
|
|
|
|
|
•
|
changes in local market conditions such as an oversupply of
properties, including space available by sublease or new
construction, or a reduction in demand for properties in the
Company’s programs, making it more difficult for the
Company’s programs to lease space at attractive rental
rates or at all;
|
|
|
|
|
•
|
competition from other available properties, which could cause
the Company’s programs to lose current or prospective
tenants or cause them to reduce rental rates; and
|
|
|
|
|
•
|
changes in federal, state or local regulations and controls
affecting rents, prices of goods, interest rates, fuel and
energy consumption.
|
Due to these changes, among others, tenants and lease
guarantors, if any, may be unable to make their lease payments.
Defaults by tenants or the failure of any lease guarantors to
fulfill their obligations, or other early termination of a lease
could, depending upon the size of the leased premises and the
Company’s ability as property manager to successfully find
a substitute tenant, have a material adverse effect on the
Company’s revenue.
Conflicts
of interest inherent in transactions between the Company’s
programs and the Company, and among its programs, could create
liability for the Company that could have a material adverse
effect on its results of operations and financial
condition.
These conflicts include but are not limited to the following:
|
|
|
|
|
|
•
|
the Company experiences conflicts of interests with certain of
its directors, officers and affiliates from time to time with
regard to any of its investments, transactions and agreements in
which it holds a direct or indirect pecuniary interest;
|
|
|
|
|
•
|
since the Company receives both management fees and acquisition
and disposition fees for its programs’ properties, the
Company could be in conflict with its programs over whether
their properties should be sold or held by the program and the
Company may make decisions or take actions based on factors
other than in the best interest of investors of a particular
sponsored investor program;
|
|
|
|
|
•
|
a component of the compensation of certain of the Company’s
executives is based on the performance of particular programs,
which could cause the executives to favor those programs over
others;
|
|
|
|
|
•
|
the Company may face conflicts of interests as to how it
allocates property acquisition opportunities or prospective
tenants among competing programs;
|
|
|
|
|
•
|
the Company may face conflicts of interests if programs sell
properties to each other or invest in each other; and
|
|
|
|
|
•
|
the Company’s executive officers will devote only as much
of their time to a program as they determine is reasonably
required, which may be substantially less than full time; during
times of intense activity in other programs, these officers may
devote less time and fewer resources to a program than are
necessary or appropriate to manage the program’s business.
|
The Company cannot assure you that one or more of these
conflicts will not result in claims by investors in its
programs, which could have a material adverse effect on its
results of operations and financial condition.
The
offerings conducted to raise capital for the Company’s TIC
Programs are done in reliance on exemptions from the
registration requirements of the Securities Act. A failure to
satisfy the requirements for the appropriate exemption could
void the offering or, if it is already completed, provide the
investors with rescission rights, either of which would have a
material adverse effect on the Company’s reputation and as
a result its business and results of operations.
The securities of the Company’s TIC Programs are offered
and sold in reliance upon a private placement offering exemption
from registration under the Securities Act and applicable state
securities laws. If the Company or its dealer-manager failed to
comply with the requirements of the relevant exemption and an
offering were in process, the Company may have to terminate the
offering. If an offering was completed, the
27
investors may have the right, if they so desired, to rescind
their purchase of the securities. A rescission offer could also
be required under applicable state securities laws and
regulations in states where any securities were offered without
registration or qualification pursuant to a private offering or
other exemption. If a number of holders sought rescission at one
time, the applicable program would be required to make
significant payments which could adversely affect its business
and as a result, the fees generated by the Company from such
program. If one of the Company’s programs was forced to
terminate an offering before it was completed or to make a
rescission offer, the Company’s reputation would also
likely be significantly harmed. Any reduction in fees as a
result of a rescission offer or a loss of reputation would have
a material adverse effect on the Company’s business and
results of operations.
The
inability to identify suitable refinance options may negatively
impact investment program performance and cause harm to the
Company’s reputation, cause the loss of management
contracts and third-party broker-dealer selling agreements,
limit the Company’s ability to sign future third-party
broker-dealer selling agreements and potentially expose the
Company to legal liability.
The availability of real estate financing has greatly diminished
over the past year as a result of the global credit crisis and
overall decline in the real estate market. As a result, the
Company may not be able to refinance some or all of the loans
maturing in its investment management portfolio. Failure to
obtain suitable refinance options may have a negative impact on
investment returns and may potentially cause investments to go
into foreclosure or result in a complete loss of equity for
program investors. Any such negative impact on distributions,
foreclosure or loss of equity in an investment program could
adversely affect the Company’s reputation and the
Company’s ability to attract investors for future
investment programs. In addition, it could cause the Company to
lose asset and property management contracts, cause the Company
to lose third-party broker-dealer selling agreements for
existing investment programs, including its REITs, and limit the
Company’s ability to sign future third-party broker-dealer
agreements. Significant losses in investor equity and reductions
in distributions increases the risk of claims or legal actions
by program investors. Any such legal liability could result in
damage to the Company’s reputation, loss of third-party
broker-dealer selling agreements and incurrence of legal
expenses.
An
increase in interest rates may negatively affect the equity
value of the Company’s programs or cause the Company to
lose potential investors to alternative investments, causing the
fees the Company receives for transaction and management
services to be reduced.
Although in the last two years, interest rates in the United
States have generally decreased, if interest rates were to rise,
the Company’s financing costs would likely rise and the
Company’s net yield to investors may decline. This downward
pressure on net yields to investors in the Company’s
programs could compare poorly to rising yields on alternative
investments. Additionally, as interest rates rise, valuations of
commercial real estate properties typically decline. A decrease
in both the attractiveness of the Company’s programs and
the value of assets held by these programs could cause a
decrease in both transaction and management services revenues,
which would have an adverse effect on the Company’s results
of operations.
Increasing
competition for the acquisition of real estate may impede the
Company’s ability to make future acquisitions which would
reduce the fees the Company generates from these programs and
could adversely affect the Company’s operating results and
financial condition.
The commercial real estate industry is highly competitive on an
international, national and regional level. The Company’s
programs face competition from REITs, institutional pension
plans, and other public and private real estate companies and
private real estate investors for the acquisition of properties
and for raising capital to create programs to make these
acquisitions. Competition may prevent the Company’s
programs from acquiring desirable properties or increase the
price they must pay for real estate. In addition, the number of
entities and the amount of funds competing for suitable
investment properties may increase, resulting in increased
demand and increased prices paid for these properties. If the
Company’s programs pay higher prices for properties,
investors may experience a lower return on investment and be
less inclined to invest in the Company’s next program which
may decrease the Company’s profitability. Increased
competition for properties may also preclude the Company’s
programs from acquiring properties that would generate the most
28
attractive returns to investors or may reduce the number of
properties the Company’s programs could acquire, which
could have an adverse effect on the Company’s business.
Illiquidity
of real estate investments could significantly impede the
Company’s ability to respond to adverse changes in the
performance of the Company’s programs’ properties and
harm the Company’s financial condition.
Because real estate investments are relatively illiquid, the
Company’s ability to promptly facilitate a sale of one or
more properties or investments in the Company’s programs in
response to changing economic, financial and investment
conditions may be limited. In particular, these risks could
arise from weakness in the market for a property, changes in the
financial condition or prospects of prospective purchasers,
changes in regional, national or international economic
conditions, and changes in laws, regulations or fiscal policies
of jurisdictions in which the property is located. Fees from the
disposition of properties would be materially affected if the
Company were unable to facilitate a significant number of
property dispositions for the Company’s programs.
Uninsured
and underinsured losses may adversely affect
operations.
Should a property sustain damage or an occupant sustain an
injury, the Company may incur losses due to insurance
deductibles, co-payments on insured losses or uninsured losses.
In the event of a substantial property loss or personal injury,
the insurance coverage may not be sufficient to pay the full
damages. In the event of an uninsured loss, the Company could
lose some or all of its capital investment, cash flow and
anticipated profits related to one or more properties.
Inflation, changes in building codes and ordinances,
environmental considerations, and other factors also might make
it not feasible to use insurance proceeds to replace a property
after it has been damaged or destroyed. Under these
circumstances, the insurance proceeds the Company receives, if
any, might not be adequate to restore the Company’s
economic position with respect to the property. In the event of
a significant loss at one or more of the properties in the
Company’s programs, the remaining insurance under the
applicable policy, if any, could be insufficient to adequately
insure the remaining properties. In this event, securing
additional insurance, if possible, could be significantly more
expensive than the current policy. A loss at any of these
properties or an increase in premium as a result of a loss could
decrease the income from or value of properties under management
in the Company’s programs, which in turn would reduce the
fees the Company receives from these programs. Any decrease or
loss in fees could have a material adverse effect on the
Company’s financial condition or results of operations.
The Company carries commercial general liability, fire and
extended coverage insurance with respect to the Company’s
programs’ properties. The Company obtains coverage that has
policy specifications and insured limits that the Company
believes are customarily carried for similar properties. The
Company cannot assure you, however, that particular risks that
are currently insurable will continue to be insurable on an
economic basis or that current levels of coverage will continue
to be available. In addition, the Company generally does not
obtain insurance against certain risks, such as floods.
Risks
Related to the Company in General
Delaware
law and provisions of the Company’s amended and restated
certificate of incorporation and restated bylaws contain
provisions that could delay, deter or prevent a change of
control.
The anti-takeover provisions of Delaware law impose various
impediments on the ability or desire of a third party to acquire
control of the Company, even if a change of control would be
beneficial to its existing stockholders, and the Company will be
subject to these Delaware anti-takeover provisions.
Additionally, the Company’s amended and restated
certificate of incorporation and its restated bylaws contain
provisions that might enable its management to resist a proposed
takeover of the Company. The provisions include:
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•
|
a staggered or classified board of directors;
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|
•
|
the authority of the Company’s board to issue, without
stockholder approval, preferred stock with such terms as the
Company’s board may determine;
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|
•
|
the authority of the Company’s board to adopt, amend or
repeal the Company’s bylaws; and
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29
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•
|
a prohibition on holders of less than a majority of the
Company’s outstanding shares of capital stock calling a
special meeting of the Company’s stockholders.
|
These provisions could discourage, delay or prevent a change of
control of the Company or an acquisition of the Company at a
price that its stockholders may find attractive. These
provisions also may discourage proxy contests and make it more
difficult for the Company’s stockholders to elect directors
and take other corporate actions. The existence of these
provisions could limit the price that investors might be willing
to pay in the future for shares of the Company’s common
stock.
As a
consequence the amendments to the Company’s amended and
restated certificate of incorporation adopted in connection with
the Merger, the Company has a staggered board, which may
entrench management and discourage unsolicited stockholder
proposals that may be deemed to be in the best interests of
stockholders.
The Company’s amended and restated certificate of
incorporation provides that its board of directors be divided
into three classes, each of which will generally serve for a
term of three years with only one class of directors being
elected in each year. As a result, at any annual meeting, only a
minority of the board of directors will be considered for
election. Since the Company’s staggered board would prevent
its stockholders from replacing a majority of its board of
directors at any annual meeting, it may entrench management and
discourage unsolicited stockholder proposals that may be deemed
to be in the best interests of stockholders.
The
Company has the ability to issue blank check preferred stock,
which could adversely affect the voting power and other rights
of the holders of its common stock.
The Company does not currently have any issued and outstanding
preferred stock. However, the board of directors has the right
to issue “blank check” preferred stock, which may
affect the voting rights of holders of common stock and could
deter or delay an attempt to obtain control of the Company.
There are ten million shares of preferred stock authorized.
Subject to the requisite lender approval under the Credit
Facility, the Company’s board of directors is authorized,
without any further stockholder approval, to issue one or more
additional series of preferred stock. The Company is authorized
to fix and state the voting rights, powers, designations,
preferences and relative participation or other special rights
of each such series of preferred stock and any qualifications,
limitations and restrictions thereon. Preferred stock typically
ranks prior to the common stock with respect to dividend rights,
liquidation preferences, or both, and may have full, limited, or
expanded voting rights. Accordingly, issuances of preferred
stock could adversely affect the voting power and other rights
of the holders of common stock and could negatively affect the
market price of the Company’s common stock.
The
Company has registration rights outstanding, which could have a
negative impact on its share price if exercised.
Pursuant to the Company’s registration rights agreement
with Kojaian Ventures, L.L.C. and Kojaian Holdings, LLC, and the
registration rights of the holders of Warrants issued to the
lenders under the Company’s Credit Facility, the holders of
such rights could, in the future, cause the Company to file
additional registration statements with respect to its shares of
common stock, which could have a negative impact on the market
price of the Company’s common stock.
Future
sales of the Company’s common stock could adversely affect
its stock price
The Company issued the Warrants to its lenders in connection
with the execution of the Third Amendment to its Credit
Facility. The Warrants are exercisable for nominal consideration
to purchase that number of shares of common stock of the Company
which equal 15% of the fully diluted common stock of the Company
as of October 1, 2009, subject to adjustment and are
entitled to certain registration rights. The Warrants are not
exercisable until such date (and remain exercisable until
September 30, 2019), and in the event the Company effects
the Recapitalization Plan and the Partial Prepayment on or
before September 30, 2009, the warrants shall automatically
terminate and become null and void. The issuance of shares of
common stock of the Company upon exercise of the Warrants could
materially adversely impact the market price of the
Company’s common stock.
30
In addition, there are an aggregate of 1,077,175 Company shares
subject to issuance upon the exercise of outstanding options.
Accordingly, these shares will be available for sale in the open
market, subject to vesting restrictions, and, in the case of
affiliates, certain volume limitations. The sale of shares
either pursuant to the exercise of outstanding options or as
after the satisfaction of vesting restriction of certain
restricted stock could also cause the price of the
Company’s common stock to decline.
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Item 1B.
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Unresolved
Staff Comments.
|
Not Applicable
The Company leases all of its office space through
non-cancelable operating leases. The terms of the leases vary
depending on the size and location of the office. As of
December 31, 2008, the Company leased over
747,000 square feet of office space in 73 locations under
leases which expire at various dates through June 30, 2020.
For those leases that are not renewable, the Company believes
that there are adequate alternatives available at acceptable
rental rates to meet its needs, although there can be no
assurances in this regard. Many of our offices that contain
employees of the Transaction Services, Investment Management or
Management Services segments also contain employees of other
segments. The Company’s Corporate Headquarters are in Santa
Ana, California. See Note 20 of Notes to Consolidated
Financial Statements in Item 8 of this Report for
additional information, which is incorporated herein by
reference.
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Item 3.
|
Legal
Proceedings.
|
On September 16, 2004, Triple Net Properties, LLC (which
was re-named Grubb & Ellis Realty Investors, LLC
(“GERI”) after the Merger), learned that the SEC Staff
was conducting an investigation referred to as
“In the
matter of Triple Net Properties, LLC.”
The SEC Staff
requested information from Triple Net Properties relating to
disclosure in the Triple Net Securities Offerings. The SEC Staff
also requested information from NNN Capital Corp. (which was
re-named GBE Securities after the Merger), the dealer-manager
for the Triple Net securities offerings. The SEC Staff requested
financial and other information regarding the Triple Net
securities offerings and the disclosures included in the related
offering documents from each of Triple Net Properties and NNN
Capital Corp.
On June 2, 2008, the Company was notified by the SEC Staff
that the SEC closed the investigation without any enforcement
action against the Company or its subsidiaries. As a result, the
shares of common stock owned by Mr. Thompson, the founder
of Triple Net Properties and the former Chairman of the Company
that were being held in the escrow account pending the outcome
of the SEC investigation were returned to Mr. Thompson and
the escrow agreement was terminated.
General
Grubb & Ellis and its subsidiaries are involved in
various claims and lawsuits arising out of the ordinary conduct
of its business, as well as in connection with its participation
in various joint ventures and partnerships, many of which may
not be covered by the Company’s insurance policies. In the
opinion of management, the eventual outcome of such claims and
lawsuits is not expected to have a material adverse effect on
the Company’s financial position or results of operations.
31
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Item 4.
|
Submission
of Matters to a Vote of Security Holders.
|
The Company held its Annual Meeting of Stockholders on
December 3, 2008 (the “Annual Meeting”). At the
Annual Meeting, the Company’s stockholders voted upon each
of the following matters:
1. The election of three (3) Class A directors,
each to serve for a term of three (3) years expiring in
2011 and until their successors are elected and qualified, for
which our Board of Directors nominated Harold H. Greene, Devin
I. Murphy and D. Fleet Wallace for election at the Annual
Meeting;
2. The ratification of the appointment, by the Board of
Directors, of Ernst & Young LLP as the Company’s
independent registered public accounting firm for the fiscal
year ending December 31, 2008;
3. A proposal submitted by a stockholder to adopt a
resolution to amend the Amended and Restated Bylaws of the
Company to require the Company to hold the Annual Meeting on
December 3, 2008 and to prevent the Company from delaying
such meeting to a later date; and
4. A proposal submitted by a stockholder to adopt a
resolution to amend the Amended and Restated Bylaws of the
Company to require stockholder approval for adjournment of a
stockholder meeting at which a quorum is present.
With respect to matter number 1, each of Harold H. Greene, Devin
I. Murphy and D. Fleet Wallace were elected to serve for a term
of three (3) years expiring in 2011 and until their
successors are elected and qualified. The results of the
election are below:
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Election of Directors
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For
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Withheld
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Abstentions
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Broker Non-Votes
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Harold H. Greene
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28,486,574
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135,814
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25,698,805
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0
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Devin I. Murphy
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32,839,367
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130,723
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21,351,103
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0
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D. Fleet Wallace
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28,482,376
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140,012
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25,698,805
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0
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Anthony W. Thompson
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19,884,716
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1,466,386
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32,970,091
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0
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Harold A. Ellis, Jr.
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25,624,199
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74,605
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28,622,389
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0
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Stuart A. Tanz
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25,624,414
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74,390
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28,622,389
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0
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|
In addition, each of Glenn L. Carpenter, Gary H. Hunt, C.
Michael Kojaian, Robert J. McLaughlin and Rodger D. Young
continue to serve on the Board in accordance with their
respective terms.
With respect to matter number 2: 54,145,810 votes were cast in
favor; 125,647 votes were cast against; there were 49,736
abstentions; and there were no broker non-votes.
With respect to matter number 3: 20,912,450 votes were cast in
favor; 11,464,320 votes were cast against; there were 21,944,423
abstentions; and there were no broker non-votes. Accordingly,
since a majority of all issued and outstanding shares as of the
record date for the Annual Meeting (of which there were
64,628,798 shares) voting in favor of this proposal was
required for this proposal to be approved, the proposal was
defeated.
With respect to matter number 4: 30,522,726 votes were cast in
favor; 23,673,747 votes were cast against; there were 124,720
abstentions; and there were no broker non-votes. Accordingly,
since a majority of all issued and outstanding shares as of the
record date for the Annual Meeting (of which there were
64,628,798 shares) voting in favor of this proposal was
required for this proposal to be approved, the proposal was
defeated.
32
GRUBB &
ELLIS COMPANY
PART II
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Item 5.
|
Market
for Registrant’s Common Equity and Related Stockholder
Matters.
|
Market
and Price Information
The principal market for the Company’s common stock is the
NYSE. The following table sets forth the high and low sales
prices of the Company’s common stock on the respective
market for each quarter of the years ended December 31,
2008 and 2007.
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2008
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2007
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High
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Low
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High
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Low
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First Quarter
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$
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7.50
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$
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3.80
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$
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11.90
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$
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10.23
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Second Quarter
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$
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7.50
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$
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3.61
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$
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13.25
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$
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10.69
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Third Quarter
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$
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5.00
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$
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2.70
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$
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12.15
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$
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7.00
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Fourth Quarter
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$
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2.88
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$
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0.81
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$
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9.57
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$
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4.95
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As of May 15, 2009, there were 1,071 registered holders of
the Company’s common stock and 65,265,828 shares of
common stock outstanding. Sales of substantial amounts of common
stock, including shares issued upon the exercise of warrants or
options, or the perception that such sales might occur, could
adversely affect prevailing market prices for the common stock.
The Company declared first and second quarter cash dividends in
2008 for an aggregate of $0.2050 per share for the year. On
July 11, 2008, the Company’s Board of Directors
approved the suspension of future dividend payments. Legacy NNN
declared aggregate quarterly cash dividends in 2007 of $0.33 per
share and the Company declared a fourth quarter cash dividend in
2007 of $0.03 for an aggregate of $0.36 per share in cash
dividends for the year.
Sales of
Unregistered Securities
During 2008, the Company implemented a deferred compensation
plan that allows for the granting of “phantom” shares
of company stock to participants under a deferred compensation
plan arrangement. These awards vest over three to five years.
Vested phantom stock awards are paid according to distribution
elections made by the participants at the time of vesting and
are expected to be settled by the Company purchasing shares of
Company common stock in the open market from time to time and
delivering such shares to the participant. During 2008, the
Company awarded an aggregate of 5.4 million phantom shares
to certain employees with an aggregate value on the various
grant dates of $22.5 million. On December 31, 2008, an
aggregate of 5.2 million phantom share grants were
outstanding. Generally, upon vesting, recipients of the grants
are entitled to receive the number of phantom shares granted,
regardless of the value of the shares upon the date of vesting;
provided, however, grants with respect to 900,000 phantom shares
had a guaranteed minimum share price ($3.1 million in the
aggregate) that will result in the Company paying additional
compensation to the participants should the value of the shares
upon vesting be less than the grant date value of the shares.
The issuances by the Company of the “phantom” share
awards in the transactions described above were exempt from the
registration requirements of Section 5 of the Securities
Act pursuant to Section 4(2) of the Securities Act, as
amended, as such transactions did not involve a public offering
by the Company.
33
Equity
Compensation Plan Information
The following table provides information on equity compensation
plans of the Company as of December 31, 2008.
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Number of securities
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remaining available
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Weighted average
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for
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Number of securities to
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exercise price of
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future issuance under
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be
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outstanding
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equity compensation
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issued upon exercise of
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options,
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plans (excluding
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outstanding options,
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warrants and
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securities reflected in
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warrants and rights
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rights
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column (a))
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Plan Category
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(a)
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(b)
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(c)
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Equity compensation plans approved by security holders
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1,077,175
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$
|
7.76
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2,055,375
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Equity compensation plans not approved by security holders
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—
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—
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—
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Total
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1,077,175
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$
|
7.76
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|
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2,055,375
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Grubb &
Ellis Stock Performance
This section entitled, “Grubb & Ellis Stock
Performance” is not to be deemed to be “soliciting
material” or to be “filed” with the SEC or
subject to Regulation 14A or 14C or to the liabilities of
Section 18 of the Exchange Act, except to the extent that
the Company specifically requests that such information be
treated as soliciting material or specifically incorporates it
by reference into any filing under the Securities Act or the
Exchange Act.
The graph below matches the cumulative
66-month
total return to shareholders on Grubb & Ellis
Company’s common stock versus the cumulative total returns
of the S&P 500 index, and a customized peer group of three
companies that includes: CB Richard Ellis Group Inc,
Grubb & Ellis Company and Jones Lang Lasalle Inc. The
graph assumes that the value of the investment in the
company’s common stock, in the peer group, and the S&P
500 index (including reinvestment of dividends) was $100 on
6/30/2003
and tracks it through
12/31/2008.
34
COMPARISON OF 66
MONTH CUMULATIVE TOTAL RETURN*
Among
Grubb & Ellis Company, The S&P 500 Index
And A Peer Group
*$100
invested on 6/30/03 in stock & index-including reinvestment
of dividends. Fiscal year ended December 31.
Copyright
©
2009 S&P, a division of The McGraw-Hill Companies Inc. All
rights reserved.
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6/03
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6/04
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6/05
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6/06
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6/07
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12/07
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12/08
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Grubb & Ellis Company
|
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100.00
|
|
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|
169.36
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595.74
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787.23
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987.23
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547.79
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|
110.55
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S&P 500
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100.00
|
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|
119.11
|
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126.64
|
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137.57
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165.90
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163.63
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|
103.09
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Peer Group
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100.00
|
|
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|
171.44
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352.04
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|
629.07
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|
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|
884.74
|
|
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|
533.23
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|
142.38
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|
The stock price performance included in this graph is not
necessarily indicative of future stock price performance.
35
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|
|
Item 6.
|
Selected
Financial Data.
|
The following tables set forth the selected historical
consolidated financial data for Grubb & Ellis and its
subsidiaries, as of and for the years ended, December 31,
2008, 2007 (restated), 2006 (restated), 2005 (restated), and
2004 (restated). GERI (formerly Triple Net Properties) was the
accounting acquirer of Realty and NNN Capital Corp. The selected
historical consolidated financial data as of and for the years
ended December 31, 2008, 2007 (restated) and 2006
(restated) has been derived from the audited financial
statements included in Item 8. of this Report. The selected
historical financial data as of and for the years ended
December 31, 2005 (restated) and 2004 (restated) have been
derived from the audited consolidated financial statements not
included in this Report. Historical results are not necessarily
indicative of the results that may be expected for any future
period.
The selected historical consolidated financial data for the
years ended December 31, 2007 (restated), 2006 (restated),
2005 (restated) and 2004 (restated) has been restated to correct
accounting errors related to the timing of revenue recognition
relating to certain
tenant-in-common
investment programs sponsored by GERI and the consolidation of
certain entities that should have been consolidated into the
Company’s financial statements as described in Item 8,
Note 3 to the consolidated financial statements. The
selected historical consolidated financial data set forth below
should be read in conjunction with Item 7 and the
consolidated financial statements.
The impact of the restatement on fiscal year 2007 resulted in an
increase in net income of $230,000, or less than $.01 per basic
and diluted share, an increase in total assets of
$12.1 million, an increase in total liabilities of
$5.5 million and an increase in minority interest liability
of $11.2 million. The impact of the restatement on fiscal
year 2006 resulted in an increase in net income of
$3.9 million, or $0.19 per basic and diluted share, a
increase in total assets of $19.7 million, an increase in
total liabilities of $18.1 million and an increase in
minority interest liability of $6.3 million. The impact of
the restatement resulted on fiscal year 2005 resulted in a
decrease in net income of $8.1 million, or $0.47 per basic
and diluted share, an increase in total assets of
$39.7 million, an increase in total liabilities of
$47.4 million and an increase in minority interest
liability of $993,000. The impact of the restatement on fiscal
year 2004 resulted in an decrease in net income of $619,000, or
$0.04 per basic and diluted share and an increase in total
liabilities of $619,000.
36
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|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
(In thousands, except per share
data)
|
|
2008
|
|
|
Restated(1)
|
|
|
Restated(2)
|
|
|
Restated(3)
|
|
|
Restated(3)
|
|
|
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total services revenue
|
|
$
|
595,495
|
|
|
$
|
201,538
|
|
|
$
|
99,599
|
|
|
$
|
80,817
|
|
|
$
|
64,281
|
|
|
Total revenue
|
|
|
611,821
|
|
|
|
217,937
|
|
|
|
108,543
|
|
|
|
84,423
|
|
|
|
66,592
|
|
|
Total compensation costs
|
|
|
503,004
|
|
|
|
104,109
|
|
|
|
49,449
|
|
|
|
29,873
|
|
|
|
19,717
|
|
|
Total operating expense
|
|
|
867,275
|
|
|
|
175,588
|
|
|
|
97,633
|
|
|
|
71,035
|
|
|
|
51,082
|
|
|
Operating (loss) income
|
|
|
(255,454
|
)
|
|
|
42,349
|
|
|
|
10,910
|
|
|
|
13,388
|
|
|
|
15,510
|
|
|
(Loss) income from continuing operations
|
|
|
(279,492
|
)
|
|
|
26,826
|
|
|
|
20,934
|
|
|
|
13,438
|
|
|
|
15,628
|
|
|
Net (loss) income
|
|
|
(330,870
|
)
|
|
|
21,072
|
|
|
|
19,971
|
|
|
|
10,047
|
|
|
|
15,628
|
|
|
Basic (loss) earnings per share:
|
|
$
|
(5.21
|
)
|
|
$
|
0.55
|
|
|
$
|
1.01
|
|
|
$
|
0.58
|
|
|
$
|
0.90
|
|
|
Diluted (loss) earnings per share:
|
|
$
|
(5.21
|
)
|
|
$
|
0.55
|
|
|
$
|
1.01
|
|
|
$
|
0.58
|
|
|
$
|
0.90
|
|
|
Basic weighted average shares outstanding
|
|
|
63,515
|
|
|
|
38,652
|
|
|
|
19,681
|
|
|
|
17,200
|
|
|
|
17,407
|
|
|
Diluted weighted average shares outstanding
|
|
|
63,515
|
|
|
|
38,653
|
|
|
|
19,694
|
|
|
|
17,200
|
|
|
|
17,407
|
|
|
Dividends declared per share
|
|
$
|
0.205
|
|
|
$
|
0.36
|
|
|
$
|
0.10
|
|
|
|
—
|
|
|
|
—
|
|
|
Consolidated Statement of Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(33,629
|
)
|
|
$
|
33,543
|
|
|
$
|
17,356
|
|
|
$
|
23,536
|
|
|
$
|
17,214
|
|
|
Net cash used in investing activities
|
|
|
(76,330
|
)
|
|
|
(486,909
|
)
|
|
|
(56,203
|
)
|
|
|
(35,183
|
)
|
|
|
(13,046
|
)
|
|
Net cash provided by (used in) financing activities
|
|
|
93,616
|
|
|
|
400,468
|
|
|
|
140,525
|
|
|
|
10,251
|
|
|
|
(7,647
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
2008
|
|
|
2007 Restated
|
|
|
2006 Restated
|
|
|
2005 Restated
|
|
|
Restated
|
|
|
|
|
Consolidated Balance Sheet Data (at end of period):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
520,277
|
|
|
$
|
988,542
|
|
|
$
|
347,709
|
|
|
$
|
126,057
|
|
|
$
|
42,911
|
|
|
Line of credit
|
|
|
63,000
|
|
|
|
8,000
|
|
|
|
—
|
|
|
|
8,500
|
|
|
|
3,545
|
|
|
Notes payable
|
|
|
215,959
|
|
|
|
348,931
|
|
|
|
62,978
|
|
|
|
54,931
|
|
|
|
—
|
|
|
Senior and participating notes
|
|
|
16,277
|
|
|
|
16,277
|
|
|
|
10,263
|
|
|
|
2,300
|
|
|
|
4,845
|
|
|
Redeemable preferred liability
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,077
|
|
|
|
5,717
|
|
|
Stockholders’ equity
|
|
|
70,171
|
|
|
|
404,056
|
|
|
|
217,125
|
|
|
|
20,081
|
|
|
|
16,164
|
|
|
|
|
|
|
(1)
|
|
Based on Generally Accepted Accounting Principles (GAAP), the
operating results for the year ended December 31, 2007
(restated) includes the results of legacy NNN for the full
periods presented and the results of the legacy
Grubb & Ellis business for the period from
December 8, 2007 through December 31, 2007.
|
|
|
|
(2)
|
|
Includes a full year of operating results of GERI, one and
one-half months of Realty (acquired on November 16,
2006) and one-half month of GBE Securities (formerly NNN
Capital Corp.) (acquired on December 14, 2006). GERI was
treated as the acquirer in connection with these transactions.
|
|
|
|
(3)
|
|
Based on GAAP, reflects operating results of GERI.
|
37
|
|
|
|
Item 7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
Note Regarding Forward-Looking Statements
The accompanying Management’s Discussion and Analysis of
Financial Condition and Results of Operations reflects the
restatement of previously issued financial statements, as
discussed in Item 8, Note 3 to the consolidated
financial statements.
This Annual Report contains statements that are
forward-looking and as such are not historical facts. Rather,
these statements constitute projections, forecasts or
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. You should not place
undue reliance on these statements. Forward-looking statements
include information concerning the Company’s liquidity and
possible or assumed future results of operations, including
descriptions of the Company’s business strategies. These
statements often include words such as “believe,”
“expect,” “anticipate,” “intend,”
“plan,” “estimate” “seek,”
“will,” “may” or similar expressions. These
statements are based on certain assumptions that the Company has
made in light of its experience in the industry as well as its
perceptions of the historical trends, current conditions,
expected future developments and other factors the Company
believes are appropriate under these circumstances.
All such forward-looking statements speak only as of the date
of this Annual Report. The Company expressly disclaims any
obligation or undertaking to release publicly any updates or
revisions to any forward-looking statements contained herein to
reflect any change in the Company’s expectations with
regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
As you read this Annual Report, you should understand that
these statements are no guarantees of performance or results.
They involve risks, uncertainties and assumptions. You should
understand the risks and uncertainties discussed in
“Item 1A — Risk Factors” and elsewhere
in this Annual Report, could affect the Company’s actual
financial results and could cause actual results to differ
materially from those expressed in the forward-looking
statements. Some important factors include, but are not limited
to:
|
|
|
|
|
|
•
|
our ability to satisfy financial and other covenants of our
Credit Facility;
|
|
|
|
|
•
|
the continued weakening national economy in general and the
commercial real estate markets in particular;
|
|
|
|
|
•
|
the continued global credit crises and capital markets
disruption;
|
|
|
|
|
•
|
changes in general economic and business conditions, including
interest rates, the cost and availability of financing of
capital for investment in real estate, clients’ willingness
to make real estate commitments and other factors impacting the
value of real estate assets;
|
|
|
|
|
•
|
our ability to retain major clients and renew related contracts;
|
|
|
|
|
•
|
the failure of properties sponsored or managed by us to perform
as anticipated;
|
|
|
|
|
•
|
the effects of the restatement of certain of our financial
statements;
|
|
|
|
|
•
|
our ability to compete in specific geographic markets or
business segments that are material to us;
|
|
|
|
|
•
|
the contraction of the TIC market;
|
|
|
|
|
•
|
declining values of real assets and distributions on our
programs;
|
|
|
|
|
•
|
significant variability in our results of operations among
quarters;
|
|
|
|
|
•
|
our ability to retain our senior management and attract and
retain qualified and experienced employees;
|
|
|
|
|
•
|
our ability to comply with the laws and regulations applicable
to real estate brokerage investment syndication and mortgage
transactions;
|
|
|
|
|
•
|
our exposure to liabilities in connection with real estate
brokerage, real estate and property management activities;
|
38
|
|
|
|
|
|
•
|
changes in the key components of revenue growth for large
commercial real estate services companies;
|
|
|
|
|
•
|
reliance of companies on outsourcing for their commercial real
estate needs;
|
|
|
|
|
•
|
liquidity and availability of additional or continued sources of
financing for the Company’s investment programs;
|
|
|
|
|
•
|
trends in use of large, full-service real estate providers;
|
|
|
|
|
•
|
diversification of our client base;
|
|
|
|
|
•
|
improvements in operating efficiency;
|
|
|
|
|
•
|
protection of our brand;
|
|
|
|
|
•
|
trends in pricing for commercial real estate services; and
|
|
|
|
|
•
|
the effect of implementation of new tax and accounting rules and
standards.
|
Overview
and Background
The Company is a commercial real estate services and investment
management firm. The Merger was accounted for using the purchase
method of accounting based on accounting principles generally
accepted in the United States (“GAAP”) and as such,
although structured as a reverse merger, NNN is considered the
acquirer of legacy Grubb & Ellis. As a consequence,
the operating results for the twelve months ended
December 31, 2008 reflect the consolidated results of the
Company as a result of the Merger, while the twelve months ended
December 31, 2007 includes the full year operating results
of legacy NNN and the operating results of legacy
Grubb & Ellis for the period from December 8,
2007 through December 31, 2007. The year ended
December 31, 2006 includes solely the operating results of
legacy NNN.
Unless otherwise indicated, all pre-Merger legacy NNN share data
have been adjusted to reflect the conversion as a result of the
Merger (see Note 10 of Notes to Consolidated Financial
Statements in Item 8 of this Report for additional
information).
Critical
Accounting Policies
The Company’s consolidated financial statements have been
prepared in accordance with GAAP. Certain accounting policies
are considered to be critical accounting policies, as they
require management to make assumptions about matters that are
highly uncertain at the time the estimate is made and changes in
the accounting estimate are reasonably likely to occur from
period to period. The Company believes that the following
critical accounting policies reflect the more significant
judgments and estimates used in the preparation of its
consolidated financial statements.
Revenue
Recognition
Transaction
Services
Real estate sales commissions are recognized when earned which
is typically the close of escrow. Receipt of payment occurs at
the point at which all Company services have been performed, and
title to real property has passed from seller to buyer, if
applicable. Real estate leasing commissions are recognized upon
execution of appropriate lease and commission agreements and
receipt of full or partial payment, and, when payable upon
certain events such as tenant occupancy or rent commencement,
upon occurrence of such events. All other commissions and fees
are recognized at the time the related services have been
performed and delivered by the Company to the client, unless
future contingencies exist.
Investment
Management
The Company earns fees associated with its transactions by
structuring, negotiating and closing acquisitions of real estate
properties to third-party investors. Such fees include
acquisition fees for locating and acquiring the property and
selling it to various TIC investors, REITs and its various real
estate funds. The Company accounts for acquisition and loan fees
in accordance with AICPA Statement of Position
92-1
(“SOP 92-1”),
Accounting for Real Estate Syndication Income
, and
Statement of Financial Accounting
39
Standards No. 66 (“SFAS No. 66”),
Accounting for Sales of Real Estate
. In general, the
Company records the acquisition and loan fees upon the close of
sale to the buyer if the buyer is independent of the seller,
collection of the sales price, including the acquisition fees
and loan fees, is reasonably assured, and the Company is not
responsible for supporting operations of the property.
Organizational marketing expense allowance (“OMEA”),
fees are earned and recognized from gross proceeds of equity
raised in connection with offerings and are used to pay
formation costs, as well as organizational and marketing costs.
When the Company does not meet the criteria for revenue
recognition under SFAS No. 66 and
SOP 92-1,
revenue is deferred until revenue can be reasonably estimated or
until the Company defers revenue up to its maximum exposure to
loss. The Company earns disposition fees for disposing of the
property on behalf of the REIT, investment fund or TIC. The
Company recognizes the disposition fee when the sale of the
property closes. The Company is entitled to loan advisory fees
for arranging financing related to properties under management.
The Company earns captive asset and property management fees
primarily for managing the operations of real estate properties
owned by the real estate programs, REITs and limited liability
companies that invest in real estate or value funds it sponsors.
Such fees are based on pre-established formulas and contractual
arrangements and are earned as such services are performed. The
Company is entitled to receive reimbursement for expenses
associated with managing the properties; these expenses include
salaries for property managers and other personnel providing
services to the property. Each property in the Company’s
TIC Programs may also be charged an accounting fee for costs
associated with preparing financial reports. The Company is also
entitled to leasing commissions when a new tenant is secured and
upon tenant renewals. Leasing commissions are recognized upon
execution of leases.
Through its dealer-manager, the Company facilitates capital
raising transactions for its programs its dealer-manager acts as
a dealer-manager exclusively for the Company’s programs and
does not provide securities services to any third party. The
Company’s wholesale dealer-manager services are comprised
of raising capital for its programs through its selling
broker-dealer relationships. Most of the commissions, fees and
allowances earned for its dealer-manager services are passed on
to the selling broker-dealers as commissions and to cover
offering expenses, and the Company retains the balance.
Accordingly, the Company records these fees net of the amounts
paid to its selling broker-dealer relationships.
Management
Services
Management fees are recognized at the time the related services
have been performed by the Company, unless future contingencies
exist. In addition, in regard to management and facility service
contracts, the owner of the property will typically reimburse
the Company for certain expenses that are incurred on behalf of
the owner, which are comprised primarily of
on-site
employee salaries and related benefit costs. The amounts which
are to be reimbursed per the terms of the services contract, are
recognized as revenue by the Company in the same period as the
related expenses are incurred. In certain instances, the Company
sub contracts its property management services to independent
property managers, in which case the Company passes a portion of
their property management fee on to the sub contractor, and the
Company retains the balance. Accordingly, the Company records
these fees net of the amounts paid to its sub contractors.
Basis
of Presentation and Principles of Consolidation
The consolidated financial statements include the accounts of
the Company and its wholly-owned and majority-owned controlled
subsidiaries’ variable interest entities (“VIEs”)
in which the Company is the primary beneficiary and
partnerships/LLCs in which the Company is the managing member or
general partner and the other partners/members lack substantive
rights (hereinafter collectively referred to as the
“Company”). All significant intercompany accounts and
transactions have been eliminated in consolidation. For
acquisitions of an interest in an entity or newly formed joint
venture or limited liability company, the Company evaluates the
entity to determine if the entity is deemed a VIE, and if the
Company is deemed to be the primary beneficiary, in accordance
with Financial Accounting Standards Board (“FASB”)
Interpretation No. 46(R),
Consolidation of Variable
Interest Entities
(“FIN No. 46(R)”).
The Company consolidates entities that are VIEs when the Company
is deemed to be the primary beneficiary of the VIE. For entities
in which (i) the Company is not deemed to be the primary
beneficiary,
40
(ii) the Company’s ownership is 50.0% or less and
(iii) the Company has the ability to exercise significant
influence, the Company uses the equity accounting method (i.e.
at cost, increased or decreased by the Company’s share of
earnings or losses, plus contributions less distributions). The
Company also uses the equity method of accounting for
jointly-controlled
tenant-in-common
interests. As events occur, the Company will reconsider its
determination of whether an entity is a VIE and who the primary
beneficiary is to determine if there is a change in the original
determinations and will report such changes on a quarterly basis.
Purchase
Price Allocation
In accordance with the Financial Accounting Standards
Board’s (“FASB”) Statement of Financial
Accounting Standards (“SFAS”) No. 141,
Business Combinations
(“SFAS 141”), the
purchase price of acquired properties is allocated to tangible
and identified intangible assets and liabilities based on their
respective fair values. The allocation to tangible assets
(building and land) is based upon determination of the value of
the property as if it were vacant using discounted cash flow
models similar to those used by independent appraisers. Factors
considered include an estimate of carrying costs during the
expected
lease-up
periods considering current market conditions and costs to
execute similar leases. Additionally, the purchase price of the
applicable property is allocated to the above or below market
value of in-place leases and the value of in-place leases and
related tenant relationships.
The value allocable to the above or below market component of
the acquired in-place leases is determined based upon the
present value (using a discount rate which reflects the risks
associated with the acquired leases) of the difference between
(i) the contractual amounts to be paid pursuant to the
lease over its remaining term, and (ii) the Company’s
estimate of the amounts that would be paid using fair market
rates over the remaining term of the lease. The amounts
allocated to above market leases are included in identified
intangible assets and below market lease values are included in
liabilities in the accompanying consolidated financial
statements and are amortized to rental revenue over the
weighted-average remaining term of the acquired leases with each
property.
The total amount of identified intangible assets acquired is
further allocated to in-place lease costs and the value of
tenant relationships based on management’s evaluation of
the specific characteristics of each tenant’s lease and the
Company’s overall relationship with that respective tenant.
Characteristics considered in allocating these values include
the nature and extent of the credit quality and expectations of
lease renewals, among other factors. These allocations are
subject to change within one year of the date of purchase based
on information related to one or more events identified at the
date of purchase that confirm the value of an asset or liability
of an acquired property.
Impairment
of Long-Lived Assets
In accordance with SFAS No. 144,
Accounting for the
Impairment or Disposal of Long-Lived Assets
, long-lived
assets are periodically evaluated for potential impairment
whenever events or changes in circumstances indicate that their
carrying amount may not be recoverable. In the event that
periodic assessments reflect that the carrying amount of the
asset exceeds the sum of the undiscounted cash flows (excluding
interest) that are expected to result from the use and eventual
disposition of the asset, the Company would recognize an
impairment loss to the extent the carrying amount exceeded the
fair value of the property. The Company estimates the fair value
using available market information or other industry valuation
techniques such as present value calculations. This valuation
review resulted in the recognition of an impairment charge of
approximately $90.4 million against the carrying value of
the properties and real estate investments during the year ended
December 31, 2008. No impairment losses were recognized for
the years ended December 31, 2007 and 2006.
The Company recognizes goodwill and other
non-amortizing
intangible assets in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets
(“SFAS No. 142”). Under
SFAS No. 142, goodwill is recorded at its carrying
value and is tested for impairment at least annually or more
frequently if impairment indicators exist at a level of
reporting referred to as a reporting unit. The Company
recognizes goodwill in accordance with SFAS No. 142
and tests the carrying value for impairment during the fourth
quarter of each year. The goodwill impairment analysis is a
two-step process. The first step used to identify potential
41
impairment involves comparing each reporting unit’s
estimated fair value to its carrying value, including goodwill.
To estimate the fair value of its reporting units, the Company
used a discounted cash flow model and market comparable data.
Significant judgment is required by management in developing the
assumptions for the discounted cash flow model. These
assumptions include cash flow projections utilizing revenue
growth rates, profit margin percentages, discount rates,
market/economic conditions, etc. If the estimated fair value of
a reporting unit exceeds its carrying value, goodwill is
considered to not be impaired. If the carrying value exceeds
estimated fair value, there is an indication of potential
impairment and the second step is performed to measure the
amount of impairment. The second step of the process involves
the calculation of an implied fair value of goodwill for each
reporting unit for which step one indicated a potential
impairment. The implied fair value of goodwill is determined by
measuring the excess of the estimated fair value of the
reporting unit as calculated in step one, over the estimated
fair values of the individual assets, liabilities and identified
intangibles. During the fourth quarter of 2008, the Company
identified the uncertainty surrounding the global economy and
the volatility of the Company’s market capitalization as
goodwill impairment indicators. The Company’s goodwill
impairment analysis resulted in the recognition of an impairment
charge of approximately $172.7 million during the year
ended December 31, 2008. The Company also analyzed
it’s trade name for impairment pursuant to
SFAS No. 142 and determined that the trade name was
not impaired as of December 31, 2008. Accordingly, no
impairment charge was recorded related to the trade name during
the year ended December 31, 2008. In addition to testing
goodwill and it’s trade name for impairment, the Company
tested the intangible contract rights for impairment during the
fourth quarter of 2008. The intangible contract rights represent
the legal right to future disposition fees of a portfolio of
real estate properties under contract. As a result of the
current economic environment, a portion of these disposition
fees may not be recoverable. Based on the Company’s
analysis for the current and projected property values,
condition of the properties and status of mortgage loans
payable, the Company determined that there are certain
properties for which receipt of disposition fees was improbable.
As a result, the Company recorded an impairment charge of
approximately $8.6 million related to the impaired
intangible contract rights as of December 31, 2008.
Insurance
and Claim Reserves
The Company has maintained partially self-insured and deductible
programs for, general liability, workers’ compensation and
certain employee health care costs. In addition, the Company
assumed liabilities at the date of the Merger representing
reserves related to a self insured errors and omissions program
of the acquired company. Reserves for all such programs are
included in accrued claims and settlements and compensation and
employee benefits payable, as appropriate. Reserves are based on
the aggregate of the liability for reported claims and an
actuarially-based estimate of incurred but not reported claims.
As of the date of the Merger, the Company entered into a premium
based insurance policy for all error and omission coverage on
claims arising after the date of the Merger. Claims arising
prior to the date of the Merger continue to be applied against
the previously mentioned liability reserves assumed relative to
the acquired company.
The Company is also subject to various proceedings, lawsuits and
other claims related to commission disputes and environmental,
labor and other matters, and is required to assess the
likelihood of any adverse judgments or outcomes to these
matters. A determination of the amount of reserves, if any, for
these contingencies is made after careful analysis of each
individual issue. New developments in each matter, or changes in
approach such as a change in settlement strategy in dealing with
these matters, may warrant an increase or decrease in the amount
of these reserves.
Recently
Issued Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial
Accounting Standards (“SFAS”) No. 157,
Fair
Value Measurements
(“SFAS No. 157”).
SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value
instruments. In February 2008, the FASB issued FASB Staff
Position
No. FAS 157-2,
Effective Date of FASB Statement No. 157
(the
“FSP”). The FSP amends SFAS No. 157 to delay
the effective date of SFAS No. 157 for non-financial
assets and non-financial liabilities, except for items that are
recognized or disclosed at fair value in the financial
statements on a recurring basis (that is, at least annually).
There was no effect on the Company’s consolidated financial
statements as a result of the adoption of SFAS No. 157
as of January 1,
42
2008 as it relates to financial assets and financial
liabilities. For items within its scope, the FSP defers the
effective date of SFAS No. 157 to fiscal years
beginning after November 15, 2008, and interim periods
within those fiscal years. The Company will adopt
SFAS No. 157 as it relates to non-financial assets and
non-financial liabilities in the first quarter of 2009 and does
not believe adoption will have a material effect on its
consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial
Liabilities,
(“SFAS No. 159”).
SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair
value. The objective of the guidance is to improve financial
reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related
assets and liabilities differently without having to apply
complex hedge accounting provisions. The Company adopted
SFAS No. 159 on a prospective basis on January 1,
2008. The adoption of SFAS No. 159 did not have a
material impact on the consolidated financial statements since
the Company did not elect to apply the fair value option for any
of its eligible financial instruments or other items on the
January 1, 2008 effective date.
In December 2007, the FASB issued revised
SFAS No. 141,
Business Combinations,
(“SFAS No. 141R”).
SFAS No. 141R will change the accounting for business
combinations and will require an acquiring entity to recognize
all the assets acquired and liabilities assumed in a transaction
at the acquisition-date fair value with limited exceptions.
SFAS No. 141R will change the accounting treatment and
disclosure for certain specific items in a business combination.
SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or
after December 15, 2008. SFAS No. 141R will have
an impact on accounting for business combinations once adopted
but the effect is dependent upon acquisitions at that time.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements — An Amendment of ARB No. 51,
(“SFAS No. 160”). SFAS No. 160
establishes new accounting and reporting standards for the
non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 requires
that noncontrolling interests be presented as a component of
consolidated stockholders’ equity, eliminates minority
interest accounting such that the amount of net income
attributable to the noncontrolling interests will be presented
as part of consolidated net income in the accompanying
consolidated statements of operations and not as a separate
component of income and expense, and requires that upon any
changes in ownership that result in the loss of control of the
subsidiary, the noncontrolling interest be re-measured at fair
value with the resultant gain or loss recorded in net income.
SFAS No. 160 is effective for fiscal years beginning
on or after December 15, 2008. The Company will adopt
SFAS No. 160 in the first quarter of 2009 and does not
believe the adoption will have a material effect on its
consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities
(“SFAS No. 161”).
SFAS No. 161 is intended to improve financial
reporting of derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better
understand their effects on an entity’s financial position,
financial performance, and cash flows. SFAS No. 161
achieves these improvements by requiring disclosure of the fair
values of derivative instruments and their gains and losses in a
tabular format. It also provides more information about an
entity’s liquidity by requiring disclosure of derivative
features that are credit risk-related. Finally, it requires
cross-referencing within footnotes to enable financial statement
users to locate important information about derivative
instruments. SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning
after November 15, 2008, with early application encouraged.
The Company will adopt SFAS No. 161 in the first
quarter of 2009 and does not believe the adoption will have a
material effect on its consolidated financial statements.
In April 2008, the FASB issued FSP
SFAS No. 142-3,
Determination of the Useful Life of Intangible Assets,
(“FSP
SFAS 142-3”).
FSP
SFAS 142-3
is intended to improve the consistency between the useful life
of recognized intangible assets under SFAS No. 142,
Goodwill and Other Intangible Assets,
(“SFAS No. 142”), and the period of expected
cash flows used to measure the fair value of the assets under
SFAS No. 141R. FSP
SFAS 142-3
amends the factors an entity should consider in developing
renewal or
43
extension assumptions in determining the useful life of
recognized intangible assets. In addition to the required
disclosures under SFAS No. 142, FSP
SFAS 142-3
requires disclosure of the entity’s accounting policy
regarding costs incurred to renew or extend the term of
recognized intangible assets, the weighted average period to the
next renewal or extension, and the total amount of capitalized
costs incurred to renew or extend the term of recognized
intangible assets. FSP
SFAS 142-3
is effective for financial statements issued for fiscal years
and interim periods beginning after December 15, 2008. The
Company will adopt FSP
SFAS 142-3
on January 1, 2009. The adoption of FSP
SFAS 142-3
is not expected to have a material impact on the consolidated
financial statements.
In June 2008, the FASB issued FSP
EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities
(“FSP
EITF 03-6-1”)
,
which addresses whether instruments granted in share-based
payment transactions are participating securities prior to
vesting and, therefore, need to be included in the computation
of earnings per share under the two-class method described in
SFAS No. 128,
Earnings per Share
. FSP
EITF 03-6-1,
which will apply to the Company because it grants instruments to
employees in share-based payment transactions that meet the
definition of participating securities, is effective
retrospectively for financial statements issued for fiscal years
and interim periods beginning after December 15, 2008. The
Company will adopt FSP
EITF 03-6-1
in the first quarter of 2009 and does not believe the adoption
will have a material effect on its consolidated financial
statements.
In December 2008, the Financial Accounting Standards Board
(“FASB”) issued Staff Position (“FSP”)
Statement of Financial Account Standards (“FAS”)
No. 140-4
and FIN 46(R)-8, “Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities” (“FSP
FAS 140-4”).
The purpose of this FSP is to improve disclosures by public
entities and enterprises until pending amendments to
SFAS No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities” (“SFAS 140”), and
FIN 46(R) are finalized and approved by the FASB. The FSP
amends SFAS 140 to require public entities to provide
additional disclosures about transferors’ continuing
involvements with transferred financial assets. It also amends
FIN 46(R) to require public enterprises to provide
additional disclosures about their involvement with variable
interest entities. FSP
FAS 140-4
and FIN 46(R)-8 is effective for financial statements
issued for fiscal years and interim periods ending after
December 15, 2008. For periods after the initial adoption
date, comparative disclosures are required. The Company adopted
the FSP and FIN 46(R)-8 on December 31, 2008.
RESULTS
OF OPERATIONS
Overview
The Company reported revenue of $611.8 million for the year
ended December 31, 2008, compared with revenue of
$217.9 million for the same period of 2007. Approximately
$442.0 million of the increase was attributed to a full
year of results from the Transaction Services and Management
Services businesses. The remaining decrease of
$48.1 million was attributed to a net decrease of
$48.1 million in Investment Management revenue. The
decrease in revenue as compared to the prior year period can be
attributed to lower acquisition fees as a result of less
tenant-in-common
equity raise and lower disposition fees, only partially offset
by an increase in acquisition fees related to our public
non-traded REITs as a result of a significant increase in equity
raised. Additionally, $6.8 million of property management
fees related to captive management programs were recorded in
management services revenue as the property management related
to those programs was transferred subsequent to the Merger. The
Company completed a total of 50 acquisitions and 9 dispositions
on behalf of the investment programs it sponsors at values of
approximately $1.2 billion and $225.8 million,
respectively, during the year ended December 31, 2008. The
net acquisitions from the Investment Management business allowed
the Company to grow its captive assets under management by
approximately 17.5% from $5.8 billion as of
December 31, 2007 to $6.8 billion as of
December 31, 2008.
The net loss for the year ended December 31, 2008 was
$330.9 million, or $5.21 per diluted share, and included a
non-cash charge of $181.3 million for goodwill and
intangible assets impairment, a non-cash charge of
$90.4 million for real estate related impairments (of which
$32.9 million was recorded in the fourth quarter), a
$28.0 million charge, $18.9 million of which is
non-cash, which includes an allowance for bad debt
44
on related party receivables and advances and an expected loss
on the sale of two properties under management for which the
Company has a recourse obligation, a second quarter non-cash
charge of $8.9 million for depreciation and amortization
related to the reclassification of five assets held for sale to
assets held for investment, a first quarter net write-off of its
investment in GERA of $5.8 million and $14.7 million
of merger and integration related costs. In addition, the
year-to-date results included approximately $11.7 million
of stock-based compensation, $1.2 million for amortization
of contract rights and other identified intangible assets and
$1.8 million of recognized loss on marketable equity
securities.
As of September 30, 2008, the Company initiated a plan to
sell the properties it classified as real estate held for
investment in its financial statements as of September 30,
2008. As of December 31, 2008, the Company had a covenant
within its Credit Facility which required the sale of certain of
these assets before March 31, 2009. The downturn in the
global capital markets significantly lessened the probability
that the Company would be able to achieve relief from this
covenant through amendment or other financial resolutions by
March 31 2009. Pursuant to SFAS No. 144,
Accounting
for the Impairment or Disposal of Long-Lived Assets,
the
Company assessed the value of the assets. In addition, the
Company reviewed the valuation of its other owned properties and
real estate investments. This valuation review resulted in the
Company recognizing an impairment charge of approximately
$90.4 million against the carrying value of the properties
and real estate investments as of December 31, 2008.
As a result of the Merger in December 2007, the newly combined
Company’s operating segments were evaluated for reportable
segments. The legacy NNN reportable segments were realigned into
a single operating and reportable segment called Investment
Management. This realignment had no impact on the Company’s
consolidated balance sheet, results of operations or cash flows.
The Company reports its revenue by three operating business
segments in accordance with the provisions of
SFAS No. 131,
Disclosures about Segments of an
Enterprise and Related Information
. Transaction Services,
which comprises its real estate brokerage operations; Investment
Management which includes providing acquisition, financing and
disposition services with respect to its programs, asset
management services related to its programs, and dealer-manager
services by its securities broker-dealer, which facilitates
capital raising transactions for its TIC, REIT and other
investment programs; and Management Services, which includes
property management, corporate facilities management, project
management, client accounting, business services and engineering
services for unrelated third parties and the properties owned by
the programs it sponsors. Additional information on these
business segments can be found in Note 18 of Notes to
Consolidated Financial Statements in Item 8 of this Report.
45
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007
The following summarizes comparative results of operations for
the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
December 31,
|
|
|
Change
|
|
|
(In thousands)
|
|
2008
|
|
|
2007(1)
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction services
|
|
$
|
240,250
|
|
|
$
|
35,522
|
|
|
$
|
204,728
|
|
|
|
576.3
|
%
|
|
Investment management
|
|
|
101,581
|
|
|
|
149,651
|
|
|
|
(48,070
|
)
|
|
|
(32.1
|
)
|
|
Management services
|
|
|
253,664
|
|
|
|
16,365
|
|
|
|
237,299
|
|
|
|
1,450.0
|
|
|
Rental related
|
|
|
16,326
|
|
|
|
16,399
|
|
|
|
(73
|
)
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
611,821
|
|
|
|
217,937
|
|
|
|
393,884
|
|
|
|
180.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation costs
|
|
|
503,004
|
|
|
|
104,109
|
|
|
|
398,895
|
|
|
|
383.2
|
|
|
General and administrative
|
|
|
119,660
|
|
|
|
44,251
|
|
|
|
75,409
|
|
|
|
170.4
|
|
|
Depreciation and amortization
|
|
|
10,312
|
|
|
|
2,621
|
|
|
|
7,691
|
|
|
|
293.4
|
|
|
Rental related
|
|
|
14,414
|
|
|
|
16,054
|
|
|
|
(1,640
|
)
|
|
|
(10.2
|
)
|
|
Interest
|
|
|
5,914
|
|
|
|
2,168
|
|
|
|
3,746
|
|
|
|
172.8
|
|
|
Merger related costs
|
|
|
14,732
|
|
|
|
6,385
|
|
|
|
8,347
|
|
|
|
130.7
|
|
|
Real estate related impairments
|
|
|
17,954
|
|
|
|
—
|
|
|
|
17,954
|
|
|
|
—
|
|
|
Goodwill and intangible asset impairment
|
|
|
181,285
|
|
|
|
—
|
|
|
|
181,285
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
867,275
|
|
|
|
175,588
|
|
|
|
691,687
|
|
|
|
393.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (Loss) Income
|
|
|
(255,454
|
)
|
|
|
42,349
|
|
|
|
(297,803
|
)
|
|
|
(703.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (Expense) Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in losses of unconsolidated entities
|
|
|
(13,311
|
)
|
|
|
2,029
|
|
|
|
(15,340
|
)
|
|
|
(756.0
|
)
|
|
Interest income
|
|
|
902
|
|
|
|
2,992
|
|
|
|
(2,090
|
)
|
|
|
(69.9
|
)
|
|
Other
|
|
|
(6,458
|
)
|
|
|
(465
|
)
|
|
|
(5,993
|
)
|
|
|
(1,288.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income
|
|
|
(18,867
|
)
|
|
|
4,556
|
|
|
|
(23,423
|
)
|
|
|
(514.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before minority
interest and income tax provision
|
|
|
(274,321
|
)
|
|
|
46,905
|
|
|
|
(321,226
|
)
|
|
|
(684.8
|
)
|
|
Minority interest in loss (income) of consolidated entities
|
|
|
11,719
|
|
|
|
(1,961
|
)
|
|
|
13,680
|
|
|
|
697.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (income) from continuing operations before income tax
provision
|
|
|
(262,602
|
)
|
|
|
44,944
|
|
|
|
(307,546
|
)
|
|
|
(684.3
|
)
|
|
Income tax provision
|
|
|
(16,890
|
)
|
|
|
(18,118
|
)
|
|
|
(1,228
|
)
|
|
|
(6.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (income) from continuing operations
|
|
|
(279,492
|
)
|
|
|
26,826
|
|
|
|
(306,318
|
)
|
|
|
(1,141.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations — net of taxes
|
|
|
(51,735
|
)
|
|
|
(6,006
|
)
|
|
|
(45,729
|
)
|
|
|
(761.4
|
)
|
|
Gain on disposal of discontinued operations — net of
taxes
|
|
|
357
|
|
|
|
252
|
|
|
|
105
|
|
|
|
41.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss from discontinued operations
|
|
|
(51,378
|
)
|
|
|
(5,754
|
)
|
|
|
(45,624
|
)
|
|
|
(792.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Loss) Income
|
|
$
|
(330,870
|
)
|
|
$
|
21,072
|
|
|
$
|
(351,942
|
)
|
|
|
(1,670.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Based on GAAP, the operating results for twelve months ended
December 31, 2007 includes the results of NNN for the full
periods presented and the results of the legacy
Grubb & Ellis business for the period from
December 8, 2007 through December 31, 2007.
|
46
Revenue
Transaction
Services Revenue
The Company earns revenue from the delivery of transaction and
management services to the commercial real estate industry.
Transaction fees include commissions from leasing, acquisition
and disposition, and agency leasing assignments as well as fees
from appraisal and consulting services. Management fees, which
include reimbursed salaries, wages and benefits, comprise the
remainder of the Company’s Transaction Services revenue,
and include fees related to both property and facilities
management outsourcing as well as project management and
business services.
The Transaction services segment was acquired from the legacy
Grubb & Ellis on December 7, 2007 which includes
brokerage commission, valuation and consulting revenue. As of
December 31, 2008, legacy Grubb & Ellis had 814
brokers, down from 927 as of December 31, 2007.
Investment
Management Revenue
Investment management revenue of $101.6 million for the
year ended December 31, 2008, which includes transaction,
captive management and dealer-manager businesses, was comprised
primarily of transaction fees of $43.4 million, asset and
property management fees of $38.0 million and
dealer-manager fees of $15.1 million.
Transaction related fees decreased $39.8 million, or 47.8%,
to $43.4 million for the year ended December 31, 2008,
compared to approximately $83.2 million for the same period
in 2007. The year-over-year decrease in transaction fees was
primarily due to decreases of $14.6 million in real estate
acquisition fees, $13.5 million in real estate disposition
fees, $5.0 million in OMEA fees, and $6.6 million in
other transaction related fees.
Acquisition fees decreased approximately $14.6 million, or
31.3%, to $32.1 million for the year ended
December 31, 2008, compared to approximately
$46.7 million for the same period in 2007. The
year-over-year decrease in acquisition fees was primarily
attributed to a decrease of approximately $19.1 million in
fees earned from the Company’s TIC Programs and a decrease
of approximately $2.8 million in fees earned from the
Company’s other real estate funds and joint ventures,
partially offset by an increase of $3.1 million from the
non-traded REIT programs and $4.2 million from Private
Client Management. During the year ended December 31, 2008,
the Company acquired 50 properties on behalf of its sponsored
programs for an approximate aggregate total of
$1.2 billion, compared to 77 properties for an approximate
aggregate total of $2.0 billion during the same period in
2007.
Disposition fees decreased approximately $13.5 million, or
74.5%, to approximately $4.6 million for the year ended
December 31, 2008, compared to approximately
$18.2 million for the same period in 2007. The decrease
reflects lower sales volume and lower sales values due to
current market conditions. Fees on dispositions as a percentage
of aggregate sales price was 2.6% for the year ended
December 31, 2008, compared to 2.4% for the same period in
2007, primarily due to a change in the mix of properties sold.
Offsetting the disposition fees during the year ended
December 31, 2008 and 2007 was $1.2 million and
$3.2 million, respectively, of amortization of identified
intangible contract rights associated with the acquisition of
Realty as they represent the right to future disposition fees of
a portfolio of real properties under contract.
OMEA fees decreased approximately $5.0 million, or 54.3%,
to $4.2 million for the year ended December 31, 2008,
compared to approximately $9.1 million for the same period
in 2007. OMEA fees as a percentage of equity raised for the year
ended December 31, 2008 was 2.4%, compared to 2.0% for the
same period in 2007. The decrease in OMEA fees earned was
primarily due to a decline in TIC equity raised, declining to
$176.9 million in TIC equity raised in 2008, compared to
$452.2 million in TIC equity raised in 2007.
The Company completed a total of 50 acquisitions and 9
dispositions on behalf of the investment programs it sponsors at
values in excess of $1.2 billion and $225.8 million,
respectively, during 2008. The net acquisitions from the
Investment Management business allowed the Company to grow its
captive assets under
47
management by more than 17.0% during 2008. As of
December 31, 2008, the value of the Company’s assets
under management was in excess of $6.8 billion.
Captive management fees were down approximately 7.5%
year-over-year and include the movement of approximately
$6.8 million of revenue to the Company’s management
services segment. Exclusive of this transfer of revenue, captive
management fees increased approximately 9.1% year-over-year.
Management
Services Revenue
Management Services revenue includes asset and property
management fees as well as reimbursed salaries, wages and
benefits from the Company’s third party property management
and facilities outsourcing services, along with business
services fees. Management Services revenue was
$253.7 million for the year ended December 31, 2008
and $16.4 million from December 8, 2007 through
December 31, 2007. Following the closing of the merger,
Grubb & Ellis Management Services assumed management
of nearly 27.1 million square feet of NNN’s
46.9 million-square-foot captive investment management
portfolio. As of December 31, 2008, the Company managed
231.0 million square feet of property.
Rental
Revenue
Rental revenue includes pass-through revenue for the master
lease accommodations related to the Company’s TIC Programs.
Operating
Expense Overview
Operating expenses increased $691.7 million, or 393.9%, to
$867.3 million for the year ended December 31, 2008,
compared to $175.6 million for the same period in 2007. The
increase includes approximately $455.6 million due to the
legacy Grubb & Ellis business, $18.0 million in
real estate related impairments, $181.3 million in goodwill
and intangible asset impairments, a $28.0 million charge
which includes an allowance for bad debt on related party
receivables and advances and an expected loss on the sale of two
properties under management for which the Company has a recourse
obligation, $8.3 million due to additional merger related
costs and $4.2 million in additional non-cash stock based
compensation.
Compensation
costs
Compensation costs increased $398.9 million, or 383.2%, to
$503.0 million for the year ended December 31, 2008,
compared to $104.1 million for the same period in 2007 due
to approximately $406.3 million of compensation costs
attributed to legacy Grubb & Ellis’ operations.
Compensation costs related to the investment management business
decreased approximately 9.4% to $56.6 million, for the year
ended December 31, 2008, compared to $62.5 million for
the same period in 2007. Included in the compensation cost was
non-cash stock compensation expense which increased by
$4.2 million to $11.7 million for the year ended
December 31, 2008 compared to $7.5 million for the
same period in 2007.
General
and Administrative
General and administrative expense increased approximately
$75.4 million, or 170.4%, to $119.7 million for the
year ended December 31, 2008, compared to
$44.3 million for the same period in 2007 due to
approximately $48.4 million of general and administration
expenses attributed to legacy Grubb & Ellis operations
and an increase of $27.0 million related to the investment
management business, primarily due to an increase in allowances
for bad debt on related party receivables and advances.
General and administrative expense was 19.6% of total revenue
for the year ended December 31, 2008, compared with 20.3%
for the same period in 2007.
Depreciation
and Amortization
Depreciation and amortization increased approximately
$7.7 million, or 293.4%, to $10.3 million for the year
ended December 31, 2008, compared to $2.6 million for
the same period in 2007. The increase includes approximately
$6.3 million due to the legacy Grubb & Ellis
business. Included in depreciation and amortization expense was
approximately $3.5 million for amortization of other
identified intangible assets.
48
Rental
Expense
Rental expense includes pass-through expenses for master lease
accommodations related to the Company’s TIC Programs.
Interest
Expense
Interest expense increased approximately $3.7 million, or
172.8%, to $5.9 million for the year ended
December 31, 2008, compared to $2.2 million for the
same period in 2007. Interest expense is primarily comprised of
interest expense related to the Company’s Line of Credit.
Real
Estate Related Impairments
The Company recognized an impairment charge of approximately
$18.0 million during the year ended December 31, 2008
related to certain unconsolidated real estate investments. The
impairment charges were recognized against the carrying value of
the investments during the year ended December 31, 2008. In
addition, the Company recognized approximately
$72.4 million in real estate related impairments related to
six properties held for sale as of December 31, 2008, for
which the net income (loss) of the properties are classified as
discontinued operations. See
Discontinued Operations
discussion below.
Goodwill
and Intangible Assets Impairment
The Company recognized a goodwill and intangible assets
impairment charge of approximately $181.3 million during
the year ended December 31, 2008. The total impairment
charge of $181.3 million is comprised of
$172.7 million related to goodwill impairment and
$8.6 million related to the impairment of intangible
contract rights. The Company recognizes goodwill in accordance
with SFAS No. 142 and tests the carrying value for
impairment during the fourth quarter of each year. The goodwill
impairment analysis is a two-step process. The first step used
to identify potential impairment involves comparing each
reporting unit’s estimated fair value to its carrying
value, including goodwill. To estimate the fair value of its
reporting units, the Company used a discounted cash flow model
and market comparable data. Significant judgment is required by
management in developing the assumptions for the discounted cash
flow model. These assumptions include cash flow projections
utilizing revenue growth rates, profit margin percentages,
discount rates, market/economic conditions, etc. If the
estimated fair value of a reporting unit exceeds its carrying
value, goodwill is considered to not be impaired. If the
carrying value exceeds estimated fair value, there is an
indication of potential impairment and the second step is
performed to measure the amount of impairment. The second step
of the process involves the calculation of an implied fair value
of goodwill for each reporting unit for which step one indicated
a potential impairment. The implied fair value of goodwill is
determined by measuring the excess of the estimated fair value
of the reporting unit as calculated in step one, over the
estimated fair values of the individual assets, liabilities and
identified intangibles. During the fourth quarter of 2008, the
Company identified the uncertainty surrounding the global
economy and the volatility of the Company’s market
capitalization as goodwill impairment indicators. The
Company’s goodwill impairment analysis resulted in the
recognition of an impairment charge of approximately
$172.7 million during the year ended December 31,
2008. The Company also analyzed its trade name for impairment
pursuant to SFAS No. 142 and determined that the trade
name was not impaired as of December 31, 2008. Accordingly,
no impairment charge was recorded related to the trade name
during the year ended December 31, 2008. In addition to
testing goodwill and its trade name for impairment, the Company
tested the intangible contract rights for impairment during the
fourth quarter of 2008. The intangible contract rights represent
the legal right to future disposition fees of a portfolio of
real estate properties under contract. As a result of the
current economic environment, a portion of these disposition
fees may not be recoverable. Based on our analysis for the
current and projected property values, condition of the
properties and status of mortgage loans payable associated with
these contract rights, the Company determined that there are
certain properties for which receipt of disposition fees was
improbable. As a result, the Company recorded an impairment
charge of approximately $8.6 million related to the
impaired intangible contract rights as of December 31, 2008.
49
Equity in
Earnings (Losses) of Unconsolidated Real Estate
In the first quarter of 2008, the Company wrote off its
investment in GERA, which resulted in a net impact of
approximately $5.8 million, including $4.5 million
related to stock and warrant purchases and $1.3 million
related to operating advances and third party costs. Equity in
losses also includes $10.3 million in equity in earnings
related to seven LLCs that are consolidated pursuant to
FIN No. 46(R). The consolidated LLCs record equity in
earnings based on the LLCs pro rata ownership interest in the
underlying unconsolidated properties.
Minority
Interests
Minority interest in loss increased by $13.7 million, or
697.6%, to $11.7 million during the year ended
December 31, 2008, compared to minority interest in income
of $2.0 million for the same period in 2007. Minority
interest in loss includes $8.6 million in real estate
related impairments recorded at the underlying properties during
the year ended December 31, 2008.
Discontinued
Operations
In accordance with SFAS No. 144, for the year ended
December 31, 2008, discontinued operations included the net
income (loss) of six properties and two limited liability
company (“LLC”) entities classified as held for sale
as of December 31, 2008. The net loss of $51.4 million
during the year ended December 31, 2008 includes
approximately $72.4 million of real estate related
impairments. During October 2008, the Company initiated a plan
to sell the properties it classified as held for investment in
its financial statements as of September 30, 2008. As of
December 31, 2008, the Company had a covenant within its
Credit Facility which required the sale of certain of these
assets before March 31, 2009. The downturn in the global
capital markets significantly lessened the probability that the
Company would be able to achieve relief from this covenant
through amendment or other financial resolutions by
March 31, 2009. Pursuant to SFAS No. 144, the
Company assessed the value of the assets. The impairment charges
were recognized against the carrying value of the properties
during the year ended December 31, 2008. (See Note 19
of the Notes to Consolidated Financial Statements in Item 8
of this Report for additional information.)
Income
Tax
The Company recognized a tax expense from continuing operations
of approximately $16.9 million for the year ended
December 31, 2008, compared to a tax expense of
$18.1 million for the same period in 2007. In 2008 and
2007, the reported effective income tax rates were (6.42%) and
40.38%, respectively. The 2008 effective tax rate was negatively
impacted by impairments of Goodwill and the recording of a
valuation allowance against deferred tax assets to the extent
the realization of the associated tax benefit is not
more-likely-than-not. Based on management’s evaluation of
the Company’s tax position, it is believed the amounts
related to the valuation allowances are appropriately accrued.
The Company’s deferred tax assets are primarily
attributable to impairments of various real estate holdings.
(See Note 24 of the Notes to Consolidated Financial
Statements in Item 8 of this Report for additional
information.)
Net
(Loss) Income
As a result of the above items, the Company recognized a net
loss of approximately $330.9 million, or $5.21 per diluted
share for the year ended December 31, 2008, compared to net
income of $21.1 million, or $0.55 per diluted share, for
the same period in 2007.
50
Year
Ended December 31, 2007 Compared to Year Ended
December 31, 2006
The following summarizes comparative results of operations for
the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Change
|
|
|
(In thousands)
|
|
2007(1)
|
|
|
2006(2)
|
|
|
$
|
|
|
%
|
|
|
|
|
Restated
|
|
|
Restated
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction services
|
|
$
|
35,522
|
|
|
$
|
—
|
|
|
$
|
35,522
|
|
|
|
—
|
%
|
|
Investment management
|
|
|
149,651
|
|
|
|
99,599
|
|
|
|
50,052
|
|
|
|
50.3
|
|
|
Management services
|
|
|
16,365
|
|
|
|
—
|
|
|
|
16,365
|
|
|
|
—
|
|
|
Rental related
|
|
|
16,399
|
|
|
|
8,944
|
|
|
|
7,455
|
|
|
|
83.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
217,937
|
|
|
|
108,543
|
|
|
|
109,394
|
|
|
|
100.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation costs
|
|
|
104,109
|
|
|
|
49,449
|
|
|
|
54,660
|
|
|
|
110.5
|
|
|
General and administrative
|
|
|
44,251
|
|
|
|
30,188
|
|
|
|
14,063
|
|
|
|
46.6
|
|
|
Depreciation and amortization
|
|
|
2,621
|
|
|
|
1,808
|
|
|
|
813
|
|
|
|
45.0
|
|
|
Rental related
|
|
|
16,054
|
|
|
|
9,423
|
|
|
|
6,631
|
|
|
|
70.4
|
|
|
Interest
|
|
|
2,168
|
|
|
|
6,765
|
|
|
|
(4,597
|
)
|
|
|
(68.0
|
)
|
|
Merger related costs
|
|
|
6,385
|
|
|
|
—
|
|
|
|
6,385
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
175,588
|
|
|
|
97,633
|
|
|
|
77,955
|
|
|
|
79.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
42,349
|
|
|
|
10,910
|
|
|
|
31,439
|
|
|
|
288.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings (losses) of unconsolidated entities
|
|
|
2,029
|
|
|
|
1,948
|
|
|
|
81
|
|
|
|
4.2
|
|
|
Interest income
|
|
|
2,992
|
|
|
|
713
|
|
|
|
2,279
|
|
|
|
319.6
|
|
|
Other
|
|
|
(465
|
)
|
|
|
—
|
|
|
|
(465
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
|
4,556
|
|
|
|
2,661
|
|
|
|
1,895
|
|
|
|
71.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before minority interest and
income tax (provision) benefit
|
|
|
46,905
|
|
|
|
13,571
|
|
|
|
33,334
|
|
|
|
245.6
|
|
|
Minority interest in income of consolidated entities
|
|
|
(1,961
|
)
|
|
|
(78
|
)
|
|
|
(1,883
|
)
|
|
|
(2,414.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income tax (provision)
benefit
|
|
|
44,944
|
|
|
|
13,493
|
|
|
|
31,451
|
|
|
|
233.1
|
|
|
Income tax (provision) benefit
|
|
|
(18,118
|
)
|
|
|
7,441
|
|
|
|
(25,559
|
)
|
|
|
(343.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
26,826
|
|
|
|
20,934
|
|
|
|
5,892
|
|
|
|
28.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations — net of taxes
|
|
|
(6,006
|
)
|
|
|
(1,031
|
)
|
|
|
(4,975
|
)
|
|
|
(482.5
|
)
|
|
Gain on disposal of discontinued operations — net of
taxes
|
|
|
252
|
|
|
|
68
|
|
|
|
184
|
|
|
|
270.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss from discontinued operations
|
|
|
(5,754
|
)
|
|
|
(963
|
)
|
|
|
(4,791
|
)
|
|
|
(497.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
21,072
|
|
|
$
|
19,971
|
|
|
$
|
1,101
|
|
|
|
5.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Based on GAAP, the operating results for twelve months ended
December 31, 2007 includes the results of NNN for the full
periods presented and the results of the legacy
Grubb & Ellis business for the period from
December 8, 2007 through December 31, 2007.
|
|
|
|
(2)
|
|
Based on GAAP, the operating results for the twelve months ended
December 31, 2006 represents legacy NNN business.
|
51
Revenue
Transaction
Services Revenue
The Company earns revenue from the delivery of transaction and
management services to the commercial real estate industry.
Transaction fees include commissions from leasing, acquisition
and disposition, and agency leasing assignments as well as fees
from appraisal and consulting services. Management fees, which
include reimbursed salaries, wages and benefits, comprise the
remainder of the Company’s Transaction Services revenue,
and include fees related to both property and facilities
management outsourcing as well as project management and
business services.
Transaction services segment was acquired from the legacy
Grubb & Ellis on December 7, 2007 which includes
brokerage commission, valuation and consulting revenue. As of
December 31, 2007, legacy Grubb & Ellis had 927
brokers, up from 917 at December 31, 2006.
Investment
Management Revenue
Investment management revenue of $149.7 million for the
year ended December 31, 2007, which includes transaction,
captive management and dealer-manager businesses, was comprised
primarily of transaction fees of $83.2 million, asset and
property management fees of $41.0 million and
dealer-manager fees of $18.0 million.
Transaction related fees increased $27.0 million, or 48.0%,
for the year ended December 31, 2007, primarily due to
increases of $20.7 million in real estate acquisition fees,
$2.5 million in real estate disposition fees,
$1.4 million in OMEA fees and $2.4 million in other
transaction related fees.
Acquisition fees increased $20.7 million, or 79.4%, to
$46.7 million for the year ended December 31, 2007,
compared to $26.0 million for the same period in 2006. Net
fees as a percentage of aggregate acquisition price increased to
2.3% for the twelve months ended December 31, 2007,
compared to 1.9% for the same period in 2006, which resulted in
$8.5 million in additional fees earned during 2007. During
the year ended December 31, 2007, the Company acquired 77
properties (including six which were still owned as of
December 31, 2007) on behalf of its sponsored programs
for an approximate aggregate total of $2.0 billion,
compared to 45 properties for an approximate aggregate total of
$1.4 billion during the same period in 2006. This increase
in acquisition volume in 2007 resulted in an additional
$11.9 million in net fees.
The $2.5 million increase in real estate disposition fees
for the year ended December 31, 2007 was primarily due to
an increase in fees realized from the sales of properties, with
$18.2 million in net fees realized from the disposition of
28 properties, with an average sales price of $31.3 million
per property for the year ended December 31, 2007, compared
to $15.7 million in fees realized from the disposition of
22 properties for the same period in 2006 with an average sales
price of $37.9 million per property. Included in the fees
realized from the sales of properties were $5.7 million in
fees earned as a result of the continuing liquidation of
G REIT, Inc. (“G REIT”) for the year ended
December 31, 2007, compared to $5.3 million for the
same period in 2006. The disposition fees were reduced during
the years ended December 31, 2007 and 2006 in the amount of
$3.2 million and $410,000, respectively, as a result of
amortizing the identified intangible contract rights associated
with the acquisition of Realty as they represent the right to
future disposition fees of a portfolio of real properties under
contract. Fees on dispositions as a percentage of aggregate
sales price was 2.4% for the year ended December 31, 2007,
compared to 1.9% for the same period in 2006 (excluding one
property sold in 2006 for which the Company waived the entire
amount of the disposition fee), primarily due to a change in the
mix of properties sold.
OMEA fees increased $1.4 million, or 18.2%, to
$9.1 million for the twelve months ended December 31,
2007, compared to $7.7 million for the same period in 2006.
OMEA fees as a percentage of equity raised for the year ended
December 31, 2007 was 2.0%, compared to 1.5% for the same
period in 2006. The increase in OMEA fees earned was primarily
due to $2.5 million in non-recurring credits issued in 2006
partially offset by $900,000 due to lower TIC equity raised in
2007 of $451.0 million, compared to $510.0 million in
TIC equity raised in 2006.
52
The diversified platform created as a result of the merger has
already generated new revenue opportunities. The Company’s
largest TIC investment during the fourth quarter of 2007 was
generated from the net proceeds of a Transaction Services client
that was re-invested on a tax deferred basis through GERI’s
TIC platform.
The Company completed a total of 77 acquisitions and 30
dispositions on behalf of the investment programs it sponsors at
values in excess of $2.0 billion and $880.0 million,
respectively, during 2007. The net acquisitions from the
Investment Management business allowed the Company to grow its
captive assets under management by more than 27.0% during 2007.
At December 31, 2007, the value of the Company’s
assets under management was in excess of $5.7 billion.
The $6.4 million, or 18.6%, increase in captive management
revenue was primarily due to an increase in property and asset
management fees of $6.2 million, or 18.6%, to
$41.0 million for the year ended December 31, 2007,
compared to $34.6 million for 2006. This increase was
primarily the result of the growth in recurring revenue, as
total square footage of assets under management increased to an
average of approximately 29.4 million for the year ended
December 31, 2007, compared to approximately
26.2 million for the same period in 2006. Property and
asset management fees per average square foot were $1.39 for the
year ended December 31, 2007, compared to $1.32 for the
same period in 2006. The increase in property and asset
management fees per average square foot was primarily due to a
change in product mix. During 2007, assets managed under TIC
Programs and within Grubb & Ellis Healthcare REIT,
Inc. (“Healthcare REIT”) and Grubb & Ellis
Apartment REIT, Inc. (“Apartment REIT”) increased to
approximately 83.7% of average assets under management compared
to 75.7% in 2006, while assets managed under G REIT and T
REIT, Inc. (“T REIT”) decreased to approximately 5.7%,
compared to 17.6% in 2006 as a result of the liquidation of
those entities. Property and asset management fees in TIC
Programs earn up to 6% and in Healthcare REIT and Apartment REIT
earn up to approximately 4% plus 1% of each REIT’s average
invested assets, while G REIT and T REIT programs earn
approximately 4%.
Management
Services Revenue
Management Services revenue includes asset and property
management fees as well as reimbursed salaries, wages and
benefits from the Company’s third party property management
and facilities outsourcing services, along with business
services fees. Revenue was $16.4 million from
December 8, 2007 through December 31, 2007. Following
the closing of the merger, Grubb & Ellis Management
Services assumed management of nearly 23 million square
feet of NNN’s 41.7 million-square-foot captive
investment management portfolio. The Company expects to transfer
6 million square feet of outsourced property management
during the first half of 2008. At December 31, 2007, the
Company managed 216 million square feet of property.
Rental
Revenue
Rental revenue includes pass-through revenue for the master
lease accommodations related to the Company’s TIC Programs.
Operating
Expense Overview
Operating expenses increased $78.0 million, or 79.8%, for
the year ended December 31, 2007, compared to the same
period in 2006. Of the $78.0 million, $47.0 million
was due to the Grubb & Ellis legacy business from
December 8, 2007 to December 31, 2007. The remaining
$31.0 million of the increase was attributed to legacy
NNN’s Investment Management business, including
$7.5 million in rental related expense, $10.2 million
resulting from operations of the Company’s broker-dealer
acquired in December 2006, $5.5 million in compensation
related costs, $7.5 million in non-cash stock based
compensation, $6.4 million in merger related costs, offset
by a decrease of $4.7 million in interest expense and a net
decrease of approximately $500,000 in other operating costs.
Compensation
costs
Compensation costs increased $54.7 million, or 110.5%, to
$104.1 million for the year ended December 31, 2007,
compared to $49.4 million for the same period in 2006.
Approximately $41.7 million of the increase was attributed
to compensation costs from legacy Grubb & Ellis’
operations from December 8 through December 31, 2007. The
remaining $13.0 million of the increase was related to the
investment
53
management business which increased to $62.5 million, or
26.3%, for the year ended December 31, 2007, compared to
$49.5 million for the same period in 2006. The increase of
$5.5 million, or 11.1%, in compensation related costs,
which included $2.1 million in reimbursable salaries, wages
and benefits, was primarily due to an increase in full-time
equivalent employees of approximately 89%. Contributing to the
increase in compensation costs was $7.5 million in non-cash
stock based compensation.
General
and Administrative
General and administrative expense increased $14.1 million,
or 46.6%, to $44.3 million for the year ended
December 31, 2007, compared to $30.2 million for the
same period in 2006. Approximately $4.7 million of the
increase was attributed to general and administration expenses
from the legacy Grubb & Ellis operations from
December 8, 2007 through December 31, 2007. The
remaining $9.4 million of the increase was related to the
investment management business which increased to
$39.6 million for the year ended December 31, 2007,
compared to $30.2 million for the same period in 2006. The
increase was primarily due to a $10.2 million increase
resulting from operations of the Company’s broker-dealer
acquired in December 2006, partially offset by decrease of
$1.2 million related to non-recurring credits granted to
certain investors in 2006.
Depreciation
and Amortization
Depreciation and amortization increased $813,000, or 45.0%, to
$2.6 million for the year ended December 31, 2007,
compared to $1.8 million for the same period in 2006.
Approximately $885,000 of the increase was attributed to
depreciation and amortization expense from the legacy
Grubb & Ellis operations from December 8 through
December 31, 2007.
Rental
Expense
Rental expense includes pass-through expenses for master lease
accommodations related to the Company’s TIC Programs.
Interest
Expense
Interest expense decreased $4.6 million, or 68.0%, to
$2.2 million for the year ended December 31, 2007,
compared to $6.8 million for the same period in 2006. The
decrease was related to the investment management business and
was primarily comprised of a decrease of approximately
$2.0 million related to a prepayment penalty assessed to
the Company in 2006 related to the early payoff and termination
of the line of credit with Wachovia Bank National Association
along with a decrease of approximately $1.3 million in
interest expense in 2007 as a result of the line of credit
having been paid off in 2006. In addition, interest expense
related to preferred membership units decreased by approximately
$1.1 million in 2007 as the preferred membership units were
paid off in 2006.
Discontinued
Operations
In 2007, GERI acquired 13 properties to resell to its sponsored
programs. In accordance with SFAS No. 144, for the
year ended December 31, 2007, discontinued operations
included the net income (loss) of one property and its
associated limited liability company (“LLC”) entity
sold to a joint venture, two properties and the associated LLCs
resold to Healthcare REIT and ten properties and their
associated LLCs classified as held for sale as of
December 31, 2007. In addition, for the year ended
December 31, 2007, discontinued operations included the net
income (loss) of six properties and two LLCs owned by the
Company and classified as held for sale. (See Note 19 of
Notes to Consolidated Financial Statements in Item 8 of
this Report for additional information).
Income
Tax
The Company incurred a tax provision of $18.1 million for
the year ended December 31, 2007, compared to a tax benefit
of $7.4 million for the same period in 2006. Effective with
the close of NNN’s 144A private equity offering on
November 16, 2006, GERI became a wholly-owned subsidiary,
which caused a change in GERI’s tax status from a
non-taxable partnership to a taxable C corporation. The change
in tax status required NNN to recognize a one time income tax
benefit of $6.0 million for the future tax effects
attributable to temporary differences between GAAP basis and tax
accounting principles as of the effective date of
54
November 15, 2006. The $25.6 million decrease in tax
expense was primarily a result of the nonrecurring tax benefit
noted above coupled with the inclusion of 12 months of book
income in 2007 versus six weeks of book income in 2006 due to
the change in tax status. In addition, the Company is subject to
the highest federal income tax rate of 35% in 2007, compared to
a 34% statutory tax rate in 2006. (See Note 24 of Notes to
Consolidated Financial Statements in Item 8 of this Report
for additional information).
Net
Income
As a result of the above items, net income increased
$1.1 million to $21.1 million, or $0.55 per fully
diluted share, for the year ended December 31, 2007,
compared to net income of $20.0 million, or $1.01 per fully
diluted share, for the same period in 2006.
Liquidity
and Capital Resources
As of December 31, 2008, cash and cash equivalents
decreased by approximately $16.3 million, from a cash
balance of $49.3 million as of December 31, 2007. The
Company’s operating activities used net cash of
$33.6 million, as the Company repaid net operating
liabilities totaling $20.2 million primarily related to
incentive compensation and deferred commissions paid during the
first quarter, which attained peak levels during the quarter
ended December 31, 2007. Other operating activities used
net cash totaling $13.4 million. Investing activities used
net cash of $76.3 million primarily for acquisition funding
of Company sponsored real estate programs. Financing activities
provided net cash of $93.6 million primarily through
borrowings including $55.0 million under the Company’s
Line of Credit and mortgage financing of Company sponsored real
estate programs. Financing activities for the year ended
December 31, 2008 also included dividend payments of
$15.1 million related to the dividends declared by the
Company in December 2007 and the first and second quarters of
2008, $30.0 million for repayment of mezzanine financing on
two of the assets held for sale and $13.0 million for
repayment of mortgage debt in connection with the restructuring
of the financing related to two of the assets held for sale.
Current
Sources of Capital and Liquidity
The Company believes that it will have sufficient capital
resources to satisfy its liquidity needs over the next
twelve-month period. The Company expects to meet its short-term
liquidity needs, which may include principal repayments of debt
obligations, investments in various real estate investor
programs and institutional funds and capital expenditures,
through current and retained cash flow earnings, the sale of
real estate properties, additional long-term secured and
unsecured borrowings and proceeds from the potential issuance of
debt or equity securities and the potential sale of other
assets. The Credit Facility restricts our ability to operate
outside of the Approved Budget without the permission of the
requisite majority of lenders. In addition, we are required to
remit Net Cash Proceeds from the sale of assets including real
estate assets to repay advances under the Credit Facility and
pursue additional sources of capital in accordance with the
Recapitalization Plan. All of these demands put the
Company’s liquidity and financial resources at risk. As of
the date of filing this
Form 10-K,
the Company had approximately $67.3 million outstanding
under the Credit Facility.
On October 31, 2008, the Company entered into that certain
Agreement for the Purchase and Sale of Real Property and Escrow
Instructions to effect the sale of the Danbury Property to an
unaffiliated entity for a purchase price of $76.0 million.
This agreement was amended and restated in its entirety by that
certain Danbury Merger Agreement dated as of January 23,
2009, as amended by the First Amendment to Danbury Merger
Agreement dates as of January 23, 2009 which reduced the
purchase price to $73.5 million. In accordance with the
terms of the Danbury Merger Agreement, as amended by the First
Danbury Amendment, the Company received one half of the
buyer’s deposits in an amount of $3.125 million from
the buyer upon the execution of the Danbury Merger Agreement,
which released escrow deposit remains subject to the terms of
the Danbury Merger Agreement, and the remaining
$3.125 million of deposits continued to be held in escrow
pending the closing. On May 19, 2009, the Company and the
buyer entered into the Second Danbury Amendment pursuant to
which the remaining $3.125 million of deposits held in
escrow were released to the Company (and remain subject to the
terms of the Danbury Merger Agreement, as amended), and the
purchase
55
price was reduced to $72.4 million. In accordance with the
Second Danbury Amendment, the closing of the sale of the
property expected to occur on or before June 1, 2009.
In February 2007, the Company entered into a $25.0 million
revolving line of credit with LaSalle Bank N.A. This line of
credit consisted of $10.0 million for use in property
acquisitions and $15.0 million for general corporate
purposes and bore interest at prime plus 0.50% or three-month
LIBOR plus 1.50%, at the Company’s option, on each drawdown.
On December 7, 2007, the Company entered into the Credit
Facility to replace its revolving line of credit with LaSalle
Bank N.A. The Credit Facility is for general corporate purposes
which at the time generally bore interest at either the prime
rate or LIBOR based rates plus an applicable margin ranging from
1.50% to 2.50%. As of December 31, 2007, the Company had
$8.0 million outstanding under the Credit Facility.
On August 5, 2008, the Company entered into the First
Letter Amendment to its Credit Facility. The First Letter
Amendment, among other things, provided the Company with an
extension from September 30, 2008 to March 31, 2009 to
dispose of the three real estate assets that the Company had
previously acquired on behalf of GERA. Additionally, the First
Letter Amendment also, among other things, modified select debt
and financial covenants in order to provide greater flexibility
to facilitate the Company’s TIC Programs.
On November 4, 2008, the Company amended (the “Second
Letter Amendment”) its Credit Agreement. The effective date
of the Second Letter Amendment is September 30, 2008.
(Certain capitalized terms set forth below that are not
otherwise defined herein have the meaning ascribed to them in
the Credit Facility, as amended.
The Second Letter Amendment, among other things, a) reduced
the amount available under the Credit Facility from
$75.0 million to $50.0 million by providing that no
advances or letters of credit shall be made available to the
Company after September 30, 2008 until such time as
borrowings have been reduced to less than $50.0 million;
b) provided that 100% of any net cash proceeds from the
sale of certain real estate assets that have to be sold by the
Company shall permanently reduce the Revolving Credit
Commitments, provided that the Revolving Credit Commitments
shall not be reduced to less than $50.0 million by reason
of the operation of such asset sales; and c) modified the
interest rate incurred on borrowings by increasing the
applicable margins by 100 basis points and by providing for
an interest rate floor for any prime rate related borrowings.
Additionally, the Second Letter Amendment, among other things,
modified restrictions on guarantees of primary obligations from
$125.0 million to $50.0 million, modifies select
financial covenants to reflect the impact of the current
economic environment on the Company’s financial
performance, amended certain restrictions on payments by
deleting any dividend/share repurchase limitations and modified
the reporting requirements of the Company with respect to real
property owned or held.
As of September 30, 2008, the Company was not in compliance
with certain of its financial covenants related to EBITDA. As a
result, part of the Second Letter Amendment included a provision
to modify selected covenants. The Debt/EBITDA ratio for the
quarters ending September 30, 2008 and December 31,
2008 were amended from 3.75:1.00 to 5.50:1.00, while the
Debt/EBITDA Ratio for the quarters ending March 31, 2009
and thereafter remain at 3.50:1.00. The Interest Coverage Ratio
for the quarters ending September 30, 2008,
December 31, 2008 and March 31, 2009 were amended from
3.50:1.00 to 3.25:1.00, while the Interest Coverage Ratio for
the quarters ended June 30, 2009 and September 30,
2009 remained unchanged at 3.50:1.00 and for the quarters ended
December 31, 2009 and thereafter remained unchanged at
4.00:1.00. The Recourse Debt/Core EBITDA Ratio for the quarters
ending September 30, 2008 and December 31, 2008 were
amended from 2.25:1.00 to 4.25:1.00, while the Recourse
Debt/Core EBITDA Ratio for the quarters thereafter remained
unchanged at 2.25:1.00. The Core EBITDA to be maintained by the
Company at all times was reduced from $60.0 million to
$30.0 million and the Minimum Liquidity to be maintained by
the Company at all times was reduced from $25.0 million to
$15.0 million. The Company was not in compliance with
certain debt covenants as of December 31, 2008, all of
which were effectively cured as of such date by the Third
Amendment to the Credit Facility described below. As a
consequence of the foregoing, and certain provisions
56
of the Third Amendment, the $63.0 million outstanding under
the Credit Facility has been classified as a current liability
as of December 31, 2008. See “Risk Factors” set
forth in Item 1A. of Part I above.
On May 20, 2009, the Company further amended its Credit
Facility by entering into the Third Amendment. The Third
Amendment, among other things, bifurcates the existing credit
facility into two revolving credit facilities, (i) a
$38,000,000 Revolving Credit A Facility which is deemed fully
funded as of the date of the Third Amendment, and (ii) a
$29,289,245 Revolving Credit B Facility, comprised of revolving
credit advances in the aggregate of $25,000,000 which are deemed
fully funded as of the date of the Third Amendment and letters
of credit advances in the aggregate amount of $4,289,245 which
are issued and outstanding as of the date of the Third
Amendment. The Third Amendment requires the Company to draw down
$4,289,245 under the Revolving Credit B Facility on the date of
the Third Amendment and deposit such funds in a cash collateral
account to cash collateralize outstanding letters of credit
under the Credit Facility and eliminates the swingline features
of the Credit Facility and the Company’s ability to cause
the lenders to issue any additional letters of credit. In
addition, the Third Amendment also changes the termination date
of the Credit Facility from December 7, 2010 to
March 31, 2010 and modifies the interest rate incurred on
borrowings by initially increasing the applicable margin by
450 basis points (or to 7.00% on prime rate loans and 8.00%
on LIBOR based loans).
The Third Amendment also eliminated specific financial
covenants, and in its place, the Company is required to comply
with the Approved Budget, that has been agreed to by the Company
and the lenders, subject to agreed upon variances. The Company
is also required under the Third Amendment to effect the
Recapitalization Plan, on or before September 30, 2009 and
in connection therewith to effect the Partial Prepayment of the
Revolving A Credit Facility. In the event the Company fails to
effect the Recapitalization Plan and in connection therewith to
reduce the Revolving Credit A Credit Facility by the Partial
Prepayment amount, the (i) lenders will have the right
commencing on October 1, 2009, to exercise the Warrants,
for nominal consideration, to purchase common stock of the
Company equal to 15% of the common stock of the Company on a
fully diluted basis as of such date, subject to adjustment,
(ii) the applicable margin automatically increases to 11%
on prime rate loans and increases to 12% on LIBOR based loans,
(iii) the Company shall be required to amortize an
aggregate of $10 million of the Revolving Credit A Facility
in three (3) equal installments on the first business day
of each of the last three (3) months of 2009, (iv) the
Company is obligated to submit a revised budget by
October 1, 2009, (v) the Credit Facility will
terminate on January 15, 2010, and (vi) no further
advances may be drawn under the Credit Facility.
In the event that Company effects the Recapitalization Plan and
the Partial Prepayment amount on or prior to September 30,
2009, the Warrants automatically will expire and not become
exercisable, the applicable margin will automatically be reduced
to 3% on prime rate loans and 4% on LIBOR based loans and the
Company shall have the right, subject to the requisite approval
of the lenders, to seek an extension of the term of the Credit
Facility to January 5, 2011, provided the Company also pays
a fee of .25% of the then outstanding commitments under the
Credit Facility.
As a result of the Third Amendment the Company is required to
prepay Revolving Credit A Advances (and to the extent the
Revolving Credit A Facility shall be reduced to zero, prepay
outstanding Revolving Credit B Advances) in an amount equal to
100% (or, after the Revolving Credit A Advances are reduced by
at least the Partial Prepayment amount, in an amount equal to
50%) of Net Cash Proceeds (as defined in the Credit Agreement)
from:
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assets sales,
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conversions of Investments (as defined in the Credit Agreement),
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the refund of any taxes or the sale of equity interests by the
Company or its subsidiaries,
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the issuance of debt securities, or
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any other transaction or event occurring outside the ordinary
course of business of the Company or its subsidiaries;
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57
provided, however
, that (a) the Net Cash Proceeds
received from the sale of the certain real property assets shall
be used to prepay outstanding Revolving Credit B Advances and to
the extent Revolving Credit B Advances shall be reduced to zero,
to prepay outstanding Revolving Credit A Advances, (b) the
Company shall prepay outstanding Revolving Credit B Advances in
an amount equal to 100% of the Net Cash Proceeds from the sale
of the Danbury Property unless the Company is then not in
compliance with the Recapitalization Plan in which event
Revolving Credit A Advances shall be prepaid first and
(c) the Company’s 2008 tax refund was used to prepay
outstanding Revolving Credit B Advances upon the closing of the
Third Amendment.
The Third Amendment requires the Company to (a) sell the
Danbury Property by June 1, 2009, unless such date is
extended with the applicable approval of the lenders and
(b) use its commercially reasonable best efforts to sell
four other commercial properties, including the two other GERA
Properties, by September 30, 2009.
As part of the Company’s strategic plan, management has
identified more than $20.0 million of expense synergies, on
an annualized basis, a portion of which has been invested in
enhancing the management team with the addition of several
executives in key operational and management roles. In
connection with the Merger, the Company announced its intention
to pay a $0.41 per share dividend per annum, which equates to
approximately $26.5 million on an annual basis. The Company
declared and paid such dividends for holders of records at the
end of each of the fourth calendar quarter of 2007 and the first
and second calendar quarters of 2008. On July 11, 2008, the
Company’s Board of Directors approved the suspension of
future dividend payments. In addition, the Board of Directors
approved a share repurchase program under which the Company may
repurchase up to $25 million of its common stock through
the end of 2009. As of December 31, 2008, the Company has
repurchased 532,000 shares of its common stock for
$1.8 million. The Third Amendment to the Credit Agreement
restricts the Company’s ability to repurchase any
additional shares.
Long-Term
Liquidity Needs
The Company expects to meet its long-term liquidity needs, which
may include principal repayments of debt obligations,
investments in various real estate investor programs and
institutional funds and capital expenditures, through current
and retained cash flow earnings, the sale of real estate
properties, additional long-term secured and unsecured
borrowings and proceeds from the potential issuance of debt or
equity securities and the potential sale of other assets. The
Credit Facility restricts our ability to operate outside of the
Approved Budget without the permission of the requisite majority
of lenders, and the failure to operate within the Approved
Budget by more than the greater of $1,500,000 or 15% on a
cumulative basis for more than three consecutive weeks would,
absent the requisite approval, result in an event of default of
the Credit Facility and make the entire balance due and payable.
In addition, we are required to remit Net Cash Proceeds from the
sale of assets including real estate assets to repay advances
under the Credit Facility and pursue additional sources of
capital in accordance with the Recapitalization Plan. The
Company’s Credit Facility requires the Company to implement
the Recapitalization Plan and complete each step provided in the
Recapitalization Plan by the dates set for such completion. In
the event the Company is unable to effect the Partial Prepayment
in connection with the Recapitalization Plan by
September 30, 2009, the Company is required to amortize
$10 million of the Revolving Credit A Facility in three
equal installments on the first business day of each of the last
three months of 2009 and the entire Credit Facility would become
due and payable on January 15, 2010. In addition, the
Company would not have access to any further advances under the
Revolving Credit B Facility which would greatly reduce the
Company’s liquidity. All of these demands put the
Company’s liquidity and financial resources at risk.
Factors
That May Influence Future Sources of Capital and
Liquidity
Although Realty was required to have real estate licenses in all
of the states in which it acted as a broker for NNN’s
programs and received real estate commissions prior to 2007,
Realty did not hold a license in certain of those states when it
earned fees for those services. In addition, almost all of
Triple Net Properties’ revenue was based on an arrangement
with Realty to share fees from NNN’s programs. Triple Net
Properties did not hold a real estate license in any state,
although most states in which properties of NNN’s programs
were located may have required Triple Net Properties to hold a
license in order to share fees. As a result, Realty and the
Company may be subject to penalties, such as fines (which could
be a multiple of the amount
58
received), restitution payments and termination of management
agreements, and to the suspension or revocation of certain of
Realty’s real estate broker licenses. As of
December 31, 2008, no liabilities have been accrued for the
failure to hold real estate licenses. To the extent that Realty
or the Company incurs any liability arising from the failure to
comply with real estate broker licensing requirements in certain
states, Anthony W. Thompson, Louis J. Rogers and Jeffrey T.
Hanson have agreed to forfeit to the Company up to an aggregate
of 4,124,120 shares of the Company common stock. In
addition, Mr. Thompson has agreed to indemnify the Company,
to the extent the liability incurred by the Company for such
matters exceeds the deemed $46,865,000 value of these shares
(based upon the $11.36 per share value of such shares as of such
agreement), up to an additional $9,435,000 in cash. These shares
are held in escrow in connection with an independent escrow
agreement entered into on November 14, 2006 between NNN,
Messrs. Thompson, Rogers and Hanson and the escrow agent.
The above indemnifications expire on November 16, 2009.
Since Mr. Hanson is entitled over time to receive up to
743,160 shares from Messrs. Thompson and Rogers
(557,370 from Mr. Thompson and 185,790 from
Mr. Rogers) from the shares held in the indemnification and
escrow agreement, he is a party to it as well and his liability
is limited to those shares. If Mr. Hanson’s right to
receive the shares vests, then to the extent shares attributable
to his ownership are available, and not subject to potential
claims, under the indemnification and escrow agreement, he will
be permitted to remove 88,000 shares on each of
January 1, 2008 and 2009 to pay taxes. As
Mr. Hanson’s right to receive the shares vests, then
to the extent shares attributable to his ownership are
available, and not subject to potential claims, under the
indemnification and escrow agreement, he will be permitted to
remove certain shares to pay taxes. On January 20, 2009,
Mr. Hanson was permitted to remove 247,695 shares from
the escrow to pay taxes.
On November 16, 2007, the Company completed the acquisition
of a 51% membership interest in Grubb & Ellis Alesco
Global Advisors, LLC (“Alesco”). Pursuant to the
Intercompany Agreement between the Company and Alesco, dated as
of November 16, 2007, the Company committed to invest
$20.0 million in seed capital into the open and closed end
real estate funds that Alesco expects to launch. Additionally,
upon achievement of certain earn-out targets, the Company is
required to purchase up to an additional 27% interest in Alesco
for $15.0 million. The Company is allowed to use
$15.0 million of seed capital to fund the earn-out
payments. As of December 31, 2008, the Company has invested
$500,000 in seed capital into the open and closed end real
estate funds that Alesco launched during 2008.
Cash
Flow
Year
Ended December 31, 2008 Compared to Year Ended
December 31, 2007
Net cash used in operating activities increased
$69.5 million to $36.0 million for the year ended
December 31, 2008, compared to net cash provided by
operating activities of $33.5 million for the same period
in 2007. Net cash used in operating activities included a
decrease in net income of $351.9 million adjusted for an
increase in non-cash reconciling items, the most significant of
which was $181.3 million in goodwill impairment,
$90.4 million in real estate related impairments,
$11.7 million in stock-based compensation,
$29.0 million in depreciation and amortization primarily
related to five properties held for sale, $1.2 million as a
result of amortizing the identified intangible contract rights
associated with the acquisition of Realty, partially offset by a
$3.3 million increase in deferred taxes. Also contributing
to this increase was cash used in net changes in other operating
assets and liabilities of $36.3 million.
Net cash used in investing activities decreased
$413.0 million to $73.9 million for the year ended
December 31, 2008, compared to $486.9 million for the
same period in 2007. This decrease in cash used in investing
activities was primarily related to a decrease of
$483.0 million of cash used in the acquisition and related
improvements of office properties and asset purchases for
GERI’s sponsored TIC Programs, partially offset by
$92.9 million in proceeds from the sales of certain real
estate assets in 2007.
Net cash provided by financing activities decreased
$306.9 million to $93.6 million for the year ended
December 31, 2008, compared to $400.5 million for the
same period in 2007. The decrease was primarily due to a
decrease of $443.7 million in borrowings on notes payable
related to properties purchased for GERI’s sponsored TIC
Programs in 2008, a decrease of $27.0 million in
contributions from minority interests in 2008 offset by a
decrease of $87.5 million in repayments of notes payable
and capital lease obligations and an increase in advances on the
line of credit of $55.0 million in 2008.
59
Year
Ended December 31, 2007 Compared to Year Ended
December 31, 2006
Net cash provided by operating activities increased
$16.2 million to $33.5 million for the year ended
December 31, 2007, compared to $17.4 million for the
same period in 2006. Net cash provided by operating activities
included an increase in net income of $1.1 million adjusted
for an increase in non-cash reconciling items, the most
significant of which was $5.2 million in stock-based
compensation, $6.6 million in depreciation and amortization
primarily related to two properties purchased in 2007,
$2.7 million as a result of amortizing the identified
intangible contract rights associated with the acquisition of
Realty, partially offset by a $1.0 million increase in
deferred taxes. Also contributing to this increase was cash
provided by net changes in other operating assets and
liabilities of $6.1 million. This increase in cash from
operating activities was partially offset by a $7.3 million
increase in accounts receivable from related parties which
consisted primarily of accrued management, leasing and
transaction fees from the Company’s various sponsored
programs.
Net cash used in investing activities increased
$430.7 million to $486.9 million for the year ended
December 31, 2007, compared to $56.2 million for the
same period in 2006. This increase in cash used in investing
activities was primarily related to $142.3 million of cash
used in the acquisition and related improvements to two office
properties held for investment and $462.8 million for asset
purchases of GERI’s sponsored programs, to facilitate the
reselling of such assets to its TIC Programs and REITs,
partially offset by $92.9 million in proceeds from the
sales of these assets and $117.5 million in proceeds from
repayment of advances to related parties.
Net cash provided by financing activities increased
$259.9 million to $400.5 million for the year ended
December 31, 2007, compared to $140.5 million for the
same period in 2006. The increase was primarily due to an
increase of $426.3 million in borrowings on notes payable
related to properties acquired in 2007 and an increase of
$34.5 million in contributions from minority interests in
2007 and a decrease of $11.6 million in dividends paid in
2007. Partially offsetting the year-over-year increase in cash
provided by financing activities was $146.0 million in net
proceeds in November 2006 as a result of the issuance of
NNN’s common stock through the 144A private equity
offering, an increase of $47.9 million in principal
repayments on notes payable in 2007 and $7.5 million in
additional repayments under the Company’s line of credit in
2007.
Commitments,
Contingencies and Other Contractual Obligations
Contractual
Obligations
The Company leases office space throughout the country through
non-cancelable operating leases, which expire at various dates
through June 30, 2020.
The following table summarizes contractual obligations as of
December 31, 2008 and the effect that such obligations are
expected to have on the Company’s liquidity and cash flow
in future periods. This table does not reflect any available
extension options.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
|
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
|
|
(In thousands)
|
|
2009
|
|
|
(2010-2011)
|
|
|
(2012-2013)
|
|
|
(After 2013)
|
|
|
Total
|
|
|
|
|
Principal — secured debt
|
|
$
|
63,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
63,000
|
|
|
Interest — secured debt
|
|
|
3,570
|
|
|
|
6,951
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,521
|
|
|
Principal — properties held for sale
|
|
|
108,779
|
|
|
|
180
|
|
|
|
—
|
|
|
|
107,000
|
|
|
|
215,959
|
|
|
Interest — properties held for sale
|
|
|
8,656
|
|
|
|
13,021
|
|
|
|
13,012
|
|
|
|
14,187
|
|
|
|
48,876
|
|
|
Principal — senior notes
|
|
|
—
|
|
|
|
16,277
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16,277
|
|
|
Interest — senior notes
|
|
|
1,424
|
|
|
|
2,849
|
|
|
|
843
|
|
|
|
—
|
|
|
|
5,116
|
|
|
Operating lease obligations — others
|
|
|
9,793
|
|
|
|
21,754
|
|
|
|
21,884
|
|
|
|
19,880
|
|
|
|
73,311
|
|
|
Operating lease obligations — general
|
|
|
22,085
|
|
|
|
30,829
|
|
|
|
22,082
|
|
|
|
16,903
|
|
|
|
91,899
|
|
|
Capital lease obligations
|
|
|
333
|
|
|
|
203
|
|
|
|
—
|
|
|
|
—
|
|
|
|
536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
217,640
|
|
|
$
|
92,064
|
|
|
$
|
57,821
|
|
|
$
|
157,970
|
|
|
$
|
525,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
TIC Program Exchange Provisions.
Prior to the
Merger, NNN entered into agreements in which NNN agreed to
provide certain investors with a right to exchange their
investment in certain TIC Programs for an investment in a
different TIC program. NNN also entered into an agreement with
another investor that provided the investor with certain
repurchase rights under certain circumstances with respect to
their investment. The agreements containing such rights of
exchange and repurchase rights pertain to initial investments in
TIC programs totaling $31.6 million. The Company deferred
revenues relating to these agreements of $584,000, $393,000 and
$986,000 for the years ended December 31, 2006, 2007 and
2008, respectively. Additional losses of $14.3 million
related to these agreements were recorded in 2008 to reflect the
impairment in value of properties underlying the agreements with
investors. As of December 31, 2008 the Company had recorded
liabilities totaling $18.6 million related to such
agreements, consisting of $4.3 million of cumulative
deferred revenues and $14.3 million of additional losses
related to these agreements.
Off-Balance Sheet Arrangements.
From time to
time the Company provides guarantees of loans for properties
under management. As of December 31, 2008, there were 151
properties under management with loan guarantees of
approximately $3.5 billion in total principal outstanding
with terms ranging from one to 10 years, secured by
properties with a total aggregate purchase price of
approximately $4.8 billion. As of December 31, 2007,
there were 143 properties under management with loan guarantees
of approximately $3.4 billion in total principal
outstanding with terms ranging from one to 10 years,
secured by properties with a total aggregate purchase price of
approximately $4.6 billion. In addition, the consolidated
VIEs and unconsolidated VIEs are jointly and severally liable on
the non-recourse mortgage debt related to the interests in the
Company’s TIC investments totaling $277.8 million and
$385.3 million as of December 31, 2008, respectively.
The Company’s guarantees consisted of the following as of
December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
|
|
Non-recourse/carve-out guarantees of debt of properties under
management(1)
|
|
$
|
3,414,433
|
|
|
$
|
3,167,447
|
|
|
Non-recourse/carve-out guarantees of the Company’s debt(1)
|
|
$
|
107,000
|
|
|
$
|
221,430
|
|
|
Guarantees of the Company’s mezzanine debt
|
|
$
|
—
|
|
|
$
|
48,790
|
|
|
Recourse guarantees of debt of properties under management
|
|
$
|
42,426
|
|
|
$
|
47,399
|
|
|
Recourse guarantees of the Company’s debt
|
|
$
|
10,000
|
|
|
$
|
10,000
|
|
|
|
|
|
|
(1)
|
|
A “non-recourse/carve-out” guaranty imposes personal
liability on the guarantor in the event the borrower engages in
certain acts prohibited by the loan documents.
|
Management evaluates these guarantees to determine if the
guarantee meets the criteria required to record a liability in
accordance with FASB Financial Interpretation No. 45,
Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others
(“FIN No. 45”) Subsequent to the
initial measurement under FIN No. 45, the Company
evaluates the ongoing liability relating to these guarantees in
accordance with SFAS No. 5. As of December 31,
2008, the Company recorded a liability of $9.1 million
related to recourse guarantees of debt of properties under
management which matured in January and April 2009. Any other
such liabilities were insignificant as of December 31, 2008
and 2007.
|
|
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
Interest
Rate Risk
Derivatives
— The Company’s Credit
Facility debt obligations and mortgage loan obligations are
floating rate obligations whose interest rate and related
monthly interest payments vary with the movement in LIBOR
and/or
prime
lending rates. As of December 31, 2008 and 2007, the
outstanding principal balances on the Credit Facility debt
obligations totaled $63.0 million and $8.0 million,
respectively, and on the mortgage loan debt obligations totaled
$216.0 million and $348.9 million, respectively. Since
interest payments on any future obligation will increase if
interest rate markets rise, or decrease if interest rate markets
decline, the Company will be subject to cash flow risk related
to these debt instruments. In order to mitigate this risk, the
terms of
61
the Company’s Credit Facility required the Company to
maintain interest rate hedge agreements that were in effect as
of the date of the Third Amendment against variable interest
debt obligations. To fulfill this requirement, the Company holds
two interest rate cap agreements with Deutsche Bank
Trust Company Americas, which provide for quarterly
payments to the Company equal to the variable interest amount
paid by the Company in excess of 6.00% of the underlying
notional amounts. In addition, the terms of certain mortgage
loan agreements required the Company to purchase two-year
interest rate caps on
30-day
LIBOR
with a LIBOR strike price of 6.00%, thereby locking the maximum
interest rate on borrowings under the mortgage loans at 7.70%
for the initial two year term of the mortgage loans.
The Company’s earnings are affected by changes in
short-term interest rates as a result of the variable interest
rates incurred on its Credit Facility. The Company’s Credit
Facility is secured by its assets, bears interest at the
bank’s prime rate or LIBOR plus applicable margins based on
compliance with covenants with respect to consummation of a
recapitalization transaction in accordance with the
Recapitalization Plan and currently matures on March 31 2010,
subject to extension or early termination under certain
circumstances.. Since interest payments on this obligation will
increase if interest rate markets rise, or decrease if interest
rate markets decline, the Company is subject to cash flow risk
related to this debt instrument as amounts are drawn under the
Line of Credit.
Additionally, the Company’s earnings are affected by
changes in short-term interest rates as a result of the variable
interest rate incurred on the portion of the outstanding
mortgages on its real estate held for sale. As of
December 31, 2008 and 2007, the outstanding principal
balance on these variable rate debt obligations was
$108.7 million and $169.3 million, respectively, with
a weighted average interest rate of 3.78% and 8.23% per annum,
respectively. Since interest payments on these obligations will
increase if interest rates rise, or decrease if interest rates
decline, the Company is subject to cash flow risk related to
these debt instruments. As of December 31, 2008, for
example, a 0.5% increase in interest rates would have increased
the Company’s overall annual interest expense by
approximately $390,000, or 3.67%. As of December 31, 2007,
for example, a 0.8% increase in interest rates would have
increased the Company’s overall annual interest expense by
approximately $1.4 million, or 9.72%.This sensitivity
analysis contains certain simplifying assumptions, for example,
it does not consider the impact of changes in prepayment risk.
During the fourth quarter of 2006, GERI entered into several
interest rate lock agreements with commercial banks aggregating
to approximately $400.0 million, with interest rates
ranging from 6.15% to 6.19% per annum. All rate locks were
cancelled and all deposits in connection with these agreements
were refunded to the Company in April 2008.
Except for the acquisition of Grubb & Ellis Alesco
Global Advisors, LLC, as previously described, the Company does
not utilize financial instruments for trading or other
speculative purposes, nor does it utilize leveraged financial
instruments.
62
|
|
|
|
Item 8.
|
Financial
Statements and Supplementary Data.
|
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Grubb & Ellis Company
|
|
|
|
|
|
|
|
|
64
|
|
|
|
|
|
67
|
|
|
|
|
|
68
|
|
|
|
|
|
69
|
|
|
|
|
|
70
|
|
|
|
|
|
72
|
|
63
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of Grubb &
Ellis Company
We have audited the consolidated balance sheets of
Grubb & Ellis Company and subsidiaries as of
December 31, 2008 and 2007, and the related consolidated
statements of operations, stockholders’ equity, and cash
flows for the years then ended. Our audits also included the
financial statement schedules listed in the index at
Item 15. These financial statements and schedules are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements and schedules based on our audits. We did not audit
the financial statements of Grubb & Ellis Securities,
Inc. (f.k.a. NNN Capital Corp.), a wholly-owned subsidiary,
which statements reflect total assets of $6,264,000 and
$20,584,000 as of December 31, 2008 and 2007, respectively,
and total revenues of $15,224,000 and $18,315,000 for the years
then ended. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar
as it relates to the amounts included for Grubb &
Ellis Securities, Inc. (f.k.a. NNN Capital Corp.), is based
solely on the report of the other auditors.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the
report of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audit and the report of other
auditors, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of Grubb & Ellis Company and subsidiaries at
December 31, 2008 and 2007, and the consolidated results of
their operations and their cash flows for the years then ended,
in conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
As discussed in Note 3, the accompanying 2007 consolidated
financial statements have been restated.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Grubb & Ellis Company’s internal control over
financial reporting as of December 31, 2008, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated May 27, 2009
expressed an adverse opinion thereon.
/s/ Ernst & Young LLP
Irvine, California
May 27, 2009
64
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Grubb & Ellis Securities, Inc. (f.k.a. NNN Capital
Corp.)
Santa Ana, California
We have audited the accompanying statements of financial
condition of Grubb & Ellis Securities, Inc. (f.k.a. NNN
Capital Corp.) (the “Company”) (not separately
included herein) as of December 31, 2008 and 2007, and the
related statements of operations, changes in stockholder’s
equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We have conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not
engaged to perform an audit of the Company’s internal
controls over financial reporting. Our audits included
consideration of internal controls over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstance, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Grubb & Ellis Securities, Inc. (f.k.a. NNN Capital
Corp.) as of December 31, 2008 and 2007 and the results of
its operations and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the
United States of America.
|
|
|
|
|
|
|
|
San Diego, California
November 19, 2009
|
|
/s/ PKF
PKF
Certified Public Accountants
A Professional Corporation
|
65
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders Grubb &
Ellis Company:
We have audited the accompanying consolidated statements of
operations, stockholders’ equity, and cash flows of
Grubb & Ellis Company (formerly NNN Realty Advisors,
Inc.) and subsidiaries (the “Company”) for the year
ended December 31, 2006. Our audit also included the
financial statement schedule listed in the Index at
Item 15. These financial statements and financial statement
schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit 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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the results of operations and
cash flows of Grubb & Ellis Company and subsidiaries
for the year ended December 31, 2006, in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, such consolidated 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.
As discussed in Note 3, the accompanying 2006 consolidated
financial statements have been restated.
/s/
Deloitte
& Touche LLP
Los Angeles, California
May 7, 2007 (May 27, 2009 as to the restatement discussed
in Note 3 and of discontinued operations discussed in
Note 19 )
66
GRUBB &
ELLIS COMPANY
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
Restated
|
|
|
|
|
ASSETS
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
32,985
|
|
|
$
|
49,328
|
|
|
Restricted cash
|
|
|
36,047
|
|
|
|
70,023
|
|
|
Investment in marketable equity securities
|
|
|
1,510
|
|
|
|
9,052
|
|
|
Current portion of accounts receivable from related
parties — net
|
|
|
22,630
|
|
|
|
32,795
|
|
|
Current portion of advances to related parties — net
|
|
|
2,982
|
|
|
|
6,667
|
|
|
Notes receivable from related party — net
|
|
|
9,100
|
|
|
|
7,600
|
|
|
Service fees receivable — net
|
|
|
26,987
|
|
|
|
19,521
|
|
|
Current portion of professional service contracts — net
|
|
|
4,326
|
|
|
|
7,235
|
|
|
Real estate deposits and pre-acquisition costs
|
|
|
5,961
|
|
|
|
11,818
|
|
|
Properties held for sale
|
|
|
167,408
|
|
|
|
332,176
|
|
|
Identified intangible assets and other assets held for
sale — net
|
|
|
37,145
|
|
|
|
76,985
|
|
|
Prepaid expenses and other assets
|
|
|
22,770
|
|
|
|
12,855
|
|
|
Deferred tax assets
|
|
|
—
|
|
|
|
7,991
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
369,851
|
|
|
|
644,046
|
|
|
Accounts receivable from related parties — net
|
|
|
11,072
|
|
|
|
10,360
|
|
|
Advances to related parties — net
|
|
|
11,499
|
|
|
|
3,751
|
|
|
Professional service contracts — net
|
|
|
10,320
|
|
|
|
13,088
|
|
|
Investments in unconsolidated entities
|
|
|
8,733
|
|
|
|
22,191
|
|
|
Property, equipment and leasehold improvements — net
|
|
|
14,009
|
|
|
|
16,728
|
|
|
Goodwill
|
|
|
—
|
|
|
|
169,317
|
|
|
Identified intangible assets — net
|
|
|
91,527
|
|
|
|
105,473
|
|
|
Other assets — net
|
|
|
3,266
|
|
|
|
3,588
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
520,277
|
|
|
$
|
988,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’
EQUITY
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
70,222
|
|
|
$
|
102,004
|
|
|
Due to related parties
|
|
|
2,447
|
|
|
|
3,329
|
|
|
Line of credit
|
|
|
63,000
|
|
|
|
—
|
|
|
Current portion of capital lease obligations
|
|
|
333
|
|
|
|
351
|
|
|
Notes payable of properties held for sale
|
|
|
215,959
|
|
|
|
348,931
|
|
|
Liabilities of properties held for sale — net
|
|
|
16,843
|
|
|
|
25,550
|
|
|
Other liabilities
|
|
|
35,762
|
|
|
|
12,360
|
|
|
Deferred tax liabilities
|
|
|
2,080
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
406,646
|
|
|
|
492,525
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
|
Line of credit
|
|
|
—
|
|
|
|
8,000
|
|
|
Senior notes
|
|
|
16,277
|
|
|
|
16,277
|
|
|
Capital lease obligations
|
|
|
203
|
|
|
|
439
|
|
|
Other long-term liabilities
|
|
|
6,077
|
|
|
|
7,434
|
|
|
Deferred tax liabilities
|
|
|
17,298
|
|
|
|
29,915
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
446,501
|
|
|
|
554,590
|
|
|
Commitment and contingencies (Note 20)
|
|
|
|
|
|
|
|
|
|
Minority interest
|
|
|
3,605
|
|
|
|
29,896
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
Preferred stock: $0.01 par value; 10,000,000, shares
authorized as of December 31, 2008 and 2007; no shares
issued and outstanding as of December 31, 2008 and 2007
|
|
|
—
|
|
|
|
—
|
|
|
Common stock: $0.01 par value; 100,000,000 shares
authorized; 65,382,601 and 64,824,777 shares issued and
outstanding as of December 31, 2008 and 2007, respectively
|
|
|
654
|
|
|
|
648
|
|
|
Additional paid-in capital
|
|
|
402,780
|
|
|
|
393,665
|
|
|
(Accumulated deficit) retained earnings
|
|
|
(333,263
|
)
|
|
|
10,792
|
|
|
Other comprehensive loss
|
|
|
—
|
|
|
|
(1,049
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
70,171
|
|
|
|
404,056
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, minority interest and stockholders’
equity
|
|
$
|
520,277
|
|
|
$
|
988,542
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
67
GRUBB &
ELLIS COMPANY
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
Restated
|
|
|
Restated
|
|
|
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction services
|
|
$
|
240,250
|
|
|
$
|
35,522
|
|
|
$
|
—
|
|
|
Investment management
|
|
|
101,581
|
|
|
|
149,651
|
|
|
|
99,599
|
|
|
Management services
|
|
|
253,664
|
|
|
|
16,365
|
|
|
|
—
|
|
|
Rental related
|
|
|
16,326
|
|
|
|
16,399
|
|
|
|
8,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
611,821
|
|
|
|
217,937
|
|
|
|
108,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation costs
|
|
|
503,004
|
|
|
|
104,109
|
|
|
|
49,449
|
|
|
General and administrative
|
|
|
119,660
|
|
|
|
44,251
|
|
|
|
30,188
|
|
|
Depreciation and amortization
|
|
|
10,312
|
|
|
|
2,621
|
|
|
|
1,808
|
|
|
Rental related
|
|
|
14,414
|
|
|
|
16,054
|
|
|
|
9,423
|
|
|
Interest
|
|
|
5,914
|
|
|
|
2,168
|
|
|
|
6,765
|
|
|
Merger related costs
|
|
|
14,732
|
|
|
|
6,385
|
|
|
|
—
|
|
|
Real estate related impairments
|
|
|
17,954
|
|
|
|
—
|
|
|
|
—
|
|
|
Goodwill and intangible asset impairment
|
|
|
181,285
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expense
|
|
|
867,275
|
|
|
|
175,588
|
|
|
|
97,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING (LOSS) INCOME
|
|
|
(255,454
|
)
|
|
|
42,349
|
|
|
|
10,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER (EXPENSE) INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in (losses) earnings of unconsolidated entities
|
|
|
(13,311
|
)
|
|
|
2,029
|
|
|
|
1,948
|
|
|
Interest income
|
|
|
902
|
|
|
|
2,992
|
|
|
|
713
|
|
|
Other
|
|
|
(6,458
|
)
|
|
|
(465
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other (expense) income
|
|
|
(18,867
|
)
|
|
|
4,556
|
|
|
|
2,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before minority
interest and income tax (provision) benefit
|
|
|
(274,321
|
)
|
|
|
46,905
|
|
|
|
13,571
|
|
|
Minority interest in loss (income) of consolidated entities
|
|
|
11,719
|
|
|
|
(1,961
|
)
|
|
|
(78
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations before income tax
(provision) benefit
|
|
|
(262,602
|
)
|
|
|
44,944
|
|
|
|
13,493
|
|
|
Income tax (provision) benefit
|
|
|
(16,890
|
)
|
|
|
(18,118
|
)
|
|
|
7,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
|
(279,492
|
)
|
|
|
26,826
|
|
|
|
20,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISCONTINUED OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations — net of taxes
|
|
|
(51,735
|
)
|
|
|
(6,006
|
)
|
|
|
(1,031
|
)
|
|
Gain on disposal of discontinued operations — net of
taxes
|
|
|
357
|
|
|
|
252
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss from discontinued operations
|
|
|
(51,378
|
)
|
|
|
(5,754
|
)
|
|
|
(963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME
|
|
$
|
(330,870
|
)
|
|
$
|
21,072
|
|
|
$
|
19,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
$
|
(4.40
|
)
|
|
$
|
0.69
|
|
|
$
|
1.06
|
|
|
Loss from discontinued operations
|
|
|
(0.81
|
)
|
|
|
(0.14
|
)
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings per share
|
|
$
|
(5.21
|
)
|
|
$
|
0.55
|
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
$
|
(4.40
|
)
|
|
$
|
0.69
|
|
|
$
|
1.06
|
|
|
Loss from discontinued operations
|
|
|
(0.81
|
)
|
|
|
(0.14
|
)
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) earnings per share
|
|
$
|
(5.21
|
)
|
|
$
|
0.55
|
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
63,515
|
|
|
|
38,652
|
|
|
|
19,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
63,515
|
|
|
|
38,653
|
|
|
|
19,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
68
GRUBB &
ELLIS COMPANY
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
(Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
Deficit)
|
|
|
Total
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
Stockholders’
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Loss
|
|
|
Earnings
|
|
|
Equity
|
|
|
|
|
Balance as of January 1, 2006 (as previously
reported)
|
|
|
17,372
|
|
|
$
|
174
|
|
|
$
|
3,902
|
|
|
$
|
—
|
|
|
$
|
24,701
|
|
|
$
|
28,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior year adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,696
|
)
|
|
|
(8,696
|
)
|
|
Balance as of January 1, 2006 (as restated)
|
|
|
17,372
|
|
|
|
174
|
|
|
|
3,902
|
|
|
|
—
|
|
|
|
16,005
|
|
|
|
20,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(31,883
|
)
|
|
|
(31,883
|
)
|
|
Issuance of common stock to acquire Realty and NNN Capital
Corp.
|
|
|
5,289
|
|
|
|
53
|
|
|
|
60,361
|
|
|
|
—
|
|
|
|
—
|
|
|
|
60,414
|
|
|
Issuance of common stock
|
|
|
14,080
|
|
|
|
141
|
|
|
|
159,859
|
|
|
|
—
|
|
|
|
—
|
|
|
|
160,000
|
|
|
Offering costs
|
|
|
—
|
|
|
|
—
|
|
|
|
(13,885
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(13,885
|
)
|
|
Issuance of restricted shares to directors and officers
|
|
|
541
|
|
|
|
5
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5
|
|
|
Vesting of share-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
2,448
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,448
|
|
|
Change in unrealized (loss) on marketable securities, net of
taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(26
|
)
|
|
|
—
|
|
|
|
(26
|
)
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,971
|
|
|
|
19,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
19,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006(as restated)
|
|
|
37,282
|
|
|
|
373
|
|
|
|
212,685
|
|
|
|
(26
|
)
|
|
|
4,093
|
|
|
|
217,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(14,373
|
)
|
|
|
(14,373
|
)
|
|
Vesting of share-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
9,027
|
|
|
|
—
|
|
|
|
—
|
|
|
|
9,027
|
|
|
Common stock for merger transaction
|
|
|
26,196
|
|
|
|
262
|
|
|
|
171,953
|
|
|
|
—
|
|
|
|
—
|
|
|
|
172,215
|
|
|
Issuance of restricted shares to directors, officers and
employees
|
|
|
1,450
|
|
|
|
14
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
14
|
|
|
Cancellation of non-vested restricted shares
|
|
|
(103
|
)
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
Change in unrealized loss on marketable securities, net of taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,023
|
)
|
|
|
—
|
|
|
|
(1,023
|
)
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
21,072
|
|
|
|
21,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007(as restated)
|
|
|
64,825
|
|
|
|
648
|
|
|
|
393,665
|
|
|
|
(1,049
|
)
|
|
|
10,792
|
|
|
|
404,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(13,395
|
)
|
|
|
(13,395
|
)
|
|
Vesting of share-based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
11,248
|
|
|
|
—
|
|
|
|
210
|
|
|
|
11,458
|
|
|
Repurchase of common stock
|
|
|
(532
|
)
|
|
|
(5
|
)
|
|
|
(1,835
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,840
|
)
|
|
Issuance of restricted shares to directors, officers and
employees
|
|
|
1,552
|
|
|
|
15
|
|
|
|
(15
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Issuance of stock to directors, officers and employees related
to equity compensation awards
|
|
|
77
|
|
|
|
1
|
|
|
|
378
|
|
|
|
—
|
|
|
|
—
|
|
|
|
379
|
|
|
Cancellation of non-vested restricted shares
|
|
|
(539
|
)
|
|
|
(5
|
)
|
|
|
(75
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(80
|
)
|
|
Change in unrealized loss on marketable securities, net of taxes
|
|
|
—
|
|
|
|
—
|
|
|
|
(586
|
)
|
|
|
1,049
|
|
|
|
—
|
|
|
|
463
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(330,870
|
)
|
|
|
(330,870
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(330,407
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
65,383
|
|
|
$
|
654
|
|
|
$
|
402,780
|
|
|
$
|
—
|
|
|
$
|
(333,263
|
)
|
|
$
|
70,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
69
GRUBB &
ELLIS COMPANY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
Restated
|
|
|
Restated
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(330,870
|
)
|
|
$
|
21,072
|
|
|
$
|
19,971
|
|
|
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in (earnings) losses of unconsolidated entities
|
|
|
13,311
|
|
|
|
(2,029
|
)
|
|
|
(1,948
|
)
|
|
Depreciation and amortization (including amortization of signing
bonuses)
|
|
|
28,961
|
|
|
|
8,652
|
|
|
|
2,086
|
|
|
Loss on disposal of property, equipment and leasehold
improvements
|
|
|
494
|
|
|
|
861
|
|
|
|
—
|
|
|
Goodwill and intangible asset impairment
|
|
|
181,286
|
|
|
|
—
|
|
|
|
—
|
|
|
Impairment of real estate
|
|
|
90,351
|
|
|
|
—
|
|
|
|
—
|
|
|
Stock-based compensation
|
|
|
11,705
|
|
|
|
9,041
|
|
|
|
3,865
|
|
|
Compensation expense on profit sharing arrangements
|
|
|
1,878
|
|
|
|
1,999
|
|
|
|
—
|
|
|
Amortization/write-off of intangible contractual rights
|
|
|
1,179
|
|
|
|
3,133
|
|
|
|
410
|
|
|
Amortization of deferred financing costs
|
|
|
1,006
|
|
|
|
1,713
|
|
|
|
31
|
|
|
Loss (gain) on sale of marketable equity securities
|
|
|
7,215
|
|
|
|
(184
|
)
|
|
|
—
|
|
|
Deferred income taxes
|
|
|
(3,784
|
)
|
|
|
(7,109
|
)
|
|
|
(8,147
|
)
|
|
Allowance for uncollectible accounts
|
|
|
13,319
|
|
|
|
806
|
|
|
|
1,408
|
|
|
Minority interest in (losses) income of consolidated entities
|
|
|
(11,719
|
)
|
|
|
1,961
|
|
|
|
78
|
|
|
Loss on write-off of real estate deposits and pre-acquisition
costs
|
|
|
2,415
|
|
|
|
—
|
|
|
|
—
|
|
|
Other operating noncash gains (losses)
|
|
|
2,267
|
|
|
|
8
|
|
|
|
(105
|
)
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable from related parties
|
|
|
6,480
|
|
|
|
6,018
|
|
|
|
(1,254
|
)
|
|
Prepaid expenses and other assets
|
|
|
(28,945
|
)
|
|
|
(36,295
|
)
|
|
|
(919
|
)
|
|
Accounts payable and accrued expenses
|
|
|
(19,915
|
)
|
|
|
15,884
|
|
|
|
2,367
|
|
|
Other liabilities
|
|
|
(263
|
)
|
|
|
8,012
|
|
|
|
(487
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(33,629
|
)
|
|
|
33,543
|
|
|
|
17,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(4,407
|
)
|
|
|
(3,331
|
)
|
|
|
(2,339
|
)
|
|
Tenant improvements and capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of marketable equity securities
|
|
|
(997
|
)
|
|
|
(30,732
|
)
|
|
|
(2,360
|
)
|
|
Proceeds from sale of marketable equity securities
|
|
|
2,653
|
|
|
|
22,870
|
|
|
|
—
|
|
|
Advances to related parties
|
|
|
(13,173
|
)
|
|
|
(39,112
|
)
|
|
|
(19,268
|
)
|
|
Proceeds from repayment of advances to related parties
|
|
|
20,043
|
|
|
|
117,496
|
|
|
|
16,713
|
|
|
Payments to related parties
|
|
|
(882
|
)
|
|
|
(2,704
|
)
|
|
|
(1,064
|
)
|
|
Origination of notes receivable from related parties
|
|
|
(15,100
|
)
|
|
|
(39,300
|
)
|
|
|
(10,000
|
)
|
|
Proceeds from repayment of notes receivable from related parties
|
|
|
13,600
|
|
|
|
41,700
|
|
|
|
777
|
|
|
Investments in unconsolidated entities
|
|
|
(29,163
|
)
|
|
|
(9,076
|
)
|
|
|
(111,772
|
)
|
|
Sale of
tenant-in-common
interests in unconsolidated entities
|
|
|
—
|
|
|
|
20,466
|
|
|
|
101,128
|
|
|
Distributions of capital from unconsolidated entities
|
|
|
914
|
|
|
|
1,256
|
|
|
|
20,049
|
|
|
Acquisition of businesses — net of cash acquired
|
|
|
—
|
|
|
|
339
|
|
|
|
(7,398
|
)
|
|
Acquisition of properties
|
|
|
(122,163
|
)
|
|
|
(605,126
|
)
|
|
|
(80,905
|
)
|
|
Proceeds from sale of properties
|
|
|
—
|
|
|
|
92,945
|
|
|
|
31,684
|
|
|
Real estate deposits and pre-acquisition costs
|
|
|
(59,780
|
)
|
|
|
(50,202
|
)
|
|
|
(14,106
|
)
|
|
Proceeds from collection of real estate deposits and
pre-acquisition costs
|
|
|
118,835
|
|
|
|
49,427
|
|
|
|
26,722
|
|
|
Restricted cash
|
|
|
13,290
|
|
|
|
(53,825
|
)
|
|
|
(4,064
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(76,330
|
)
|
|
|
(486,909
|
)
|
|
|
(56,203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
70
GRUBB &
ELLIS COMPANY
CONSOLIDATED
STATEMENTS OF CASH FLOWS — (Continued)
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
Restated
|
|
|
Restated
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances on line of credit
|
|
|
55,000
|
|
|
|
—
|
|
|
|
14,000
|
|
|
Repayment of advances on line of credit
|
|
|
—
|
|
|
|
(30,000
|
)
|
|
|
(22,500
|
)
|
|
Borrowings on notes payable and capital lease obligations
|
|
|
103,339
|
|
|
|
547,015
|
|
|
|
120,711
|
|
|
Repayments of notes payable and capital lease obligations
|
|
|
(56,386
|
)
|
|
|
(143,848
|
)
|
|
|
(95,930
|
)
|
|
Other financing costs
|
|
|
—
|
|
|
|
850
|
|
|
|
(1,867
|
)
|
|
Proceeds from issuance of senior notes
|
|
|
—
|
|
|
|
6,015
|
|
|
|
10,263
|
|
|
Repayments of participating notes
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,300
|
)
|
|
Redemption of redeemable preferred membership units
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,506
|
)
|
|
Deferred financing costs
|
|
|
(2,412
|
)
|
|
|
(2,310
|
)
|
|
|
(1,515
|
)
|
|
Net proceeds from issuance of common stock
|
|
|
52
|
|
|
|
—
|
|
|
|
146,000
|
|
|
Repurchase of common stock
|
|
|
(1,840
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Dividends paid to common stockholders
|
|
|
(15,128
|
)
|
|
|
(16,449
|
)
|
|
|
(28,070
|
)
|
|
Contributions from minority interests
|
|
|
15,084
|
|
|
|
42,061
|
|
|
|
7,554
|
|
|
Distributions to minority interests
|
|
|
(4,093
|
)
|
|
|
(2,866
|
)
|
|
|
(315
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
93,616
|
|
|
|
400,468
|
|
|
|
140,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH
|
|
|
(16,343
|
)
|
|
|
(52,898
|
)
|
|
|
101,678
|
|
|
Cash and cash equivalents — Beginning of year
|
|
|
49,328
|
|
|
|
102,226
|
|
|
|
548
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents — End of year
|
|
$
|
32,985
|
|
|
$
|
49,328
|
|
|
$
|
102,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
21,089
|
|
|
$
|
10,148
|
|
|
$
|
5,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
2,151
|
|
|
$
|
22,622
|
|
|
$
|
179
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual for tenant improvements, lease commissions and capital
expenditures
|
|
$
|
739
|
|
|
$
|
814
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment acquired with capital lease obligations
|
|
$
|
52
|
|
|
$
|
541
|
|
|
$
|
355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends accrued
|
|
$
|
—
|
|
|
$
|
1,733
|
|
|
$
|
3,813
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deconsolidation of assets held by variable interest entities
|
|
$
|
301,656
|
|
|
$
|
372,674
|
|
|
$
|
28,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deconsolidation of liabilities held by variable interest entities
|
|
$
|
222,448
|
|
|
$
|
269,732
|
|
|
$
|
17,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets acquired in acquisition
|
|
$
|
—
|
|
|
$
|
462,730
|
|
|
$
|
26,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities assumed in acquisition
|
|
$
|
—
|
|
|
$
|
259,659
|
|
|
$
|
19,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
71
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE
YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
Grubb & Ellis Company (“the Company” or
“Grubb & Ellis”), a Delaware corporation
founded 50 years ago in Northern California, is a
commercial real estate services and investment management firms.
On December 7, 2007, the Company effected a stock merger
(the “Merger”) with NNN Realty Advisors, Inc.
(“NNN”), a real estate asset management company and
sponsor of public non-traded real estate investment trusts
(“REITs”), as well as a sponsor of tax deferred
tenant-in-common
(“TIC”) 1031 property exchanges and other investment
programs. Upon the closing of the Merger, a change of control
occurred. The former stockholders of NNN acquired approximately
60% of the Company’s issued and outstanding common stock.
The Company offers property owners, corporate occupants and
program investors comprehensive integrated real estate
solutions, including transactions, management, consulting and
investment advisory services supported by market research and
local market expertise.
In certain instances throughout these Financial Statements
phrases such as “legacy Grubb & Ellis” or
similar descriptions are used to reference, when appropriate,
Grubb & Ellis prior to the Merger. Similarly, in
certain instances throughout these Financial Statements the term
NNN, “legacy NNN” or similar phrases are used to
reference, when appropriate, NNN Realty Advisors, Inc. prior to
the Merger.
|
|
|
|
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of Presentation and Principles of
Consolidation
— The consolidated financial
statements include the accounts of the Company and its
wholly-owned and majority-owned controlled subsidiaries’,
variable interest entities (“VIEs”) in which the
Company is the primary beneficiary, and partnerships/limited
liability companies (“LLCs”) in which the Company is
the managing member or general partner and the other
partners/members lack substantive rights (hereinafter
collectively referred to as the “Company”). All
significant intercompany accounts and transactions have been
eliminated in consolidation. For acquisitions of an interest in
an entity or newly formed joint venture or limited liability
company, the Company evaluates the entity to determine if the
entity is deemed a VIE, and if the Company is deemed to be the
primary beneficiary, in accordance with Financial Accounting
Standards Board (“FASB”) Interpretation
No. 46(R),
Consolidation of Variable Interest
Entities
(“FIN No. 46(R)”).
The Company consolidates entities that are VIEs when the Company
is deemed to be the primary beneficiary of the VIE. For entities
in which (i) the Company is not deemed to be the primary
beneficiary, (ii) the Company’s ownership is 50.0% or
less and (iii) the Company has the ability to exercise
significant influence, the Company uses the equity accounting
method (i.e. at cost, increased or decreased by the
Company’s share of earnings or losses, plus contributions
less distributions). The Company also uses the equity method of
accounting for jointly-controlled
tenant-in-common
interests. As reconsideration events occur, the Company will
reconsider its determination of whether an entity is a VIE and
who the primary beneficiary is to determine if there is a change
in the original determinations and will report such changes on a
quarterly basis.
As more fully discussed in Note 16, the Company has entered
into a Third Amendment to its Credit Facility that requires the
Company to comply with the Approved Budget that has been agreed
to by the Company and the lenders, subject to agreed upon
variances. The Company is also required under the Third
Amendment to effect the Recapitalization plan on or before
September 30, 2009 and in connection therewith to effect a
Partial Prepayment on or before September 30, 2009. Among
other things, in the event the Company does not complete the
recapitalization plan
and/or
make
the Partial Prepayment, the Credit Facility will terminate on
January 15, 2010. In light of the current state of the
financial markets and economic environment, there is risk that
the Company will be unable to meet the terms of the Credit
Facility which would result in the entire balance of the debt
becoming due and payable. If the Credit Facility were to become
72
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
due and payable on the alternative due date of January 15,
2010, there can be no assurances that the Company will have
access to alternative funding sources, or if such sources are
available to the Company, that they will be on favorable terms
and conditions to the Company, which at that time could create
substantial doubt about the Company’s ability to continue
as a going concern after January 15, 2010.
Use of Estimates
— The financial statements
have been prepared in conformity with accounting principles
generally accepted in the United States (“GAAP”),
which requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities (including
disclosure of contingent assets and liabilities) as of 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.
Credit Facility
— Weak economic conditions
could impact the Company’s ability to remain in compliance
with the debt covenants contained within its Credit Facility
described in Note 16 below. If revenues are less than the
Company has projected, the Company will be required to take
further actions within its control to reduce costs so as to
allow the Company to remain in compliance with the financial
covenants in the Credit Facility. In the event the Company is
required to amend the Credit Facility in order to remain in
compliance with the financial covenants set forth therein, there
can be no assurances that it will be able to do so.
Reclassifications
— Certain reclassifications
have been made to prior year and prior interim period amounts in
order to conform to the current period presentation. These
reclassifications have no effect on reported net income.
Adjustments related to the restatement of previously issued
financial statements are detailed in Note 3.
Cash and cash equivalents —
Cash and cash
equivalents consist of all highly liquid investments with a
maturity of three months or less when purchased. Short-term
investments with remaining maturities of three months or less
when acquired are considered cash equivalents.
Restricted Cash —
Restricted cash is comprised
primarily of cash and loan impound reserve accounts for property
taxes, insurance, capital improvements, and tenant improvements
related to consolidated properties. As of December 31, 2008
and 2007, the restricted cash was $36.0 million and
$70.0 million, respectively.
Accounts Receivable from Related Parties
—
Accounts receivable from related parties consist of fees earned
from syndicated entities and properties under management,
including property and asset management fees. Property and asset
management fees are collected from the operations of the
underlying real estate properties.
Allowance for Uncollectible Receivables
—
Receivables are carried net of management’s estimate of
uncollectible receivables. Management’s determination of
the adequacy of these allowances is based upon evaluations of
historical loss experience, operating performance of the
underlying properties, current economic conditions, and other
relevant factors.
Real Estate Deposits and Pre-acquisition
Costs
— Real estate deposits and pre-acquisition
costs are incurred when the Company evaluates properties for
purchase and syndication. Pre-acquisition costs are capitalized
as incurred. Real estate deposits may become nonrefundable under
certain circumstances. The majority of the real estate deposits
outstanding as of December 31, 2008 and 2007, were either
refunded to the Company during the subsequent year or used to
purchase property and subsequently reimbursed from the
syndicated equity. Costs of abandoned projects represent
pre-acquisition costs associated with properties no longer
sought for acquisition by the Company and are included in
general and administrative expense in the Company’s
consolidated statement of operations.
73
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Payments to obtain an option to acquire real property are
capitalized as incurred. All other costs related to a property
that are incurred before the property is acquired, or before an
option to acquire it is obtained, are capitalized if all of the
following conditions are met and otherwise are charged to
expense as incurred:
|
|
|
|
|
|
•
|
the costs are directly identifiable with the specific property;
|
|
|
|
|
•
|
the costs would be capitalized if the property were already
acquired; and
|
|
|
|
|
•
|
acquisition of the property or an option to acquire the property
is probable. This condition requires that the Company is
actively seeking to acquire the property and have the ability to
finance or obtain financing for the acquisition and that there
is no indication that the property is not available for sale.
|
Purchase Price Allocation
— In accordance with
Statement of Financial Accounting Standards (“SFAS”)
No. 141,
Business Combinations
(“SFAS No. 141”), the purchase price of
acquired businesses or properties is allocated to tangible and
identified intangible assets and liabilities based on their
respective fair values. In the case of real estate acquisitions,
the allocation to tangible assets (building and land) is based
upon determination of the value of the property as if it were
vacant using discounted cash flow models similar to those used
by independent appraisers. Factors considered include an
estimate of carrying costs during the expected
lease-up
periods considering current market conditions and costs to
execute similar leases. Additionally, the purchase price of the
applicable property is allocated to the above or below market
value of in-place leases and the value of in-place leases and
related tenant relationships.
The value allocable to the above or below market component of
the acquired in-place leases is determined based upon the
present value (using a discount rate which reflects the risks
associated with the acquired leases) of the difference between
(i) the contractual amounts to be paid pursuant to the
lease over its remaining term, and (ii) our estimate of the
amounts that would be paid using fair market rates over the
remaining term of the lease. The amounts allocated to above
market leases are included in identified intangible assets
— net and below market lease values are included in
liabilities of real estate properties in the accompanying
consolidated financial statements and are amortized to rental
revenue over the weighted-average remaining term of the acquired
leases with each property.
The total amount of identified intangible assets acquired is
further allocated to in-place lease costs and the value of
tenant relationships based on management’s evaluation of
the specific characteristics of each tenant’s lease and our
overall relationship with that respective tenant.
Characteristics considered in allocating these values include
the nature and extent of the credit quality and expectations of
lease renewals, among other factors. These allocations are
subject to change within one year of the date of purchase based
on information related to one or more events identified at the
date of purchase that confirm the value of an asset or liability
of an acquired property.
Identified Intangible Assets
— The
Company’s acquisitions require the application of purchase
accounting in accordance with SFAS No. 141. This
results in tangible and identified intangible assets and
liabilities of the acquired entity being recorded at fair value.
Identified intangible assets includes a trade name, which is not
being amortized and has an indefinite estimated useful life. The
remaining other intangible assets primarily include contract
rights, affiliate agreements, customer relationships and
internally developed software, which are all being amortized
over estimated useful lives ranging up to 20 years.
Properties Held for Investment
— Properties
held for investment are carried at historical cost less
accumulated depreciation, net of any impairments. The cost of
these properties include the cost of land, completed buildings,
and related improvements. Expenditures that increase the service
life of properties are capitalized; the cost of maintenance and
repairs is charged to expense as incurred. The cost of buildings
and improvements is depreciated on a straight-line basis over
the estimated useful lives of the buildings and improvements,
ranging primarily from 15 to 39 years, and the shorter of
the lease term or useful life, ranging from one to ten years for
tenant improvements.
74
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Properties Held for Sale
— In accordance with
SFAS No. 144,
Accounting for the Impairment or
Disposal of Long-Lived Assets
(“SFAS No. 144”), at the time a property
is held for sale, such property is carried at the lower of
(i) its carrying amount or (ii) fair value less costs
to sell. In addition, no depreciation or amortization of tenant
origination cost is recorded for a property classified as held
for sale. The Company classifies operating properties as
properties held for sale in the period in which all of the
required criteria are met.
SFAS No. 144 requires, in many instances, that the
balance sheet and income statements for both current and prior
periods report the assets, liabilities and results of operations
of any component of an entity which has either been disposed of,
or is classified as held for sale, as discontinued operations.
In instances when a company expects to have significant
continuing involvement in the component beyond the date of sale,
the operations of the component instead continue to be fully
recorded within the continuing operations of the Company through
the date of sale. In accordance with this requirement, the
Company records any results of operations related to its real
estate held for sale as discontinued operations only when the
Company expects not to have significant continuing involvement
in the real estate after the date of sale.
Property, Equipment and Leasehold
Improvements
— Property and equipment are stated
at cost, less accumulated depreciation and amortization.
Depreciation and amortization expense is recorded on a
straight-line basis over the estimated useful lives of the
related assets, which range from three to seven years. Leasehold
improvements are amortized on a straight-line basis over the
life of the related lease or the estimated service life of the
improvements, whichever is shorter. Maintenance and repairs are
expensed as incurred, while betterments are capitalized. Upon
the sale or retirement of depreciable assets, the related
accounts are relieved, with any resulting gain or loss included
in operations.
Impairment of Long-Lived Assets
— In accordance
with SFAS No. 144, long-lived assets are periodically
evaluated for potential impairment whenever events or changes in
circumstances indicate that their carrying amount may not be
recoverable. In the event that periodic assessments reflect that
the carrying amount of the asset exceeds the sum of the
undiscounted cash flows (excluding interest) that are expected
to result from the use and eventual disposition of the asset,
the Company would recognize an impairment loss to the extent the
carrying amount exceeded the fair value of the property. The
Company estimates the fair value using available market
information or other industry valuation techniques such as
present value calculations. The Company recognized impairment
charges of approximately $90.4 million against the carrying
value of the properties and real estate investments for the year
ended December 31, 2008, $18.0 million is recorded
separately on the statement of operations and $72.4 million
is included in discontinued operations. No impairment losses
were recognized for the years ended December 31, 2007 and
2006.
The Company recognizes goodwill and other
non-amortizing
intangible assets in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets
(“SFAS No. 142”). Under
SFAS No. 142, goodwill is recorded at its carrying
value and is tested for impairment at least annually or more
frequently if impairment indicators exist, at a level of
reporting referred to as a reporting unit. The Company
recognizes goodwill in accordance with SFAS No. 142
and tests the carrying value for impairment during the fourth
quarter of each year. The goodwill impairment analysis is a
two-step process. The first step used to identify potential
impairment involves comparing each reporting unit’s
estimated fair value to its carrying value, including goodwill.
To estimate the fair value of its reporting units, the Company
used a discounted cash flow model and market comparable data.
Significant judgment is required by management in developing the
assumptions for the discounted cash flow model. These
assumptions include cash flow projections utilizing revenue
growth rates, profit margin percentages, discount rates,
market/economic conditions, etc. If the estimated fair value of
a reporting unit exceeds its carrying value, goodwill is
considered to not be impaired. If the carrying value exceeds
estimated fair value, there is an indication of potential
impairment and the second step is performed to measure the
amount of impairment. The second step of the process involves
the calculation of an implied fair value of goodwill for each
reporting unit for which step one indicated a potential
impairment. The implied fair value of goodwill is determined by
measuring the excess of the estimated fair value of the
reporting unit as
75
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
calculated in step one, over the estimated fair values of the
individual assets, liabilities and identified intangibles.
During the fourth quarter of 2008, the Company identified the
uncertainty surrounding the global economy and the volatility of
the Company’s market capitalization as goodwill impairment
indicators. The Company’s goodwill impairment analysis
resulted in the recognition of an impairment charge of
approximately $172.7 million during the year ended
December 31, 2008.
The Company also analyzed its trade name for impairment pursuant
to SFAS No. 142 and determined that the trade name was
not impaired as of December 31, 2008. Accordingly, no
impairment charge was recorded related to the trade name during
the year ended December 31, 2008. In addition to testing
goodwill and its trade name for impairment, the Company tested
the intangible contract rights for impairment during the fourth
quarter of 2008. The intangible contract rights represent the
legal right to future disposition fees of a portfolio of real
estate properties under contract. As a result of the current
economic environment, a portion of these disposition fees may
not be recoverable. Based on the Company’s analysis for the
current and projected property values, condition of the
properties and status of mortgage loans payable, the Company
determined that there are certain properties for which receipt
of disposition fees was no longer probable. As a result, the
Company recorded an impairment charge of approximately
$8.6 million related to the impaired intangible contract
rights as of December 31, 2008.
Revenue
Recognition
Transaction
Services
Real estate commissions are recognized when earned which is
typically the close of escrow. Receipt of payment occurs at the
point at which all Company services have been performed, and
title to real property has passed from seller to buyer, if
applicable. Real estate leasing commissions are recognized upon
execution of appropriate lease and commission agreements and
receipt of full or partial payment, and, when payable upon
certain events such as tenant occupancy or rent commencement,
upon occurrence of such events. All other commissions and fees
are recognized at the time the related services have been
performed and delivered by the Company to the client, unless
future contingencies exist.
Investment
Management
The Company earns fees associated with its transactions by
structuring, negotiating and closing acquisitions of real estate
properties to third-party investors. Such fees include
acquisition fees for locating and acquiring the property and
selling it to various TIC investors, REITs and its various real
estate funds. The Company accounts for acquisition and loan fees
in accordance with AICPA Statement of Position
92-1
(“SOP 92-1”),
Accounting for Real Estate Syndication Income
, and
Statement of Financial Accounting Standards No. 66
(“SFAS No. 66”),
Accounting for Sales of
Real Estate
. In general, the Company records the acquisition
and loan fees upon the close of sale to the buyer if the buyer
is independent of the seller, collection of the sales price,
including the acquisition fees and loan fees, is reasonably
assured, and the Company is not responsible for supporting
operations of the property. Organizational marketing expense
allowance (“OMEA”), fees are earned and recognized
from gross proceeds of equity raised in connection with
offerings and are used to pay formation costs, as well as
organizational and marketing costs. When the Company does not
meet the criteria for revenue recognition under
SFAS No. 66 and
SOP 92-1,
revenue is deferred until revenue can be reasonably estimated or
until the Company defers revenue up to its maximum exposure to
loss. The Company earns disposition fees for disposing of the
property on behalf of the REIT, investment fund or TIC. The
Company recognizes the disposition fee when the sale of the
property closes. The Company is entitled to loan advisory fees
for arranging financing related to properties under management.
The Company earns captive asset and property management fees
primarily for managing the operations of real estate properties
owned by the real estate programs, REITs and LLCs that invest in
real estate or value funds it sponsors. Such fees are based on
pre-established formulas and contractual arrangements and are
76
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
earned as such services are performed. The Company is entitled
to receive reimbursement for expenses associated with managing
the properties; these expenses include salaries for property
managers and other personnel providing services to the property.
Each property in the Company’s TIC Programs is charged an
accounting fee for costs associated with preparing financial
reports. The Company is also entitled to leasing commissions
when a new tenant is secured and upon tenant renewals. Leasing
commissions are recognized upon execution of leases.
Through its dealer-manager, the Company facilitates capital
raising transactions for its programs its dealer-manager acts as
a dealer-manager exclusively for the Company’s programs and
does not provide securities services to any third party. The
Company’s wholesale dealer-manager services are comprised
of raising capital for its programs through its selling
broker-dealer relationships. Most of the commissions, fees and
allowances earned for its dealer-manager services are passed on
to the selling broker-dealers as commissions and to cover
offering expenses, and the Company retains the balance.
Accordingly, the Company records these fees net of the amounts
paid to its selling broker-dealer relationships.
Management
Services
Management fees are recognized at the time the related services
have been performed by the Company, unless future contingencies
exist. In addition, in regard to management and facility service
contracts, the owner of the property will typically reimburse
the Company for certain expenses that are incurred on behalf of
the owner, which are comprised primarily of
on-site
employee salaries and related benefit costs. The amounts which
are to be reimbursed per the terms of the services contract, are
recognized as revenue by the Company in the same period as the
related expenses are incurred. In certain instances, the Company
sub contracts its property management services to independent
property managers, in which case the Company passes a portion of
their property management fee on to the sub contractor, and the
Company retains the balance. Accordingly, the Company records
these fees net of the amounts paid to its sub contractors.
Professional Service Contracts
— The Company
holds multi-year service contracts with certain key transaction
professionals for which cash payments were made to the
professionals upon signing, the costs of which are being
amortized over the lives of the respective contracts, which are
generally two to five years. Amortization expense relating to
these contracts of approximately $9.2 million and $443,000
was recorded for the years ended December 31, 2008 and
2007, respectively, and is included in compensation costs in the
Company’s consolidated statement of operations.
Fair Value of Financial Instruments
—
SFAS No. 107,
Disclosures About Fair Value of
Financial Instruments
(“SFAS No. 107”),
requires disclosure of fair value of financial instruments,
whether or not recognized on the face of the balance sheet, for
which it is practical to estimate that value.
SFAS No. 107 defines fair value as the quoted market
prices for those instruments that are actively traded in
financial markets. In cases where quoted market prices are not
available, fair values are estimated using present value or
other valuation techniques. The fair value estimates are made at
the end of each year based on available market information and
judgments about the financial instrument, such as estimates of
timing and amount of expected future cash flows. Such estimates
do not reflect any premium or discount that could result from
offering for sale at one time the Company’s entire holdings
of a particular financial instrument, nor do they consider that
tax impact of the realization of unrealized gains or losses. In
many cases, the fair value estimates cannot be substantiated by
comparison to independent markets, nor can the disclosed value
be realized in immediate settlement of the instrument.
As of December 31, 2008, the fair values of the
Company’s notes payable, senior notes and lines of credit
were approximately $195.4 million, $15.5 million and
$60.0 million, respectively, compared to the carrying
values of $216.0 million, $16.3 million and
$63.0 million, respectively. The amounts recorded for
accounts receivable, notes receivable, advances and accounts
payable and accrued liabilities approximate fair value due to
their short-term nature.
77
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Fair Value Measurements
— Effective
January 1, 2008, the Company adopted
SFAS No. 157,
Fair Value Measurements
, or
SFAS No. 157. SFAS No. 157 defines fair
value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements.
SFAS No. 157 applies to reported balances that are
required or permitted to be measured at fair value under
existing accounting pronouncements; accordingly, the standard
does not require any new fair value measurements of reported
balances.
SFAS No. 157 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,
SFAS No. 157 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).
Level 1 inputs utilize quoted prices (unadjusted) in active
markets for identical assets or liabilities that we have the
ability to access. Level 2 inputs are inputs other than
quoted prices included in Level 1 that are observable for
the asset or liability, either directly or indirectly.
Level 2 inputs may include quoted prices for similar assets
and liabilities in active markets, as well as inputs that are
observable for the asset or liability (other than quoted
prices), such as interest rates, foreign exchange rates, and
yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs for the asset or
liability, which are typically based on an entity’s own
assumptions, as there is little, if any, related market
activity. In instances where the determination of the fair value
measurement is based on inputs from different levels of the fair
value hierarchy, the level in the fair value hierarchy within
which the entire fair value measurement falls is based on the
lowest level input that is significant to the fair value
measurement in its entirety. The Company’s assessment of
the significance of a particular input to the fair value
measurement in its entirety requires judgment, and considers
factors specific to the asset or liability. In accordance with
the provisions of FSP
SFAS No. 157-2,
the Company has partially applied the provisions of
SFAS No. 157 only to its financial assets and
liabilities recorded at fair value, which consist of
available-for-sale marketable securities and interest rate caps.
Stock-Based Compensation
— Effective
January 1, 2006, the Company adopted
SFAS No. 123R,
Share Based Payment
, under the
modified prospective transition method. SFAS No. 123R
requires the measurement of compensation cost at the grant date,
based upon the estimated fair value of the award, and requires
amortization of the related expense over the employee’s
requisite service period.
(Loss) earnings per share
— Basic (loss)
earnings per share is computed by dividing net (loss) income by
the weighted average number of common shares outstanding during
each period. The computation of diluted (loss) earnings per
share further assumes the dilutive effect of stock options,
stock warrants and contingently issuable shares. Contingently
issuable shares represent non-vested stock awards and unvested
stock fund units in the deferred compensation plan. In
accordance with SFAS No. 128,
Earnings Per
Share
, these shares are included in the dilutive earnings
per share calculation under the treasury stock method. Unless
otherwise indicated, all pre-merger NNN share data have been
adjusted to reflect the conversion as a result of the Merger
(see Note 10 for additional information).
Concentration of Credit Risk
— Financial
instruments that potentially subject the Company to a
concentration of credit risk are primarily cash investments and
accounts receivable. The Company currently maintains
substantially all of its cash with several major financial
institutions. The Company has cash in financial institutions
which is insured by the Federal Deposit Insurance Corporation,
or FDIC, up to $250,000 per depositor per insured bank. As of
December 31, 2008, the Company had cash accounts in excess
of FDIC insured limits. The Company believes this risk is not
significant.
78
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Accrued Claims and Settlements
— The Company
has maintained partially self-insured and deductible programs
for general liability, workers’ compensation and certain
employee health care costs. In addition, the Company assumed
liabilities at the date of the Merger representing reserves
related to self insured errors and omissions program of the
acquired company. Reserves for all such programs are included in
accrued claims and settlements and compensation and employee
benefits payable, as appropriate. Reserves are based on the
aggregate of the liability for reported claims and an
actuarially-based estimate of incurred but not reported claims.
As of the date of the Merger, the Company entered into a premium
based insurance policy for all error and omission coverage on
claims arising after the date of the Merger. Claims arising
prior to the date of the Merger continue to be applied against
the previously mentioned liability reserves assumed relative to
the acquired company.
Income Taxes
— Income taxes are accounted for
under the asset and liability method in accordance with
SFAS No. 109,
Accounting for Income Taxes
(“SFAS No. 109”). Deferred tax assets and
liabilities are determined based on temporary differences
between the financial reporting and the tax basis of assets and
liabilities and operating loss and tax credit carry forwards.
Deferred tax assets and liabilities are measured by applying
enacted tax rates and laws and are released in the years in
which the temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date. Valuation allowances are provided
against deferred tax assets when it is more likely than not that
some portion or all of the deferred tax asset will not be
realized. During the year ended December 31, 2008, the
Company recorded a valuation allowance of $48.9 million.
Effective January 1, 2007, the Company adopted FASB
Interpretation No. 48
“Accounting for Uncertainty
in Income Taxes-An Interpretation of Statement of Financial
Accounting Standard No. 109”
(“FIN 48”). FIN 48 prescribes a
recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
As a result of the implementation of FIN No. 48, the
Company had no additional liability that was required to be
recorded; accordingly, no charge was taken to opening retained
earnings on January 1, 2007 upon adoption of
FIN No. 48.
Marketable Securities
— The Company accounts
for investments in marketable debt and equity securities in
accordance with SFAS No. 115,
Accounting for
Certain Investments in Debt and Equity Securities
(“SFAS No. 115”). The Company determines
the appropriate classification of debt and equity securities at
the time of purchase and reevaluates such designation as of each
balance sheet date. Marketable securities acquired are
classified with the intent to generate a profit from short-term
movements in market prices as trading securities. Debt
securities are classified as held to maturity when there is a
positive intent and ability to hold the securities to maturity.
Marketable equity and debt securities not classified as trading
or held to maturity are classified as available for sale.
In accordance with SFAS No. 115, trading securities
are carried at their fair value with realized and unrealized
gains and losses included in the statement of operations. The
available for sale securities are carried at their fair market
value and any difference between cost and market value is
recorded as unrealized gain or loss, net of income taxes, and is
reported as accumulated other comprehensive income in the
consolidated statement of stockholders’ equity. Premiums
and discounts are recognized in interest income using the
effective interest method. Realized gains and losses and
declines in value expected to be other-than-temporary on
available for sale securities are included in other income. The
cost of securities sold is based on the specific identification
method. Interest and dividends on securities classified as
available for sale are included in interest income.
Comprehensive Income (Loss)
— Pursuant to
SFAS No. 130,
Reporting Comprehensive Income
,
the Company has included a calculation of comprehensive (loss)
income in its accompanying consolidated
79
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
statements of stockholders’ equity for the years ended
December 31, 2008, 2007 and 2006. Comprehensive (loss)
income includes net (loss) income adjusted for certain revenues,
expenses, gains and losses that are excluded from net (loss)
income.
Guarantees
— The Company accounts for its
guarantees in accordance with FASB Interpretation No. 45,
Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others
(“FIN No. 45”).
FIN No. 45 elaborates on the disclosures to be made by
the guarantor in its interim and annual financial statements
about its obligations under certain guarantees that it has
issued. It also requires that a guarantor recognize, at the
inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. Management
evaluates these guarantees to determine if the guarantee meets
the criteria required to record a liability.
Segment Disclosure
— As a result of the Merger
in December 2007, the newly combined Company’s operating
segments were evaluated for reportable segments. As a result,
the legacy NNN reportable segments were realigned into a single
operating and reportable segment called Investment Management.
This realignment had no impact on the Company’s
consolidated balance sheet, results of operations or cash flows.
In accordance with the provisions of Statement of Financial
Accounting Standards No. 131,
Disclosures about Segments
of an Enterprise and Related Information
(“SFAS No. 131”), the Company divides
its services into three primary business segments, transaction
services, investment management and management services.
Derivative Instruments and Hedging Activities
—
The Company applies the provisions of SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities
, as amended (“SFAS No. 133”).
SFAS No. 133 requires companies to record derivatives
on the balance sheet as assets or liabilities, measured at fair
value, while changes in that fair value may increase or decrease
reported net (loss) income or stockholders’ equity,
depending on interest rate levels and computed
“effectiveness” of the derivatives, as that term is
defined by SFAS No. 133, but will have no effect on
cash flows. The Company’s derivatives consist solely of
four interest rate cap agreements with third parties, which were
executed in relation to its credit agreement or notes payable
obligations. These cap agreements were not accounted for as
effective cash flow hedges as of December 31, 2008.
Recently
Issued Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(“SFAS No. 157”). SFAS No. 157
defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands
disclosures about fair value instruments. In February 2008, the
FASB issued FASB Staff Position
No. FAS 157-2,
Effective Date of FASB Statement No. 157
(the
“FSP”). The FSP amends SFAS No. 157 to delay
the effective date of SFAS No. 157 for non-financial
assets and non-financial liabilities, except for items that are
recognized or disclosed at fair value in the financial
statements on a recurring basis (that is, at least annually).
There was no effect on the Company’s consolidated financial
statements as a result of the adoption of SFAS No. 157
as of January 1, 2008 as it relates to financial assets and
financial liabilities. For items within its scope, the FSP
defers the effective date of SFAS No. 157 to fiscal
years beginning after November 15, 2008, and interim
periods within those fiscal years. The Company will adopt
SFAS No. 157 as it relates to non-financial assets and
non-financial liabilities in the first quarter of 2009 and does
not believe adoption will have a material effect on its
consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159,
The
Fair Value Option for Financial Assets and Financial
Liabilities,
(“SFAS No. 159”).
SFAS No. 159 permits entities to choose to measure
many financial instruments and certain other items at fair
value. The objective of the guidance is to improve financial
reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related
assets and liabilities differently without having to apply
complex hedge accounting provisions. The Company adopted
SFAS No. 159 on a prospective basis on January 1,
2008. The adoption of SFAS No. 159 did not have a
material impact on the consolidated financial statements since
the Company did
80
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
not elect to apply the fair value option for any of its eligible
financial instruments or other items on the January 1, 2008
effective date.
In December 2007, the FASB issued revised
SFAS No. 141,
Business Combinations,
(“SFAS No. 141R”).
SFAS No. 141R will change the accounting for business
combinations and will require an acquiring entity to recognize
all the assets acquired and liabilities assumed in a transaction
at the acquisition-date fair value with limited exceptions.
SFAS No. 141R will change the accounting treatment and
disclosure for certain specific items in a business combination.
SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or
after December 15, 2008. SFAS No. 141R will have
an impact on accounting for business combinations once adopted
but the effect is dependent upon acquisitions at that time.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements — An Amendment of ARB No. 51,
(“SFAS No. 160”). SFAS No. 160
establishes new accounting and reporting standards for the
non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 requires
that noncontrolling interests be presented as a component of
consolidated stockholders’ equity, eliminates minority
interest accounting such that the amount of net income
attributable to the noncontrolling interests will be presented
as part of consolidated net income in the accompanying
consolidated statements of operations and not as a separate
component of income and expense, and requires that upon any
changes in ownership that result in the loss of control of the
subsidiary, the noncontrolling interest be re-measured at fair
value with the resultant gain or loss recorded in net income.
SFAS No. 160 is effective for fiscal years beginning
on or after December 15, 2008. The Company will adopt
SFAS No. 160 in the first quarter of 2009 and does not
believe the adoption will have a material effect on its
consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities
(“SFAS No. 161”).
SFAS No. 161 is intended to improve financial
reporting of derivative instruments and hedging activities by
requiring enhanced disclosures to enable investors to better
understand their effects on an entity’s financial position,
financial performance, and cash flows. SFAS No. 161
achieves these improvements by requiring disclosure of the fair
values of derivative instruments and their gains and losses in a
tabular format. It also provides more information about an
entity’s liquidity by requiring disclosure of derivative
features that are credit risk-related. Finally, it requires
cross-referencing within footnotes to enable financial statement
users to locate important information about derivative
instruments. SFAS No. 161 is effective for financial
statements issued for fiscal years and interim periods beginning
after November 15, 2008, with early application encouraged.
The Company will adopt SFAS No. 161 in the first
quarter of 2009 and does not believe the adoption will have a
material effect on its consolidated financial statements.
In April 2008, the FASB issued FSP
SFAS No. 142-3,
Determination of the Useful Life of Intangible Assets,
(“FSP
SFAS 142-3”).
FSP
SFAS 142-3
is intended to improve the consistency between the useful life
of recognized intangible assets under SFAS No. 142,
Goodwill and Other Intangible Assets,
(“SFAS No. 142”), and the period of expected
cash flows used to measure the fair value of the assets under
SFAS No. 141R. FSP
SFAS 142-3
amends the factors an entity should consider in developing
renewal or extension assumptions in determining the useful life
of recognized intangible assets. In addition to the required
disclosures under SFAS No. 142, FSP
SFAS 142-3
requires disclosure of the entity’s accounting policy
regarding costs incurred to renew or extend the term of
recognized intangible assets, the weighted average period to the
next renewal or extension, and the total amount of capitalized
costs incurred to renew or extend the term of recognized
intangible assets. FSP
SFAS 142-3
is effective for financial statements issued for fiscal years
and interim periods beginning after December 15, 2008. The
Company will adopt FSP
SFAS 142-3
on January 1, 2009. The adoption of FSP
SFAS 142-3
is not expected to have a material impact on the consolidated
financial statements.
81
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In June 2008, the FASB issued FSP
EITF 03-6-1,
Determining Whether Instruments Granted in Share-Based
Payment Transactions Are Participating Securities
(“FSP
EITF 03-6-1”)
,
which addresses whether instruments granted in share-based
payment transactions are participating securities prior to
vesting and, therefore, need to be included in the computation
of earnings per share under the two-class method described in
SFAS No. 128,
Earnings per Share
. FSP
EITF 03-6-1,
which will apply to the Company because it grants instruments to
employees in share-based payment transactions that meet the
definition of participating securities, is effective
retrospectively for financial statements issued for fiscal years
and interim periods beginning after December 15, 2008. The
Company will adopt FSP
EITF 03-6-1
in the first quarter of 2009 and does not believe the adoption
will have a material effect on its consolidated financial
statements.
In December 2008, the Financial Accounting Standards Board
(“FASB”) issued Staff Position (“FSP”)
Statement of Financial Account Standards
No. 140-4
and FIN 46(R)-8,
Disclosures by Public Entities
(Enterprises) about Transfers of Financial Assets and Interests
in Variable Interest Entities
(“FSP
FAS 140-4”).
The purpose of this FSP is to improve disclosures by public
entities and enterprises until pending amendments to
SFAS No. 140,
Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities
(“SFAS 140”), and FIN 46(R) are
finalized and approved by the FASB. The FSP amends SFAS 140
to require public entities to provide additional disclosures
about transferors’ continuing involvements with transferred
financial assets. It also amends FIN 46(R) to require
public enterprises to provide additional disclosures about their
involvement with variable interest entities. FSP
FAS 140-4
and FIN 46(R)-8 is effective for financial statements
issued for fiscal years and interim periods ending after
December 15, 2008. For periods after the initial adoption
date, comparative disclosures are required. The Company adopted
the FSP and FIN 46(R)-8 on December 31, 2008.
|
|
|
|
3.
|
RESTATEMENT
OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
|
On March 16, 2009, management and the Audit Committee of
the Board of Directors concluded that the Company’s
previously issued audited financial statements should be
restated, for the reasons discussed below.
The restatement of the Company’s financial statements was
based upon a review of the accounting treatment of certain
transactions entered into by NNN with respect to certain
tenant-in-common
investment programs (“TIC Programs”) sponsored by NNN
prior to the Merger. The review of NNN’s accounting
treatment was prompted by the Company being made aware of the
existence of a letter agreement, wherein NNN agreed to provide
certain investors with a right to exchange their investment in
certain TIC Programs for an investment in a different TIC
Program (the “Exchange Letter”). In the course of its
review, the Company became aware of additional letter
agreements, some providing for a right of exchange similar to
that contained in the Exchange Letter, another that provided the
investor with certain repurchase rights under certain
circumstances with respect to their investment and others in
which NNN committed to provide certain investors in certain TIC
Programs a specified rate of return. The agreements containing
such rights of exchange and repurchase rights pertain to initial
investments in TIC programs totaling $31.6 million.
Upon review of the accounting treatment for these letter
agreements as well as other TIC Programs and master lease
arrangements, management concluded that some of the letter
agreements had not been accounted for and that revenue had been
incorrectly recognized as it related to these letter agreements
as well as other TIC Programs and master lease arrangements
under SFAS No. 66 and
SOP 92-1
because the Company had various forms of continuing involvement
after the close of the sale of the investments in the TIC
Programs to third-parties. As a result of the recognition by the
Company of the applicable fee revenue in the incorrect
accounting periods, the Company reduced retained earnings as of
January 1, 2006 by approximately $8.7 million;
increased revenues in 2006 by approximately $518,000; and
increased revenues in 2007 by approximately $251,000 to correct
these errors.
Management also concluded that because NNN had various forms of
continuing involvement after the close of the sale of the
investments in the TIC Programs to third-parties, certain
entities involved in the TIC
82
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Programs were variable interest entities in which the Company
was the primary beneficiary and therefore were required to be
consolidated in accordance with FIN No. 46(R). As a
result, the Company increased total assets by
$12.3 million, total liabilities by $1.1 million and
minority interest by $11.2 million at December 31,
2007 to correct this error.
Management further concluded the method used for
December 31, 2007 to present, in its statement of cash
flows, its deconsolidation of certain entities the Company no
longer controlled was erroneous to the extent certain non cash
investing and financing transactions were presented as sources
and uses of cash. As a result of this error, cash flows used in
investing activities increased by $251.6 million and cash
flows provided by financing activities increased by
$251.9 million.
Restatement adjustments pertaining to income taxes relate to the
revenue recognition restatement adjustments described above.
All applicable notes have been restated to reflect the above
described adjustments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007
|
|
|
|
As
|
|
|
|
|
|
|
|
previously
|
|
|
|
|
|
(In thousands)
|
|
reported(1)
|
|
Adjustments
|
|
As Restated
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
$
|
69,098
|
|
|
$
|
925
|
|
|
$
|
70,023
|
|
|
Current portion of accounts receivable from related
parties — net
|
|
|
32,575
|
|
|
|
220
|
|
|
|
32,795
|
|
|
Current portion of advances to related parties — net
|
|
|
7,010
|
|
|
|
(343
|
)
|
|
|
6,667
|
|
|
Deferred tax assets
|
|
|
7,854
|
|
|
|
137
|
|
|
|
7,991
|
|
|
Total current assets
|
|
|
643,107
|
|
|
|
939
|
|
|
|
644,046
|
|
|
Investments in unconsolidated entities
|
|
|
11,028
|
|
|
|
11,163
|
|
|
|
22,191
|
|
|
Total assets
|
|
|
976,440
|
|
|
|
12,102
|
|
|
|
988,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
100,867
|
|
|
|
1,137
|
|
|
|
102,004
|
|
|
Other liabilities
|
|
|
5,055
|
|
|
|
7,305
|
|
|
|
12,360
|
|
|
Total current liabilities
|
|
|
484,083
|
|
|
|
8,442
|
|
|
|
492,525
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
32,837
|
|
|
|
(2,922
|
)
|
|
|
29,915
|
|
|
Total liabilities
|
|
|
549,070
|
|
|
|
5,520
|
|
|
|
554,590
|
|
|
Minority interest
|
|
|
18,725
|
|
|
|
11,171
|
|
|
|
29,896
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
15,381
|
|
|
|
(4,589
|
)
|
|
|
10,792
|
|
|
Total stockholders’ equity
|
|
|
408,645
|
|
|
|
(4,589
|
)
|
|
|
404,056
|
|
|
Total liabilities, minority interest and stockholders’
equity
|
|
|
976,440
|
|
|
|
12,102
|
|
|
|
988,542
|
|
83
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
For The Year Ended December 31, 2007
|
|
For The Year Ended December 31, 2006
|
|
|
|
As Previously
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
|
|
Reported(1)
|
|
Adjustments
|
|
As Restated
|
|
Reported(1)
|
|
Adjustments
|
|
As Restated
|
|
|
|
REVENUE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment management
|
|
$
|
149,400
|
|
|
$
|
251
|
|
|
$
|
149,651
|
|
|
$
|
99,081
|
|
|
$
|
518
|
|
|
$
|
99,599
|
|
|
Total revenue
|
|
|
217,686
|
|
|
|
251
|
|
|
|
217,937
|
|
|
|
108,025
|
|
|
|
518
|
|
|
|
108,543
|
|
|
OPERATING EXPENSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
44,251
|
|
|
|
—
|
|
|
|
44,251
|
|
|
|
29,845
|
|
|
|
343
|
|
|
|
30,188
|
|
|
Interest
|
|
|
2,164
|
|
|
|
4
|
|
|
|
2,168
|
|
|
|
5,569
|
|
|
|
1,196
|
|
|
|
6,765
|
|
|
Total operating expense
|
|
|
175,584
|
|
|
|
4
|
|
|
|
175,588
|
|
|
|
96,094
|
|
|
|
1,539
|
|
|
|
97,633
|
|
|
OPERATING INCOME (LOSS)
|
|
|
42,102
|
|
|
|
247
|
|
|
|
42,349
|
|
|
|
11,931
|
|
|
|
(1,021
|
)
|
|
|
10,910
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings (losses) of unconsolidated entities
|
|
|
(339
|
)
|
|
|
2,368
|
|
|
|
2,029
|
|
|
|
491
|
|
|
|
1,457
|
|
|
|
1,948
|
|
|
Interest income
|
|
|
2,990
|
|
|
|
2
|
|
|
|
2,992
|
|
|
|
713
|
|
|
|
—
|
|
|
|
713
|
|
|
Other
|
|
|
(650
|
)
|
|
|
185
|
|
|
|
(465
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Total other income
|
|
|
2,001
|
|
|
|
2,555
|
|
|
|
4,556
|
|
|
|
1,204
|
|
|
|
1,457
|
|
|
|
2,661
|
|
|
Income from continuing operations before minority interest and
income tax (provision) benefit
|
|
|
44,103
|
|
|
|
2,802
|
|
|
|
46,905
|
|
|
|
13,135
|
|
|
|
436
|
|
|
|
13,571
|
|
|
Minority interest in loss (income) of consolidated entities
|
|
|
459
|
|
|
|
(2,420
|
)
|
|
|
(1,961
|
)
|
|
|
(308
|
)
|
|
|
230
|
|
|
|
(78
|
)
|
|
Income from continuing operations before income tax benefit
(provision)
|
|
|
44,562
|
|
|
|
382
|
|
|
|
44,944
|
|
|
|
12,827
|
|
|
|
666
|
|
|
|
13,493
|
|
|
Income tax (provision) benefit
|
|
|
(17,966
|
)
|
|
|
(152
|
)
|
|
|
(18,118
|
)
|
|
|
4,230
|
|
|
|
3,211
|
|
|
|
7,441
|
|
|
Income from continuing operations
|
|
|
26,596
|
|
|
|
230
|
|
|
|
26,826
|
|
|
|
17,057
|
|
|
|
3,877
|
|
|
|
20,934
|
|
|
NET INCOME
|
|
$
|
20,842
|
|
|
$
|
230
|
|
|
$
|
21,072
|
|
|
$
|
16,094
|
|
|
$
|
3,877
|
|
|
$
|
19,971
|
|
|
Basic earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.68
|
|
|
$
|
0.01
|
|
|
$
|
0.69
|
|
|
$
|
0.87
|
|
|
$
|
0.19
|
|
|
$
|
1.06
|
|
|
Loss from discontinued operations
|
|
$
|
(0.14
|
)
|
|
$
|
—
|
|
|
$
|
(0.14
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
—
|
|
|
$
|
(0.05
|
)
|
|
Net earnings per share
|
|
$
|
0.54
|
|
|
$
|
0.01
|
|
|
$
|
0.55
|
|
|
$
|
0.82
|
|
|
$
|
0.19
|
|
|
$
|
1.01
|
|
|
Diluted earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.68
|
|
|
$
|
0.01
|
|
|
$
|
0.69
|
|
|
$
|
0.87
|
|
|
$
|
0.19
|
|
|
$
|
1.06
|
|
|
Loss from discontinued operations
|
|
$
|
(0.14
|
)
|
|
$
|
—
|
|
|
$
|
(0.14
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
—
|
|
|
$
|
(0.05
|
)
|
|
Net earnings per share
|
|
$
|
0.54
|
|
|
$
|
0.01
|
|
|
$
|
0.55
|
|
|
$
|
0.82
|
|
|
$
|
0.19
|
|
|
$
|
1.01
|
|
|
Basic weighted average shares outstanding
|
|
|
38,652
|
|
|
|
|
|
|
|
38,652
|
|
|
|
19,681
|
|
|
|
|
|
|
|
19,681
|
|
|
Diluted weighted average shares outstanding
|
|
|
38,653
|
|
|
|
|
|
|
|
38,653
|
|
|
|
19,694
|
|
|
|
|
|
|
|
19,694
|
|
84
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year Ended December 31, 2007
|
|
For The Year Ended December 31, 2006
|
|
|
|
As
|
|
|
|
|
|
As
|
|
|
|
|
|
|
|
Previously
|
|
|
|
As
|
|
Previously
|
|
|
|
As
|
|
(In thousands)
|
|
Reported
|
|
Adjustments
|
|
Restated
|
|
Reported(1)
|
|
Adjustments
|
|
Restated
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
20,842
|
|
|
$
|
230
|
|
|
$
|
21,072
|
|
|
$
|
16,094
|
|
|
$
|
3,877
|
|
|
$
|
19,971
|
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in losses (earnings) of unconsolidated entities
|
|
|
339
|
|
|
|
(2,368
|
)
|
|
|
(2,029
|
)
|
|
|
(491
|
)
|
|
|
(1,457
|
)
|
|
|
(1,948
|
)
|
|
Depreciation and amortization
|
|
|
9,668
|
|
|
|
(1,016
|
)
|
|
|
8,652
|
|
|
|
2,086
|
|
|
|
—
|
|
|
|
2,086
|
|
|
Loss on disposal of property, equipment and leasehold
improvements
|
|
|
—
|
|
|
|
861
|
|
|
|
861
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Stock-based compensation
|
|
|
9,041
|
|
|
|
—
|
|
|
|
9,041
|
|
|
|
3,865
|
|
|
|
—
|
|
|
|
3,865
|
|
|
Compensation expense on profit sharing arrangements
|
|
|
—
|
|
|
|
1,999
|
|
|
|
1,999
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Amortization/write-off of intangible contract rights
|
|
|
3,249
|
|
|
|
(116
|
)
|
|
|
3,133
|
|
|
|
410
|
|
|
|
—
|
|
|
|
410
|
|
|
Amortization of deferred financing costs
|
|
|
1,713
|
|
|
|
—
|
|
|
|
1,713
|
|
|
|
31
|
|
|
|
—
|
|
|
|
31
|
|
|
Gain on sale of marketable equity securities
|
|
|
—
|
|
|
|
(184
|
)
|
|
|
(184
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Deferred income taxes
|
|
|
(5,918
|
)
|
|
|
(1,191
|
)
|
|
|
(7,109
|
)
|
|
|
(4,936
|
)
|
|
|
(3,211
|
)
|
|
|
(8,147
|
)
|
|
Allowance for uncollectible accounts
|
|
|
859
|
|
|
|
(53
|
)
|
|
|
806
|
|
|
|
1,408
|
|
|
|
—
|
|
|
|
1,408
|
|
|
Minority interest
|
|
|
(459
|
)
|
|
|
2,420
|
|
|
|
1,961
|
|
|
|
308
|
|
|
|
(230
|
)
|
|
|
78
|
|
|
Other operating non cash (gains) losses
|
|
|
(119
|
)
|
|
|
127
|
|
|
|
8
|
|
|
|
(448
|
)
|
|
|
343
|
|
|
|
(105
|
)
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable from related parties
|
|
|
(8,907
|
)
|
|
|
14,925
|
|
|
|
6,018
|
|
|
|
(2,636
|
)
|
|
|
1,382
|
|
|
|
(1,254
|
)
|
|
Prepaid expenses and other assets
|
|
|
366
|
|
|
|
(36,661
|
)
|
|
|
(36,295
|
)
|
|
|
(1,062
|
)
|
|
|
143
|
|
|
|
(919
|
)
|
|
Accounts payable and accrued expenses
|
|
|
1,110
|
|
|
|
14,774
|
|
|
|
15,884
|
|
|
|
51
|
|
|
|
2,316
|
|
|
|
2,367
|
|
|
Other liabilities
|
|
|
1,857
|
|
|
|
6,155
|
|
|
|
8,012
|
|
|
|
521
|
|
|
|
(1,008
|
)
|
|
|
(487
|
)
|
|
Net cash provided by (used in) operating activities
|
|
|
33,641
|
|
|
|
(98
|
)
|
|
|
33,543
|
|
|
|
15,201
|
|
|
|
2,155
|
|
|
|
17,356
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(2,693
|
)
|
|
|
(638
|
)
|
|
|
(3,331
|
)
|
|
|
(1,984
|
)
|
|
|
(355
|
)
|
|
|
(2,339
|
)
|
|
Purchases of marketable equity securities
|
|
|
(2,087
|
)
|
|
|
(28,645
|
)
|
|
|
(30,732
|
)
|
|
|
(2,360
|
)
|
|
|
—
|
|
|
|
(2,360
|
)
|
|
Proceeds from sale of marketable equity securities
|
|
|
—
|
|
|
|
22,870
|
|
|
|
22,870
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Advances to related parties
|
|
|
(5,340
|
)
|
|
|
(33,772
|
)
|
|
|
(39,112
|
)
|
|
|
(19,268
|
)
|
|
|
—
|
|
|
|
(19,268
|
)
|
|
Proceeds from repayment of advances to related parties
|
|
|
3,072
|
|
|
|
114,424
|
|
|
|
117,496
|
|
|
|
16,713
|
|
|
|
—
|
|
|
|
16,713
|
|
|
Payments to related parties
|
|
|
(3,080
|
)
|
|
|
376
|
|
|
|
(2,704
|
)
|
|
|
—
|
|
|
|
(1,064
|
)
|
|
|
(1,064
|
)
|
|
Origination of notes receivable from related parties
|
|
|
(7,600
|
)
|
|
|
(31,700
|
)
|
|
|
(39,300
|
)
|
|
|
(10,000
|
)
|
|
|
—
|
|
|
|
(10,000
|
)
|
|
Proceeds from repayment of notes receivable from related parties
|
|
|
10,000
|
|
|
|
31,700
|
|
|
|
41,700
|
|
|
|
777
|
|
|
|
—
|
|
|
|
777
|
|
|
Investments in unconsolidated entities
|
|
|
(2,250
|
)
|
|
|
(6,826
|
)
|
|
|
(9,076
|
)
|
|
|
596
|
|
|
|
(112,368
|
)
|
|
|
(111,772
|
)
|
|
Sale of
tenant-in-common
interests in unconsolidated entities
|
|
|
—
|
|
|
|
20,466
|
|
|
|
20,466
|
|
|
|
—
|
|
|
|
101,128
|
|
|
|
101,128
|
|
|
Distributions of capital received from investments in
unconsolidated entities
|
|
|
—
|
|
|
|
1,256
|
|
|
|
1,256
|
|
|
|
—
|
|
|
|
20,049
|
|
|
|
20,049
|
|
|
Acquisition of properties
|
|
|
(677,392
|
)
|
|
|
72,266
|
|
|
|
(605,126
|
)
|
|
|
(80,905
|
)
|
|
|
—
|
|
|
|
(80,905
|
)
|
|
Proceeds from sale of properties
|
|
|
472,553
|
|
|
|
(379,608
|
)
|
|
|
92,945
|
|
|
|
31,684
|
|
|
|
—
|
|
|
|
31,684
|
|
|
Real estate deposits and pre-acquisition costs
|
|
|
(11,686
|
)
|
|
|
(38,516
|
)
|
|
|
(50,202
|
)
|
|
|
(15,948
|
)
|
|
|
1,842
|
|
|
|
(14,106
|
)
|
|
Proceeds from collection of real estate deposits and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
pre-acquisition costs
|
|
|
12,749
|
|
|
|
36,678
|
|
|
|
49,427
|
|
|
|
33,768
|
|
|
|
(7,046
|
)
|
|
|
26,722
|
|
|
Restricted cash
|
|
|
(21,909
|
)
|
|
|
(31,916
|
)
|
|
|
(53,825
|
)
|
|
|
(2,787
|
)
|
|
|
(1,277
|
)
|
|
|
(4,064
|
)
|
|
Net cash (used in) provided by investing activities
|
|
|
(235,324
|
)
|
|
|
(251,585
|
)
|
|
|
(486,909
|
)
|
|
|
(57,112
|
)
|
|
|
909
|
|
|
|
(56,203
|
)
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances on line of credit
|
|
|
(30,000
|
)
|
|
|
—
|
|
|
|
(30,000
|
)
|
|
|
—
|
|
|
|
14,000
|
|
|
|
14,000
|
|
|
Repayment of advances on line of credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(8,500
|
)
|
|
|
(14,000
|
)
|
|
|
(22,500
|
)
|
|
Borrowings on notes payable and capital lease obligations
|
|
|
239,888
|
|
|
|
307,127
|
|
|
|
547,015
|
|
|
|
71,106
|
|
|
|
49,605
|
|
|
|
120,711
|
|
|
Repayments of notes payable and capital leases obligations
|
|
|
(62,874
|
)
|
|
|
(80,974
|
)
|
|
|
(143,848
|
)
|
|
|
(36,820
|
)
|
|
|
(59,110
|
)
|
|
|
(95,930
|
)
|
|
Other financing costs
|
|
|
850
|
|
|
|
—
|
|
|
|
850
|
|
|
|
(1,973
|
)
|
|
|
106
|
|
|
|
(1,867
|
)
|
|
Contributions from minority interests
|
|
|
13,409
|
|
|
|
28,652
|
|
|
|
42,061
|
|
|
|
904
|
|
|
|
6,650
|
|
|
|
7,554
|
|
|
Distributions to minority interests
|
|
|
—
|
|
|
|
(2,866
|
)
|
|
|
(2,866
|
)
|
|
|
—
|
|
|
|
(315
|
)
|
|
|
(315
|
)
|
|
Net cash provided by (used in) financing activities
|
|
|
148,529
|
|
|
|
251,939
|
|
|
|
400,468
|
|
|
|
143,589
|
|
|
|
(3,064
|
)
|
|
|
140,525
|
|
|
NET (DECREASE) INCREASE IN CASH
|
|
|
(53,154
|
)
|
|
|
256
|
|
|
|
(52,898
|
)
|
|
|
101,678
|
|
|
|
—
|
|
|
|
101,678
|
|
|
Cash and cash equivalents – End of year
|
|
$
|
49,072
|
|
|
$
|
256
|
|
|
$
|
49,328
|
|
|
$
|
102,226
|
|
|
$
|
—
|
|
|
$
|
102,226
|
|
|
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deconsolidation of assets held by variable interest entities
|
|
$
|
—
|
|
|
$
|
372,674
|
|
|
$
|
372,674
|
|
|
$
|
—
|
|
|
$
|
28,016
|
|
|
$
|
28,016
|
|
|
Deconsolidation of liabilities held by variable interest entities
|
|
$
|
—
|
|
|
$
|
269,732
|
|
|
$
|
269,732
|
|
|
$
|
—
|
|
|
$
|
17,449
|
|
|
$
|
17,449
|
|
|
|
|
|
|
(1)
|
|
Amounts presented “as previously reported” have been
reclassified to conform to current year presentation. See
discussion of reclassifications in note 2.
|
85
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company has partially applied the provisions of
SFAS No. 157 to its financial assets recorded at fair
value, which consist of available-for-sale marketable
securities. SFAS No. 157 establishes a three-tiered
fair value hierarchy that prioritizes inputs to valuation
techniques used in fair value calculations. Level 1 inputs,
the highest priority, are quoted prices in active markets for
identical assets, while other levels use observable market data
or internally-developed valuation models. The valuation of the
Company’s available-for-sale marketable securities is based
on quoted prices in active markets for identical securities.
The historical cost and estimated fair value of the
available-for-sale marketable securities held by the Company are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007
|
|
|
|
|
|
|
|
Gross Unrealized
|
|
|
|
|
|
(In thousands)
|
|
Historical Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Market Value
|
|
|
|
|
Marketable equity securities
|
|
$
|
4,440
|
|
|
$
|
—
|
|
|
$
|
(1,355
|
)
|
|
$
|
3,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of marketable equity securities resulted in realized
losses of approximately $1.8 million during 2008, of which
the Company recognized $1.6 million of these losses during
the second quarter, prior to the sale of all the securities, as
the Company believed that the decline in the value of these
securities was other than temporary. Sales of equity securities
resulted in realized gains of $1.2 million and realized
losses of $1.0 million for the year ended December 31,
2007. There were no sales of equity securities for the year
ended December 31, 2006.
Investments
in Limited Partnerships
Since the acquisition of its subsidiary, Grubb & Ellis
Alesco Global Advisors, LLC (“Alesco”) in 2007, the
Company serves as general partner and investment advisor to six
hedge fund limited partnerships, five of which are required to
be consolidated: Grubb & Ellis AGA Realty Income Fund,
LP, AGA Strategic Realty Fund, L.P., AGA Global Realty
Fund LP and AGA Realty Income Partners LP and one mutual
fund which is required to be consolidated, Grubb &
Ellis Realty Income Fund.
In accordance with
EITF 04-05
“Determining Whether a General Partner, or the General
Partners as a Group Controls a Limited Partnership of Similar
Entity When the Limited Partners Have Certain Rights,”
Alesco consolidates five hedge fund limited partnerships as
the rights of the limited partners do not overcome the rights of
the general partner.
For the years ended December 31, 2008 and 2007, Alesco had
investment losses of approximately $4.6 million and
$680,000, respectively, which are reflected in other expense and
offset in minority interest in loss of consolidated entities on
the statements of operations. Alesco earned approximately
$103,000 and $15,000 of management fees based on ownership
interest under the agreements for the years ended
December 31, 2008 and 2007, respectively. As of
December 31, 2008 and 2007 these limited partnerships had
assets of approximately $1.5 million and $6.0 million,
respectively, primarily consisting of exchange traded marketable
securities, including equity securities and foreign currencies.
The following table reflects trading securities. The original
cost, estimated market value and gross unrealized appreciation
and depreciation of equity securities are presented in the
tables below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2008
|
|
|
As of December 31, 2007
|
|
|
|
|
|
|
|
Gross
|
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
|
Fair
|
|
|
|
|
Historical
|
|
|
Unrealized
|
|
|
Market
|
|
|
Historical
|
|
|
Gross Unrealized
|
|
|
Market
|
|
|
(In thousands)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
|
|
Equity securities
|
|
$
|
1,933
|
|
|
$
|
12
|
|
|
$
|
(435
|
)
|
|
$
|
1,510
|
|
|
$
|
7,250
|
|
|
$
|
134
|
|
|
$
|
(1,417
|
)
|
|
$
|
5,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year Ended
|
|
|
For The Year Ended
|
|
|
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
Realized
|
|
|
Unrealized
|
|
|
|
|
|
|
|
|
Realized
|
|
|
Unrealized
|
|
|
|
|
|
|
|
Investment
|
|
|
Gains
|
|
|
Gains
|
|
|
|
|
|
Investment
|
|
|
Gains
|
|
|
Gains
|
|
|
|
|
|
(In thousands)
|
|
Income
|
|
|
(Losses)
|
|
|
(Losses)
|
|
|
Total
|
|
|
Income
|
|
|
(Losses)
|
|
|
(Losses)
|
|
|
Total
|
|
|
|
|
Equity securities
|
|
$
|
307
|
|
|
$
|
(5,454
|
)
|
|
$
|
841
|
|
|
$
|
(4,306
|
)
|
|
$
|
163
|
|
|
$
|
(185
|
)
|
|
$
|
(618
|
)
|
|
$
|
(640
|
)
|
|
Less investment expenses
|
|
|
(283
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(283
|
)
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
(40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24
|
|
|
$
|
(5,454
|
)
|
|
$
|
841
|
|
|
$
|
(4,589
|
)
|
|
$
|
123
|
|
|
$
|
(185
|
)
|
|
$
|
(618
|
)
|
|
$
|
(680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related party transactions as of December 31, 2008 and 2007
are summarized below:
Accounts
Receivable
Accounts receivable from related parties consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Accrued property management fees
|
|
$
|
23,298
|
|
|
$
|
19,574
|
|
|
Accrued lease commissions
|
|
|
7,720
|
|
|
|
9,945
|
|
|
Other accrued fees
|
|
|
3,372
|
|
|
|
4,432
|
|
|
Other receivables
|
|
|
647
|
|
|
|
4,147
|
|
|
Accrued asset management fees
|
|
|
1,725
|
|
|
|
1,206
|
|
|
Accounts receivable from sponsored REITs
|
|
|
4,768
|
|
|
|
4,796
|
|
|
Accrued real estate acquisition fees
|
|
|
1,834
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
43,364
|
|
|
|
44,187
|
|
|
Allowance for uncollectible receivables
|
|
|
(9,662
|
)
|
|
|
(1,032
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable from related parties — net
|
|
|
33,702
|
|
|
|
43,155
|
|
|
Less portion classified as current
|
|
|
(22,630
|
)
|
|
|
(32,795
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Non-current portion
|
|
$
|
11,072
|
|
|
$
|
10,360
|
|
|
|
|
|
|
|
|
|
|
|
87
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Advances
to Related Parties
The Company makes advances to affiliated real estate entities
under management in the normal course of business. Such advances
are uncollateralized, generally have payment terms of one year
or less and bear interest at 6.0% to 12.0% per annum. The
advances consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
(In thousands)
|
|
|
|
|
Restated
|
|
|
|
|
Advances to properties of related parties
|
|
$
|
14,714
|
|
|
$
|
9,823
|
|
|
Advances to related parties
|
|
|
2,937
|
|
|
|
2,434
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
17,651
|
|
|
|
12,257
|
|
|
Allowance for uncollectible advances
|
|
|
(3,170
|
)
|
|
|
(1,839
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Advances to related parties — net
|
|
|
14,481
|
|
|
|
10,418
|
|
|
Less portion classified as current
|
|
|
(2,982
|
)
|
|
|
(6,667
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Non-current portion
|
|
$
|
11,499
|
|
|
$
|
3,751
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, advances to a program that is
30.0% owned and managed by Anthony W. Thompson, the
Company’s former Chairman and a significant shareholder,
who subsequently resigned in February 2008 but remains a
substantial stockholder of the Company, totaled
$1.0 million including accrued interest. These amounts were
repaid in full during the year ended December 31, 2008 and
as of December 31, 2008 there were no outstanding advances
related to this program. However, as of December 31, 2008,
accounts receivable totaling $310,000 is due from this program.
On November 4, 2008, the Company made a formal written
demand to Mr. Thompson for these monies.
As of December 31, 2008, advances to a program that is
40.0% owned and, as of April 1, 2008, managed by
Mr. Thompson totaled $983,000, which includes $61,000 in
accrued interest. As of December 31, 2008, the total
outstanding balance of $983,000 was past due. The total past due
amount of $983,000 has been reserved for and is included in the
allowance for uncollectible advances. On November 4, 2008
and April 3, 2009, the Company made a formal written demand
to Mr. Thompson for these monies.
Notes
Receivable From Related Party
In December 2007, the Company advanced $10.0 million to
Grubb & Ellis Apartment REIT, Inc. (“Apartment
REIT”) on an unsecured basis. The unsecured note required
monthly interest-only payments which began on January 1,
2008. The balance owed to the Company as of December 31,
2007 which consisted of $7.6 million in principal was
repaid in full in the first quarter of 2008.
In June 2008, the Company advanced $6.0 million to
Grubb & Ellis Healthcare REIT, Inc. (“Healthcare
REIT”) on an unsecured basis. The unsecured note had a
maturity date of December 30, 2008 and bore interest at a
fixed rate of 4.96% per annum, however, Healthcare REIT repaid
in full the $6.0 million note in the third quarter of 2008.
The note required monthly interest-only payments beginning on
August 1, 2008 and provided for a default interest rate in
an event of default equal to 2.00% per annum in excess of the
stated interest rate.
In June 2008, the Company advanced $3.7 million to
Apartment REIT on an unsecured basis. The unsecured note
originally had a maturity date of December 27, 2008 and
bore interest at a fixed rate of 4.95% per annum. Effective
November 10, 2008, the Company extended the maturity date
to May 10, 2009 and adjusted the interest rate to a fixed
rate of 5.26% per annum, and effective May 10, 2009, the
Company extended the maturity date to November 10, 2009 and
adjusted the interest rate to a fixed rate of 8.43% per annum.
The note requires monthly interest-only payments beginning on
August 1, 2008 and provides for a
88
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
default interest rate in an event of default equal to 2.00% per
annum in excess of the stated interest rate. In September 2008,
the Company advanced an additional $5.4 million to
Apartment REIT on an unsecured basis. The unsecured note
originally had a maturity date of March 15, 2009 and bore
interest at a fixed rate of 4.99% per annum. Effective
March 9, 2009, the Company extended the maturity date to
September 15, 2009 and adjusted the interest rate to a
fixed rate of 5.00% per annum. The note requires monthly
interest-only payments beginning on October 1, 2008 and
provides for a default interest rate in an event of default
equal to 2.00% per annum in excess of the stated interest rate.
As of December 31, 2008, the balance owed by Apartment REIT
to the Company on the two unsecured notes totals
$9.1 million in principal with no interest outstanding.
6. SERVICE FEES RECEIVABLE, NET
Service fees receivable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Transaction services fees receivable
|
|
$
|
16,185
|
|
|
$
|
11,289
|
|
|
Management services fees receivable
|
|
|
11,848
|
|
|
|
8,903
|
|
|
Allowance for uncollectible accounts
|
|
|
(871
|
)
|
|
|
(343
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
27,162
|
|
|
|
19,849
|
|
|
Less portion classified as current
|
|
|
(26,987
|
)
|
|
|
(19,521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Non-current portion (included in other assets)
|
|
$
|
175
|
|
|
$
|
328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
VARIABLE
INTEREST ENTITIES
|
The determination of the appropriate accounting method with
respect to the Company’s variable interest entities
(“VIEs”), including joint ventures, is based on
FIN No. 46(R). The Company consolidates any VIE for
which it is the primary beneficiary.
The Company determines if an entity is a VIE under
FIN No. 46(R) based on several factors, including
whether the entity’s total equity investment at risk upon
inception is sufficient to finance the entity’s activities
without additional subordinated financial support. The Company
makes judgments regarding the sufficiency of the equity at risk
based first on a qualitative analysis, then a quantitative
analysis, if necessary. In a quantitative analysis, the Company
incorporates various estimates, including estimated future cash
flows, asset hold periods and discount rates, as well as
estimates of the probabilities of various scenarios occurring.
If the entity is a VIE, the Company then determines whether to
consolidate the entity as the primary beneficiary. The Company
is deemed to be the primary beneficiary of the VIE and
consolidates the entity if the Company will absorb a majority of
the entity’s expected losses, receive a majority of the
entity’s expected residual returns or both.
A change in the judgments, assumptions and estimates outlined
above could result in consolidating an entity that is not
currently consolidated or accounting for an investment on the
equity method that is currently consolidated, the effects of
which could be material to the Company’s consolidated
financial statements.
As of December 31, 2008 the Company had investments in
seven LLCs that are VIEs in which the Company is the primary
beneficiary. These seven LLCs hold interests in the
Company’s TIC investments. The carrying value of the assets
and liabilities for these consolidated VIEs as of
December 31, 2008 was $3.7 million and $309,000,
respectively. As of December 31, 2007, the Company had
investments in 13 LLCs that are VIEs in which the Company is the
primary beneficiary. These 13 LLCs hold interests in the
Company’s TIC investments. The carrying value of the assets
and liabilities for these consolidated VIEs as of
89
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
December 31, 2007 was $23.9 million and
$24.4 million, respectively. The $24.4 million in
liabilities includes $18.8 million of full recourse
mezzanine debt. In addition, these consolidated VIEs are joint
and severally liable on the non-recourse mortgage debt related
to the interests in the Company’s TIC investments totalling
$277.8 million and $392.2 million as of
December 31, 2008 and 2007, respectively. This mortgage
debt is not consolidated as the LLCs account for the interests
in the Company’s TIC investments under the equity method
and the non recourse mortgage debt does not meet the criteria
under SFAS No. 140 for recognizing the share of the
debt assumed by the other TIC interest holders for
consolidation. The Company does consider the third party TIC
holders ability and intent to repay their share of the joint and
several liability in evaluating the recovery. Six LLCs
deconsolidated during the year ended December 31, 2008 as a
result of the Company selling interests in certain real estate
properties that it held through these consolidated LLCs which
resulted in the Company no longer being the primary beneficiary
of these LLCs.
If the interest in the entity is determined to not be a VIE
under FIN No. 46(R), then the entity is evaluated for
consolidation under the American Institute of Certified Public
Accountants’ Statement of Position
No. 78-9,
Accounting for Investments in Real Estate Ventures
,
(“SOP 78-9”),
as amended by Emerging Issues Task Force
No. 04-5,
Determining Whether a General Partner, or the General
Partners as a Group, Controls a Limited Partnership or Similar
Entity When the Limited Partners Have Certain Rights
(“EITF 04-5”).
As of December 31, 2008 and 2007 the Company had a number
of entities that were determined to be VIEs, that did not meet
the consolidation requirements of FIN No. 46(R). The
unconsolidated VIEs are accounted for under the equity method.
The aggregate investment carrying value of the unconsolidated
VIEs was $5.0 million and $5.2 million as of
December 31, 2008 and 2007, respectively, and was
classified under Investments in Unconsolidated Entities in the
consolidated balance sheet. The Company’s maximum exposure
to loss as a result of its investments in unconsolidated VIEs is
typically limited to the aggregate of the carrying value of the
investment and future funding commitments. Future funding
commitments as of December 31, 2008 for the unconsolidated
VIEs totalled $823,000. In addition, as of December 31,
2008 and 2007, these unconsolidated VIEs are joint and severally
liable on non-recourse mortgage debt totalling
$385.3 million and $336.9 million, respectively. This
mortgage debt is not consolidated as the LLCs account for the
interests in the Company’s TIC investments under the equity
method and the non recourse mortgage debt does not meet the
criteria under SFAS No. 140 for recognizing the share
of the debt assumed by the other TIC interest holders for
consolidation. The Company does consider the third party TIC
holders ability and intent to repay their share of the joint and
several liability in evaluating the recovery. Although the
mortgage debt is non-recourse to the VIE that holds the TIC
interest, the Company has full recourse guarantees on a portion
of such mortgage debt totalling $3.5 million and $0 as of
December 31, 2008 and 2007, respectively. In evaluating the
recovery of the TIC investment the Company evaluated the
likelihood that the lender would foreclose on the VIEs interest
in the TIC to satisfy the obligation. See
Note 8 — Investments in Unconsolidated Entities
for additional information.
|
|
|
|
8.
|
INVESTMENTS
IN UNCONSOLIDATED ENTITIES
|
As of December 31, 2008 and 2007, the Company held
investments in five joint ventures totaling $3.8 million
and $5.9 million, respectively, which represent a range of
5.0% to 10.0% ownership interest in each property. In addition,
pursuant to FIN No. 46(R), the Company has
consolidated seven LLCs with investments in unconsolidated
entities totaling $3.7 million as of December 31, 2008
and 13 LLCs with investments in unconsolidated entities totaling
$17.0 million as of December 31, 2007, respectively
(of which $5.9 million is included in properties held for
sale including investments in unconsolidated entities on the
consolidated balance sheet as of December 31, 2007). In
addition, the Company had an investment in Grubb &
Ellis Realty Advisors, Inc. (“GERA”) of
$4.1 million as of December 31, 2007. The remaining
amounts within investments in unconsolidated entities are
related to various LLCs, which represent ownership interests of
less than 1.0%.
90
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As of December 31, 2007, the Company owned approximately
5.9 million shares of common stock of GERA, which was a
publicly traded special purpose acquisition company, which
represented approximately 19% of the outstanding common stock.
The Company also owned approximately 4.6 million GERA
warrants which were exercisable into additional GERA common
stock, subject to certain conditions. As part of the Merger, the
Company recorded each of these investments at fair value on
December 7, 2007, the date they were acquired, at a total
investment of approximately $4.5 million.
All of the officers of GERA were also officers or directors of
legacy Grubb & Ellis, although such persons did not
receive any compensation from GERA in their capacity as officers
of GERA. Due to the Company’s ownership position and
influence over the operating and financial decisions of GERA,
the Company’s investment in GERA was accounted for within
the Company’s consolidated financial statements under the
equity method of accounting. The Company’s combined
carrying value of these GERA investments as of December 31,
2007, totaled approximately $4.1 million, net of an
unrealized loss, and was included in investments in
unconsolidated entities in the Company’s consolidated
balance sheet as of that date.
On February 28, 2008, a special meeting of the stockholders
of GERA was held to vote on, among other things, a proposed
transaction with the Company. GERA failed to obtain the
requisite consents of its stockholders to approve the proposed
business transaction and at a subsequent special meeting of the
stockholders of GERA held on April 14, 2008, the
stockholders of GERA approved the dissolution and plan of
liquidation of GERA. The Company did not receive any funds or
other assets as a result of GERA’s dissolution and
liquidation.
As a consequence, the Company wrote off its investment in GERA
and other advances to that entity in the first quarter of 2008
and recognized a loss of approximately $5.8 million which
is recorded in equity in losses on the consolidated statement of
operations and is comprised of $4.5 million related to
stock and warrant purchases and $1.3 million related to
operating advances and third party costs, which included an
unrealized loss previously reflected in accumulated other
comprehensive loss.
As of December 31, 2008 and 2007 the Company had interests
in certain variable interest entities, of which the Company was
not considered the primary beneficiary. Accordingly, such VIEs
were not consolidated in the financial statements.
9. PROPERTY, EQUIPMENT AND LEASEHOLD
IMPROVEMENTS
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
Useful Life
|
|
2008
|
|
|
2007
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
3-5 years
|
|
$
|
31,096
|
|
|
$
|
32,002
|
|
|
Automobiles
|
|
5 years
|
|
|
11
|
|
|
|
11
|
|
|
Capital leases
|
|
1-5 years
|
|
|
1,566
|
|
|
|
1,519
|
|
|
Furniture and fixtures
|
|
7 years
|
|
|
25,083
|
|
|
|
25,283
|
|
|
Leasehold improvements
|
|
1-5 years
|
|
|
7,834
|
|
|
|
7,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
65,590
|
|
|
|
66,625
|
|
|
Accumulated depreciation and amortization
|
|
|
|
|
(51,581
|
)
|
|
|
(49,897
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment — net
|
|
|
|
$
|
14,009
|
|
|
$
|
16,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized $6.8 million, $1.8 million and
$1.8 million of depreciation expense for the years ended
December 31, 2008, 2007 and 2006, respectively.
91
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
|
10.
|
BUSINESS
COMBINATIONS AND GOODWILL
|
Merger
of Grubb & Ellis Company with NNN
On December 7, 2007, the Company effected the Merger with
NNN, a real estate asset management company and sponsor of TIC
Programs as well as a sponsor of two non-traded REITs and other
investment programs.
On December 7, 2007, pursuant to the Merger Agreement
(i) each issued and outstanding share of common stock of
NNN was automatically converted into 0.88 of a share of common
stock of the Company, and (ii) each issued and outstanding
stock options of NNN, exercisable for common stock of NNN, was
automatically converted into the right to receive stock options
exercisable for common stock of the Company based on the same
0.88 share conversion ratio. Therefore,
43,779,740 shares of common stock of NNN that were issued
and outstanding immediately prior to the Merger were
automatically converted into 38,526,171 shares of common
stock of the Company, and the 739,850 NNN stock options that
were issued and outstanding immediately prior to the Merger were
automatically converted into 651,068 stock options of the
Company. The prior year share and option amounts have been
retroactively adjusted to reflect the 0.88 conversion.
Under the purchase method of accounting, the Merger
consideration of $172.2 million was determined based on the
closing price of the Company’s common stock of $6.43 per
share on the date the merger closed, applied to the
26,195,655 shares of the Company’s common stock
outstanding plus the fair value of vested options outstanding of
approximately $3.8 million. The fair value of these vested
options was calculated using the Black-Scholes option-pricing
model which incorporated the following assumptions: weighted
average exercise price of $7.02 per option, volatility of
105.11%, a 5 year expected life of the awards, risk-free
interest rate of 3.51% and no expected dividend yield.
The results of operations of legacy Grubb & Ellis have
been included in the consolidated results of operations since
December 8, 2007 and the results of operations of NNN have
been included in the consolidated results of operations for the
full year ended December 31, 2007.
The purchase price was allocated to the assets acquired and
liabilities assumed based on the estimated fair value of net
assets as of the acquisition date as follows (in thousands):
|
|
|
|
|
|
|
Current assets
|
|
$
|
189,214
|
|
|
Other assets
|
|
|
29,797
|
|
|
Identified intangible assets acquired
|
|
|
86,600
|
|
|
Goodwill
|
|
|
107,507
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
413,118
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
233,894
|
|
|
Other liabilities
|
|
|
7,022
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
240,916
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
172,202
|
|
|
|
|
|
|
|
As a result of the merger, the Company incurred
$14.7 million and $6.4 million in merger related
expenses during 2008 and 2007, respectively, as reflected on the
Company’s consolidated statement of operations.
Additionally, as a result of the Merger, the Company recorded
$1.6 million and $3.6 million as a purchase accounting
liability for severance for certain executives in 2008 and 2007,
respectively, as part of a change in control provision in the
related employment agreements.
92
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As part of its Merger transition, the Company recently completed
its personnel reorganization plan, and recorded additional
severance liabilities totaling approximately $2.3 million
during the year ended December 31, 2008, which increased
the goodwill recorded from the acquisition. These liabilities
relate primarily to severance and other benefits to be paid to
involuntarily terminated employees of the acquired company. Such
liabilities, totaling approximately $7.4 million, have been
recorded related to the personnel reorganization plan, of which
approximately $6.7 million has been paid to terminated
employees as of December 31, 2008. As a result of the
Merger, approximately $110.9 million has been recorded to
goodwill as of December 31, 2008, which was subsequently
written off as an impairment charge during the year ended
December 31, 2008.
Acquisition
of NNN/ROC Apartment Holdings, LLC
On July 1, 2007, the Company completed the acquisition of
the remaining 50.0% membership interest in NNN/ROC Apartment
Holdings, LLC (“ROC”). ROC holds contract rights
associated with a fee sharing agreement between ROC Realty
Advisors and NNN with respect to certain fee streams (including
an interest in net cash flows associated with subtenant leases
(as Landlord) in excess of expenses from the Master Lease
Agreement (as tenant) and related multi-family property
acquisitions where ROC Realty Advisors, LLC sourced the deals
for placement into the TIC investment programs. The aggregate
purchase price for the acquisition of 50.0% membership interest
of ROC was approximately $1.7 million in cash.
Acquisition
of Alesco Global Advisors, LLC
On November 16, 2007, the Company completed the acquisition
of the 51.0% membership interest in Alesco. Alesco is a
registered investment advisor focused on real estate securities
and manages private investment funds exclusively for qualified
investors. Alesco holds several investment advisory contracts
right and it the general partner of several domestic mutual fund
investments limited partnerships. Alesco is also an investment
advisor to one offshore hedge fund. The Company’s purpose
of acquiring Alesco was to create a global leader in real estate
securities management within open and closed end mutual funds,
and hedge funds. The aggregate purchase price was approximately
$3.0 million in cash. Additionally, upon achievement of
certain earn-out targets, the Company is required to purchase up
to an additional 27% interest in Alesco for $15.0 million.
Acquisition
of Triple Net Properties, Realty, and NNN Capital
Corp.
NNN was organized as a corporation in the State of Delaware in
September 2006 and was formed to acquire each of GERI (formerly
Triple Net Properties, LLC), Triple Net Properties Realty, Inc.
(“Realty”) and Grubb & Ellis Securities,
Inc. (“GBE Securities” formerly NNN Capital Corp.) and
its other subsidiaries (collectively, NNN), to bring the
businesses conducted by those companies under one corporate
umbrella and to facilitate an offering pursuant to
Rule 144A of the Securities Act (“the 144A
offering”), which transactions are collectively referred to
as “the formation transactions.” On November 16,
2006, NNN closed a $160.0 million private placement of
common stock to institutional investors and certain accredited
investors with 14.1 million shares of the Company’s
common stock sold in the offering at $11.36 per share. Triple
Net Properties was the accounting acquirer of Realty and NNN
Capital Corp.
Concurrently with the close of the 144A offering, the following
transactions occurred:
|
|
|
|
|
|
•
|
TNP Merger Sub, LLC, a Delaware limited liability company and
wholly-owned subsidiary of NNN, entered into an agreement and
plan of merger with Triple Net Properties, a Virginia limited
liability company owned by Anthony W. Thompson (former Chairman
of the Board), Scott D. Peters (former executive officer and
director), Louis J. Rogers (former director and former executive
officer of Triple Net Properties) and a number of other
employees and third-party investors. In connection with the
merger agreement, NNN entered into contribution agreements with
the holders of a majority of the
|
93
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
|
|
|
|
common membership interests of Triple Net Properties. Under the
merger agreement and the contribution agreements, NNN issued
17,372,438 shares of the Company’s common stock (to
the accredited investor members) and $986,000 in cash (to the
unaccredited investor members in lieu of 0.5% of the shares of
the Company’s common stock they would otherwise be entitled
to receive, which was valued at the $11.36 offering price to
investors in the 144A offering) in exchange for all the common
member interests. Concurrently with the closing of the 144A
offering on November 16, 2006, Triple Net Properties became
a wholly-owned subsidiary of NNN. For accounting purposes,
Triple Net Properties was considered the acquirer of Realty and
NNN Capital Corp.
|
|
|
|
|
|
|
•
|
NNN entered into a contribution agreement with Mr. Thompson
and Mr. Rogers pursuant to which they contributed all of
the outstanding shares of Realty, to the Company in exchange for
4,124,120 shares of the Company’s common stock and,
with respect to Mr. Thompson, $9.4 million in cash in
lieu of the shares of NNN he would otherwise be entitled to
receive, which was valued at the $11.36 offering price to
investors in the 144A offering. Concurrently with the closing of
the 144A offering on November 16, 2006, Realty became a
wholly-owned subsidiary of NNN.
|
|
|
|
|
•
|
NNN entered into a contribution agreement with
Mr. Thompson, Mr. Rogers and Kevin K. Hull pursuant to
which they contributed all of the outstanding shares of NNN
Capital Corp. to the Company in exchange for
1,164,680 shares of the Company’s common stock and,
with respect to Mr. Thompson, $2.7 million in cash in
lieu of the shares of NNN he would otherwise be entitled to
receive, which was valued at the $11.36 offering price to
investors in the 144A offering. NNN Capital Corp. became a
wholly-owned subsidiary of NNN on December 14, 2006.
|
In connection with these transactions, the owners of Realty and
Capital Corp have agreed to indemnify NNN for a breach of any
representations and for certain other losses, subject to a
maximum aggregate limit on the amount of their liability of
$12.0 million. Mr. Thompson and Mr. Rogers also
agreed to escrow shares of NNN’s common stock and indemnify
NNN for certain other matters. Except for these escrow
arrangements, NNN has no assurance that any contributing party
providing these limited representations or indemnities will have
adequate capital to fulfill its indemnity obligations.
The acquisitions were accounted for under the purchase method of
accounting, and accordingly all assets and liabilities were
adjusted to and recorded at their estimated fair values as of
the acquisition date. Goodwill and other intangible assets
represent the excess of purchase price over the fair value of
net assets acquired. In accordance with SFAS No. 141,
the Company recorded goodwill for a purchase business
combination to the extent that the purchase price of the
acquisition exceeded the net identifiable assets and intangible
assets of the acquired companies.
The purchase accounting adjustments for the acquisition of
Realty and NNN Capital Corp. were recorded in the accompanying
consolidated financial statements as of, and for periods
subsequent to the acquisition dates. The excess purchase price
over the estimated fair value of net assets acquired has been
recorded to goodwill, which is not deductible for tax purposes.
The final valuation of the net assets acquired is complete.
The aggregate purchase price for the acquisition of Realty and
NNN Capital Corp. was approximately $72.2 million, which
included: (1) issuance of 5,288,800 shares of the
Company’s common stock, valued at $11.36 per share (the
offering price upon the close of the 144A); and
(2) $12.1 million in cash paid to Mr. Thompson in
lieu of the shares of the Company’s common stock he would
otherwise be entitled to receive, valued at $11.36 per share. As
of December 31, 2006, the total purchase price has been
paid.
94
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following represents the calculation of the purchase price
of Realty and the excess purchase price over the estimated fair
value of the net assets acquired:
|
|
|
|
|
|
|
|
|
|
|
(In thousands except share and
per share data)
|
|
|
|
|
|
|
|
|
|
Purchase of shares of Realty for cash
|
|
|
|
|
|
$
|
9,435
|
|
|
Purchase of shares of Realty for stock
|
|
|
|
|
|
|
46,865
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
|
|
|
|
|
56,300
|
|
|
Adjusted beginning equity
|
|
$
|
1,733
|
|
|
|
|
|
|
Adjustment for fair value of intangible contract rights
|
|
|
(20,538
|
)
|
|
|
|
|
|
Adjustment to goodwill to reflect deferred tax liability arising
from allocation of purchase price to intangible contract rights
|
|
|
8,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: fair value of net assets acquired
|
|
|
|
|
|
|
(10,591
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill: Excess purchase price over fair value of net assets
|
|
|
|
|
|
$
|
45,709
|
|
|
|
|
|
|
|
|
|
|
|
Realty was comprised of the following:
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Current assets
|
|
$
|
5,326
|
|
|
Intangible contract rights
|
|
|
20,538
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
25,864
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Current liabilities
|
|
|
7,059
|
|
|
Long-term deferred tax liability
|
|
|
8,214
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
15,273
|
|
|
|
|
|
|
|
|
Fair value of net assets acquired
|
|
$
|
10,591
|
|
|
|
|
|
|
|
The issuance of the Company’s common stock to the owners of
Realty was based upon the following:
|
|
|
|
|
|
|
Realty fair value
|
|
$
|
56,300
|
|
|
Cash payment toward purchase
|
|
|
(9,435
|
)
|
|
|
|
|
|
|
|
Value of shares issued
|
|
$
|
46,865
|
|
|
|
|
|
|
|
|
Price per share issued
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
Shares issued to Realty owners
|
|
|
4,686,500
|
|
|
|
|
|
|
|
The following represents the calculation of the purchase price
of GBE Securities and the excess purchase price over the
estimated fair value of the net assets acquired:
|
|
|
|
|
|
|
(In thousands, except share and
per share data)
|
|
|
|
|
|
|
Purchase of shares of GBE Securities for cash
|
|
$
|
2,665
|
|
|
Purchase of shares of GBE Securities for stock
|
|
|
13,235
|
|
|
|
|
|
|
|
|
Total purchase price
|
|
|
15,900
|
|
|
Less: fair value of net assets acquired
|
|
|
(1,426
|
)
|
|
|
|
|
|
|
|
Goodwill: Excess purchase price over fair value of net assets
|
|
$
|
14,474
|
|
|
|
|
|
|
|
95
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
GBE Securities was comprised of the following:
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Current assets
|
|
$
|
5,391
|
|
|
Property and equipment
|
|
|
104
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
5,495
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Current liabilities
|
|
|
4,069
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
4,069
|
|
|
|
|
|
|
|
|
Fair value of net assets acquired
|
|
$
|
1,426
|
|
|
|
|
|
|
|
The issuance of the Company’s common stock to the owners of
GBE Securities was based upon the following:
|
|
|
|
|
|
|
GBE Securities fair value
|
|
$
|
15,900
|
|
|
Cash payment toward purchase
|
|
|
(2,665
|
)
|
|
|
|
|
|
|
|
Value of shares issued
|
|
$
|
13,235
|
|
|
|
|
|
|
|
|
Price per share issued
|
|
$
|
10.00
|
|
|
|
|
|
|
|
|
Shares issued to GBE Securities owners
|
|
|
1,323,500
|
|
|
|
|
|
|
|
Supplemental
information (unaudited)
Unaudited pro forma results, assuming the above mentioned 2007
acquisitions had occurred as of January 1, 2007 for
purposes of the 2007 pro forma disclosures, are presented below.
The unaudited pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of
what operating results would have been had all acquisitions
occurred on January 1, 2007, and may not be indicative of
future operating results.
|
|
|
|
|
|
|
|
|
Unaudited
|
|
|
|
Pro Forma
|
|
|
|
Results
|
|
|
|
For The Year
|
|
|
|
Ended
|
|
|
|
December 31, 2007
|
|
(In thousands, except per share
data)
|
|
Restated
|
|
|
|
Revenue
|
|
$
|
733,095
|
|
|
Loss from continuing operations
|
|
$
|
(790
|
)
|
|
Net income
|
|
$
|
18,930
|
|
|
Basic earnings per share
|
|
$
|
0.30
|
|
|
Weighted average shares outstanding for basic earnings per share
|
|
|
63,393
|
|
|
Diluted earnings per share
|
|
$
|
0.29
|
|
|
Weighted average shares outstanding for diluted earnings per
share
|
|
|
64,785
|
|
96
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
|
|
|
Management
|
|
|
Investment
|
|
|
Goodwill
|
|
|
|
|
|
|
|
Services
|
|
|
Services
|
|
|
Management
|
|
|
Unassigned
|
|
|
Total
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
60,183
|
|
|
$
|
—
|
|
|
$
|
60,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill acquired
|
|
|
|
|
|
|
|
|
|
|
1,627
|
|
|
|
—
|
|
|
|
1,627
|
|
|
Goodwill acquired — unassigned(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
107,507
|
|
|
|
107,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
—
|
|
|
|
—
|
|
|
|
61,810
|
|
|
|
107,507
|
|
|
|
169,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill assigned
|
|
|
41,098
|
|
|
|
6,902
|
|
|
|
59,507
|
|
|
|
(107,507
|
)
|
|
|
—
|
|
|
Goodwill acquired
|
|
|
1,533
|
|
|
|
98
|
|
|
|
1,724
|
|
|
|
—
|
|
|
|
3,355
|
|
|
Impairment charge off
|
|
|
(42,631
|
)
|
|
|
(7,000
|
)
|
|
|
(123,041
|
)
|
|
|
—
|
|
|
|
(172,672
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The fair values of the assets and liabilities recorded on the
date of acquisition related to the Merger were preliminary and
subject to refinement as additional valuation information was
received. The goodwill recorded in connection with the
acquisition was assigned to the individual reporting units
pursuant to FASB Statement No. 142 during the year ended
December 31, 2008. Approximately $8.8 million of
goodwill is expected to be deductible for tax purposes.
|
Under SFAS No. 142, goodwill is recorded at its
carrying value and is tested for impairment at least annually or
more frequently if impairment indicators exist at a level of
reporting referred to as a reporting unit. The Company
recognizes goodwill in accordance with SFAS No. 142
and tests the carrying value for impairment during the fourth
quarter of each year. The goodwill impairment analysis is a
two-step process. The first step is used to identify potential
impairment by comparing each reporting unit’s estimated
fair value to its carrying value, including goodwill. To
estimate the fair value of its reporting units, the Company used
a discounted cash flow model and market comparable data.
Significant judgment is required by management in developing the
assumptions for the discounted cash flow model. These
assumptions include cash flow projections utilizing revenue
growth rates, profit margin percentages, discount rates,
market/economic conditions, etc. If the estimated fair value of
a reporting unit exceeds its carrying value, goodwill is
considered to not be impaired. If the carrying value exceeds
estimated fair value, there is an indication of potential
impairment and the second step is performed to measure the
amount of impairment. The second step of the process involves
the calculation of an implied fair value of goodwill for each
reporting unit for which step one indicated a potential
impairment. The implied fair value of goodwill is determined by
measuring the excess of the estimated fair value of the
reporting unit as calculated in step one, over the estimated
fair values of the individual assets, liabilities and identified
intangibles. During the fourth quarter of 2008, the Company
identified the uncertainty surrounding the global economy and
the volatility of the Company’s market capitalization as
goodwill impairment indicators. The Company’s goodwill
impairment analysis resulted in the recognition of an impairment
charge of approximately $172.7 million during the year
ended December 31, 2008. The Company also analyzed its
trade name for impairment pursuant to SFAS No. 142 and
determined that the trade name was not impaired as of
December 31, 2008. Accordingly, no impairment charge was
recorded related to the trade name during the year ended
December 31, 2008.
97
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
|
11.
|
PROPERTY
ACQUISITIONS
|
2008
Acquisitions
Acquisition
of Properties for TIC Sponsored Programs
During the year ended December 31, 2008, the Company
completed the acquisition of two office properties and two
multifamily residential properties on behalf of TIC sponsored
programs, all of which were sold to the respective programs
during the same period. The aggregate purchase price including
the closing costs of these four properties was
$111.7 million, of which $69.0 million was financed
with mortgage debt.
2007
Acquisitions
Acquisition
of Properties for TIC Sponsored Programs
During the year ended December 31, 2007, the Company
completed the acquisition of sixteen office properties and three
residential properties. The Company classified these properties
as property held for sale upon acquisition. The aggregate
purchase price including the closing costs of these properties
was $294.0 million, of which $254.8 million was
financed with mortgage debt. The Company’s discontinued
operations include the combined results of these acquisitions.
As of December 31, 2007, twelve of these properties have
been sold and four properties remain held for sale as follows:
Park Central, acquired November 29, 2007, Emberwood
Apartments, acquired December 4, 2007, Woodside, acquired
December 13, 2007 and Exchange South, acquired
December 13, 2007.
Acquisition
of Properties for Investment
During the year ended December 31, 2007, the Company also
completed the acquisition of two office properties. The
aggregate purchase price including closing costs of these
properties was $141.5 million, of which $123.0 million
was financed with mortgage debt. During 2008, the Company
initiated a plan to sell these two office properties and has
classified the properties as real estate held for sale in its
financial statements as of December 31, 2008.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of
acquisition for the properties that are included in properties
held for sale as of December 31, 2007:
|
|
|
|
|
|
|
|
|
2007
|
|
|
(In thousands)
|
|
|
|
|
|
|
Land
|
|
$
|
16,395
|
|
|
Building and improvements
|
|
|
79,946
|
|
|
In place leases
|
|
|
5,560
|
|
|
Above market leases
|
|
|
450
|
|
|
Tenant relationships
|
|
|
6,931
|
|
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
109,282
|
|
|
|
|
|
|
|
|
Below market leases
|
|
$
|
(233
|
)
|
|
|
|
|
|
|
|
Net liabilities assumed
|
|
$
|
(233
|
)
|
|
|
|
|
|
|
Pro forma statement of operations data is not required as all
results of operations for properties held for sale are included
in discontinued operations in the Company’s consolidated
statement of operations.
98
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
|
12.
|
IDENTIFIED
INTANGIBLE ASSETS
|
Identified intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
(In thousands)
|
|
Useful Life
|
|
2008
|
|
|
2007
|
|
|
|
|
Contract rights
|
|
|
|
|
|
|
|
|
|
|
|
Contract rights, established for the legal right to future
disposition fees of a portfolio of real estate properties under
contract
|
|
Amortize per disposition
transactions
|
|
$
|
11,924
|
|
|
$
|
20,538
|
|
|
Accumulated amortization — contract rights
|
|
|
|
|
(4,700
|
)
|
|
|
(3,521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract rights, net
|
|
|
|
|
7,224
|
|
|
|
17,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other identified intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
|
Indefinite
|
|
|
64,100
|
|
|
|
64,100
|
|
|
Affiliate agreement
|
|
20 years
|
|
|
10,600
|
|
|
|
10,600
|
|
|
Customer relationships
|
|
5 to 7 years
|
|
|
5,436
|
|
|
|
5,579
|
|
|
Internally developed software
|
|
4 years
|
|
|
6,200
|
|
|
|
6,200
|
|
|
Customer backlog
|
|
1 year
|
|
|
300
|
|
|
|
300
|
|
|
Other contract rights
|
|
5 to 7 years
|
|
|
1,418
|
|
|
|
1,418
|
|
|
Non-compete and employment agreements
|
|
3 to 4 years
|
|
|
97
|
|
|
|
597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88,151
|
|
|
|
88,794
|
|
|
Accumulated amortization
|
|
|
|
|
(3,848
|
)
|
|
|
(338
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other identified intangible assets, net
|
|
|
|
|
84,303
|
|
|
|
88,456
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total identified intangible assets, net
|
|
|
|
$
|
91,527
|
|
|
$
|
105,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense recorded for the contract rights was
$1.2 million, $3.1 million and $410,000 for the years
ended December 31, 2008, 2007 and 2006, respectively.
Amortization expense was charged as a reduction to investment
management revenue in each respective period. The amortization
of the contract rights for intangible assets will be applied
based on the net relative value of disposition fees realized
when the properties are sold. The Company tested the intangible
contract rights for impairment during the fourth quarter of
2008. The intangible contract rights represent the legal right
to future disposition fees of a portfolio of real estate
properties under contract. As a result of the current economic
environment, a portion of these disposition fees may not be
recoverable. Based on our analysis for the current and projected
property values, condition of the properties and status of
mortgage loans payable associated with these contract rights,
the Company determined that there are certain properties for
which receipt of disposition fees was improbable. As a result,
the Company recorded an impairment charge of approximately
$8.6 million related to the impaired intangible contract
rights as of December 31, 2008.
The Company’s trade name was evaluated for potential
impairment pursuant to SFAS No. 142. See Note 2
for further discussion.
Amortization expense recorded for the other identified
intangible assets was $3.5 million, $338,000 and $0 for the
years ended December 31, 2008, 2007 and 2006, respectively.
Amortization expense was included as part of operating expense
in the accompanying consolidated statement of operations.
99
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Amortization expense for the other identified intangible assets
for each of the next five years ended December 31 is as follows:
|
|
|
|
|
|
|
|
|
(In
|
|
|
|
|
thousands)
|
|
|
|
|
2009
|
|
$
|
3,224
|
|
|
2010
|
|
|
3,224
|
|
|
2011
|
|
|
3,122
|
|
|
2012
|
|
|
1,516
|
|
|
2013
|
|
|
1,157
|
|
|
Thereafter
|
|
|
7,960
|
|
|
|
|
|
|
|
|
|
|
$
|
20,203
|
|
|
|
|
|
|
|
|
|
|
|
13.
|
ACCOUNTS
PAYABLE AND ACCRUED EXPENSES
|
Accounts payable and accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
(In thousands)
|
|
|
|
|
Restated
|
|
|
|
|
Accrued liabilities
|
|
$
|
11,502
|
|
|
$
|
14,990
|
|
|
Salaries and related costs
|
|
|
13,643
|
|
|
|
16,028
|
|
|
Accounts payable
|
|
|
14,323
|
|
|
|
10,961
|
|
|
Broker commissions
|
|
|
14,002
|
|
|
|
26,597
|
|
|
Dividends
|
|
|
—
|
|
|
|
1,733
|
|
|
Severance
|
|
|
2,957
|
|
|
|
4,965
|
|
|
Bonuses
|
|
|
9,741
|
|
|
|
14,934
|
|
|
Property management fees and commissions due to third parties
|
|
|
2,940
|
|
|
|
4,909
|
|
|
Interest
|
|
|
651
|
|
|
|
1,431
|
|
|
Other
|
|
|
463
|
|
|
|
5,456
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
70,222
|
|
|
$
|
102,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.
|
CAPITAL
LEASE OBLIGATIONS
|
Capital lease obligations consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Capital leases obligations
|
|
$
|
536
|
|
|
$
|
790
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
536
|
|
|
|
790
|
|
|
Less portion classified as current
|
|
|
(333
|
)
|
|
|
(351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Non-current portion
|
|
$
|
203
|
|
|
$
|
439
|
|
|
|
|
|
|
|
|
|
|
|
100
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As of December 31, 2008, the future minimum payments due
under the capital lease obligations are as follows for the years
ending December 31:
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
2009
|
|
$
|
371
|
|
|
2010
|
|
|
189
|
|
|
2011
|
|
|
23
|
|
|
|
|
|
|
|
|
Less imputed interest
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
$
|
536
|
|
|
|
|
|
|
|
|
|
|
|
15.
|
NOTES PAYABLE OF PROPERTIES HELD FOR SALE INCLUDING
INVESTMENTS IN UNCONSOLIDATED ENTITIES
|
Notes payable of properties held for sale including investments
in unconsolidated entities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Mortgage debt payable to various financial institutions, with
variable interest rates based on London Interbank Offered Rate
(“LIBOR”) and include an interest rate cap for LIBOR
at 6.00% (interest rates ranging from 2.91% to 6.00% per annum
as of December 31, 2008). The notes require monthly
interest-only payments and mature in July 2009 and have
automatic one-year extension options
|
|
$
|
108,677
|
|
|
$
|
120,500
|
|
|
Mortgage debt payable to various financial institutions. Fixed
interest rates range from 5.95% to 6.32% per annum. The notes
mature at various dates through February 2017. As of
December 31, 2008, all notes require monthly interest-only
payments
|
|
|
107,000
|
|
|
|
107,000
|
|
|
Mezzanine debt payable to various financial institutions, with
variable interest rates based on LIBOR (ranging from 11.31% to
12.00% per annum as of December 31, 2007), required monthly
interest-only payments. These debts were paid in full during the
first and second quarters of 2008
|
|
|
—
|
|
|
|
30,000
|
|
|
Mortgage debt payable to various financial institutions. Fixed
interest rates range from 6.14% to 6.79% per annum. The notes
were scheduled to mature at various dates through January 2018.
As of December 31, 2007, all notes required monthly
interest-only payments (paid in full in 2008)
|
|
|
—
|
|
|
|
72,230
|
|
|
Mezzanine debt payable to various financial institutions, fixed
and variable interest rates range from 6.86% to 10.23% per
annum. The notes were scheduled to mature at various dates
through December 2008. As of December 31, 2007, all notes
required monthly interest-only payments (paid in full in 2008)
|
|
|
—
|
|
|
|
18,790
|
|
|
Unsecured notes payable to third-party investors with fixed
interest at 6.00% per annum and matures in December 2011.
Principal and interest payments are due quarterly
|
|
|
282
|
|
|
|
411
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
215,959
|
|
|
$
|
348,931
|
|
|
|
|
|
|
|
|
|
|
|
GERI historically had entered into several interest rate lock
agreements with commercial banks. All rate locks were cancelled
and all deposits in connection with these agreements were
refunded to the Company in April 2008.
The Company restructured the financing of two properties through
amendments to the mortgage note in July 2008. The amendments
allowed the Company to use pre-funded reserves of approximately
$13.0 million to reduce the outstanding balance of the
mortgage note payable on the properties. In connection with the
101
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
amendments, the LIBOR margin was changed to 3.50% from 2.50%,
the cross collateralization provisions of the mortgages were
removed and several minor covenants were revised.
As of December 31, 2008, the principal payments due on
notes payable of properties held for sale including investments
in unconsolidated entities for each of the next five years
ending December 31 and thereafter are summarized as follows:
|
|
|
|
|
|
|
|
|
(In
|
|
|
|
|
thousands)
|
|
|
|
|
2009
|
|
$
|
108,779
|
|
|
2010
|
|
|
143
|
|
|
2011
|
|
|
37
|
|
|
2012
|
|
|
—
|
|
|
2013
|
|
|
—
|
|
|
Thereafter
|
|
|
107,000
|
|
|
|
|
|
|
|
|
|
|
$
|
215,959
|
|
|
|
|
|
|
|
In February 2007, the Company entered into a $25.0 million
revolving line of credit with LaSalle Bank N.A. to replace the
previous revolving line of credit. This line of credit consisted
of $10.0 million for acquisitions and $15.0 million
for general corporate purposes and bore interest at prime rate
plus 0.50% or three-month LIBOR plus 1.50%, at the
Company’s option and matured February 20, 2010. During
2007, the Company paid $100,000 in loan fees relating to the
revolving line of credit.
On December 7, 2007, the Company terminated the
$25.0 million line of credit with LaSalle Bank N.A. and
entered into a $75.0 million Second Amended and Restated
Credit Agreement by and among the Company, the guarantors named
therein, the financial institutions defined therein as lender
parties, Deutsche Bank Trust Company Americas, as lender
and administrative agent (the “Credit Facility”). The
Company is restricted to solely use the line of credit for
investments, acquisitions, working capital, equity interest
repurchase or exchange, and other general corporate purposes.
The line bore interest at either the prime rate or LIBOR based
rates, as the Company may choose on each of its borrowings, plus
an applicable margin based on the Company’s Debt/Earnings
Before Interest, Taxes, Depreciation and Amortization
(“EBITDA”) ratio as defined in the credit agreement.
On August 5, 2008, the Company entered into an amendment
(the ‘First Letter Amendment”) to its Credit Facility.
The First Letter Amendment, among other things, provided the
Company with an extension from September 30, 2008 to
March 31, 2009 to dispose of the three real estate assets
that the Company had previously acquired on behalf of GERA.
Additionally, the First Letter Amendment also, among other
things, modified select debt and financial covenants in order to
provide greater flexibility to facilitate the Company’s TIC
Programs.
On November 4, 2008, the Company amended (the “Second
Letter Amendment”) its Credit Facility revising certain
terms of that certain Second Amended and Restated Credit
Agreement dated as of December 7, 2007, as amended. The
effective date of the Second Letter Amendment was
September 30, 2008.
The Second Letter Amendment, among other things:
(a) modified the amount available under the Credit Facility
from $75.0 million to $50.0 million by providing that
no advances or letters of credit shall be made available to the
Company after September 30, 2008 until such time as
borrowings have been reduced to less than $50.0 million;
(b) provided that 100% of any net cash proceeds from the
sale of certain real estate assets that have to be sold by the
Company shall permanently reduce the Revolving Credit
Commitments, provided that the Revolving Credit Commitments
shall not be reduced to less than $50.0 million by reason
of the
102
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
operation of such asset sales; and (c) modified the
interest rate incurred on borrowings by increasing the
applicable margins by 100 basis points and by providing for
an interest rate floor for any prime rate related borrowings.
Additionally, the Second Letter Amendment, among other things,
modified restrictions on guarantees of primary obligations from
$125.0 million to $50.0 million, modified select
financial covenants to reflect the impact of the current
economic environment on the Company’s financial
performance, amended certain restrictions on payments by
deleting any dividend/share repurchase limitations and modifies
the reporting requirements of the Company with respect to real
property owned or held.
As of September 30, 2008, the Company was not in compliance
with certain of its financial covenants related to EBITDA. As a
result, part of the Second Letter Amendment included a provision
which modified selected covenants. The Debt /EBITDA ratio for
the quarters ending September 30, 2008 and
December 31, 2008 were amended from 3.75:1.00 to 5.50:1.00,
while the Debt /EBITDA Ratio for the quarters ending
March 31, 2009 and thereafter remain at 3.50:1.00. The
Interest Coverage Ratio for the quarters ending
September 30, 2008, December 31, 2008 and
March 31, 2009 were amended from 3.50:1.00 to 3.25:1.00,
while the Interest Coverage Ratio for the quarters ended
June 30, 2009 and September 30, 2009 remained
unchanged at 3.50:1.00 and for the quarters ended
December 31, 2009 and thereafter remained unchanged at
4.00:1.00. The Recourse Debt/Core EBITDA Ratio for the quarters
ending September 30, 2008 and December 31, 2008 were
amended from 2.25:1.00 to 4.25:1.00, while the Recourse
Debt/Core EBITDA Ratio for the quarters thereafter remained
unchanged at 2.25:1.00. The Core EBITDA to be maintained by the
Company at all times was reduced from $60.0 million to
$30.0 million and the Minimum Liquidity to be maintained by
the Company at all times was reduced from $25.0 million to
$15.0 million. The Company was not in compliance with
certain debt covenants as of December 31, 2008, all of
which were effectively cured as of such date by the Third
Amendment to the Credit Facility described below. As a
consequence of the foregoing, and certain provisions of the
Third Amendment, the Credit Facility has been classified as a
current liability as of December 31, 2008.
On May 20, 2009, the Company further amended its Credit
Facility by entering into the Third Amendment. The Third
Amendment, among other things, bifurcates the existing credit
facility into two revolving credit facilities, (i) a
$38,000,000 Revolving Credit A Facility which is deemed fully
funded as of the date of the Third Amendment, and (ii) a
$29,289,245 Revolving Credit B Facility, comprised of revolving
credit advances in the aggregate of $25,000,000 which are deemed
fully funded as of the date of the Third Amendment and letters
of credit advances in the aggregate amount of $4,289,245 which
are issued and outstanding as of the date of the Third
Amendment. The Third Amendment requires the Company to draw down
$4,289,245 under the Revolving Credit B Facility on the date of
the Third Amendment and deposit such funds in a cash collateral
account to cash collateralize outstanding letters of credit
under the Credit Facility and eliminates the swingline features
of the Credit Facility and the Company’s ability to cause
the lenders to issue any additional letters of credit. In
addition, the Third Amendment also changes the termination date
of the Credit Facility from December 7, 2010 to
March 31, 2010 and modifies the interest rate incurred on
borrowings by initially increasing the applicable margin by
450 basis points (or to 7.00% on prime rate loans and 8.00%
on LIBOR based loans).
The Third Amendment also eliminated specific financial
covenants, and in its place, the Company is required to comply
with the Approved Budget, that has been agreed to by the Company
and the lenders, subject to agreed upon variances. The Company
is also required under the Third Amendment to effect the
Recapitalization Plan, on or before September 30, 2009 and
in connection therewith to effect a prepayment of at least
seventy two (72%) of the Revolving Credit A Advances (the
“Partial Prepayment”). In the event the Company fails
to effect the Recapitalization Plan and in connection therewith
to effect a Partial Prepayment on or before September 30,
2009, the (i) lenders will have the right commencing on
October 1, 2009, to exercise the Warrants, for nominal
consideration, to purchase common stock of the Company equal to
15% of
103
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
the common stock of the Company on a fully diluted basis as of
such date, subject to adjustment, (ii) the applicable
margin automatically increases to 11% on prime rate loans and
increases to 12% on LIBOR based loans, (iii) the Company
shall be required to amortize an aggregate of $10 million
of the Revolving Credit A Facility in three (3) equal
installments on the first business day of each of the last three
(3) months of 2009, (iv) the Company is obligated to
submit a revised budget by October 1, 2009, (v) the
Credit Facility will terminate on January 15, 2010, and
(vi) no further advances may be drawn under the Credit
Facility.
In the event that Company effects the Recapitalization Plan and
in connection therewith effects a partial repayment of the
Revolving A Credit Facility on a prior to September 30,
2009, the Warrants automatically will expire and not become
exercisable, the applicable margin will automatically be reduced
to 3% on prime rate loans and 4% on LIBOR based loans and the
Company shall have the right, subject to the requisite approval
of the lenders, to seek an extension of the term of the Credit
Facility to January 5, 2011, provided the Company also pays
a fee of .25% of the then outstanding commitments under the
Credit Facility.
As a result of the Third Amendment the Company is required to
prepay outstanding Revolving Credit A Advances (and to the
extent the Revolving Credit A Facility shall be reduced to zero,
prepay outstanding Revolving Credit B Advances) in an amount
equal to 100% (or, after the Revolving Credit A Advances are
reduced by at least the Partial Prepayment amount, in an amount
equal to 50%) of Net Cash Proceeds (as defined in the Credit
Agreement) from:
|
|
|
|
|
|
•
|
assets sales,
|
|
|
|
|
•
|
conversions of Investments (as defined in the Credit Agreement),
|
|
|
|
|
•
|
the refund of any taxes or the sale of equity interests by the
Company or its subsidiaries,
|
|
|
|
|
•
|
the issuance of debt securities, or
|
|
|
|
|
•
|
any other transaction or event occurring outside the ordinary
course of business of the Company or its subsidiaries;
|
provided, however
, that (a) the Net Cash Proceeds
received from the sale of the certain real property assets shall
be used to prepay outstanding Revolving Credit B Advances and to
the extent Revolving Credit B Advances shall be reduced to zero,
to prepay outstanding Revolving Credit A Advances, (b) the
Company shall prepay outstanding Revolving Credit B Advances in
an amount equal to 100% of the Net Cash Proceeds from the sale
of the Danbury Corporate Center in Danbury Connecticut (the
“Danbury Property”) unless the Company is then not in
compliance with the Recapitalization Plan in which event
Revolving Credit A Advances shall be prepaid first and
(c) the Company’s 2008 tax refund was used to prepay
outstanding Revolving Credit B Advances upon the closing of the
Third Amendment.
The Third Amendment requires the Company to (a) sell the
Danbury Property by June 1, 2009, unless such date is
extended with the applicable approval of the lenders and
(b) use its commercially reasonable best efforts to sell
four other commercial properties, including the two other GERA
Properties, by September 30, 2009.
The Company’s Credit Facility is secured by substantially
all of the Company’s assets. The outstanding balance on the
Credit Facility was $63.0 million and $8.0 million as
of December 31, 2008 and December 31, 2007,
respectively, and carried a weighted average interest rate of
5.80% and 7.75%, respectively.
In light of the current state of the financial markets and
economic environment, there is risk that the Company will be
unable to meet the terms of the Credit Facility which would
result in the entire balance of the debt becoming due and
payable. If the Credit Facility were to become due and payable
immediately or on the alternative due date of January 15,
2010, there can be no assurances that the Company will have
access to alternative funding sources, or if such sources are
available to the Company, that they will be on favorable terms
and conditions to the Company. If the Credit Facility were to
become immediately due and payable, the
104
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
recoverability of the Company’s assets may be further
impaired which could affect the ability to repay the debt.
On August 1, 2006, NNN Collateralized Senior Notes, LLC
(the “Senior Notes Program”), the Senior Notes Program
began offering $50,000,000 in aggregate principal amount which
mature in 2011 and bear interest at a rate of 8.75% per annum.
Interest on the notes is payable monthly in arrears on the first
day of each month, commencing on the first day of the month
occurring after issuance. The notes will mature five years from
the date of first issuance of any of such notes, with two
one-year options to extend the maturity date of the notes at the
Senior Notes Program’s option. The interest rate will
increase to 9.25% per annum during any extension. The Senior
Notes Program has the right to redeem the notes, in whole or in
part, at: (1) 102.0% of their principal amount plus accrued
interest any time after January 1, 2008; (2) 101.0% of
their principal amount plus accrued interest any time after
July 1, 2008; and (3) par value after January 1,
2009. The notes are the Senior Notes Program’s senior
obligations, ranking
pari passu
in right of payment with
all other senior debt incurred and ranking senior to any
subordinated debt it may incur. The notes are effectively
subordinated to all present or future debt secured by real or
personal property to the extent of the value of the collateral
securing such debt. The notes will be secured by a pledge of the
Senior Notes Program’s membership interest in NNN
Series A Holdings, LLC, which is the Senior Notes
Program’s wholly-owned subsidiary for the sole purpose of
making the investments. Each note is guaranteed by GERI. The
guarantee is secured by a pledge of GERI membership interest in
the Senior Notes Program. The Program was closed in January
2007. The total amount raised from this program was
$16.3 million.
As of December 31, 2008 and 2007, the Senior Notes
Program’s balance is reflected in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date
|
|
Maturity
|
|
December 31,
|
|
Current
|
|
Call
|
|
Ownership
|
|
Subsidiary
|
|
Issued
|
|
Date
|
|
2008
|
|
2007
|
|
Rate
|
|
Date
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
100%
|
|
Senior Notes Program
|
|
08/01/2006
|
|
08/01/2011
|
|
$
|
16,277
|
|
|
$
|
16,277
|
|
|
|
8.75
|
%
|
|
|
N/A
|
|
In conjunction with the Merger, management re-evaluated its
reportable segments and determined that the Company’s
reportable segments consist of Transaction Services, Investment
Management, and Management Services. The Company’s
Investment Management segment includes all of NNN’s
historical business units and, therefore, all historical data
have been conformed to reflect the reportable segments as a
combined company.
Transaction Services
— Transaction services
advises buyers, sellers, landlords and tenants on the sale,
leasing and valuation of commercial property and includes the
Company’s national accounts group and national affiliate
program operations.
Investment Management
— Investment Management
includes services for acquisition, financing and disposition
with respect to the Company’s investment programs, asset
management services related to the Company’s programs, and
dealer-manager services by its securities broker-dealer, which
facilitates capital raising transactions for its investment
programs.
Management Services
— Management services
provide property management and related services for owners of
investment properties and facilities management services for
corporate owners and occupiers.
The Company also has certain corporate level activities
including interest income from notes and advances, property
rental related operations, legal administration, accounting,
finance, and management information systems which are not
considered separate operating segments.
105
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company evaluates the performance of its segments based upon
operating (loss) income. Operating (loss) income is defined as
operating revenue less compensation and general and
administrative costs and excludes other rental related, rental
expense, interest expense, depreciation and amortization and
certain other operating and non-operating expenses. The
accounting policies of the reportable segments are the same as
those described in the Company’s summary of significant
accounting policies (See Note 2). Beginning in 2009,
allocations of corporate compensation and corporate general and
administrative costs will be excluded from the evaluation of
segment performance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
|
|
|
Investment
|
|
|
Management
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
Services
|
|
|
Management
|
|
|
Services
|
|
|
Total
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
240,250
|
|
|
$
|
101,581
|
|
|
$
|
253,664
|
|
|
$
|
595,495
|
|
|
Compensation costs
|
|
|
220,648
|
|
|
|
56,591
|
|
|
|
225,765
|
|
|
|
503,004
|
|
|
General and administrative
|
|
|
45,805
|
|
|
|
64,978
|
|
|
|
8,877
|
|
|
|
119,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating (loss) income
|
|
$
|
(26,203
|
)
|
|
$
|
(19,988
|
)
|
|
$
|
19,022
|
|
|
$
|
(27,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
$
|
100,606
|
|
|
$
|
90,047
|
|
|
$
|
50,232
|
|
|
$
|
240,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
|
|
|
Investment
|
|
|
Management
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
Services
|
|
|
Management
|
|
|
Services
|
|
|
Total
|
|
|
(In thousands)
|
|
Restated
|
|
|
Restated
|
|
|
Restated
|
|
|
Restated
|
|
|
|
|
Revenue
|
|
$
|
35,522
|
|
|
$
|
149,651
|
|
|
$
|
16,365
|
|
|
$
|
201,538
|
|
|
Compensation costs
|
|
|
27,081
|
|
|
|
62,454
|
|
|
|
14,574
|
|
|
|
104,109
|
|
|
General and administrative
|
|
|
3,894
|
|
|
|
39,535
|
|
|
|
822
|
|
|
|
44,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$
|
4,547
|
|
|
$
|
47,662
|
|
|
$
|
969
|
|
|
$
|
53,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
$
|
141,348
|
|
|
$
|
480,155
|
|
|
$
|
14,469
|
|
|
$
|
635,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
|
|
|
Investment
|
|
|
Management
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
Services
|
|
|
Management
|
|
|
Services
|
|
|
Total
|
|
|
(In thousands)
|
|
Restated
|
|
|
Restated
|
|
|
Restated
|
|
|
Restated
|
|
|
|
|
Revenue
|
|
$
|
—
|
|
|
$
|
99,599
|
|
|
$
|
—
|
|
|
$
|
99,599
|
|
|
Compensation costs
|
|
|
—
|
|
|
|
49,449
|
|
|
|
—
|
|
|
|
49,449
|
|
|
General and administrative
|
|
|
—
|
|
|
|
30,188
|
|
|
|
—
|
|
|
|
30,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income
|
|
$
|
—
|
|
|
$
|
19,962
|
|
|
$
|
—
|
|
|
$
|
19,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
$
|
—
|
|
|
$
|
273,705
|
|
|
$
|
—
|
|
|
$
|
273,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following is reconciliation between segment operating (loss)
income to consolidated net (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
(In thousands)
|
|
|
|
|
Restated
|
|
|
Restated
|
|
|
|
|
Reconciliation to consolidated net (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating (loss) income
|
|
$
|
(27,169
|
)
|
|
$
|
53,178
|
|
|
$
|
19,962
|
|
|
Non-segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental related revenue
|
|
|
16,326
|
|
|
|
16,399
|
|
|
|
8,944
|
|
|
Operating expenses
|
|
|
(244,611
|
)
|
|
|
(27,228
|
)
|
|
|
(17,996
|
)
|
|
Other (expense) income
|
|
|
(18,867
|
)
|
|
|
4,556
|
|
|
|
2,661
|
|
|
Minority interest in loss (income) of consolidated entities
|
|
|
11,719
|
|
|
|
(1,961
|
)
|
|
|
(78
|
)
|
|
Income tax (provision) benefit
|
|
|
(16,890
|
)
|
|
|
(18,118
|
)
|
|
|
7,441
|
|
|
Loss from discontinued operations
|
|
|
(51,378
|
)
|
|
|
(5,754
|
)
|
|
|
(963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(330,870
|
)
|
|
$
|
21,072
|
|
|
$
|
19,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation
of segment assets to consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets
|
|
$
|
240,885
|
|
|
$
|
635,972
|
|
|
$
|
273,705
|
|
|
Corporate assets
|
|
|
279,392
|
|
|
|
352,570
|
|
|
|
74,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
520,277
|
|
|
$
|
988,542
|
|
|
$
|
347,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate expenditures
|
|
$
|
4,407
|
|
|
$
|
3,331
|
|
|
$
|
2,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
4,407
|
|
|
$
|
3,331
|
|
|
$
|
2,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.
|
PROPERTIES
HELD FOR SALE INCLUDING INVESTMENTS IN UNCONSOLIDATED ENTITIES
AND DISCONTINUED OPERATIONS
|
A summary of the properties and related LLCs held for sale
balance sheet information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
922
|
|
|
$
|
59
|
|
|
Restricted cash
|
|
|
33,142
|
|
|
|
67,047
|
|
|
Properties held for sale including investments in unconsolidated
entities
|
|
|
167,408
|
|
|
|
332,176
|
|
|
Identified intangible assets and other assets
|
|
|
37,145
|
|
|
|
76,985
|
|
|
Other assets
|
|
|
—
|
|
|
|
617
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
238,617
|
|
|
$
|
476,884
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable of properties held for sale including investments
in unconsolidated entities
|
|
$
|
215,959
|
|
|
$
|
348,931
|
|
|
Liabilities of properties held for sale
|
|
|
16,843
|
|
|
|
25,550
|
|
|
Other liabilities
|
|
|
2,407
|
|
|
|
12,379
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
$
|
235,209
|
|
|
$
|
386,860
|
|
|
|
|
|
|
|
|
|
|
|
107
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
During 2008, the Company initiated a plan to sell the properties
it classified as real estate held for investment in its
financial statements. As of December 31, 2008, the Company
has a covenant within its Credit Facility which requires the
sale of certain of these assets before March 31, 2009. The
downturn in the global capital markets significantly lessened
the probability that the Company would be able to achieve relief
from this covenant through amendment or other financial
resolutions. Pursuant to SFAS No. 144
,
the
Company assessed the value of the assets. In addition, the
Company reviewed the valuation of its other owned properties and
real estate investments. This valuation review resulted in the
Company recognizing an impairment charge of approximately
$90.4 million against the carrying value of the properties
and real estate investments as of December 31, 2008, $18.0
of which is recorded separately on the statements of operations
and $72.4 million of which is included in discontinued
operations. There were no impairment charges recognized during
the years ended December 31, 2007 and 2006.
On October 31, 2008, the Company entered into that certain
Agreement for the Purchase and Sale of Real Property and Escrow
Instructions to effect the sale of the Danbury Corporate Center
located at 39 Old Ridgebury Road, Danbury, Connecticut, to an
unaffiliated entity for a purchase price of $76.0 million.
This agreement was amended and restated in its entirety by that
certain Danbury Merger Agreement dated as of January 23,
2009, as amended by the First Amendment to Danbury Merger
Agreement dated as of January 23, 2009 (the “First
Danbury Amendment”) which reduced the purchase price to
$73.5 million. In accordance with the terms of the Danbury
Merger Agreement, as amended by the First Danbury Amendment, the
Company received one half of the buyer’s deposits in an
amount of $3.125 million from the buyer upon the execution
of the Danbury Merger Agreement, which released escrow deposit
remains subject to the terms of the Danbury Merger Agreement,
and the remaining $3.125 million of deposits continued to
be held in escrow pending the closing. On May 19, 2009, the
Company and the buyer entered into the Second Amendment to the
Danbury Merger Agreement (the “Second Danbury
Amendment”) pursuant to which the remaining
$3.125 million of deposits held in escrow were released to
the Company (and remain subject to the terms of the Danbury
Merger Agreement, as amended), and the purchase price was
reduced to $72,400,000. In accordance with the Second Danbury
Amendment, the closing of the sale of the property is expected
to occur on or before June 1, 2009.
The investments in unconsolidated entities held for sale
represent the Company’s interest in certain real estate
properties that it holds through various consolidated LLCs. In
accordance with SFAS No. 66,
Accounting for Sales
of Real Estate
, and Emerging Issues Task Force
98-8,
the
Company treats the disposition of these interests similar to the
disposition of real estate it holds directly. In addition,
pursuant to FIN No. 46(R), when the Company is no
longer the primary beneficiary of the LLC, the Company
deconsolidates the LLC.
During the year ended December 31, 2008, the Company sold
interests in certain real estate properties that it holds
through various consolidated LLCs resulting in the
deconsolidation of the LLCs and a decrease of approximately
$198.0 million in properties held for sale including
investments in unconsolidated entities. These non-cash
transactions concurrently resulted in a decrease in restricted
cash of approximately $20.7 million, a decrease in other
assets, identified intangible assets and other assets held for
sale of approximately $48.4 million, a decrease in
investments in unconsolidated entities of approximately
$34.6 million, a decrease in accounts payable and accrued
expenses of approximately $13.5 million, a decrease in
notes payable of properties held for sale including investments
in unconsolidated entities of approximately $180.2 million,
a decrease in minority interest liability of approximately
$27.6 million, a decrease in other liabilities of
approximately $1.3 million and an increase in proceeds from
related parties of approximately $79.1 million.
During the year ended December 31, 2007, the Company sold
interests in certain real estate properties that it holds
through various consolidated LLCs resulting in the
deconsolidation of the LLCs and a decrease of approximately
$290.3 million in properties held for sale including
investments in unconsolidated entities.
108
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
These non-cash transactions concurrently resulted in a decrease
in restricted cash of approximately $33.5 million, a
decrease in other assets, identified intangible assets and other
assets held for sale of approximately $48.9 million, a
decrease in accounts payable and accrued expenses of
approximately $8.6 million, a decrease in notes payable of
properties held for sale including investments in unconsolidated
entities of approximately $238.1 million, a decrease in
minority interest liability of approximately $19.4 million,
a decrease in other liabilities of approximately
$3.7 million and an increase in proceeds from related
parties of approximately $102.9 million.
In instances when the Company expects to have significant
ongoing cash flows or significant continuing involvement in the
component beyond the date of sale, the income (loss) from
certain properties held for sale continue to be fully recorded
within the continuing operations of the Company through the date
of sale.
The net results of discontinued operations and the net gain on
dispositions of properties sold or classified as held for sale
as of December 31, 2008, in which the Company has no
significant ongoing cash flows or significant continuing
involvement, are reflected in the consolidated statements of
operations as discontinued operations. The Company will receive
certain fee income from these properties on an ongoing basis
that is not considered significant when compared to the
operating results of such properties.
The following table summarizes the income (loss) and expense
components-
net of taxes that comprised discontinued operations for the
years ended December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
$
|
40,287
|
|
|
$
|
22,236
|
|
|
$
|
1,541
|
|
|
Rental expense
|
|
|
(36,892
|
)
|
|
|
(10,037
|
)
|
|
|
(862
|
)
|
|
Depreciation and amortization
|
|
|
—
|
|
|
|
(7,117
|
)
|
|
|
(199
|
)
|
|
Interest expense (including amortization of deferred financing
costs)
|
|
|
(15,816
|
)
|
|
|
(15,092
|
)
|
|
|
(1,572
|
)
|
|
Real estate related impairments
|
|
|
(72,397
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Tax benefit
|
|
|
33,083
|
|
|
|
4,004
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued
operations-net
of taxes
|
|
|
(51,735
|
)
|
|
|
(6,006
|
)
|
|
|
(1,031
|
)
|
|
Gain on disposal of discontinued
operations-net
of taxes
|
|
|
357
|
|
|
|
252
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loss from discontinued operations
|
|
$
|
(51,378
|
)
|
|
$
|
(5,754
|
)
|
|
$
|
(963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.
|
COMMITMENTS
AND CONTINGENCIES
|
Operating Leases
— The Company has
non-cancelable operating lease obligations for office space and
certain equipment ranging from one to ten years, and sublease
agreements under which the Company acts as a sublessor. The
office space leases often times provide for annual rent
increases, and typically require payment of property taxes,
insurance and maintenance costs.
Rent expense under these operating leases was approximately
$23.2 million, $4.3 million and $2.2 million for
the years ended December 31, 2008, 2007 and 2006,
respectively. Rent expense is included in general and
administrative expense in the accompanying consolidated
statements of operations.
109
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
As of December 31, 2008, future minimum amounts payable
under non-cancelable operating leases are as follows for the
years ending December 31:
|
|
|
|
|
|
|
|
|
(In
|
|
|
|
|
thousands)
|
|
|
|
|
2009
|
|
$
|
22,085
|
|
|
2010
|
|
|
16,760
|
|
|
2011
|
|
|
14,069
|
|
|
2012
|
|
|
12,458
|
|
|
2013
|
|
|
9,624
|
|
|
Thereafter
|
|
|
16,903
|
|
|
|
|
|
|
|
|
|
|
$
|
91,899
|
|
|
|
|
|
|
|
Operating Leases — Other
— The
Company is a master lessee of seven multi-family residential
properties in various locations under non-cancelable leases. The
leases, which commenced in various months and expire from June
2015 through March 2016, require minimum monthly payments
averaging $795,000 over the
10-year
period. Rent expense under these operating leases was
approximately $9.4 million, $8.6 million and
$4.6 million, for the years ended December 31, 2008,
2007 and 2006, respectively. As of December 31, 2008,
rental related expense, based on contractual amounts due, are as
follows for the years ending December 31:
|
|
|
|
|
|
|
|
|
Rental
|
|
|
|
|
Related
|
|
|
|
|
Expense
|
|
|
(In thousands)
|
|
|
|
|
|
|
2009
|
|
$
|
9,793
|
|
|
2010
|
|
|
10,812
|
|
|
2011
|
|
|
10,942
|
|
|
2012
|
|
|
10,942
|
|
|
2013
|
|
|
10,942
|
|
|
Thereafter
|
|
|
19,880
|
|
|
|
|
|
|
|
|
|
|
$
|
73,311
|
|
|
|
|
|
|
|
The Company subleases these multifamily spaces to third parties
for no more than one year. Rental income from these subleases
was approximately $16.4 million, $16.4 million and
$8.9 million for the years ended December 31, 2008,
2007 and 2006, respectively.
The Company is also a 50% joint venture partner of four
multi-family residential properties in various locations under
non-cancelable leases. The leases, which commenced in various
months and expire from November 2014 through January 2015,
require minimum monthly payments averaging $372,000 over the
10-year
period. Rent expense under these operating leases was
approximately $4.5 million, $4.3 million and
110
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
$3.2 million, for the years ended December 31, 2008,
2007 and 2006, respectively. As of December 31, 2008,
rental related expense, based on contractual amounts due, are as
follows for the years ending December 31:
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
2009
|
|
$
|
4,474
|
|
|
2010
|
|
|
4,474
|
|
|
2011
|
|
|
4,474
|
|
|
2012
|
|
|
4,474
|
|
|
2013
|
|
|
4,474
|
|
|
Thereafter
|
|
|
4,518
|
|
|
|
|
|
|
|
|
|
|
$
|
26,888
|
|
|
|
|
|
|
|
The Company subleases these multifamily spaces to third parties
for no more than one year. Rental income from these subleases
was approximately $9.0 million, $8.4 million and
$8.0 million for the years ended December 31, 2008,
2007 and 2006, respectively.
As of December 31, 2008, the Company had recorded
liabilities totaling $7.3 million related to such master
lease arrangements, consisting of $4.6 million of
cumulative deferred revenues relating to acquisition fees and
loan fees received from 2004 through 2006 and $2.7 million
of additional loss reserves which were recorded in 2008.
TIC Program Exchange Provision -
Prior to the
Merger, NNN entered into agreements in which NNN agreed to
provide certain investors with a right to exchange their
investment in certain TIC Programs for an investment in a
different TIC program. NNN also entered into an agreement with
another investor that provided the investor with certain
repurchase rights under certain circumstances with respect to
their investment. The agreements containing such rights of
exchange and repurchase rights pertain to initial investments in
TIC programs totalling $31.6 million. The Company deferred
revenues relating to these agreements of $986,000, $393,000 and
$584,000 for the years ended December 31, 2008, 2007 and
2006, respectively. Additional losses of $14.3 million
related to these agreements were recorded in 2008 to reflect the
impairment in value of properties underlying the agreements with
investors. As of December 31, 2008 the Company had recorded
liabilities totalling $18.6 million related to such
agreements, consisting of $4.3 million of cumulative
deferred revenues and $14.3 million of additional losses
related to these agreements. In addition, the Company is joint
and severally liable on the non-recourse mortgage debt related
to these TIC Programs totalling $277.8 million and
$392.2 million as of December 31, 2008 and 2007,
respectively. This mortgage debt is not consolidated as the LLCs
account for the interests in the Company’s TIC investments
under the equity method and the non recourse mortgage debt does
not meet the criteria under SFAS No. 140 for
recognizing the share of the debt assumed by the other TIC
interest holders for consolidation. The Company does consider
the third party TIC holders ability and intent to repay their
share of the joint and several liability in evaluating the
recoverability of the Company’s investment in the TIC
Program.
Capital Lease Obligations
— The Company leases
computers, copiers, and postage equipment that are accounted for
as capital leases (See Note 14 of for additional
information).
SEC Investigation —
On June 2, 2008, the
Company announced that the staff of the SEC Los Angeles
Enforcement Division informed the Company that the SEC was
closing the previously disclosed September 16, 2004
investigation referred to as
“In the matter of Triple
Net Properties, LLC,”
without any enforcement action
against Triple Net Properties or its subsidiaries.
General —
The Company is involved in various
claims and lawsuits arising out of the ordinary conduct of its
business, as well as in connection with its participation in
various joint ventures and partnerships, many of which may not
be covered by the Company’s insurance policies. In the
opinion of management, the eventual
111
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
outcome of such claims and lawsuits is not expected to have a
material adverse effect on the Company’s financial position
or results of operations.
Guarantees
— From time to time the Company
provides guarantees of loans for properties under management. As
of December 31, 2008, there were 151 properties under
management with loan guarantees of approximately
$3.5 billion in total principal outstanding with terms
ranging from one to 10 years, secured by properties with a
total aggregate purchase price of approximately
$4.8 billion. As of December 31, 2007, there were 143
properties under management with loans that were guaranteed of
approximately $3.4 billion in total principal outstanding
secured by properties with a total aggregate purchase price of
approximately $4.6 billion. In addition, the consolidated
VIEs and unconsolidated VIEs are jointly and severally liable on
the non-recourse mortgage debt related to the interests in the
Company’s TIC investments totaling $277.8 million and
$385.3 million as of December 31, 2008, respectively.
The Company’s guarantees consisted of the following as of
December 31, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
Non-recourse/carve-out guarantees of debt of properties under
management(1)
|
|
$
|
3,414,433
|
|
|
$
|
3,167,447
|
|
|
Non-recourse/carve-out guarantees of the Company’s debt(1)
|
|
$
|
107,000
|
|
|
$
|
221,430
|
|
|
Guarantees of the Company’s mezzanine debt
|
|
$
|
—
|
|
|
$
|
48,790
|
|
|
Recourse guarantees of debt of properties under management
|
|
$
|
42,426
|
|
|
$
|
47,399
|
|
|
Recourse guarantees of the Company’s debt
|
|
$
|
10,000
|
|
|
$
|
10,000
|
|
|
|
|
|
|
(1)
|
|
A “non-recourse/carve-out” guarantee imposes personal
liability on the guarantor in the event the borrower engages in
certain acts prohibited by the loan documents.
|
Management evaluates these guarantees to determine if the
guarantee meets the criteria required to record a liability in
accordance with FIN No. 45. As of December 31,
2008, the Company recorded a liability of $9.1 million
related to recourse guarantees of debt of properties under
management which matured in January and April 2009. Any other
such liabilities were insignificant as of December 31, 2008
and 2007.
Environmental Obligations
— In the
Company’s role as property manager, it could incur
liabilities for the investigation or remediation of hazardous or
toxic substances or wastes at properties the Company currently
or formerly managed or at off-site locations where wastes were
disposed. Similarly, under debt financing arrangements on
properties owned by sponsored programs, the Company has agreed
to indemnify the lenders for environmental liabilities and to
remediate any environmental problems that may arise. The Company
is not aware of any environmental liability or unasserted claim
or assessment relating to an environmental liability that the
Company believes would require disclosure or the recording of a
loss contingency as of December 31, 2008 and 2007.
Real Estate Licensing Issues
— Although Realty
was required to have real estate licenses in all of the states
in which it acted as a broker for NNN’s programs and
received real estate commissions prior to 2007, Realty did not
hold a license in certain of those states when it earned fees
for those services. In addition, almost all of GERI’s
revenue was based on an arrangement with Realty to share fees
from NNN’s programs. GERI did not hold a real estate
license in any state, although most states in which properties
of the NNN’s programs were located may have required GERI
to hold a license. As a result, Realty and the Company may be
subject to penalties, such as fines (which could be a multiple
of the amount received), restitution payments and termination of
management agreements, and to the suspension or revocation of
certain of Realty’s real estate broker licenses. As of
December 31, 2008, there have been no claims, and the
Company cannot assess or estimate whether it will incur any
losses as a result of the foregoing.
112
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
To the extent that the Company incurs any liability arising from
the failure to comply with real estate broker licensing
requirements in certain states, Mr. Thompson,
Mr. Rogers and Mr. Hanson have agreed to forfeit to
the Company up to an aggregate of 4,124,120 shares of the
Company’s common stock, and each share will be deemed to
have a value of $11.36 per share in satisfying this obligation.
Mr. Thompson has agreed to indemnify the Company, to the
extent the liability incurred by the Company for such matters
exceeds the deemed $46,865,000 value of these shares (as of the
date of the agreement), up to an additional $9,435,000 in cash.
In connection with this arrangement, NNN has entered into an
indemnification and escrow agreement with Mr. Thompson,
Mr. Rogers, Mr. Hanson, an independent escrow agent
and NNN, pursuant to which the escrow agent will hold
4,124,120 shares of the Company’s common stock that
are otherwise issuable to Mr. Thompson and Mr. Rogers
in connection with the NNN’s formation transactions
(2,885,520 shares for Mr. Thompson and
1,238,600 shares for Mr. Rogers) to secure
Mr. Thompson’s and Mr. Rogers’ obligations
to the Company with respect to these matters.
Mr. Thompson’s and Mr. Rogers’ liability
under this arrangement will not exceed the sum of the value of
their shares in the escrow except to the extent
Mr. Thompson may be obligated to indemnify the Company for
excess liabilities up to an additional $9,435,000 in cash. Since
Mr. Hanson is entitled over time to receive up to
743,160 shares from Messrs. Thompson and Rogers
(557,370 from Mr. Thompson and 185,790 from
Mr. Rogers) from the shares held in the indemnification and
escrow agreement, he is a party to it as well and his liability
is limited to those shares. If Mr. Hanson’s right to
receive the shares vests, then to the extent shares attributable
to his ownership are available, and not subject to potential
claims, under the indemnification and escrow agreement, he is
permitted to remove 88,000 shares on each of
January 1, 2008 and 2009 to pay taxes. As
Mr. Hanson’s right to receive the shares vests, then
to the extent shares attributable to his ownership are
available, and not subject to potential claims, under the
indemnification and escrow agreement, he will be permitted to
remove certain shares to pay taxes. On January 20, 2009,
Mr. Hanson was permitted to remove 247,695 shares from
the escrow to pay taxes.
Alesco Seed Capital
- On November 16, 2007, the
Company completed the acquisition of a 51% membership interest
in Grubb & Ellis Alesco Global Advisors, LLC
(“Alesco”). Pursuant to the Intercompany Agreement
between the Company and Alesco, dated as of November 16,
2007, the Company committed to invest $20.0 million in seed
capital into the open and closed end real estate funds that
Alesco expects to launch. Additionally, upon achievement of
certain earn-out targets, the Company is required to purchase up
to an additional 27% interest in Alesco for $15.0 million.
The Company is allowed to use $15.0 million of seed capital
to fund the earn-out payments. As of December 31, 2008, the
Company has invested $500,000 in seed capital into the open and
closed end real estate funds that Alesco launched during 2008.
|
|
|
|
21.
|
EARNINGS
(LOSS) PER SHARE
|
The Company computes earnings per share in accordance with
SFAS No. 128,
Earnings Per Share
(“SFAS No. 128”). Under the provisions
of SFAS No. 128, basic earnings (loss) per share is
computed using the weighted-average number of common shares
outstanding during the period. Diluted earnings (loss) per share
is computed using the weighted-average number of common and
common equivalent shares of stock outstanding during the periods
utilizing the treasury stock method for stock options and
unvested restricted stock.
On December 7, 2007, pursuant to the Merger Agreement
(i) each issued and outstanding share of common stock of
NNN was automatically converted into 0.88 of a share of common
stock of the Company, and (ii) each issued and outstanding
stock option of NNN, exercisable for common stock of NNN, was
automatically converted into the right to receive stock option
exercisable for common stock of the Company based on the same
0.88 share conversion ratio.
Unless otherwise indicated, all pre-merger NNN share data have
been adjusted to reflect the 0.88 conversion as a result of the
Merger.
113
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following is a reconciliation between weighted-average
shares used in the basic and diluted earnings (loss) per share
calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
(In thousands, except per share
amounts)
|
|
|
|
|
Restated
|
|
|
Restated
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations, net of tax
|
|
$
|
(279,492
|
)
|
|
$
|
26,826
|
|
|
$
|
20,934
|
|
|
Loss from discontinued operations, net of tax
|
|
|
(51,378
|
)
|
|
|
(5,754
|
)
|
|
|
(963
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(330,870
|
)
|
|
$
|
21,072
|
|
|
$
|
19,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding
|
|
|
63,515
|
|
|
|
38,652
|
|
|
|
19,681
|
(1)
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted stock
|
|
|
—
|
(2)
|
|
|
1
|
(2)
|
|
|
13
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common and common equivalent
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares outstanding
|
|
|
63,515
|
|
|
|
38,653
|
|
|
|
19,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations, net of tax
|
|
$
|
(4.40
|
)
|
|
$
|
0.69
|
|
|
$
|
1.06
|
|
|
Loss from discontinued operations, net of tax
|
|
|
(0.81
|
)
|
|
|
(0.14
|
)
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(5.21
|
)
|
|
$
|
0.55
|
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from continuing operations, net of tax
|
|
$
|
(4.40
|
)
|
|
$
|
0.69
|
|
|
$
|
1.06
|
|
|
Loss from discontinued operations, net of tax
|
|
|
(0.81
|
)
|
|
|
(0.14
|
)
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share
|
|
$
|
(5.21
|
)
|
|
$
|
0.55
|
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Shares of NNN’s common stock as December 31, 2007,
were converted to the Company’s common shares outstanding
by applying December 7, 2007 merger exchange ratio for
earnings (loss) per share disclosure purposes.
|
|
|
|
(2)
|
|
Excluded from the calculation of diluted weighted-average common
shares were approximately 3.1 million, 2.0 million and
181,000 shares of options and restricted stock that have an
anti-dilutive effect when applying the treasury stock method as
of December 31, 2008, 2007 and 2006, respectively. In
addition, excluded from the calculation of diluted
weighted-average common shares as of December 31, 2008 were
approximately 5.2 million shares that may be awarded to
employees related to the deferred compensation plan. See
Note 23 – Employee Benefit Plans for additional
information on the deferred compensation plan.
|
|
|
|
|
22.
|
OTHER
RELATED PARTY TRANSACTIONS
|
Offering Costs and Other Expenses Related to Public
Non-traded REITs
— The Company, through its
consolidated subsidiaries Grubb & Ellis Apartment REIT
Advisor, LLC, and Grubb & Ellis Healthcare REIT
Advisor, LLC, bears certain general and administrative expenses
in its capacity as advisor of Apartment REIT and Healthcare
REIT, respectively, and is reimbursed for these expenses.
However, Apartment REIT and
114
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Healthcare REIT will not reimburse the Company for any operating
expenses that, in any four consecutive fiscal quarters, exceed
the greater of 2.0% of average invested assets (as defined in
their respective advisory agreements) or 25.0% of the respective
REIT’s net income for such year, unless the board of
directors of the respective REITs approve such excess as
justified based on unusual or nonrecurring factors. All
unreimbursable amounts are expensed by the Company.
The Company also pays for the organizational, offering and
related expenses on behalf of Apartment REIT and Healthcare
REIT. These organizational, offering and related expenses
include all expenses (other than selling commissions and the
marketing support fee which generally represent 7.0% and 2.5% of
the gross offering proceeds, respectively) to be paid by
Apartment REIT and Healthcare REIT in connection with their
offerings. These expenses only become the liability of Apartment
REIT and Healthcare REIT to the extent selling commissions, the
marketing support fee and due diligence expense reimbursements
and other organizational and offering expenses do not exceed
11.5% of the gross proceeds of the offering. As of
December 31, 2008, the Company has incurred expenses of
$3.8 million and $0 in excess of 11.5% of the gross
proceeds of the Apartment REIT and Healthcare REIT offerings,
respectively. As of December 31, 2008, the Company has
recorded an allowance for bad debt of approximately
$3.6 million related to the Apartment REIT offering costs
incurred as the Company believes that such amounts will not be
reimbursed.
Management Fees
— The Company provides both
transaction and management services to parties, which are
related to a principal stockholder and director of the Company
(collectively, “Kojaian Companies”). In addition, the
Company also pays asset management fees to the Kojaian Companies
related to properties the Company manages on their behalf.
Revenue, including reimbursable expenses related to salaries,
wages and benefits, earned by the Company for services rendered
to these affiliates, including joint ventures, officers and
directors and their affiliates, was $7.3 million, $530,000,
and $0, respectively for the years ended December 31, 2008,
2007 and 2006.
Other Related Party
— GERI, which is wholly
owned by the Company, owns a 50.0% managing member interest in
Grubb & Ellis Apartment REIT Advisor, LLC and,
therefore, consolidates Grubb & Ellis Apartment REIT
Advisor, LLC. Each of Grubb & Ellis Apartment
Management, LLC and ROC REIT Advisors, LLC own a 25.0% equity
interest in Grubb & Ellis Apartment REIT Advisor, LLC.
As of December 31, 2008, Andrea R. Biller, the
Company’s General Counsel, Executive Vice President and
Secretary, owned an equity interest of 18.0% of
Grubb & Ellis Apartment Management, LLC. As of
December 31, 2007, each of Scott D. Peters, the
Company’s former Chief Executive Officer and President, and
Andrea R. Biller owned an equity interest of 18.0% of
Grubb & Ellis Apartment Management, LLC. On
August 8, 2008, in accordance with the terms of the
operating agreement of Grubb & Ellis Apartment
Management, LLC, Grubb & Ellis Apartment Management
LLC tendered settlement for the purchase of the 18.0% equity
interest in Grubb & Ellis Apartment Management LLC
that was previously owned by Mr. Peters. As a consequence,
through a wholly-owned subsidiary, the Company’s equity
interest in Grubb & Ellis Apartment Management, LLC
increased from 64.0% to 82.0% after giving effect to this
purchase from Mr. Peters. As of December 31, 2008 and
December 31, 2007, Stanley J. Olander, Jr., the
Company’s Executive Vice President — Multifamily,
owned an equity interest of 33.3% of ROC REIT Advisors, LLC.
GERI owns a 75.0% managing member interest in Grubb &
Ellis Healthcare REIT Advisor, LLC and, therefore, consolidates
Grubb & Ellis Healthcare REIT Advisor, LLC.
Grubb & Ellis Healthcare Management, LLC owns a 25.0%
equity interest in Grubb & Ellis Healthcare REIT
Advisor, LLC. As of December 31, 2008, each of
Ms. Biller and Mr. Hanson, the Company’s Chief
Investment Officer and GERI’s President, owned an equity
interest of 18.0% of Grubb & Ellis Healthcare
Management, LLC. As of December 31, 2007, each of
Mr. Peters, Ms. Biller and Mr. Hanson owned an
equity interest of 18.0% in Grubb & Ellis Healthcare
Management, LLC. On August 8, 2008, in accordance with the
terms of the operating agreement of Grubb & Ellis
Healthcare Management, LLC, Grubb & Ellis Healthcare
Management, LLC tendered settlement for the purchase of 18.0%
equity interest in Grubb & Ellis Healthcare
Management, LLC that was previously owned
115
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
by Mr. Peters. As a consequence, through a wholly-owned
subsidiary, the Company’s equity interest in
Grubb & Ellis Healthcare Management, LLC increased
from 46.0% to 64.0% after giving effect to this purchase from
Mr. Peters.
In connection with his resignation on July 10, 2008,
Mr. Peters is no longer a member of Grubb & Ellis
Apartment Management, LLC and Grubb & Ellis Healthcare
Management, LLC.
Mr. Thompson, as a special member, was entitled to receive
up to $175,000 annually in compensation from each of
Grubb & Ellis Apartment Management, LLC and
Grubb & Ellis Healthcare Management, LLC. Effective
February 8, 2008, upon his resignation as Chairman, he was
no longer a special member. As part of his resignation, the
Company has agreed to continue to pay him up to an aggregate of
$569,000 through the initial offering periods related to
Apartment REIT, Inc. and Healthcare REIT, Inc., of which
$263,000 remains outstanding as of December 31, 2008.
The grants of membership interests in Grubb & Ellis
Apartment Management, LLC and Grubb & Ellis Healthcare
Management, LLC to certain executives are being accounted for by
the Company as a profit sharing arrangement. Compensation
expense is recorded by the Company when the likelihood of
payment is probable and the amount of such payment is estimable,
which generally coincides with Grubb & Ellis Apartment
REIT Advisor, LLC and Grubb & Ellis Healthcare REIT
Advisor, LLC recording its revenue. Compensation expense related
to this profit sharing arrangement associated with
Grubb & Ellis Apartment Management, LLC includes
distributions of $88,000, $175,000 and $22,000 respectively,
earned by Mr. Thompson, $85,000, $159,000 and $50,000,
respectively, earned by Mr. Peters and $122,000, $159,000
and $50,000, respectively, earned by Ms. Biller for the
years ended December 31, 2008, 2007 and 2006, respectively.
Compensation expense related to this profit sharing arrangement
associated with Grubb & Ellis Healthcare Management,
LLC includes distributions of $175,000 and $175,000,
respectively, earned by Mr. Thompson, $387,000 and
$414,000, respectively, earned by Mr. Peters and $548,000
and $414,000, respectively, earned by each of Ms. Biller
and Mr. Hanson for the years ended December 31, 2008
and 2007, respectively. No distributions were paid in 2006.
As of December 31, 2008 and December 31, 2007, the
remaining 82.0% and 64.0%, respectively, equity interest in
Grubb & Ellis Apartment Management, LLC and the
remaining 64.0% and 46.0%, respectively, equity interest in
Grubb & Ellis Healthcare Management, LLC were owned by
GERI. Any allocable earnings attributable to GERI’s
ownership interests are paid to GERI on a quarterly basis.
Grubb & Ellis Apartment Management, LLC incurred
expenses of $338,000, $492,000 and $182,000 for the years ended
December 31, 2008, 2007 and 2006, respectively, and
Grubb & Ellis Healthcare Management, LLC incurred
expenses of $1,385,000, $882,000 and $0 for the years ended
December 31, 2008, 2007 and 2006, respectively, to Company
employees, which was included in compensation expense in the
consolidated statement of operations.
Mr. Thompson and Mr. Rogers have agreed to transfer up
to 15.0% of the common stock of Realty they own to
Mr. Hanson, assuming he remains employed by the Company in
equal increments on July 29, 2007, 2008 and 2009. The
transfers will be settled with 743,160 shares of the
Company’s common stock (557,370 from Mr. Thompson and
185,790 from Mr. Rogers). Because Mr. Thompson and
Mr. Rogers were affiliates of NNN at the time of such
transfers, NNN and the Company recognized a compensation charge
(See Note 23). Mr. Hanson is not entitled to any
reimbursement for his tax liability or any
gross-up
payment.
On September 20, 2006, the Company awarded Mr. Peters
a bonus of $2.1 million, which was payable in
178,957 shares of the Company’s common stock,
representing a value of $1.3 million and a cash tax
gross-up
payment of $854,000.
Mr. Peters and Ms. Biller each earned in fiscal 2006 a
performance-based bonus of $100,000 from GERI upon the receipt
by GERI of net commissions aggregating $5,000,000 or more from
the sale of G REIT properties in 2006. The performance
based-bonus was paid in March 2007.
116
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company’s directors and officers, as well as officers,
managers and employees have purchased, and may continue to
purchase, interests in offerings made by the Company’s
programs at a discount. The purchase price for these interests
reflects the fact that selling commissions and marketing
allowances will not be paid in connection with these sales. The
net proceeds to the Company from these sales made net of
commissions will be substantially the same as the net proceeds
received from other sales.
Mr. Thompson has routinely provided personal guarantees to
various lending institutions that provided financing for the
acquisition of many properties by our programs. These guarantees
cover certain covenant payments, environmental and hazardous
substance indemnification and any indemnification for any
liability arising from the SEC investigation of Triple Net
Properties. In connection with the formation transactions, the
Company indemnified Mr. Thompson for amounts he may be
required to pay under all of these guarantees to which Triple
Net Properties, Realty or NNN Capital Corp. is an obligor to the
extent such indemnification would not require the Company to
book additional liabilities on the Company’s balance sheet.
In September 2007, NNN acquired Cunningham Lending Group LLC
(“Cunningham”), a company that was wholly-owned by
Mr. Thompson, for $255,000 in cash. Prior to the
acquisition, Cunningham made unsecured loans to some of the
properties under management by GERI. The loans, which bear
interest at rates ranging from 8.0% to 12.0% per annum are
reflected in advances to related parties on the Company’s
balance sheet and are serviced by the cash flows from the
programs. In accordance with FIN No. 46(R), the
Company consolidated Cunningham in its financial statements
beginning in 2005.
|
|
|
|
23.
|
EMPLOYEE
BENEFIT PLANS
|
Stock
Incentive Plans
Unless otherwise indicated, all pre-merger NNN share data have
been adjusted to reflect the conversion as a result of the
Merger (see Note 10).
2006 Omnibus Equity Plan —
In September 2006,
NNN’s board of directors and then sole stockholder approved
and adopted the 2006 Long-Term Incentive Plan (the “2006
Plan”). As a result of the merger of Grubb &
Ellis and NNN, all issued and outstanding stock option awards
under the 2006 Plan were merged into and are subject to the
general provisions of the 2006 Omnibus Equity Plan (the
“Omnibus Plan”). Awards previously issued pursuant to
the 2006 Plan maintain all of the specific rights and
characteristics as they held when originally issued, except for
the number of shares represented within each award. The numbers
of shares contained in awards issued under the 2006 Plan have
been multiplied by a conversion factor of 0.88 to calculate a
post-merger equivalent share amount for each award. In addition,
the exercise price of any option award originally granted under
the 2006 Plan has been divided by the same conversion factor of
0.88 to achieve a post-merger equivalent exercise price. All
tables contained within this Note 23 of Notes to
Consolidated Financial Statements have been retroactively
restated to reflect the above conversion factors, effective as
if the conversion had been calculated as of January 1,
2006, the earliest date presented.
A total of 2,055,375 shares of common stock (plus
restricted shares issuable to outside directors pursuant to a
formula contained in the plan) remained eligible for future
grant under the Omnibus Plan as of December 31, 2008.
Non-Qualified Stock Options.
Non-qualified
stock options, or NQSOs, provide for the right to purchase
shares of common stock at a specified price not less than its
fair market value on the date of grant, and usually will become
exercisable (in the discretion of the administrator) in one or
more installments after the grant date, subject to the
completion of the applicable vesting service period or the
attainment of pre-established performance goals.
In terms of vesting periods, 1,105,219 stock options were
granted and vested at the date of merger. Other stock options
granted during the year ended December 31, 2007 vest in
equal annual increments over the three
117
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
years following the date of grant. Of the stock options granted
during the year ended December 31, 2006, 60,133 options
were exercisable on the date of grant. The remaining options
vest in equal annual increments over the two years following the
date of grant.
These NQSOs are subject to a maximum term of ten years from the
date of grant and are subject to earlier termination under
certain conditions. Because these stock option awards were
granted to the Company’s senior executive officers, no
forfeiture rate has been assumed.
The following table provides a summary of the Company’s
stock option activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Contractual
|
|
|
Grant Date
|
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
Term
|
|
|
Fair Value
|
|
|
|
|
Shares
|
|
|
per Share
|
|
|
(In Years)
|
|
|
per Share
|
|
|
|
|
Options outstanding as of January 1, 2006
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
180,400
|
|
|
$
|
11.36
|
|
|
|
|
|
|
$
|
4.16
|
|
|
Options exercised
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options forfeited or expired
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of December 31, 2006
|
|
|
180,400
|
|
|
$
|
11.36
|
|
|
|
9.87
|
|
|
$
|
4.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted
|
|
|
610,940
|
|
|
$
|
11.36
|
|
|
|
|
|
|
$
|
3.61
|
|
|
Options exercised
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options forfeited or expired
|
|
|
(140,800
|
)
|
|
$
|
11.36
|
|
|
|
|
|
|
$
|
3.78
|
|
|
Options converted and vested related to acquired company
|
|
|
1,105,219
|
|
|
$
|
7.06
|
|
|
|
|
|
|
$
|
3.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of December 31, 2007
|
|
|
1,755,759
|
|
|
$
|
8.65
|
|
|
|
6.14
|
|
|
$
|
3.65
|
|
|
Options granted
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(76,666
|
)
|
|
$
|
6.53
|
|
|
|
|
|
|
$
|
4.23
|
|
|
Options forfeited or expired
|
|
|
(601,918
|
)
|
|
$
|
10.74
|
|
|
|
|
|
|
$
|
2.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding as of December 31, 2008
|
|
|
1,077,175
|
|
|
$
|
7.76
|
|
|
|
6.79
|
|
|
$
|
4.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and exercisable as of December 31, 2008
|
|
|
820,797
|
|
|
$
|
6.63
|
|
|
|
6.39
|
|
|
$
|
4.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options expected to vest as of December 31, 2008
|
|
|
256,378
|
|
|
$
|
11.36
|
|
|
|
8.06
|
|
|
$
|
3.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest as of December 31, 2008
|
|
|
1,077,175
|
|
|
$
|
7.76
|
|
|
|
6.79
|
|
|
$
|
4.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS No. 123R requires companies to estimate the fair
value of its stock option equity awards on the date of grant
using an option-pricing model. The Company uses the
Black-Scholes option-pricing model. The determination of the
fair value of option-based awards using the Black-Scholes model
incorporates various assumptions including exercise price, fair
value at date of grant, volatility, and expected life of awards,
risk-free interest rates and expected dividend yield. The
expected volatility is based on the historical volatility of
comparable publicly traded companies in the real estate sector
over the most recent period commensurate with the estimated
expected life of the Company’s stock options. The expected
life of the Company’s stock options represents the average
between the vesting and contractual term, pursuant to Staff
Accounting Bulletin (“SAB”) No. 107. The fair
value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants during the
118
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
years ended December 31, 2007 and 2006. (The Company did
not grant any options during the year ended December 31,
2008):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Exercise price
|
|
$
|
8.59
|
|
|
$
|
11.36
|
|
|
Expected term (in years)
|
|
|
5.0
|
|
|
|
6.0
|
|
|
Risk-free interest rate
|
|
|
3.97
|
%
|
|
|
4.67
|
%
|
|
Expected volatility
|
|
|
81.79
|
%
|
|
|
43.94
|
%
|
|
Expected dividend yield
|
|
|
4.1
|
%
|
|
|
4.1
|
%
|
|
Fair value at date of grant
|
|
$
|
3.45
|
|
|
$
|
3.66
|
|
Option valuation models require the input of subjective
assumptions including the expected stock price volatility and
expected life. For the years ended December 31, 2008, 2007
and 2006, the Company recognized stock-based compensation
related to stock option awards of $554,000, $619,000 and
$281,000, respectively. The related income tax benefit for the
years ended December 31, 2008, 2007 and 2006 was $209,000,
$248,000 and $110,000, respectively. The total fair value of
stock options that vested for the years ended December 31,
2008, 2007 and 2006 was $774,000, $189,000 and $250,000,
respectively. As of December 31, 2008, there was $491,000
in unrecognized compensation expense related to stock option
awards that the Company expects to recognize over a weighted
average period of 13 months.
Restricted Stock.
Restricted stock may be
issued at such price, if any, and may be made subject to such
restrictions (including time vesting or satisfaction of
performance goals), as may be determined by the administrator.
Restricted stock typically may be repurchased by the Company at
the original purchase price, if any, or forfeited, if the
vesting conditions and other restrictions are not met.
For the years ended December 31, 2008 and 2007, the Company
granted restricted stock awards of 1,552,227 shares and
1,449,372 shares, respectively. Total compensation expense
recognized for restricted stock awards was $7.8 million,
$5.5 million, and $1.7 million for the years ended
December 31, 2008, 2007 and 2006, respectively. The related
income tax benefit for the years ended December 31, 2008,
2007 and 2006 was $2.9 million, $2.2 million, and
$681,000, respectively. As of December 31, 2008, there was
$6.9 million of unrecognized compensation expense related
to unvested restricted stock awards that the Company expects to
recognize over a weighted average period of 18 months.
119
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table provides a summary of the Company’s
restricted stock activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
Grant Date
|
|
|
|
|
Number of
|
|
|
Fair Value
|
|
|
|
|
Shares
|
|
|
per Share
|
|
|
|
|
Non vested shares outstanding as of January 1, 2006
|
|
|
—
|
|
|
|
|
|
|
Shares issued
|
|
|
541,200
|
|
|
$
|
10.83
|
|
|
Shares vested
|
|
|
—
|
|
|
|
|
|
|
Shares forfeited
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non vested shares outstanding as of December 31, 2006
|
|
|
541,200
|
|
|
$
|
10.83
|
|
|
Shares issued upon merger
|
|
|
40,000
|
|
|
$
|
12.49
|
|
|
Shares issued
|
|
|
1,409,372
|
|
|
$
|
10.31
|
|
|
Shares vested
|
|
|
(456,133
|
)
|
|
$
|
10.78
|
|
|
Shares forfeited
|
|
|
(102,667
|
)
|
|
$
|
10.89
|
|
|
|
|
|
|
|
|
|
|
|
|
Non vested shares outstanding as of December 31, 2007
|
|
|
1,431,772
|
|
|
$
|
10.37
|
|
|
Shares issued
|
|
|
1,552,227
|
|
|
$
|
3.06
|
|
|
Shares vested
|
|
|
(455,195
|
)
|
|
$
|
10.65
|
|
|
Shares forfeited
|
|
|
(514,792
|
)
|
|
$
|
9.79
|
|
|
|
|
|
|
|
|
|
|
|
|
Non vested shares outstanding as of December 31, 2008
|
|
|
2,014,012
|
|
|
$
|
4.95
|
|
|
|
|
|
|
|
|
|
|
|
Employment Agreements.
In October 2006, the
Company entered into employment agreements with each of
Mr. Peters, Mr. Rogers, Ms. Biller, Francene
LaPoint, the Company’s Former Executive Vice President,
Accounting and Finance, Mr. Hanson and Mr. Hull. These
agreements provide that each of these executives agree to devote
substantially all of his or her full working time to NNN’s
business. The agreements have a term of three years, and provide
for an annual base salary and bonus targets under the
performance bonus program. Additional benefits include health
benefits and other fringe benefits as the board or compensation
committee determines. Mr. Hanson’s employment
agreement further provides for a special bonus based on his
ability to procure new sources of equity, and
Mr. Peters’ new employment arrangement with the
combined company provides for a $1.0 million payment for a
second residence in California following the close of the Merger
and the purchase of a second residence. In January, 2008,
Mr. Peters irrevocably waived his right to receive the
$1.0 million payment for a second residence in California.
Effective July 10, 2008, Mr. Peters resigned as Chief
Executive Officer and President of the Company. Effective
October 3, 2008, Ms. LaPoint resigned as Executive
Vice President, Accounting and Finance of the Company.
Other stock award.
On September 20, 2006,
the Company awarded Mr. Peters a bonus of
$2.1 million, which was payable in 178,083 shares of
the Company’s common stock for a value of
$1.3 million, and cash of $854,000.
Other Equity Awards
— In accordance with
SFAS No. 123R, share-based payments awarded to an
employee of the reporting entity by a related party, or other
holder of an economic interest in the entity, as compensation
for services provided to the entity are share-based payment
transactions to be accounted for under this Statement unless the
transfer is clearly for a purpose other than compensation for
services to the reporting entity. The economic interest holder
is one who either owns 10.0% or more of an entity’s common
stock or has the ability, directly or indirectly, to control or
significantly influence the entity. The substance of such a
transaction is that the economic interest holder makes a capital
contribution to the reporting entity, and that entity makes a
share-based payment to its employee in exchange for services
rendered. SFAS No. 123R also requires that the fair
value of unvested stock options or awards granted by an acquirer
in exchange for stock options or awards held by employees of the
acquiree shall be determined at the consummation date of
120
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
the acquisition. The incremental compensation cost shall be
(1) the portion of the grant-date fair value of the
original award for which the requisite service is expected to be
rendered (or has already been rendered) at that date plus
(2) the incremental cost resulting from the acquisition
(the fair market value at the consummation date of the
acquisition over the fair value of the original grant).
On July 29, 2006, Mr. Thompson and Mr. Rogers
agreed to transfer up to 15.0% of the outstanding common stock
of Realty to Mr. Hanson, assuming he remained employed by
the Company, in equal increments on July 29, 2007, 2008 and
2009. Due to the acquisition of Realty, the transfers were
settled with 743,160 shares of the Company’s common
stock (557,370 shares from Mr. Thompson and
185,790 shares from Mr. Rogers). Since
Mr. Thompson and Mr. Rogers were affiliates who owned
more than 10.0% of Realty’s common stock and had the
ability, directly or indirectly, to control or significantly
influence the entity, and the award was granted to
Mr. Hanson in exchange for services provided to Realty
which are vested upon completion of the respective service
period, the fair value of the award was accounted for as
stock-based compensation in accordance with
SFAS No. 123R. These shares included rights to
dividends or other distributions declared on or prior to
July 29, 2009. As a result, the Company recognized
$2.8 million, $2.7 million, and $333,000 in
stock-based compensation and a related income tax benefit
(deferred tax asset) of $1.1 million, $1.1 million and
$130,000 for the years ended December 31, 2008, 2007 and
2006, respectively. As of December 31, 2008, there was
$1.6 million of unrecognized stock-based compensation
related to the unvested portion of the award that the Company
expects to recognize in 2009.
On December 7, 2007, Mr. Thompson transferred
528,000 shares of his own Company common stock to
Mr. Peters, which were to vest in equal annual increments
over the five years following the date of grant. Since
Mr. Thompson was an affiliate who owned more than 10.0% of
the Company’s common stock and had the ability, directly or
indirectly, to control or significantly influence the entity,
and the award was granted to Mr. Peters in exchange for
services provided to the Company which are vested upon
completion of the respective service period, the fair value of
the award was accounted for as stock-based compensation in
accordance with SFAS No. 123R. These shares included
rights to dividends or other distributions declared. As a
result, the Company recognized $48,000 in stock-based
compensation and a related income tax benefit (deferred tax
asset) of $19,000 for the year ended December 31, 2007.
On July 10, 2008, Scott D. Peters resigned as the
Company’s Chief Executive Officer and President, and as a
consequence, the employment agreement between the Company and
Mr. Peters was terminated in accordance with its terms. As
such, previously recognized stock-based compensation expense
related to the transfer of shares, including accrued dividends
or distributions declared, were reversed, along with forfeiture
of all rights and interests. Additionally, there will be no
further recognition of stock-based compensation related to the
unvested portion of the award.
401k Plan
— The Company adopted a 401(k) plan
(the “Plan”) for the benefit of its employees. The
Plan covers employees of the Company and eligibility begins the
first of the month following the hire date. For the years ended
December 31, 2008, 2007 and 2006, the Company contributed
$3.3 million, $817,000, and $525,000 to the Plan,
respectively.
Deferred
Compensation Plan
During 2008, the Company implemented a deferred compensation
plan that permits employees and independent contractors to defer
portions of their compensation, subject to annual deferral
limits, and have it credited to one or more investment options
in the plan. Deferrals made by employees and independent
contractors and earnings thereon are fully accrued and held in a
rabbi trust. In addition, the Company may make discretionary
contributions to the plan which vest over one to five years.
Contributions made by the Company and earnings thereon are
accrued over the vesting period and have not been funded to
date. Benefits are paid according to elections made by the
participants. Included in Other Long Term Liabilities as of
December 31, 2008 is $1.7 million reflecting the
non-stock liability under this plan. The Company has
121
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
purchased whole-life insurance contracts on certain employee
participants to recover distributions made or to be made under
this plan and have recorded the cash surrender value of the
policies of $1.1 million in Other Noncurrent Assets.
In addition, the Company may award “phantom” shares of
Company stock to participants under the deferred compensation
plan. These awards vest over three to five years. Vested phantom
stock awards are also unfunded and paid according to
distribution elections made by the participants at the time of
vesting and will be settled by the Company purchasing shares of
Company common stock in the open market from time to time and
delivering such shares to the participant. During 2008, the
Company granted an aggregate of 5.4 million phantom shares
to various employees under this plan, of which 5.2 million
phantom shares were outstanding as of December 31, 2008.
The Company recorded stock compensation expense of
$3.1 million for the year ended December 31, 2008
related to certain of these grants which provided for a minimum
guaranteed value upon vesting.
The components of income tax (benefit) provision from continuing
operations for the years ended December 31, 2008, 2007 and
2006 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
(In thousands)
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Current:
|
|
|
|
|
|
|
Restated
|
|
|
|
Restated
|
|
|
Federal
|
|
$
|
(10,981
|
)
|
|
$
|
16,991
|
|
|
$
|
375
|
|
|
State
|
|
|
(1,890
|
)
|
|
|
3,195
|
|
|
|
331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,871
|
)
|
|
|
20,186
|
|
|
|
706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
33,175
|
|
|
|
(1,943
|
)
|
|
|
(6,766
|
)
|
|
State
|
|
|
(3,414
|
)
|
|
|
(125
|
)
|
|
|
(1,381
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,761
|
|
|
|
(2,068
|
)
|
|
|
(8,147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,890
|
|
|
$
|
18,118
|
|
|
$
|
(7,441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recorded prepaid taxes totaling approximately of
$1.2 million and $2.4 million as of December 31,
2008 and 2007, respectively, comprised primarily of state tax
refund receivables and state prepaid tax estimates. The Company
also received net federal and state tax refunds of approximately
$6.2 million and $300,000 during 2008 and 2007,
respectively, comprised primarily of refunds of estimated
overpayments and net operating loss carryback claims resulting
in refunds of taxes paid in previous years.
The Company generated a federal net operating loss
(“NOL”) of approximately $9.5 million for the
taxable period of the acquired entity ending on the Merger date
December 7, 2007. The Company carried back
$6.6 million of this NOL to 2006 and claimed a refund of
taxes paid of $1.7 million. As of December 31, 2008,
federal net operating loss carryforwards were available to the
Company in the amount of approximately $2.2 million,
translating to a deferred tax asset before valuation allowance
of $800,000, which will begin to expire in 2027. The remaining
NOL carryforward is subject to an annual limitation under IRC
section 382 because the Merger caused a change of ownership
of the Company of greater than 50.0%. The annual limitation is
approximately $7.3 million. Prior to the issuance of the
Company’s December 31, 2008 Annual Report, the Company
filed its 2008 federal income tax return claiming an ordinary
loss of $29.2 million. The Company carried back this NOL to
2006 and 2007 and claimed and received a refund of taxes paid of
$10.3 million.
122
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The Company also had state net operating loss carryforwards from
previous periods totaling $74.5 million, translating to a
deferred tax asset of $6.1 million before valuation
allowances, which will begin to expire in 2017. The current
increase in deferred assets related to state net operating
losses has been offset by an increase in the valuation
allowances of $2.4 million as the future utilization of
these state NOLs is uncertain. The additional increase in
deferred tax assets of $2.2 million related to current year
estimated state net operating losses has been offset by the same
increase in the valuation allowance.
The Company regularly reviews its deferred tax assets for
recoverability and establishes a valuation allowance based upon
historical taxable income, projected future taxable income and
the expected timing of the reversals of existing temporary
differences to reduce its deferred assets to the amount that it
believes is more likely than not to be realized. Due to the
cumulative pre-tax book loss in the past three years and the
inherent volatility of the business in recent years, the Company
believes that this negative evidence supports the position that
a valuation allowance is required pursuant to
paragraphs 20-25
of SFAS 109. As of December 31, 2008, there is
approximately $6.2 million of taxable income available in
carryback years that could be used to offset deductible
temporary differences. Management determined that as of
December 31, 2008, $55.2 million of deferred tax
assets do not satisfy the recognition criteria set forth in
SFAS No. 109. Accordingly, a valuation allowance has
been recorded for this amount. If released, the entire amount
would result in a benefit to continuing operations. During the
year ended December 31, 2008, our valuation allowances
increased by approximately $52.1 million. Of the
$52.1 million increase, $2.4 million was charged
against Goodwill due to state return to provision
true-ups
of
the pre-merger returns.
The differences between the total income tax (benefit) provision
of the Company for financial statement purposes and the income
taxes computed using the applicable federal income tax rate of
35.0% for 2008 and 2007, and 34% for 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
(In thousands)
|
|
|
|
|
Restated
|
|
|
Restated
|
|
|
|
|
Federal income taxes at the statutory rate
|
|
$
|
(91,913
|
)
|
|
$
|
15,736
|
|
|
$
|
3,769
|
|
|
Income of properties not subject to corporate income tax(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,905
|
)
|
|
Tax benefit of change in tax status
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,086
|
)
|
|
State income taxes, net of federal benefit
|
|
|
(3,525
|
)
|
|
|
2,344
|
|
|
|
(51
|
)
|
|
Credits
|
|
|
(236
|
)
|
|
|
(250
|
)
|
|
|
—
|
|
|
Other
|
|
|
(235
|
)
|
|
|
(251
|
)
|
|
|
—
|
|
|
Non-taxable income
|
|
|
—
|
|
|
|
|
|
|
|
(238
|
)
|
|
Non-deductible expenses
|
|
|
63,122
|
|
|
|
460
|
|
|
|
70
|
|
|
Change in valuation allowance
|
|
|
49,677
|
|
|
|
79
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes
|
|
$
|
16,890
|
|
|
$
|
18,118
|
|
|
$
|
(7,441
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Represents Grubb & Ellis Realty Investors, LLC income
for the period January 1, 2006 through November 15,
2006.
|
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting and income tax purposes. The
significant components of deferred
123
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
tax assets and liabilities as of December 31, 2008 and 2007
from continuing and discontinued operations consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
December 31, 2008
|
|
|
December 31, 2007
|
|
|
|
|
|
|
|
Restated
|
|
|
Stock compensation
|
|
$
|
953
|
|
|
$
|
968
|
|
|
Accrued expenses
|
|
|
3,446
|
|
|
|
3,096
|
|
|
Severance accrual
|
|
|
1,160
|
|
|
|
1,986
|
|
|
Allowance for bad debts
|
|
|
3,764
|
|
|
|
1,745
|
|
|
Deferred revenue
|
|
|
122
|
|
|
|
1,750
|
|
|
Workers compensation reserves
|
|
|
689
|
|
|
|
703
|
|
|
Net operating losses
|
|
|
—
|
|
|
|
2,559
|
|
|
Other
|
|
|
870
|
|
|
|
535
|
|
|
Less valuation allowance
|
|
|
(8,363
|
)
|
|
|
(1,561
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Current deferred tax assets:
|
|
|
2,641
|
|
|
|
11,781
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(2,569
|
)
|
|
|
(2,532
|
)
|
|
Prepaid service contracts
|
|
|
(1,055
|
)
|
|
|
(1,076
|
)
|
|
Other
|
|
|
(1,097
|
)
|
|
|
(182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Current deferred tax liabilities:
|
|
|
(4,721
|
)
|
|
|
(3,790
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net current deferred tax assets (liabilities)
|
|
$
|
(2,080
|
)
|
|
$
|
7,991
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation
|
|
$
|
4,720
|
|
|
$
|
2,616
|
|
|
Capitalized cost of member redemption
|
|
|
461
|
|
|
|
935
|
|
|
Property and equipment
|
|
|
3,523
|
|
|
|
2,568
|
|
|
Legal reserve
|
|
|
1,449
|
|
|
|
2,067
|
|
|
Real estate impairments
|
|
|
40,139
|
|
|
|
—
|
|
|
Other
|
|
|
5,099
|
|
|
|
3,653
|
|
|
Capital losses
|
|
|
2,528
|
|
|
|
—
|
|
|
Net operating losses
|
|
|
9,200
|
|
|
|
4,125
|
|
|
Less valuation allowance
|
|
|
(46,841
|
)
|
|
|
(1,542
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred tax assets
|
|
|
20,278
|
|
|
|
14,422
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(38,470
|
)
|
|
|
(43,693
|
)
|
|
Other
|
|
|
894
|
|
|
|
(644
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred tax liabilities
|
|
|
(37,576
|
)
|
|
|
(44,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net noncurrent deferred tax liabilities
|
|
$
|
(17,298
|
)
|
|
$
|
(29,915
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities:
|
|
$
|
(19,378
|
)
|
|
$
|
(21,924
|
)
|
|
|
|
|
|
|
|
|
|
|
The Company classified estimated interest and penalties related
to unrecognized tax benefits in our provision for income taxes.
As of December 31, 2008, the Company remains subject to
examination by certain tax jurisdictions for the tax years ended
December 31, 2004 through 2008. There were no significant
changes in the accrued liability related to uncertain tax
positions during the year ended December 31, 2008, nor does
the Company anticipate significant changes during the next
12-month
period.
124
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
|
25.
|
SELECTED
QUARTERLY FINANCIAL DATA (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2008
|
|
|
|
|
Quarter Ended
|
|
|
|
|
As Reported(1)
|
|
|
As Restated
|
|
|
As Reported(1)
|
|
|
As Restated
|
|
|
|
|
March 31, 2008
|
|
|
March 31, 2008
|
|
|
June 30, 2008
|
|
|
June 30, 2008
|
|
|
(In thousands, except per share
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
151,086
|
|
|
$
|
150,368
|
|
|
$
|
156,678
|
|
|
$
|
156,233
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(2,724
|
)
|
|
$
|
(3,442
|
)
|
|
$
|
(376
|
)
|
|
$
|
(821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss to common stockholders
|
|
$
|
(5,868
|
)
|
|
$
|
(6,298
|
)
|
|
$
|
(5,114
|
)
|
|
$
|
(5,380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic —
|
|
$
|
(0.09
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
63,521
|
|
|
|
63,521
|
|
|
|
63,600
|
|
|
|
63,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted —
|
|
$
|
(0.09
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
63,521
|
|
|
|
63,521
|
|
|
|
63,600
|
|
|
|
63,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2008
|
|
|
|
|
Quarter Ended
|
|
|
|
|
As Reported(1)
|
|
|
As Restated
|
|
|
|
|
|
|
|
September 30, 2008
|
|
|
September 30, 2008
|
|
|
December 31, 2008
|
|
|
(In thousands, except per share
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
150,110
|
|
|
$
|
149,192
|
|
|
$
|
156,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(20,489
|
)
|
|
$
|
(33,121
|
)
|
|
$
|
(218,070
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss to common stockholders
|
|
$
|
(44,016
|
)
|
|
$
|
(56,282
|
)
|
|
$
|
(262,910
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic —
|
|
$
|
(0.69
|
)
|
|
$
|
(0.88
|
)
|
|
$
|
(4.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
63,601
|
|
|
|
63,601
|
|
|
|
63,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted —
|
|
$
|
(0.69
|
)
|
|
$
|
(0.88
|
)
|
|
$
|
(4.15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
63,601
|
|
|
|
63,601
|
|
|
|
63,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125
GRUBB &
ELLIS COMPANY
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2007
|
|
|
|
|
Quarter Ended
|
|
|
|
|
|
|
|
As Restated
|
|
|
As Reported(1)
|
|
|
As Restated
|
|
|
|
|
As Reported(1) March 31, 2007
|
|
|
March 31, 2007
|
|
|
June 30, 2007
|
|
|
June 30, 2007
|
|
|
(In thousands, except per share
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
31,616
|
|
|
$
|
32,641
|
|
|
$
|
43,258
|
|
|
$
|
42,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
5,308
|
|
|
$
|
6,333
|
|
|
$
|
17,771
|
|
|
$
|
16,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income to common stockholders
|
|
$
|
3,637
|
|
|
$
|
4,252
|
|
|
$
|
10,234
|
|
|
$
|
9,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic —
|
|
$
|
0.10
|
|
|
$
|
0.12
|
|
|
$
|
0.24
|
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
36,910
|
|
|
|
36,910
|
|
|
|
41,943
|
|
|
|
41,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted —
|
|
$
|
0.10
|
|
|
$
|
0.12
|
|
|
$
|
0.24
|
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
36,949
|
|
|
|
36,949
|
|
|
|
42,056
|
|
|
|
42,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2007
|
|
|
|
|
Quarter Ended
|
|
|
|
|
As Reported(1)
|
|
|
As Restated
|
|
|
As Reported(1)
|
|
|
As Restated
|
|
|
|
|
September 30, 2007
|
|
|
September 30, 2007
|
|
|
December 31, 2007
|
|
|
December 31, 2007
|
|
|
(In thousands, except per share
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
46,158
|
|
|
$
|
46,763
|
|
|
$
|
96,522
|
|
|
$
|
96,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
9,610
|
|
|
$
|
10,215
|
|
|
$
|
9,277
|
|
|
$
|
9,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income to common stockholders
|
|
$
|
4,053
|
|
|
$
|
4,416
|
|
|
$
|
2,918
|
|
|
$
|
2,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic —
|
|
$
|
0.10
|
|
|
$
|
0.11
|
|
|
$
|
0.07
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
41,943
|
|
|
|
41,943
|
|
|
|
43,821
|
|
|
|
43,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted —
|
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
$
|
0.07
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
42,127
|
|
|
|
42,127
|
|
|
|
43,826
|
|
|
|
43,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Amounts presented “as reported” have been
reclassified to conform to current year presentation. See
discussion of reclassifications in note 2.
126
|
|
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure.
|
None.
Item 9A.
Controls
and Procedures.
Restatement
As discussed in the
Form 8-K
filed March 17, 2009 and elsewhere in this Annual Report on
Form 10-K
(“2008
Form 10-K”),
management has restated (1) its audited financial
statements for each of the fiscal years ended December 31,
2006 and December 31, 2007; (2) the unaudited interim
financial statements for each of the quarterly periods ended
March 31, 2008 and 2007, June 30, 2008 and 2007 and
September 30, 2008 and 2007 and December 31, 2007; and
(3) selected financial data for the fiscal years ended
December 31, 2004, 2005, 2006 and 2007 in the 2008
Form 10-K.
The determination to restate this previously issued financial
information was made as a result of management’s
identification of certain letter agreements entered into by NNN
Realty Advisors (“NNN”) with respect to certain
tenant-in-common
investment programs sponsored by NNN prior to the merger of NNN
with Grubb & Ellis in December 2007 (“the
Merger”). While evaluating these letter agreements as well
as other TIC Programs and master lease arrangements, management
determined that revenue with respect to certain
tenant-in-common
investment programs and master lease arrangements was recognized
in 2004, 2005 and 2006 prior to completing the revenue
recognition criteria required by generally accepted accounting
principles. Additionally, the results of operations of certain
entities to which these letter agreements referred should have
been consolidated into the Company’s financial statements.
Evaluation
of disclosure controls and procedures
The Company maintains disclosure controls and procedures that
are designed to ensure that information required to be disclosed
in our reports pursuant to the Securities Exchange Act of 1934,
as amended, or the Exchange Act, is recorded, processed,
summarized and reported within the time periods specified in the
SEC rules and regulations, and that such information is
accumulated and communicated to management, including our
Interim Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls
and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired
control objectives, as the Company’s are designed to do,
and management necessarily was required to apply its judgment in
evaluating whether the benefits of the controls and procedures
that the Company adopts outweigh their costs.
In connection with the restatement discussed above, management
of the Company, including our Interim Chief Executive Officer
and our Chief Financial Officer reevaluated the effectiveness of
our disclosure controls and procedures both prior and subsequent
to the Merger and pursuant to SEC
Rule 13a-15(e)
and
15d-15(e)
under the Exchange Act. As a result of this reevaluation,
management has determined that the control deficiencies
discussed below constituted a material weakness in the system of
internal control prior to the Merger that was not adequately
remediated as of December 31, 2008. Therefore, management,
including our Interim Chief Executive Officer and our Chief
Financial Officer have now concluded that our disclosure
controls and procedures were not effective as of
December 31, 2008.
The Company’s management nevertheless has concluded, after
completion of a special investigation approved by the Board of
Directors and conducted by outside counsel to determine the
population of letter agreements and the
tenant-in-common
investment programs, that the consolidated financial statements
included in this 2008
Form 10-K
are fairly stated, in accordance with accounting principles
generally accepted in the United States of America. Based in
part on these additional efforts, our Interim Chief Executive
Officer and Chief Financial Officer have included their
certifications as exhibits to this 2008
Form 10-K.
Material
Weaknesses in Internal Control Over Financial
Reporting
A material weakness is a deficiency, or a combination of
deficiencies in internal control over financial reporting, that
creates a reasonable possibility that a material misstatement of
interim or annual financial
127
statements will not be prevented or detected on a timely basis.
Management identified certain material weaknesses in December,
2008 that first related to the operations of NNN prior to the
Merger. Management has concluded that the following material
weaknesses existed at December 31, 2008.
|
|
|
|
|
|
•
|
The control environment did not adequately address communication
of agreements to Legal and Accounting. As a result, the Company
failed to identify, appropriately account for, and adequately
disclose certain agreements entered into by NNN prior to the
Merger.
|
|
|
|
|
•
|
The Company did not maintain internal controls with regard to
properly evaluating revenue recognition related to a number of
tenant-in-common
investment programs.
|
As part of the post merger restructuring and first year
implementation of a Sarbanes-Oxley compliance program, certain
control environment enhancements were implemented during the
second half of 2008; including a change in senior Finance and
Accounting management, hiring of additional qualified Finance
and Accounting personnel, and restructuring of the Finance and
Accounting function. Management believes that these changes,
along with the additional remediation initiatives planned for
2009, will establish a control environment that both adequately
and effectively addresses the above noted material weaknesses.
Management’s
Report on Internal Control over Financial
Reporting
Management recognizes its responsibility for establishing and
maintaining adequate internal control over financial reporting
and has designed internal controls and procedures to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of consolidated financial
statements and related notes in accordance with generally
accepted accounting principles in the United States of America.
Management assessed the effectiveness of the Company’s
internal control over financial reporting as of
December 31, 2008. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in
Internal Control-Integrated Framework. Based on that assessment,
our management concluded that solely as a result of the material
weaknesses in internal control as described above, the Company
did not maintain effective internal control over financial
reporting as of December 31, 2008.
Ernst & Young LLP has issued an opinion on the
effectiveness of the Company’s internal control over
financial reporting as of December 31, 2008, based on COSO
criteria. This report appears under “Report of Independent
Registered Public Accounting Firm” on the following page.
Management’s
Remediation Initiatives
The Company’s management is committed to continuing efforts
aimed at improving the design adequacy and operational
effectiveness of its systems of internal control and is taking
all necessary steps to address the material weaknesses
identified above. The Company’s ongoing efforts to
strengthen the control environment related to the communication
of, accounting for, and disclosure of agreements include:
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Implementation of a required Legal and Accounting review prior
to execution of investor agreements
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Enhancement of the executive and senior management
certifications to specifically address disclosure and
communication of all known agreements
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Enhancement of management communications to address acceptable
transactions and authorization requirements
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Post merger control environment enhancements that will
contribute to remediating the material weakness in revenue
recognition practices include:
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A change in senior Finance and Accounting management,
restructuring of the Finance and Accounting functions and
engaged additional resources with the appropriate depth of
experience for our Finance and Accounting departments
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Updated accounting policies and procedures to ensure that
accounting personnel have sufficient guidance to remediate
previously communicated weaknesses and to appropriately account
for transactions
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128
We anticipate the actions described above and resulting
improvement in controls will generally strengthen our internal
control over financial reporting, and will, over time, address
the material weaknesses that we identified in our internal
control over financial reporting as of December 31, 2008.
However, because many of the control environment enhancements we
have undertaken are very recent and because they relate, in
part, to hiring of additional personnel and many of the controls
in our systems of internal controls rely extensively on manual
review and approval, the successful operation of these controls
for, at least, several fiscal quarters may be required prior to
management being able to conclude that the material weaknesses
have been eliminated.
Changes
in Internal Control over Financial Reporting
Management has evaluated, with the participation of our Interim
Chief Executive Officer and Chief Financial Officer, whether any
changes in our internal control over financial reporting that
occurred during our last fiscal quarter have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
As the material weaknesses noted above were not identified until
December 2008, there were no specific remediation actions during
the fourth fiscal quarter of 2008 which materially affected, or
are reasonably likely to materially affect, the Company’s
internal control over financial reporting other than the post
merger control environment enhancements noted above that were
being implemented to support compliance with the Sarbanes-Oxley
Act of 2002.
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Item 9B.
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Other
Information
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None.
129
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of
Directors and Shareholders of Grubb & Ellis Company
We have audited Grubb & Ellis Company’s internal
control over financial reporting as of December 31, 2008,
based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria).
Grubb & Ellis Company’s management is responsible
for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of
internal control over financial reporting included in the
accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion
on the company’s internal control over financial reporting
based on our audit.
We conducted our audit 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 effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed 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. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
A material weakness is a deficiency, or combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material
misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely basis.
The following material weaknesses have been identified and
included in management’s assessment. Management has
identified a material weakness in controls that were not
operating effectively and therefore failed to identify,
adequately disclose and appropriately account for letter
agreements relating to
tenant-in-common
investment programs entered into by NNN Realty Advisors, Inc.
prior to the merger. Management also identified a material
weakness in controls that were not operating effectively and
failed to properly evaluate the revenue recognition relating to
a number of other
tenancy-in-common
investment programs. We also have audited, in accordance with
the standards of the Public Company Accounting Oversight Board
(United States), the consolidated balance sheets of the Grubb
& Ellis Company as of December 31, 2008 and 2007
and the related consolidated statements of operations,
stockholders’ equity and cash flows for each of the two
years in the period ended December 31, 2008. These material
weaknesses were considered in determining the nature, timing,
and extent of audit tests applied in our audit of the 2008
financial statements, and this report does not affect our report
dated May 27, 2009 which expressed an unqualified opinion
on those financial statements.
In our opinion, because of the effect of the material weaknesses
described above on the achievement of the objectives of the
control criteria, Grubb & Ellis Company has not
maintained effective internal control over financial reporting
as of December 31, 2008, based on the COSO criteria.
Irvine, California
May 27, 2009
130
GRUBB &
ELLIS COMPANY
PART III
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Item 10.
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Directors,
Executive Officers and Corporate Governance.
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Information
about the Directors
The Company’s Board is comprised of three Classes of
directors. The term of office of each Class A director
extends until the annual meeting of Company stockholders in 2011
and until his successor is elected and qualified. The term of
office of each Class B director extends until the annual
meeting of Company stockholders in 2009 and until his successor
is elected and qualified. The term of office of each
Class C director extends until the annual meeting of
Company stockholders in 2010 and until his successor is elected
and qualified. Thereafter, the term of each Class shall be three
years from the applicable annual meeting.
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Class A directors
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Harold H. Greene
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70, has served as a director of the Company since December 2007.
Mr. Greene also served as a director of NNN from November
2006 to December 2007. Mr. Greene is a
40-year
veteran of the commercial and residential real estate lending
industry. He most recently served as the Managing Director for
Bank of America’s California Commercial Real Estate
Division from 1998 to his retirement in 2001, where he was
responsible for lending to commercial real estate developers in
California and managed an investment portfolio of approximately
$2.6 billion. From 1990 to 1998, Mr. Greene was the
Executive Vice President of SeaFirst Bank in Seattle, Washington
and prior to that he served as the Vice Chairman of MetroBank
from 1989 to 1990 and in various positions, including Senior
Vice President in charge of the Asset Based Finance Group, with
Union Bank, where he worked for 27 years. Mr. Greene
currently serves as a director of Gary’s and Company
(men’s clothing retailer), as a director and member of the
audit committee of Paladin Realty Income Properties, Inc., and
as a director and member of the audit, compensation and
nominating and corporate governance committees of William Lyon
Homes.
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Devin I. Murphy
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49, has served as a director of the Company since July 2008. He
is a Managing Partner of Coventry Real Estate Advisors, LLC, a
real estate private equity firm which sponsors opportunistic
institutional investment funds that acquire and develop retail
and mixed-used properties. Prior to joining Coventry Real Estate
Advisors, LLC in 2008, Mr. Murphy was the Global Head of
Real Estate Investment Banking at Deutsche Bank Securities, Inc.
from 2004 to 2007. From 1993 through 2007, he was with Morgan
Stanley & Company in a variety of real estate and
investment banking roles, including Co-Head North American Real
Estate Investment Banking and Global Head of the firm’s
Real Estate Private Capital Markets Group. Mr. Murphy also
served on the investment committee of the Morgan Stanley Real
Estate funds for 10 years during which time these funds
invested over $35 billion.
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D. Fleet Wallace
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41, has served as a director of the Company since December 2007.
Mr. Wallace also served as a director of NNN from November
2006 to December 2007. Mr. Wallace is a principal and
co-founder of McCann Realty Partners, LLC, an apartment
investment
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company focusing on garden apartment properties in the Southeast
formed in 2004. From April 1998 to August 2001, Mr. Wallace
served as corporate counsel and assistant secretary of United
Dominion Realty Trust, Inc., a publicly-traded real estate
investment trust. From September 1994 to April 1998,
Mr. Wallace was in the private practice of law with McGuire
Woods in Richmond, Virginia. Mr. Wallace has also served as
a Trustee of G REIT Liquidating Trust since January 2008.
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Class B directors
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Robert J. McLaughlin
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76, has served as a director of the Company since July 2004.
Mr. McLaughlin previously served as a director of the
Company from September 1994 to March 2001. He founded The Sutter
Group in 1982, a management consulting company that focuses on
enhancing shareholder value, and currently serves as its
President. Previously, Mr. McLaughlin served as President
and Chief Executive Officer of Tru-Circle Corporation, an
aerospace subcontractor, from November 2003 to April 2004, and
as Chairman of the Board of Directors from August 2001 to
February 2003, and as Chairman and Chief Executive Officer from
October 2001 to April 2002 of Imperial Sugar Company.
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Gary H. Hunt
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60, has served as a director of the Company since December 2007
and as the Company’s Interim Chief Executive Officer since
July 2008. Mr. Hunt also served as a director of NNN from
November 2006 to December 2007. Mr. Hunt has served as the
managing partner of California Strategies, LLC, a privately held
consulting firm in Irvine, California that works with large
homebuilders, real estate companies and government entities
since 2001. Prior to serving with California Strategies,
Mr. Hunt was the executive vice president and served on the
board of directors and on the Executive Committee of the Board
of The Irvine Company, a
110-year-old
privately held company that plans, develops and invests in real
estate primarily in Orange County, California for 25 years.
He also serves on the board of directors of Glenair Inc. and
William Lyon Homes. Mr. Hunt has also served as a Trustee
of G REIT Liquidating Trust since January 2008.
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Glenn L. Carpenter
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66, has served as a director of the Company since December 2007
and served as Chairman of the Board of the Company from February
2008 until he voluntarily stepped down as Chairman in January
2009. Mr. Carpenter also served as a director of NNN from
November 2006 to December 2007. Since August 2001,
Mr. Carpenter has served as the Chief Executive Officer,
President and Chairman of FountainGlen Properties, LP, a
privately held company in Newport Beach, California, that
develops, owns and operates apartment communities for active
seniors. Prior to serving with FountainGlen, from 1994 to 2001,
Mr. Carpenter was the Chief Executive Officer and founder
of Pacific Gulf Properties Inc., a publicly traded REIT that
developed and operated industrial business parks and various
types of apartment communities. From 1970 to 1994,
Mr. Carpenter served as Chief Executive Officer and
President, and other officer positions of Santa Anita Realty
Enterprises Inc., a publicly traded REIT that owned and managed
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industrial office buildings, apartments and shopping centers. He
has received numerous honors in the real estate field including
the 2000 Real Estate Man of the Year Award and was voted the
1999 Orange County Entrepreneur of the Year for real estate.
Mr. Carpenter sits on the board of councilors of the School
of Gerontology at the University of Southern California and is a
council and executive board member of the American Seniors
Housing Association.
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Class C directors
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C. Michael Kojaian
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47, has served as a director of the Company since December 1996.
He served as the Chairman of the Board of Directors of the
Company from June 2002 until December 7, 2007 and has
served as the Chairman of the Board of Directors of the Company
since January 6, 2009. He has been the President of Kojaian
Ventures, L.L.C. and also Executive Vice President, a director
and a shareholder of Kojaian Management Corporation, both of
which are investment firms headquartered in Bloomfield Hills,
Michigan, since 2000 and 1985, respectively. He is also a
director of Arbor Realty Trust, Inc. Mr. Kojaian has also
served as the Chairman of the Board of Directors of
Grubb & Ellis Realty Advisors, Inc., an affiliate of
the Company, from its inception in September 2005 until April
2008, and as its Chief Executive Officer from December 13,
2007 until April 2008.
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Rodger D. Young
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62, has served as a director of the Company since April 2003.
Mr. Young has been a name partner of the law firm of
Young & Susser, P.C. since its founding in 1991,
a boutique firm specializing in commercial litigation with
offices in Southfield, Michigan and New York City. In 2001,
Mr. Young was named Chairman of the Bush
Administration’s Federal Judge and U.S. Attorney
Qualification Committee by Governor John Engler and
Michigan’s Republican Congressional Delegation.
Mr. Young is a member of the American College of Trial
Lawyers and was listed in the 2007 edition of
Best Lawyers of
America
. Mr. Young was named by Chambers International
and by Best Lawyers in America as one of the top commercial
litigators in the United States.
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Communications
with the Directors
Stockholders, employees and others interested in communicating
with the Chairman of the Board may do so by writing to C.
Michael Kojaian,
c/o Corporate
Secretary, Grubb & Ellis Company, 1551 North Tustin
Avenue, Suite 300, Santa Ana, California 92705.
Stockholders, employees and others interested in communicating
with any of the other directors of the Company may do so by
writing to such director,
c/o Corporate
Secretary, Grubb & Ellis Company, 1551 North Tustin
Avenue, Suite 300, Santa Ana, California 92705.
Information
About Executive Officers
Gary Hunt has served as the Company’s Interim Chief
Executive Officer and President since July 11, 2008. For
information on Mr. Hunt see “Information about the
Directors” above. In addition to Mr. Hunt, the
following are the current executive officers of the Company:
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Andrea R. Biller
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59, has served as Executive Vice President, General Counsel and
Secretary of the Company since December 2007. She joined GERI
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in March 2003 as General Counsel and served as NNN’s
General Counsel, Executive Vice President and Secretary since
November 2006 and director since December 2007. Ms. Biller
also has served as Executive Vice President and Secretary of
Grubb & Ellis Healthcare REIT, Inc. since April 2006
and Secretary of Grubb & Ellis Apartment REIT, Inc.
since April 2009 and from December 2005 to February 2009.
Ms. Biller also has served as a director of
Grubb & Ellis Apartment REIT, Inc. since June 2008.
Ms. Biller served as Executive Vice President of
G REIT, Inc. from December 2005 to January 2008 and
Secretary of G REIT, Inc. from June 2004 to January 2008.
Ms. Biller also served as the Secretary of T REIT, Inc.
from May 2004 to July 2007. Ms. Biller served as an
Attorney at the Securities and Exchange Commission, Division of
Corporate Finance, in Washington D.C. from
1995-2000,
including two years as Special Counsel, and as a private
attorney specializing in corporate and securities law from
1990-1995
and
2000-2002.
Ms. Biller is licensed to practice law in California,
Virginia, and Washington, D.C.
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Jeffrey T. Hanson
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38, has served as Chief Investment Officer of the Company since
January 2008. He has served as Chief Investment Officer of NNN
since November and joined NNN in July 2006 as the President and
Chief Executive Officer of Realty. From December 1997 to July
2006, Mr. Hanson was a Senior Vice President with the Grubb
and Ellis Institutional Investment Group in Grubb &
Ellis’ Newport Beach office. Mr. Hanson served as a
real estate broker with CB Richard Ellis from 1996 to December
1997. Mr. Hanson formerly served as a member of the
Grubb & Ellis President’s Counsel and
Institutional Investment Group Board of Advisors.
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Stanley J. Olander, Jr.
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54, has served as an Executive Vice President —
Multifamily of the Company since December 2007. He has also
served as Chief Executive Officer and a director of
Grubb & Ellis Apartment REIT, Inc. and Chief Executive
Officer of Grubb & Ellis Apartment REIT Advisors, LLC
since December 2005. Mr. Olander has also served as
Grubb & Ellis Apartment REIT, Inc.’s Chairman of
the Board since December 2006 and has also served as President
of Grubb & Ellis Apartment REIT, Inc. and President of
Grubb & Ellis Apartment REIT Advisors, LLC since April
2007. Mr. Olander has also been a Managing Member of ROC
REIT Advisors, LLC since 2006 and a Managing Member of ROC
Realty Advisors since 2005. Additionally, since July 2007,
Mr. Olander has also served as Chief Executive Officer,
President and Chairman of the Board of Grubb & Ellis
Residential Management, Inc. He served as President and Chief
Financial Officer and a member of the board of directors of
Cornerstone Realty Income Trust, Inc. from 1996 until April
2005. Prior to the sale of Cornerstone Realty Income Trust, Inc.
in April 2005, the company’s shares were listed on the New
York Stock Exchange, it owned approximately 23,000 apartment
units in five states and had a total market capitalization of
approximately 40,000 apartment units.
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Richard W. Pehlke
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55, has served as the Executive Vice President and Chief
Financial Officer of the Company since February 2007. Prior to
joining the
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Company, Mr. Pehlke served as Executive Vice President and
Chief Financial Officer and a member of the board of directors
of Hudson Highland Group, a publicly held global professional
staffing and recruiting business, from 2003 to December 2005 and
served as a consultant during 2006. From 2001 to 2003,
Mr. Pehlke operated his own consulting business
specializing in financial strategy and leadership development.
In 2000, he was the Executive Vice President and Chief Financial
Officer of ONE, Inc. a privately held software implementation
business. Prior to 2000, Mr. Pehlke held senior financial
positions in the telecommunications, financial services and food
and consumer products industries.
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Jacob Van Berkel
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49, has served as Executive Vice President and Chief Operating
Officer of the Company since February 2008 and President, Real
Estate Services since May 2008. Mr. Van Berkel oversees
operations and business integration for Grubb & Ellis,
having joined NNN Realty Advisors in August 2007 to assist with
the merger of the two companies. He is responsible for the
strategic direction of all Grubb & Ellis’ human
resources, marketing and communications, research and other
day-to-day operational activities. He has 25 years of
experience, including more than four years at CB Richard Ellis
as senior vice president, human resources as well as in senior
global human resources, operations and sales positions with
First Data Corporation, Gateway Inc. and Western Digital.
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Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors,
executive officers and stockholders holding ten percent (10%) or
more of our voting securities (“Insiders”) to file
with the SEC reports showing their ownership and changes in
ownership of Company securities, and to send copies of these
filings to us. To our knowledge, based upon review of copies of
such reports furnished to us and upon written representations
that the Company has received to the effect that no other
reports were required during the year ended December 31,
2008, the Insiders complied with all Section 16(a) filing
requirements applicable to them, except as noted below.
On November 17, 2008, Rodger D. Young, a director of the
Company, purchased 14,000 shares of the Company’s
common stock on the open market. As a result of this
transaction, a Form 4 was due to be filed on
November 19, 2008 for Mr. Young, but was not filed
until November 21, 2008. In addition, on December 10,
2008, the Company awarded each of its outside directors 20,000
restricted shares of the Company’s common stock, pursuant
to the Company’s 2006 Omnibus Equity Plan which vest in
equal
33
1
/
3
portions on each of the first, second, and third anniversaries
of the grant date (December 10, 2008). As a result of this
award, a Form 4 was due to be filed on December 12,
2008 for each of the following directors: Glenn L. Carpenter,
Harold H. Greene, C. Michael Kojaian, Robert J. McLaughlin,
Devin I. Murphy, D. Fleet Wallace and Rodger D. Young. However,
the required Form 4s for each of the aforementioned outside
directors of the Company were not filed until December 16,
2008.
Code of
Ethics
The Company has adopted, and revised effective January 25,
2008, a code of business conduct and ethics (“Code of
Business Conduct and Ethics”) that applies to all of the
Company’s directors, officers, employees and independent
contractors, including the Company’s principal executive
officer, principal financial officer and controller and complies
with the requirements of the Sarbanes-Oxley Act of 2002 and the
NYSE listing requirements. The January 25, 2008 revision
was effected to make the Code of Business Conduct and Ethics
135
consistent with the amendment of even date to the Company’s
by-laws so as to provide that members of the board of directors
who are not an employee or executive officer of the Company
(“Non-Management Directors”) have the right to
directly or indirectly engage in the same or similar business
activities or lines of business as the Company, or any of its
subsidiaries, including those business activities or lines of
business deemed to be competing with the Company or any of its
subsidiaries. In the event that the Non-Management Director
acquires knowledge, other than as a result of his or her
position as a director of the Company, of a potential
transaction or matter that may be a corporate opportunity for
the Company, or any of its subsidiaries, such Non-Management
Director shall be entitled to offer such corporate opportunity
to the Company as such Non-Management Director deems appropriate
under the circumstances in their sole discretion.
The Company’s Code of Business Conduct and Ethics is
designed to deter wrongdoing, and to promote, among other
things, honest and ethical conduct, full, timely, accurate and
clear public disclosures, compliance with all applicable laws,
rules and regulations, the prompt internal reporting of
violations of the code, and accountability. In addition, the
Company maintains an Ethics Hotline with an outside service
provider in order to assure compliance with the so-called
“whistle blower” provisions of the Sarbanes Oxley Act
of 2002. This toll-free hotline and confidential web-site
provide officers, employees and independent contractors with a
means by which issues can be communicated to management on a
confidential basis. A copy of the Company’s Code of
Business Conduct and Ethics is available on the company’s
website at www.grubb-ellis.com and upon request and without
charge by contacting Investor Relations, Grubb & Ellis
Company, 1551 North Tustin Avenue, Suite 300, Santa Ana,
California 92705.
Change to
Procedures for Recommending Nominees for Director
As discussed in the Company’s
Form 8-K
filed on February 9, 2009, on February 5, 2009 the
Board unanimously amended the Company’s Amended and
Restated Bylaws (the “Bylaws”), by, among other
things, adding a new Section 2.10 to the Bylaws and
amending Section 3.03.
Section 2.10 requires a stockholder to give notice in
writing to the Company no later than 90 days prior to the
one year anniversary of the preceding year’s annual meeting
for nominations for election to the Board and for any other
proposals such stockholder wishes to bring before a
stockholders’ meeting other than director nominations.
Section 2.10 requires that the written notice set forth
(1) information as to the nominees for election to the
Board, (2) information as to the stockholder who delivered
the notice and the beneficial owner, if any, on whose behalf the
nomination or proposal is made, and (3) information as to
any other business that a stockholder proposes to bring before a
meeting, and requires that any proposed business constitute a
proper matter for stockholder action.
Section 3.03 of the Bylaws was amended to provide that any
nominations for election to the Board shall be made pursuant to
Section 2.10 of the Bylaws. Section 3.03 of the Bylaws
previously provided for written notice to be provided to the
Company for nominations for election to the Board no later than
14 days prior to a stockholders’ meeting (unless the
stockholders have been given less than 21 days’ notice
of the meeting in which case written notice is to be delivered
or mailed to the Company no later than the close of the seventh
day after notice of the meeting was mailed to stockholders).
Section 3.03 also previously set forth the information that
was required to be included in the written notice.
Corporate
Governance Guidelines
Effective July 6, 2006, the Board adopted corporate
governance guidelines to assist the Board in the performance of
its duties and the exercise of its responsibilities. The
Company’s Corporate Governance Guidelines are available on
the Company’s website at www.grubb-ellis.com and printed
copies may be obtained upon request by contacting Investor
Relations, Grubb & Ellis Company, 1551 North Tustin
Avenue, Suite 300, Santa Ana, California 92705.
Audit
Committee
The Audit Committee of the Board is a separately-designated
standing audit committee established in accordance with
Section 3(a)(58)(A) of the Securities Exchange Act of 1934
as amended (the “Exchange
136
Act”) and the rules thereunder. The Audit Committee
operates under a written charter adopted by the Board of
Directors. The charter of the Audit Committee was last revised
effective January 28, 2008 and is available on the
Company’s website at www.grubb-ellis.com and printed copies
of which may be obtained upon request by contacting Investor
Relations, Grubb & Ellis Company, 1551 North Tustin
Avenue, Suite 300, Santa Ana, California 92705. The current
members of the Audit Committee are Robert McLaughlin, Chair,
Harold H. Greene and D. Fleet Wallace. The Board has determined
that the members of the Audit Committee are independent under
the NYSE listing requirements and the Exchange Act and the rules
thereunder, and that Mr. McLaughlin is an audit committee
financial expert in accordance with rules established by the SEC.
Corporate
Governance and Nominating Committee
The functions of the Company’s Corporate Governance and
Nominating Committee are to assist the Board with respect to:
(i) director qualification, identification, nomination,
independence and evaluation; (ii) committee structure,
composition, leadership and evaluation; (iii) succession
planning for the CEO and other senior executives; and
(iv) corporate governance matters. The Corporate Governance
and Nominating Committee operates under a written charter
adopted by the Board, which is available on the Company’s
website at www.grubb-ellis.com and printed copies of which may
be obtained upon request by contacting Investor Relations,
Grubb & Ellis Company, 1551 North Tustin Avenue,
Suite 300, Santa Ana, California 92705. The members of the
Corporate Governance and Nominating Committee for the year ended
December 31, 2008, were Rodger D. Young, Chair, Harold H.
Greene and C. Michael Kojaian. On February 9, 2009, Devin
I. Murphy was appointed to serve as a member of the Corporate
Governance and Nominating Committee and Mr. Kojaian
resigned as a member of the Corporate Governance and Nominating
Committee. The Board has determined that Messrs. Young,
Greene, Murphy and Kojaian are independent under the NYSE
listing requirements and the Exchange Act and the rules
thereunder.
Certifications
On December 12, 2008, the Company’s General Counsel
certified to the NYSE that she was not aware of any violation by
the Company of the corporate governance listing standards of the
NYSE. The Company has filed with the SEC, as an exhibit to this
Annual Report, the certifications required by Section 302
of the Sarbanes-Oxley Act of 2002.
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Item 11.
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Executive
Compensation.
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Compensation
Discussion and Analysis
This compensation discussion and analysis describes the
governance and oversight of the Company’s executive
compensation programs and the material elements of compensation
paid or awarded to those who served as the Company’s
principal executive officer, the Company’s principal
financial officer, and the three other most highly compensated
executive officers of the Company during the period from
January 1, 2008 through December 31, 2008
(collectively, the “named executive officers” or
“NEOs” and individually, a “named executive
officer” or “NEO”). The specific amounts and
material terms of such compensation paid, payable or awarded are
disclosed in the tables and narrative included in this section
of this Annual Report.
The compensation disclosure provided with respect to the
Company’s NEOs and directors with respect to calendar year
2008 represent their full year’s compensation for such
year, incurred by the Company with respect to calendar year
2008. The compensation disclosure provided with respect to the
Company’s NEOs and directors with respect to calendar years
2007 and 2006 represent their full year’s compensation for
each of those years, incurred by either NNN or the Company, as
applicable, with respect to calendar year 2006, and incurred by
either NNN or the Company, as applicable with respect to the
entire 2007 calendar year, except for the period
December 8, 2007 through December 31, 2007, during
this three (3) week stub period the Company incurred the
entire compensation to all NEOs and directors.
137
Compensation
Committee Overview
The Board of Directors has delegated to the Compensation
Committee oversight responsibilities for the Company’s
executive compensation programs.
The Compensation Committee determines the policy and strategies
of the Company with respect to executive compensation taking
into account certain factors that the Compensation Committee
deems appropriate such as (a) compensation elements that
will enable the Company to attract and retain executive officers
who are in a position to achieve the strategic goals of the
Company which are in turn designed to enhance stockholder value,
and (b) the Company’s ability to compensate its
executives in relation to its profitability and liquidity.
The Compensation Committee approves, subject to further, final
approval by the full Board of Directors, (a) all
compensation arrangements and terms of employment, and any
material changes to the compensation arrangements or terms of
employment, for the NEOs and certain other key employees
(including employment agreements and severance arrangements),
and (b) the establishment of, and changes to, equity-based
awards programs. In addition, each calendar year, the
Compensation Committee approves the annual incentive goals and
objectives of each NEO and certain other key employees,
evaluates the performance of each NEO and certain other key
employees against the approved performance goals and objectives
applicable to him or her, determines whether and to what extent
any incentive awards have been earned by each NEO, and makes
recommendations to the Company’s Board of Directors
regarding the approval of incentive awards.
Consistent with the Compensation Committee’s objectives,
the Company’s overall compensation program is structured to
attract, motivate and retain highly qualified executives by
paying them competitively and tying their compensation to the
Company’s success as a whole and their contribution to the
Company’s success.
The Compensation Committee also provides general oversight of
the Company’s employee benefit and retirement plans.
The Compensation Committee operates under a written charter
adopted by the full Board and revised effective
December 10, 2007, which is available on the Company’s
website at www.grubb-ellis.com. Printed copies may be obtained
upon request by contacting Investor Relations, Grubb &
Ellis Company, 1551 North Tustin Avenue, Suite 300, Santa
Ana, California 92705.
Use of
Consultants
Under its charter, the Compensation Committee has the power to
select, retain, compensate and terminate any compensation
consultant it determines is useful in the fulfillment of the
Committee’s responsibilities. The Committee also has the
authority to seek advice from internal or external legal,
accounting or other advisors.
In the fourth quarter of 2007, and in anticipation of the
closing of the Merger, the Company engaged the services of FPL
Associates Compensation, an outside consulting firm, to provide
a comprehensive compensation study of the merged companies for
the Compensation Committee and the Board of Directors with
respect to an analysis of, and proposed designs and
recommendations for, compensation arrangements primarily for the
NEO’s, other service executives, directors, brokers and the
board.
The Company has previously engaged the services of Ferguson
Partners, an affiliate of FPL Associates Compensation. In
February 2007, Ferguson Partners managed the search for the
Company’s Chief Financial Officer which resulted in the
hiring of the Company’s Chief Financial Officer, Richard W.
Pehlke, in February 2007. In conjunction with the search,
Ferguson Partners advised the Committee with respect to
Mr. Pehlke’s compensation arrangements and terms of
employment. Similarly, the Compensation Committee has used the
services of Ferguson Partners in the past in connection with the
search and establishment of the compensation arrangements and
terms of employment for the other executive officers. In each
instance, and in connection with the study conducted by its
affiliate, FPL Associates Compensation in the fourth quarter of
2007, Ferguson Partners and FPL Associates Compensation provided
to the Compensation Committee and the board with information
regarding comparative market compensation arrangements.
138
In March 2008, the Company engaged Christenson Advisors, LLC to
provide an array of compensation and human resource related
services across the Company.
The Company engaged the services of Equinox Partners in July
2008 to manage the search for the Company’s Chief Executive
Officer following Scott D. Peters’ resignation in July
2008. The search process was impeded, however, in the fourth
quarter of 2008 by the proxy contest in connection the
Company’s Annual Stockholders’ Meeting held in
December in which the Company ultimately prevailed. The Company
remains actively engaged in its search for a permanent Chief
Executive Officer.
Role of
Executives in Establishing Compensation
In advance of each Compensation Committee meeting, the Chief
Executive Officer and the Chief Operating Officer work with the
Compensation Committee Chairman to set the meeting agenda. The
Compensation Committee periodically consults with the Chief
Executive Officer of the Company with respect to the hiring and
the compensation of the other NEOs and certain other key
employees. Members of management, typically the Chief Executive
Officer, the Chief Financial Officer and General Counsel,
regularly participate in non-executive portions of Compensation
Committee meetings.
Certain
Compensation Committee Activity
The Compensation Committee met ten times during the year ended
December 31, 2008 and in fulfillment of its obligations,
among other things, determined on December 3, 2008, based
upon a recommendation of Christenson Advisors, LLC, that the
cash retainer for independent, outside directors of $50,000 per
annum would remain the same as would the Board Meeting and
Committee Meeting fees of $1,500 per meeting. Similarly, the
Compensation Committee determined that the Audit Chair retainer,
the Compensation Chair retainer and the Governance Chair
retainer would remain constant at $15,000, $10,000 and $7,500
per annum, respectively. The Compensation Committee also
decided, based upon a recommendation of Christenson Advisors,
LLC, that the $60,000 annual equity award for independent,
outside directors, with respect to 2009 only, be capped at
20,000 shares due to decline in the stock market in 2008,
which adversely affected the price of the Company’s shares.
Compensation
Philosophy, Goals and Objectives
As a commercial real estate services company, the Company is a
people oriented business which strives to create an environment
that supports its employees in order to achieve its growth
strategy and other goals established by the board so as to
increase stockholder value over the long term.
The primary goals and objectives of the Company’s
compensation programs are to:
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•
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Compensate management, key employees, independent contractors
and consultants on a competitive basis in order to attract,
motivate and retain high quality, high performance individuals
who will achieve the Company’s short-term and long term
goals;
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•
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Motivate and reward executive officers whose knowledge, skill
and performance are critical to the Company’s success;
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Align the interests of the Company’s executive officers and
stockholders through equity-based long-term incentive awards
that motivate executive officers to increase stockholder value
and reward executive officers when stockholder value
increases; and
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•
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Ensure fairness among the executive management team by
recognizing contributions each executive officer makes to the
Company’s success.
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The Compensation Committee established these goals in order to
enhance stockholder value.
The Company believes that it is important for variable
compensation, i.e. where an NEO has a significant portion of his
or her total “bonus compensation” at risk, to
constitute a significant portion of total compensation and that
such variable compensation be designed so as to reward effective
team work (through
139
the achievement of Company-wide financial goals) as well as the
achievement of individual goals (through the achievement of
business unit/functional goals and individual performance goals
and objectives). The Company believes that this dual approach
best aligns the individual NEO’s interest with the
interests of the stockholders.
Compensation
During Term of Employment
The Company’s compensation program for NEOs is currently
comprised of four key elements — base salary, annual
bonus incentive compensation, stock-based compensation and a
retirement plan — that are intended to balance the
goals of achieving both short-term and long-term results which
the Company believes will effectively align management with
stockholders.
Base
Salary
Amounts paid to NEOs as base salaries are included in the column
captioned “Salary” in the Summary Compensation Table
below. The base salary of each NEO is determined based upon
their position, responsibility, qualifications and experience,
and reflects consideration of both external comparison to
available market data and internal comparison to other executive
officers.
The base salary for an NEO is typically established at the time
of the negotiation of his or her respective employment
agreement. In the case of each of the Company’s General
Counsel Executive Vice President and Corporate Secretary, Andrea
R. Biller, her compensation has not been adjusted since the
inception of her current employment agreement. In the case of
the Company’s Chief Financial Officer and Executive Vice
President, Richard W. Pehlke, his base salary was increased on
January 1, 2008 from $350,000 to $375,000. Chief Investment
Officer, Jeffrey T. Hanson’s base salary was increased on
August 1, 2008 from $350,000 to $450,000. As a result of
Jacob Van Berkel being promoted to Chief Operating Officer and
Executive Vice President on March 1, 2008, Mr. Van
Berkel’s base salary was increased from $280,000 to
$400,000.
The base salary component is designed to constitute between 20%
and 50% of total annual compensation a target for the NEOs based
upon each individual’s position in the organization and the
Compensation Committee’s determination of each
position’s ability to directly impact the Company’s
financial results.
Annual
Bonus Incentive Compensation
Amounts paid to NEOs under the annual bonus plan are included in
the column captioned “Bonus” in the Summary
Compensation Table below. In addition to earning base salaries,
each of the Company’s NEOs is eligible to receive an annual
cash bonus, the target amount of which is set by the individual
employment agreement with each NEO. The annual bonus incentive
of each NEO is determined based upon his or her position,
responsibility, qualifications and experience, and reflects
consideration of both external comparison to available market
data and internal comparison to other executive officers.
Jeffrey T. Hanson, Chief Investment Officer, had his annual
bonus incentive target increase from 100% to 150% effective
August 1, 2008. Richard W. Pehlke, Chief Financial Officer
and Executive Vice President, had his annual bonus incentive
target increase from 50% to 150% effective January 1, 2008.
In 2007, the bonus plan with respect to those NEOs who were
executive officers of the legacy Grubb & Ellis Company
had a formulaic component based on achievement of specified
Company earnings before interest and taxes (“EBIT”)
and business unit/function EBIT goals and also a component based
on the achievement of personal goals and objectives designed to
enhance the overall performance of the Company. The bonus plan
of those NEOs, who were executive officers of legacy NNN, while
taking into account NNN’s earnings before interest, taxes,
depreciation and amortization (“EBITDA”), as well as
personal goals and objectives, was not formulaic, but rather,
more discretionary in nature. Beginning in 2008, the bonus plan
for all NEOs has been standardized and will be tied to the
specified targets based on the Company’s EBITDA as
discussed below.
The annual cash bonus plan target for NEOs is between 50% and
200% of base salary and is designed to constitute from 20% to
50% of an NEO’s total annual target compensation. The bonus
plan component is
140
based on each individual’s role and responsibilities in the
company and the Committee’s determination of each
NEO’s ability to directly impact the Company’s
financial results.
The Compensation Committee reviews each NEO’s bonus plan
annually. Annual Company EBITDA targets are determined in
connection with the annual calendar-year based budget process. A
minimum threshold of 80% of Company EBITDA must be achieved
before any payment is awarded with respect to this component of
bonus compensation. Fiscal year 2008 bonus targets were set at
100% of budgeted EBITDA. At the end of each calendar year, the
Chief Executive Officer reviews the performance of each of the
other NEOs and certain other key employees against the financial
objectives and against their personal goals and objectives and
makes recommendations to the Compensation Committee for payments
on the annual cash bonus plan. The Compensation Committee
reviews the recommendations and forwards these to the Board for
final approval of payments under the plan.
For fiscal year 2008, no annual incentive bonus plan payments
were made to the NEOs.
During 2007, the Compensation Committee revised the calendar
2007 bonus plans for the Grubb & Ellis legacy NEOs to
increase the percentage of bonus tied to the Company’s EBIT
performance in order to more closely link the annual bonus to
the Company’s overall financial performance. The chart
directly below captioned “Annual Bonus Incentive
Compensation” provides the details of the calendar 2006,
calendar 2007 and calendar 2008 plans.
In addition to the annual bonus program, from time to time the
Board may establish one-time cash bonuses related to the
satisfactory performance of identified special projects. Upon
the closing of the Merger, Scott D. Peters, the Company’s
then Chief Executive Officer and President received (i) a
special one-time transaction success fee of $1,000,000,
(ii) 528,000 shares of common stock of the Company
from Anthony W. Thompson, the former Chairman of the Board of
the Company, and (iii) the right to receive up to
$1,000,000 for a second residence in California, which right
Mr. Peters irrevocably waived in January
,
2008. The
528,000 shares of common stock received from Anthony W.
Thompson were forfeited by Mr. Peters upon his departure
from the Company in July 2008 and returned to Mr. Thompson.
141
Annual
Bonus Incentive Compensation
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Bonus Target
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as a
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Business
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Calendar
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% of Base
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Company
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Unit/Function
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Personal Goals
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Year
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Salary
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Performance(5)
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Performance(5)
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and Objectives
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Gary H. Hunt(1)
Current Interim Chief
Executive Officer
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2008
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—
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—
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—
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—
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Scott D. Peters(2)
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2008
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200
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%
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70
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%
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—
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30
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%
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Former Chief Executive Officer
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2007
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200
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%
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—
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—
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—
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2006
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—
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—
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—
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—
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Richard W. Pehlke
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2008
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150
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%
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70
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%
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—
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30
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%
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Chief Financial Officer
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2007
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50
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%(3)
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90
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%
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10
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%
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Andrea R. Biller
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2008
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150
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%
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70
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%
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—
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30
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%
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Executive Vice President,
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2007
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150
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%
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—
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—
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—
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General Counsel and Corporate Secretary
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2006
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—
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—
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—
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—
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Jeffrey T. Hanson
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2008
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150
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%
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40
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%
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40
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%
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20
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%
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Chief Investment Officer
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2007
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100
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%
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—
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—
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—
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2006
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—
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—
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—
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—
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Jacob Van Berkel(4)
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2008
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100
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%
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70
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%
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—
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30
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%
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Chief Operating Officer and Executive Vice President
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2007
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100
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%
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—
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—
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—
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(1)
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Mr. Hunt has served as the Interim Chief Executive Officer
since July 2008.
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(2)
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Mr. Peters served as the Chief Executive Officer until July
2008.
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(3)
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Mr. Pehlke had a minimum guaranteed bonus of $125,000 for
calendar 2007, prorated based on his hire date in February 2007
(equal to $110,577).
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(4)
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Mr. Van Berkel joined the Company in August 2007.
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(5)
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2008 bonuses calculated based on Company EBITDA and 2007 bonuses
calculated based on Company EBIT.
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Stock-Based
Compensation and Incentives
The compensation associated with stock awards granted to NEOs is
included in the Summary Compensation Table and other tables
below (including the charts that show outstanding equity
awards). Except for the January 24, 2008 grant of 75,000
and 80,000 restricted shares of common stock to Richard W.
Pehlke and Jacob Van Berkel respectively, and the
December 3, 2008 grant of 250,000 restricted shares of
common stock to each of Richard W. Pehlke and Jacob Van Berkel,
no other grants were made to NEOs during the year ended
December 31, 2008.
In February of 2009, each of Messrs. Pehlke and Van Berkel,
on their own initiative, voluntarily returned an aggregate of
131,000 and 130,000 restricted shares, respectively, to the
Company for re-allocation of such restricted shares, on the same
terms and conditions, to various employees in their respective
business units.
The equity grants are intended to align management with the
long-term interests of the Company’s stockholders and to
have a retentive effect upon the Company’s NEOs. The
Compensation Committee and the Board of Directors approve all
equity grants to NEOs.
142
Profit
Sharing Plan
NNN has established a profit sharing plan for its employees,
pursuant to which NNN provides matching contributions.
Generally, all employees are eligible to participate following
one year of service with NNN. Matching contributions are made in
NNN’s sole discretion. Participants’ interests in
their respective contribution account vests over 4 years,
with 0.0% vested in the first year of service, 25.0% in the
second year, 50.0% in the third year and 100.0% in the fourth
year.
Retirement
Plans
The amounts paid to the Company’s NEOs under the retirement
plan are included in the column captioned “All Other
Compensation” in the Summary Compensation Table directly
below. The Company has established and maintains a retirement
savings plan under Section 401(k) of the Internal Revenue
Code of 1986 (the “Code”) to cover the Company’s
eligible employees including the Company’s NEOs. The Code
allows eligible employees to defer a portion of their
compensation, within prescribed limits, on a tax deferred basis
through contributions to the Company’s 401(k) plan. The
Company’s 401(k) plan is intended to constitute a qualified
plan under Section 401(k) of the Code and its associated
trust is intended to be exempt from federal income taxation
under Section 501(a) of the Code. The Company makes Company
matching contributions to the 401(k) plan for the benefit of the
Company’s employees including the Company’s NEOs. In
April 2009, the Company’s matching contributions to the
401(k) plan were suspended.
Personal
Benefits and Perquisites
The amounts paid to the Company’s NEOs for personal
benefits and perquisites are included in the column captioned
“All Other Compensation” in the Summary Compensation
Table below. Perquisites to which all of the Company’s NEOs
are entitled include health, dental, life insurance, long-term
disability, profit-sharing and a 401(k) savings plan, and 100%
of the premium cost of health insurance for certain NEOs is paid
for by the Company. Upon the closing of the Merger, Scott D.
Peters, the Company’s then Chief Executive Officer and
President had the right to receive up to $1,000,000 for a second
residence in California, which right Mr. Peters irrevocably
waived in January, 2008.
Long Term
Incentive Plan
On May 1, 2008, the Compensation Committee adopted the Long
Term Incentive Plan (“LTIP”) of Grubb &
Ellis Company, effective January 1, 2008, designed to
reward the efforts of the executive officers of the Company to
successfully attain the Company’s long-term goals by
directly tying the executive officers’ compensation to the
Company and individual results. During fiscal year 2008, no
named executive officer received an award under the LTIP.
The LTIP is divided into two components: (i) annual
long-term incentive target which comprises 50% of the overall
target, and (ii) multi-year annual incentive target which
comprises the other 50% .
Awards under the LTIP are earned by performance during a fiscal
year and by remaining employed by the Company through the date
awards are granted, usually in March for annual long-term
incentive awards or though the conclusion of the three-year
performance period for multi-year long term incentive awards
(“Grant Date”).
All awards are paid in shares of the Company’s common
stock, subject to the rights of the Company to distribute cash
or other non-equity forms of compensation in lieu of the
Company’s common stock.
The annual long-term incentive target is broken down into three
components: (i) absolute shareholder return (30%);
corporate EBITDA (35%); and individual performance priorities
(35%). Vesting of awards upon achievement of the annual
long-term incentive targets is as follows: (i) 33.33% of
the restricted shares of the Company’s common stock will
vest on the Grant Date; (ii) 33.33% will vest in the first
anniversary of the Grant Date; and (iii) the remaining
33.33% will vest on the second anniversary of the Grant Date.
143
The multi-year long-term incentive target is broken down into
two components: (i) absolute shareholder return (50%); and
relative total shareholder return (50%). Vesting of wards upon
achievement of the multi-year long-term incentive awards is as
follows: (i) 50% of the restricted shares of the
Company’s common stock will be paid on the Grant Date; and
(ii) 50% on the first year anniversary of the Grant Date.
Summary
Compensation Table
The following table sets forth certain information with respect
to compensation for the calendar years ended December 31,
2008, 2007 and 2006 earned by or paid to the Company’s
named executive officers for such full calendar years (by either
NNN or legacy Grubb & Ellis, as applicable, prior to
the Merger, and by the Company subsequent to the Merger).
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Change
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in
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Pension
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Non-
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Value
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Equity
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And
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Incentive
|
|
Nonqualified
|
|
|
|
|
Name and
|
|
Year
|
|
|
|
|
|
Stock
|
|
Option
|
|
Plan
|
|
Deferred
|
|
All other
|
|
|
Principal
|
|
Ended
|
|
Salary
|
|
Bonus
|
|
Awards
|
|
Awards
|
|
Compensation
|
|
Compensation
|
|
Compensation
|
|
|
|
Position
|
|
December
|
|
($)
|
|
($)
|
|
($)(11)
|
|
($)(12)
|
|
($)
|
|
Earnings
|
|
($)(8)(13)(14)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gary H. Hunt(1)
|
|
|
2008
|
|
|
$
|
300,000
|
(5)
|
|
$
|
—
|
|
|
$
|
59,088
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
359,088
|
|
|
Interim Chief
Executive
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott D. Peters(2)
|
|
|
2008
|
|
|
|
401,889
|
|
|
|
—
|
|
|
|
704,841
|
|
|
|
68,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
528,310
|
|
|
|
1,703,540
|
|
|
Former Chief
|
|
|
2007
|
|
|
|
587,808
|
|
|
|
1,825,800
|
|
|
|
2,610,555
|
|
|
|
91,250
|
|
|
|
—
|
|
|
|
—
|
|
|
|
655,621
|
|
|
|
5,771,034
|
|
|
Executive
Officer
|
|
|
2006
|
|
|
|
611,250
|
|
|
|
1,125,900
|
(7)
|
|
|
1,834,669
|
|
|
|
81,345
|
|
|
|
|
|
|
|
|
|
|
|
977,260
|
|
|
|
4,630,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard W. Pehlke(3)
|
|
|
2008
|
|
|
|
375,000
|
|
|
|
—
|
|
|
|
112,951
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
487,951
|
|
|
Executive Vice
President, and
Chief Financial
Officer
|
|
|
2007
|
|
|
|
299,500
|
|
|
|
200,000
|
|
|
|
49,770
|
|
|
|
198,808
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
748,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrea R. Biller
|
|
|
2008
|
|
|
|
400,000
|
|
|
|
—
|
|
|
|
100,106
|
|
|
|
42,803
|
|
|
|
—
|
|
|
|
—
|
|
|
|
688,565
|
|
|
|
1,231,474
|
|
|
Executive Vice
|
|
|
2007
|
|
|
|
400,000
|
|
|
|
451,000
|
|
|
|
1,286,413
|
|
|
|
73,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
592,134
|
|
|
|
2,802,547
|
|
|
President, General
Counsel and Corporate
Secretary
|
|
|
2006
|
|
|
|
391,674
|
|
|
|
501,200
|
(7)
|
|
|
411,667
|
|
|
|
65,076
|
|
|
|
—
|
|
|
|
—
|
|
|
|
72,834
|
|
|
|
1,442,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey T. Hanson
|
|
|
2008
|
|
|
|
391,667
|
|
|
|
250,000
|
(10)
|
|
|
2,900,777
|
|
|
|
38,168
|
|
|
|
—
|
|
|
|
—
|
|
|
|
556,727
|
|
|
|
4,137,339
|
|
|
Chief
|
|
|
2007
|
|
|
|
350,000
|
|
|
|
500,350
|
(10)
|
|
|
3,410,352
|
|
|
|
45,625
|
|
|
|
—
|
|
|
|
—
|
|
|
|
425,106
|
|
|
|
4,731,433
|
|
|
Investment
Officer
|
|
|
2006
|
|
|
|
117,628
|
(6)
|
|
|
1,212,180
|
(9)
|
|
|
726,079
|
|
|
|
40,673
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,083
|
|
|
|
2,097,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jacob Van Berkel(4)
|
|
|
2008
|
|
|
|
380,000
|
|
|
|
—
|
|
|
|
149,203
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,816
|
|
|
|
534,019
|
|
|
Chief Operating
Officer and
Executive Vice
President
|
|
|
2007
|
|
|
|
115,096
|
|
|
|
225,000
|
|
|
|
2,238
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
30
|
|
|
|
342,364
|
|
|
|
|
|
|
(1)
|
|
Mr. Hunt has served as the Interim Chief Executive Officer
since July 2008.
|
|
|
|
(2)
|
|
Mr. Peters served as the Chief Executive Officer from
December 2007 until July 2008.
|
|
|
|
(3)
|
|
Mr. Pehlke has served as the Chief Financial Officer since
February 2007.
|
|
|
|
(4)
|
|
Mr. Van Berkel joined the Company in August 2007.
|
|
|
|
(5)
|
|
Amounts paid to Mr. Hunt represent a consulting fee as
Mr. Hunt consults as the Interim Chief Executive Officer
and is not an employee of the Company.
|
|
|
|
(6)
|
|
Mr. Hanson’s annual salary for fiscal 2006 was
$250,000. The $117,628 represents amounts paid or to be paid to
Mr. Hanson from July 29, 2006 (the date
Mr. Hanson joined GERI) through December 31, 2006.
|
|
|
|
(7)
|
|
Bonus amounts include bonuses of $100,000 earned in fiscal 2006
to each of Mr. Peters and Ms. Biller upon the receipt
by NNN from G REIT, a public non-traded REIT that NNN
sponsored, of net
|
144
|
|
|
|
|
|
|
commissions aggregating $5 million or more from the sale of
G REIT properties pursuant to a plan of liquidation
approved by G REIT stockholders.
|
|
|
|
(8)
|
|
All other compensation also includes: (i) cash
distributions based on membership interests of $85,303, $159,418
and $50,000 earned by Mr. Peters and $121,804, $159,418 and
$50,000 earned by Ms. Biller from Grubb & Ellis
Apartment Management, LLC for each of the calendar years ended
December 31, 2008, 2007 and 2006, respectively; and
(ii) cash distributions based on membership interests of
$386,700, $413,546 and $0 earned by Mr. Peters and
$547,519, $413,546 and $0 earned by each of Mr. Hanson and
Ms. Biller from Grubb & Ellis Healthcare
Management, LLC for each of the calendar years ended
December 31, 2008, 2007 and 2006, respectively.
|
|
|
|
(9)
|
|
Mr. Hanson was appointed GERI’s Managing Director,
Real Estate on July 29, 2006. His bonus amount included a
$750,000 sign-on bonus that was paid in September 2006. Amount
also included a special bonus paid to Mr. Hanson pursuant
to his employment agreement for being the procuring cause of at
least $25 million in equity from new sources, which equity
was received by GERI during the fiscal year, for real estate
investments sourced by GERI.
|
|
|
|
(10)
|
|
Amount includes a special bonus of $250,000. The 2008 special
bonus has not yet been paid.
|
|
|
|
(11)
|
|
The amounts shown are the amounts of compensation cost related
to the grants of restricted stock, as well as the compensation
expense associated with the accelerated vesting of the
restricted stock at the Merger date, as described in Statement
of Financial Accounting Standards No. 123R
Share-Based
Payment
(“SFAS No. 123R”), utilizing the
assumptions discussed in Note 23 to the consolidated
financial statements included in Item 8 of this Annual
Report.
|
|
|
|
(12)
|
|
The amounts shown are the amounts of compensation cost related
to the grants of stock options, as well as compensation expense
associated with the accelerated vesting of the stock options at
the Merger date, as described in SFAS No. 123R,
utilizing the assumptions discussed in Note 23 to the
consolidated financial statements included in Item 8 of
this Annual Report.
|
|
|
|
(13)
|
|
The amounts shown include the Company’s incremental cost
for the provision to the named executive officers of certain
specified perquisites in fiscal 2008, 2007 and 2006, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Gross
|
|
|
Medical &
|
|
|
|
|
|
|
|
|
|
|
Living
|
|
|
Travel
|
|
|
Up
|
|
|
Dental
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
Expenses
|
|
|
Payment
|
|
|
Premiums
|
|
|
Total
|
|
|
Named Executive
Officer
|
|
Year
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
|
|
Gary H. Hunt
|
|
|
2008
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott D. Peters
|
|
|
2008
|
|
|
|
15,871
|
|
|
|
15,209
|
|
|
|
—
|
|
|
|
7,161
|
|
|
|
38,241
|
|
|
|
|
|
2007
|
|
|
|
27,314
|
|
|
|
29,573
|
|
|
|
—
|
|
|
|
8,340
|
|
|
|
65,227
|
|
|
|
|
|
2006
|
|
|
|
24,557
|
|
|
|
31,376
|
|
|
|
853,668
|
|
|
|
1,043
|
|
|
|
910,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard W. Pehlke
|
|
|
2008
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,287
|
|
|
|
7,287
|
|
|
|
|
|
2007
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrea R. Biller
|
|
|
2008
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,621
|
|
|
|
4,621
|
|
|
|
|
|
2007
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,740
|
|
|
|
1,740
|
|
|
|
|
|
2006
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
218
|
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey T. Hanson
|
|
|
2008
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
13,179
|
|
|
|
13,179
|
|
|
|
|
|
2007
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,340
|
|
|
|
8,340
|
|
|
|
|
|
2006
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,043
|
|
|
|
1,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jacob Van Berkel
|
|
|
2008
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
2007
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
145
|
|
|
|
|
(14)
|
|
The amounts shown also include the following 401(k) matching
contributions made by the Company, income attributable to life
insurance coverage and contributions to the profit-sharing plan
in fiscal 2008, 2007 and 2006, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit-Sharing
|
|
|
|
|
|
|
|
401(k) Plan
|
|
Life
|
|
Plan
|
|
|
|
|
|
|
|
Company
|
|
Insurance
|
|
Company
|
|
|
|
|
|
|
|
Contributions
|
|
Coverage
|
|
Contributions
|
|
Total
|
|
Named Executive
Officer
|
|
Year
|
|
($)
|
|
($)
|
|
($)
|
|
($)
|
|
|
|
Gary H. Hunt
|
|
|
2008
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott D. Peters
|
|
|
2008
|
|
|
|
4,600
|
|
|
|
374
|
|
|
|
—
|
|
|
|
4,974
|
|
|
|
|
|
2007
|
|
|
|
3,100
|
|
|
|
120
|
|
|
|
14,210
|
|
|
|
17,430
|
|
|
|
|
|
2006
|
|
|
|
—
|
|
|
|
116
|
|
|
|
16,500
|
|
|
|
16,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard W. Pehlke
|
|
|
2008
|
|
|
|
—
|
|
|
|
1,290
|
|
|
|
—
|
|
|
|
1,290
|
|
|
|
|
|
2007
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrea R. Biller
|
|
|
2008
|
|
|
|
—
|
|
|
|
1,290
|
|
|
|
—
|
|
|
|
1,290
|
|
|
|
|
|
2007
|
|
|
|
3,100
|
|
|
|
120
|
|
|
|
14,210
|
|
|
|
17,430
|
|
|
|
|
|
2006
|
|
|
|
6,000
|
|
|
|
116
|
|
|
|
16,500
|
|
|
|
22,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey T. Hanson
|
|
|
2008
|
|
|
|
—
|
|
|
|
270
|
|
|
|
—
|
|
|
|
270
|
|
|
|
|
|
2007
|
|
|
|
3,100
|
|
|
|
120
|
|
|
|
—
|
|
|
|
3,220
|
|
|
|
|
|
2006
|
|
|
|
—
|
|
|
|
40
|
|
|
|
—
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jacob Van Berkel
|
|
|
2008
|
|
|
|
4,600
|
|
|
|
450
|
|
|
|
—
|
|
|
|
5,050
|
|
|
|
|
|
2007
|
|
|
|
—
|
|
|
|
30
|
|
|
|
—
|
|
|
|
30
|
|
Grants of
Plan-Based Awards
The following table sets forth information regarding the grants
of plan-based awards made to its NEOs for the fiscal year ended
December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
All Other
|
|
|
|
|
|
|
|
|
|
Stock
|
|
Option
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
Awards:
|
|
Exercise or
|
|
Grant Date
|
|
|
|
|
|
Number of
|
|
Number of
|
|
Base Price
|
|
Fair
|
|
|
|
|
|
Shares of
|
|
Securities
|
|
of Option
|
|
Value of Stock
|
|
|
|
Grant
|
|
Stock or
|
|
Underlying
|
|
Awards
|
|
and Option
|
|
Name
|
|
Date
|
|
Units
|
|
Options(1)
|
|
($/Share)
|
|
Awards($)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gary H. Hunt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott D. Peters
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard W. Pehlke
|
|
|
01/24/08
|
|
|
|
75,000
|
(2)
|
|
|
—
|
|
|
|
4.41
|
|
|
|
330,750
|
|
|
|
|
|
12/03/08
|
|
|
|
250,000
|
(2)
|
|
|
|
|
|
|
1.26
|
|
|
|
315,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrea R. Biller
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey T. Hanson
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jacob Van Berkel
|
|
|
01/24/08
|
|
|
|
80,000
|
(2)
|
|
|
—
|
|
|
|
4.41
|
|
|
|
352,800
|
|
|
|
|
|
12/03/08
|
|
|
|
250,000
|
(2)
|
|
|
|
|
|
|
1.26
|
|
|
|
315,000
|
|
146
|
|
|
|
|
(1)
|
|
The grant date fair value of the shares of restricted stock and
stock options granted were computed in accordance with
SFAS No. 123R.
|
|
|
|
(2)
|
|
Amounts shown with respect to Messrs. Pehlke and Van Berkel
represent restricted stock awarded pursuant to the
Company’s 2006 Omnibus Equity Plan which will vest in equal
thirty-three and one third
(33
1
/
3
%)
installments on each of the first, second and third
anniversaries of their respective grant dates. In February 2009,
each of Messrs. Pehlke and Van Berkel, on their own
initiative, voluntarily returned an aggregate of 131,000 and
130,000 restricted shares, respectively, to the Company for
re-allocation of such restricted shares, on the same terms and
conditions, to various employees in their respective business
units.
|
Outstanding
Equity Awards at Fiscal Year-End
The following table sets forth summary information regarding the
outstanding equity awards held by the Company’s named
executive officers at December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
|
|
|
|
|
|
Number of
|
|
|
of Shares
|
|
|
|
|
Securities
|
|
|
Securities
|
|
|
|
|
|
|
|
|
Shares or
|
|
|
or Units
|
|
|
|
|
Underlying
|
|
|
Underlying
|
|
|
|
|
|
|
|
|
Units of
|
|
|
of Stock
|
|
|
|
|
Unexercised
|
|
|
Unexercised
|
|
|
Option
|
|
|
Option
|
|
|
Stock that
|
|
|
That
|
|
|
|
|
Options
|
|
|
Options
|
|
|
Exercise
|
|
|
Expiration
|
|
|
Have Not
|
|
|
Have Not
|
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Price
|
|
|
Date
|
|
|
Vested
|
|
|
Vested(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gary H. Hunt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,333
|
(2)
|
|
$
|
83,303
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,997
|
(3)
|
|
$
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott D. Peters
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard W. Pehlke
|
|
|
25,000
|
(4)
|
|
|
—
|
|
|
$
|
11.75
|
|
|
|
02/14/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,000
|
(5)
|
|
$
|
330,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250,000
|
(6)
|
|
$
|
315,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrea R. Biller
|
|
|
35,200
|
(7)
|
|
|
—
|
|
|
$
|
11.36
|
|
|
|
11/16/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,600
|
(8)
|
|
$
|
199,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey T. Hanson
|
|
|
22,000
|
(9)
|
|
|
—
|
|
|
$
|
11.36
|
|
|
|
11/16/2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
247,720
|
(10)
|
|
$
|
2,814,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,733
|
(11)
|
|
$
|
133,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jacob Van Berkel
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,733
|
(12)
|
|
$
|
59,252
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
80,000
|
(5)
|
|
$
|
352,800
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
250,000
|
(6)
|
|
$
|
315,000
|
|
|
|
|
|
|
(1)
|
|
The grant date fair value of the shares of restricted stock
granted on January 24, 2008 or December 3, 2008, as
applicable, as computed in accordance with
SFAS No. 123R, is reflected in the Grants of
Plan-Based Awards table.
|
|
|
|
(2)
|
|
Amounts shown represent 11,000 restricted shares of the
Company’s common stock that were received in connection
with the Merger in exchange for 12,500 shares of NNN
restricted stock. The 12,500 shares were awarded to
Mr. Hunt as a Director pursuant to the NNN’s 2006 Long
Term Incentive Plan and vest in equal 1/3 installments in each
of the first, second and third anniversaries of the grant date
(June 27, 2007), subject to continued service with the
Company.
|
|
|
|
(3)
|
|
Amounts shown represent 8,996 shares of the Company’s
common stock that were awarded to Mr. Hunt as a Director
under the 2006 Omnibus Equity Plan and vest in equal 1/3
installments in each of the first,
|
147
|
|
|
|
|
|
|
second and third anniversaries of the grant date
(December 10, 2007), subject to continued service with the
Company.
|
|
|
|
(4)
|
|
Amounts shown represent options granted on February 15,
2007. These options vest in equal installments of thirty-three
and one-third percent
(33
1
/
3
%)
on the last business day before each of the first, second and
third anniversaries of February 14, 2007, subject to the
terms of the Stock Option Agreement by and between
Mr. Pehlke and the Company, dated as of February 15,
2007, and the Company’s 2006 Omnibus Equity Plan. The full
25,000 options vested on the date of the Merger.
|
|
|
|
(5)
|
|
Amounts shown represent shares of the Company’s common
stock that were awarded on January 23, 2008 under the 2006
Omnibus Equity Plan which will vest in equal 1/3 installments in
each of the first, second and third anniversaries of the grant
date, subject to continued service with the Company.
|
|
|
|
(6)
|
|
Amounts shown represent shares of the Company’s common
stock that were awarded on December 3, 2008 under the 2006
Omnibus Equity Plan which will vest in equal 1/3 installments in
each of the first, second and third anniversaries of the grant
date, subject to continued service with the Company.
|
|
|
|
(7)
|
|
Amounts shown represent options received in the Merger in
exchange for stock options to acquire 40,000 shares of the
common stock of NNN Realty Advisors, Inc. for $10.00 per share.
These options vested and became exercisable with respect to
one-third of the underlying shares of the Company’s common
stock on each of November 16, 2006, November 16, 2007
and November 16, 2008 and have a maximum term of ten-years.
|
|
|
|
(8)
|
|
Amounts shown represent 26,400 restricted shares of the
Company’s common stock that were received in connection
with the Merger in exchange for 30,000 shares of NNN
restricted stock. The 30,000 shares were awarded to
Ms. Biller pursuant to the NNN’s 2006 Long Term
Incentive Plan and vest in equal 1/3 installments in each of the
first, second and third anniversaries of the grant date
(June 27, 2007), subject to continued service with the
Company.
|
|
|
|
(9)
|
|
Amounts shown represent options received in the Merger in
exchange for stock options to acquire 25,000 shares of the
common stock NNN Realty Advisors, Inc. for $10.00 per share.
These options vested and became exercisable with respect to
one-third of the underlying shares of the Company’s common
stock on each of November 16, 2006, November 16, 2007
and November 16, 2008 and have a maximum term of ten-years.
|
|
|
|
(10)
|
|
Amounts shown represent 743,160 restricted shares of the
Company’s common stock that were received in connection
with the Merger in exchange for 844,500 of NNN restricted stock
and which are transferable from Mr. Thompson and
Mr. Rogers, assuming Mr. Hanson remains employed by
the Company, in equal 1/3 installments on each of the first,
second and third anniversaries of the grant date (July 29,
2006).
|
|
|
|
(11)
|
|
Amounts shown represent 17,600 restricted shares of the
Company’s common stock that were received in connection
with the Merger in exchange for 20,000 shares of NNN
restricted stock. The 20,000 shares were awarded to
Mr. Hanson pursuant to the NNN’s 2006 Long Term
Incentive Plan and vest in equal 1/3 installments in each
of the first, second and third anniversaries of the grant date
(June 27, 2007), subject to continued service with the
Company.
|
|
|
|
(12)
|
|
Amounts shown represent 17,600 restricted shares of the
Company’s common stock that were received in connection
with the Merger in exchange for 20,000 shares of NNN
restricted stock. The 20,000 shares were awarded to
Mr. Van Berkel pursuant to the NNN’s 2006 Long Term
Incentive Plan and vest in equal 1/3 installments in each of the
first, second and third anniversaries of the grant date
(December 4, 2007), subject to continued service with the
Company.
|
148
Options
Exercises and Stock Vested
The following table sets forth summary information regarding
exercise of stock options and vesting of restricted stock held
by the Company’s named executive officers at
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
|
Number of Shares
|
|
|
|
|
|
Number of Shares
|
|
|
|
|
|
|
|
Acquired on
|
|
|
Value Realized on
|
|
|
Acquired on
|
|
|
Value realized on
|
|
|
Name
|
|
Exercise
|
|
|
Exercise ($)
|
|
|
Vesting
|
|
|
Vesting ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gary H. Hunt
|
|
|
—
|
|
|
|
—
|
|
|
|
3,667
|
(1)
|
|
$
|
14,118
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
2,999
|
(3)
|
|
|
3,749
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scott D. Peters
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard W. Pehlke
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrea R. Biller
|
|
|
—
|
|
|
|
—
|
|
|
|
8,800
|
(5)
|
|
|
33,880
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey T. Hanson
|
|
|
—
|
|
|
|
—
|
|
|
|
247,720
|
(6)
|
|
|
857,111
|
(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
5,867
|
(8)
|
|
|
22,588
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jacob Van Berkel
|
|
|
—
|
|
|
|
—
|
|
|
|
5,867
|
(9)
|
|
|
7,392
|
(10)
|
|
|
|
|
|
(1)
|
|
Amounts shown represent 11,000 restricted shares of the
Company’s common stock that were received in connection
with the Merger in exchange for 12,500 shares of NNN
restricted stock. The 12,500 shares were awarded to
Mr. Hunt pursuant to the NNN’s 2006 Long Term
Incentive Plan and vest in equal 1/3 installments in each of the
first, second and third anniversaries of the grant date
(June 27, 2007), subject to continued service with the
Company.
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(2)
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On June 26, 2008, the closing price of a share of common
stock on the NYSE was $3.85.
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(3)
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|
Amounts shown represent 8,996 shares of the Company’s
common stock that were awarded to Mr. Hunt on
December 10, 2007 under the 2006 Omnibus Equity Plan and
vest in equal 1/3 installments in each of the first, second and
third anniversaries of the grant date, subject to continued
service with the Company.
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(4)
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|
On December 9, 2008, the closing price of a share of common
stock on the NYSE was $1.25.
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(5)
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|
Amounts shown represent 26,400 restricted shares of the
Company’s common stock that were received in connection
with the Merger in exchange for 30,000 shares of NNN
restricted stock. The 30,000 shares were awarded to
Ms. Biller pursuant to the NNN’s 2006 Long Term
Incentive Plan and vest in equal 1/3 installments in each of the
first, second and third anniversaries of the grant date
(June 27, 2007), subject to continued service with the
Company.
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(6)
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|
Amounts shown represent 743,160 restricted shares of the
Company’s common stock that were received in connection
with the Merger in exchange for 844,500 of NNN restricted stock
and which are transferable from Mr. Thompson and
Mr. Rogers, assuming Mr. Hanson remains employed by
the Company, in equal 1/3 installments on each of the first,
second and third anniversaries of the grant date (July 29,
2006).
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(7)
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On July 28, 2008, the closing price of a share of common
stock on the NYSE was $3.46.
|
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(8)
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|
Amounts shown represent 17,600 restricted shares of the
Company’s common stock that were received in connection
with the Merger in exchange for 20,000 shares of NNN
restricted stock. The 20,000 shares were awarded to
Mr. Hanson pursuant to the NNN’s 2006 Long Term
Incentive Plan and vest in equal 1/3 installments in each
of the first, second and third anniversaries of the grant date
(June 27, 2007), subject to continued service with the
Company.
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|
|
|
(9)
|
|
Amounts shown represent 17,600 restricted shares of the
Company’s common stock that were received in connection
with the Merger in exchange for 20,000 shares of NNN
restricted stock. The 20,000 shares were awarded to
Mr. Van Berkel pursuant to the NNN’s 2006 Long Term
Incentive Plan and vest in
|
149
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|
|
|
|
equal 1/3 installments in each of the first, second and third
anniversaries of the grant date (December 4, 2007), subject
to continued service with the Company.
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|
|
(10)
|
|
On December 3, 2008, the closing price of a share of common
stock on the NYSE was $1.26.
|
Non-Qualified
Deferred Compensation
During fiscal year 2008, no named executive officer was a
participant in the DCP in 2008.
Contributions.
Under the DCP, the participants designated by the committee
administering the Plan (the “Committee”) may elect to
defer up to 80% of their base salary and commissions, and up to
100% of their bonus compensation. In addition, the Company may
make discretionary Company contributions to the DCP at any time
on behalf of the participants. Unless otherwise specified by the
Company, Company contributions shall be deemed to be invested in
the Company’s common stock.
Investment
Elections.
Participants designate the investment funds selected by the
Committee in which the participants’ deferral accounts
shall be deemed to be invested for purposes of determining the
amount of earnings and losses to be credited to such accounts.
Vesting.
The participants are fully vested at all times in amounts
credited to the participants’ deferral accounts. A
participant shall vest in his or her Company contribution
account as provided by the Committee, but not earlier than
12 months from the date the Company contribution is
credited to a participant’s Company contribution account.
Except as otherwise provided by the Company in writing, all
vesting of Company contributions shall cease upon a
participant’ termination of service with the Company and
any portion of a participant’s Company contribution account
which is unvested as of such date shall be forfeited; provided,
however, that if a participant’s termination of service is
the result of his or her death, the participant shall be 100%
vested in his or her Company contribution account(s).
Distributions.
Scheduled distributions elected by the participants shall be no
earlier than two years from the last day of the fiscal year in
which the deferrals are credited to the participant’s
account, or, if later, the last day of the fiscal year in which
the Company contributions vest. The participant may elect to
receive the scheduled distribution in a lump sum or in equal
installments over a period of up to five years. Company
contributions are only distributable in a lump sum.
In the event of a participant’s retirement (termination of
service after attaining age 60, or age 55 with at
least 10 years of service) or disability (as defined in the
DCP), the participant’s vested deferral accounts shall be
paid to the participant in a single lump sum on a date that is
not prior to the end of the six month period following the
participant’s retirement or disability, unless the
participant has made an alternative election to receive the
retirement or disability benefits in equal installments over a
period of up to 15 years, in which event payments shall be
made as elected.
In the event of a participant’s death, the Company shall
pay to the participant’s beneficiary a death benefit equal
to the participant’s vested accounts in a single lump sum
within 30 days after the end of the month during which the
participant’s death occurred.
The Company may accelerate payment in the event of a
participant’s “financial hardship.”
Employment
Contracts and Compensation Arrangements
Scott D.
Peters
In July 2008, Mr. Peters resigned from the Company. The
following is a description of the employment agreement under
which Mr. Peters was employed during calendar year 2008.
150
In November, 2006, Mr. Peters entered into an executive
employment agreement with the Company pursuant to which
Mr. Peters served as the Chief Executive Officer and
President of the Company. The executive employment agreement
provided for an annual base salary of $550,000 per annum. His
base salary was increased to $600,000 per annum upon the closing
of the Merger. Mr. Peters was eligible to receive an annual
discretionary bonus of up to 200% of his base salary. The
executive employment agreement had an initial term of three
years, and on the final day of the original term, and on each
anniversary thereafter, the term of the agreement could have
been extended automatically for an additional year unless the
Company or Mr. Peters provided at least one year’s
written notice that the term would not be extended. In
connection with the entering into of his executive employment
agreement in November, 2006, Mr. Peters received
154,000 shares of restricted stock and 44,000 stock options
at an exercise price of $11.36 per share, one-third of which
options vest on the grant date, and the remaining options vest
in equal installments on the first and second anniversary date
of the option grant.
Mr. Peters was also entitled to participate in the
Company’s health and other benefit plans generally afforded
to executive employees and was reimbursed for reasonable travel,
entertainment and other reasonable expenses incurred in
connection with his duties. The employment agreement contained
confidentiality, non-competition, no raid, non-solicitation,
non-disparagement and indemnification provisions.
In the event the Company had terminated Mr. Peters’
employment for Cause (as defined in the executive employment
agreement) or if he had voluntarily resigned without Good Reason
(as defined in the executive employment agreement),
Mr. Peters would have been entitled to accrued salary and
any unreimbursed business expenses. In the event that
Mr. Peters’ employment terminated because of the
expiration of his term, death or disability, the Company would
have paid any accrued salary, any unreimbursed business
expenses, and a prorated performance bonus equal to the
performance bonus (and in the case of termination for reason of
death or disability, equal to the maximum target) that otherwise
would have been payable to Mr. Peters in the fiscal year in
which the termination occurred had he continued employment
through the last day of such fiscal year, prorated for the
number of calendar months he was employed by the Company in such
fiscal year. The prorated performance bonus would have been paid
within 60 days after Mr. Peters’ date of
termination, provided that he executes and delivers to the
Company a general release and was not in material breach of any
of the provisions of the executive employment agreement.
In the event of termination of employment without Cause, or
voluntary resignation with Good Reason, the Company would have
paid any accrued salary, any unreimbursed business expenses and
a severance benefit, in a lump sum cash payment, equal to
Mr. Peters’ annual salary plus the target bonus in the
year of the termination, the sum of which will be multiplied by
a “severance benefit factor.” The “severance
benefit factor” would have been determined as follows:
(a) if the date of termination occurred during the original
three year employment term, the “severance benefit
factor” will be the greater of one, and the number of
months from the date of termination to the last day of the
original three year employment term, divided by 12, or
(b) if the date of termination was after the original three
year employment term, the “severance benefit factor”
will equal one. Also, all options would have become fully vested.
In the event of a termination by the Company without Cause at
any time within 90 days before, or 12 months after, a
Change in Control (as defined in the executive employment
agreement), or in the event of resignation for Good Reason
within 12 months after a Change in Control, or if without
Good Reason during the period commencing six months after a
Change in Control and ending 12 months after a Change in
Control, then the Company would have paid any accrued salary,
any unreimbursed business expenses, and a severance benefit. The
severance benefit would have been in a lump sum cash payment,
equal to the annual salary plus the target bonus in the year of
the termination, the sum of which will be multiplied by three.
Mr. Peters would have also received 100% of the
Company’s paid health insurance coverage as provided
immediately prior to the termination. The health insurance
coverage would have continued for two years following
termination of employment, or until Mr. Peters became
covered under another employer’s group health insurance
plan, whichever came first. Also, Mr. Peters would have
become fully vested in his options. These severance benefits
upon a Change in Control would have been paid 60 days after
the date of termination, provided the execution and delivery to
the Company of a general release and Mr. Peters was not in
material breach of any of the provisions of his executive
employment agreement. Any payment and benefits
151
discussed in this paragraph regarding a termination associated
with a Change in Control would have been in lieu of any payments
and benefits that would otherwise be awarded in an
executive’s termination.
If payments or other amounts had become due to Mr. Peters
under his executive employment agreement or otherwise, and the
excise tax imposed by Section 4999 of the Code had been
applicable to such payments, the Company would have been
required to pay a gross up payment in the amount of such excise
tax plus the amount of income, excise and other taxes due as a
result of the gross up payment. All determinations required to
be made and the assumptions to be utilized in arriving at such
determinations, with certain exceptions, would have been made by
the Company’s independent certified public accountants
serving immediately prior to the Change in Control.
In July 2008, Mr. Peters resigned from the Company and no
payments are due to him under his executive employment agreement.
Richard
W. Pehlke
Effective February 15, 2007, Mr. Pehlke and the
Company entered into a three-year employment agreement pursuant
to which Mr. Pehlke serves as the Company’s Executive
Vice President and Chief Financial Officer at an annual base
salary of $350,000. In addition, Mr. Pehlke is entitled to
receive target bonus cash compensation of up to 50% of his base
salary based upon annual performance goals to be established by
the Compensation Committee of the Company. Mr. Pehlke is
also eligible to receive a target annual performance based
equity bonus of 65% of his base salary based upon annual
performance goals to be established by the Compensation
Committee. The equity bonus is payable in restricted shares that
vest on the third anniversary of the date of the grant.
Mr. Pehlke was also granted stock options to purchase
25,000 shares of the Company’s common stock which have
a term of 10 years, are exercisable at $11.75 per share
(equal to the market price of the Company’s common stock on
the date immediately preceding the grant date) and vest ratably
over three years.
Mr. Pehlke’s annual base salary was increased from
$350,000 to $375,000 on January 1, 2008. Similarly,
Mr. Pehlke’s target bonus compensation was increased
from 50% to 150% of his base salary on January 1, 2008.
Mr. Pehlke is also entitled to participate in the
Company’s health and other benefit plans generally afforded
to executive employees and is reimbursed for reasonable travel,
entertainment and other reasonable expenses incurred in
connection with his duties. The employment agreement contains
confidentiality, non-competition, no raid, non-solicitation,
non-disparagement and indemnification provisions.
The employment agreement is terminable by the Company upon
Mr. Pehlke’s death or incapacity or for Cause (as
defined in the employment agreement), without any additional
compensation other than what has accrued to Mr. Pehlke as
of the date of any such termination, except that in the case of
death or incapacity, any unvested restricted shares
automatically vest.
In the event that Mr. Pehlke is terminated without Cause,
or if Mr. Pehlke terminates the agreement for Good Reason
(as defined in the employment agreement), Mr. Pehlke is
entitled to receive his annual base salary, payable in
accordance with the Company’s customary payroll practices,
for the balance of the term of the agreement or 24 months,
whichever is less (subject to the provisions of
Section 409A of the Internal Revenue Code of 1986, as
amended) and all then unvested options shall automatically vest.
The Company’s payment of any amounts to Mr. Pehlke
upon his termination without Cause or for Good Reason is
contingent upon him executing the Company’s then standard
form of release.
Effective December 23, 2008, Mr. Pehlke and the
Company entered into a change of control agreement pursuant to
which in the event that Mr. Pehlke is terminated without
Cause or resigns for Good Reason upon a Change of Control (as
defined in the employment agreement) or within six months
thereafter or is terminated without Cause or resigns for Good
Reason within three months prior to a Change of Control, in
contemplation thereof, Mr. Pehlke is entitled to receive
two times his base salary payable in accordance with the
Company’s customary payroll practices, over a twelve month
period (subject to the provisions of Section 409A of the
Code) plus an amount equal to one time his target annual cash
bonus payable in cash on the next immediately
152
following date when similar annual cash bonus compensation is
paid to other executive officers of the Company (but in no event
later than March 15th of the calendar year following
the calendar year to which such bonus payment relates). In
addition, upon a Change of Control, all then unvested options
and restricted shares automatically vest. The Company’s
payment of any amounts to Mr. Pehlke upon his termination
upon a Change of Control is contingent upon his executing the
Company’s then standard form of release.
Potential
Payments upon Termination or Change of Control
Richard W. Pehlke
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Involuntary
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Not for
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Involuntary
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Resignation
|
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Executive Payments
|
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Voluntary
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|
Early
|
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|
Normal
|
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Cause
|
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for Cause
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for Good
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Change in
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Upon Termination
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Termination
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Retirement
|
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Retirement
|
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Termination
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Termination
|
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Reason
|
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Control
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Death
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Disability
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Severance Payments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
421,875
|
|
|
$
|
—
|
|
|
$
|
421,875
|
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|
$
|
1,312,500
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|
|
$
|
—
|
|
|
$
|
—
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|
Bonus Incentive Compensation
|
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|
—
|
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|
|
—
|
|
|
|
—
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|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
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|
Long Term Incentive Plan
|
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|
—
|
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|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Stock Options (unvested and accelerated)(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
Restricted Stock (unvested and accelerated)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
403,000
|
|
|
|
—
|
|
|
$
|
403,000
|
|
|
$
|
403,000
|
|
|
|
—
|
|
|
|
—
|
|
|
Performance Shares (unvested and accelerated)
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|
—
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|
|
|
—
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|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
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|
|
—
|
|
|
|
—
|
|
|
|
—
|
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|
Benefit Continuation
|
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|
—
|
|
|
|
—
|
|
|
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—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Tax
Gross-Up
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
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|
Total Value
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|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
824,875
|
|
|
$
|
—
|
|
|
$
|
824,875
|
|
|
$
|
1,715,500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
(1)
|
|
Mr. Pehlke’s agreement provides for immediate vesting
of all stock options in the event of involuntary termination not
for Cause, resignation for Good Reason, or in the event of
Change of Control; the option exercise price is $11.75 and the
closing price on the NYSE on December 31, 2008 was $1.24,
therefore, as of December 31, 2008, Mr. Pehlke’s
options were out of the money.
|
Andrea R.
Biller
In November 2006, Ms. Biller entered into an executive
employment agreement with the Company pursuant to which
Ms. Biller serves as the Company’s General Counsel,
Executive Vice President and Corporate Secretary. The agreement
provides for an annual base salary of $400,000 per annum.
Ms. Biller is eligible to receive an annual discretionary
bonus of up to 150% of her base salary. The executive employment
agreement has an initial term of three (3) years, and on
the final day of the original term, and on each anniversary
thereafter, the term of the agreement is extended automatically
for an additional year unless the Company or Ms. Biller
provides at least one year’s written notice that the term
will not be extended. On October 23, 2008, the Company
provided a notice not to extend the term of the executive
employment agreement beyond its current extension date. In
connection with the entering into of her executive employment
agreement in November 2006, Ms. Biller received
114,400 shares of restricted stock and 35,200 stock options
at an exercise price of $11.36 per share, one-third of which
options vested on the grant date, and the remaining options vest
in equal installments on the first and second anniversary date
of the option grant.
Ms. Biller is also entitled to participate in the
Company’s health and other benefit plans generally afforded
to executive employees and is reimbursed for reasonable travel,
entertainment and other reasonable expenses incurred in
connection with her duties. The executive employment agreement
contains confidentiality, non-competition, no raid,
non-solicitation, non-disparagement and indemnification
provisions.
In the event the Company terminates Ms. Biller’s
employment for Cause (as defined in the executive employment
agreement) or if she voluntarily resigns without Good Reason (as
defined in the executive employment agreement), Ms. Biller
is entitled to accrued salary and any unreimbursed business
expenses. In the event that Ms. Biller’s employment
terminates because of the expiration of her term, death or
disability, the Company will pay an accrued salary, any
unreimbursed business expenses, and a prorated performance bonus
equal to the performance bonus (and in the case of termination
for reason of death or disability, equal
153
to the maximum target) that otherwise would have been payable to
Ms. Biller in the fiscal year in which the termination
occurs had she continued employment through the last day of such
fiscal year, prorated for the number of calendar months she was
employed by the Company in such fiscal year. The prorated
performance bonus will be paid within 60 days after
Ms. Biller’s date of termination, provided that she
executes and delivers to the Company a general release and is
not in material breach of any of the provisions of the executive
employment agreement.
In the event of termination of employment without Cause, or
voluntary resignation with Good Reason, the Company will pay any
accrued salary, any unreimbursed business expenses and a
severance benefit, in a lump sum cash payment, equal to
Ms. Biller’s annual salary plus the target bonus in
the year of the termination, the sum of which will be multiplied
by a “severance benefit factor.” The “severance
benefit factor” will be determined as follows: (a) if
the date of termination occurs during the original three year
employment term, the “severance benefit factor” will
be the greater of one, and the number of months from the date of
termination to the last day of the original three year
employment term, divided by 12, or (b) if the date of
termination is after the original three year employment term,
the “severance benefit factor” will equal one. Also,
all options become fully vested.
In the event of a termination by the Company without Cause at
any time within 90 days before, or 12 months after, a
Change in Control (as defined in the executive employment
agreement), or in the event of resignation for Good Reason
within 12 months after a Change in Control, or if without
Good Reason during the period commencing six months after a
Change in Control and ending 12 months after a Change in
Control, then the Company will pay any accrued salary, any
unreimbursed business expenses, and a severance benefit. The
severance benefit will be in a lump sum cash payment, equal to
the annual salary plus the target bonus in the year of the
termination, the sum of which will be multiplied by three.
Ms. Biller will also receive 100% of the Company’s
paid health insurance coverage as provided immediately prior to
the termination. The health insurance coverage will continue for
two years following termination of employment, or until
Ms. Biller becomes covered under another employer’s
group health insurance plan, whichever comes first. Also,
Ms. Biller will become fully vested in her options and
restricted shares. These severance benefits upon a Change in
Control will be paid 60 days after the date of termination,
provided the execution and delivery to the Company of a general
release and Ms. Biller is not in material breach of any of
the provisions of her executive employment agreement. Any
payment and benefits discussed in this paragraph regarding a
termination associated with a Change in Control will be in lieu
of any payments and benefits that would otherwise be awarded in
an executive’s termination.
If payments or other amounts become due to Ms. Biller under
her executive employment agreement or otherwise, and the excise
tax imposed by Section 4999 of the Code applies to such
payments, the Company is required to pay a gross up payment in
the amount of this excise tax plus the amount of income, excise
and other taxes due as a result of the gross up payment. All
determinations required to be made and the assumptions to be
utilized in arriving at such determinations, with certain
exceptions, will be made by the Company’s independent
certified public accountants serving immediately prior to the
Change in Control.
154
Potential
Payments upon Termination or Change in Control
Andrea R. Biller
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not for
|
|
|
Involuntary
|
|
|
Resignation
|
|
|
|
|
|
|
|
|
|
|
Executive Payments
|
|
Voluntary
|
|
|
Early
|
|
|
Normal
|
|
|
Cause
|
|
|
for Cause
|
|
|
for Good
|
|
|
Change in
|
|
|
|
|
|
|
|
|
Upon Termination
|
|
Termination
|
|
|
Retirement
|
|
|
Retirement
|
|
|
Termination
|
|
|
Termination
|
|
|
Reason
|
|
|
Control
|
|
|
Death
|
|
|
Disability
|
|
|
|
|
Severance Payments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,000,000
|
|
|
$
|
—
|
|
|
$
|
1,000,000
|
|
|
$
|
3,000,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Bonus Incentive Compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Long Term Incentive Plan
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Stock Options (unvested and accelerated)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Restricted Stock (unvested and accelerated)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
21,824
|
|
|
|
—
|
|
|
$
|
21,824
|
|
|
$
|
21,824
|
|
|
|
—
|
|
|
|
—
|
|
|
Performance Shares (unvested and accelerated)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Benefit Continuation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
9,242
|
|
|
|
—
|
|
|
$
|
9,242
|
|
|
$
|
9,242
|
|
|
|
—
|
|
|
|
—
|
|
|
Tax
Gross-Up
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
428,575
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,031,066
|
|
|
$
|
—
|
|
|
$
|
1,031,066
|
|
|
$
|
3,459,641
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeffrey
T. Hanson
In November, 2006, Mr. Hanson entered into an executive
employment agreement with the Company pursuant to which
Mr. Hanson serves as the Company’s Chief Investment
Officer. The agreement provides for an annual base salary of
$350,000 per annum. Mr. Hanson is eligible to receive an
annual discretionary bonus of up to 100% of his base salary. The
executive employment agreement has an initial term of three
(3) years, and on the final day of the original term, and
on each anniversary thereafter, the term of the Agreement is
extended automatically for an additional year unless the Company
or Mr. Hanson provides at least one year’s written
notice that the term will not be extended. On October 23,
2008, the Company provided a notice not to extend the term of
the executive employment agreement beyond its current extension
date. In connection with the entering into of his executive
employment agreement in November, 2006, Mr. Hanson received
44,000 shares of restricted stock and 22,000 stock options
at an exercise price of $11.36 per share, one-third of which
options vest on the grant date, and the remaining options vest
in equal installments on the first and second anniversary date
of the option grant. Mr. Hanson is entitled to receive a
special bonus of $250,000 if, during the applicable fiscal year,
(x) Mr. Hanson is the procuring cause of at least
$25 million of equity from new sources, which equity is
actually received by the Company during such fiscal year, for
real estate investments sourced by the Company, and
(y) Mr. Hanson is employed by the Company on the last
day of such fiscal year.
Mr. Hanson’s annual base salary was increased from
$350,000 to $450,000 on August 1, 2008. Similarly,
Mr. Hanson’s target bonus compensation was increased
from 100% to 150% of his base salary on August 1, 2008.
Mr. Hanson is also entitled to participate in the
Company’s health and other benefit plans generally afforded
to executive employees and is reimbursed for reasonable travel,
entertainment and other reasonable expenses incurred in
connection with his duties. The executive employment agreement
contains confidentiality, non-competition, no raid,
non-solicitation, non-disparagement and indemnification
provisions.
In the event the Company terminates Mr. Hanson’s
employment for Cause (as defined in his executive employment
agreement) or if he voluntarily resigns without Good Reason (as
defined in his executive employment agreement), Mr. Hanson
is entitled to accrued salary and any unreimbursed business
expenses. In the event that Mr. Hanson’s employment
terminates because of the expiration of his term, death or
disability, the Company will pay any accrued salary, any
unreimbursed business expenses, and a prorated performance bonus
equal to the performance bonus (and in the case of termination
for reason of death or disability, equal to the maximum target)
that otherwise would have been payable to Mr. Hanson in the
fiscal year in which the termination occurs had he continued
employment through the last day of such fiscal year, prorated
for the number of calendar months he was employed by the Company
in such fiscal year. The prorated performance bonus will be paid
within 60 days after Mr. Hanson’s date of
termination, provided that he executes and
155
delivers to the Company a general release and is not in material
breach of any of the provisions of the executive employment
agreement.
In the event of termination of employment without Cause, or
voluntary resignation with Good Reason, the Company will pay any
accrued salary, any unreimbursed business expenses and a
severance benefit, in a lump sum cash payment, equal to Mr.
Hanson’s annual salary plus the target bonus in the year of
the termination, the sum of which will be multiplied by a
“severance benefit factor.” The “severance
benefit factor” will be determined as follows: (a) if
the date of termination occurs during the original three year
employment term, the “severance benefit factor” will
be the greater of one, and the number of months from the date of
termination to the last day of the original three year
employment term, divided by 12, or (b) if the date of
termination is after the original three year employment term,
the “severance benefit factor” will equal one. Also,
all options become fully vested.
In the event of a termination by the Company without Cause at
any time within 90 days before, or 12 months after, a
Change in Control (as defined in the executive employment
agreement), or in the event of resignation for Good Reason
within 12 months after a Change in Control, or if without
Good Reason during the period commencing six months after a
Change in Control and ending 12 months after a Change in
Control, then the Company will pay any accrued salary, any
unreimbursed business expenses, and a severance benefit. The
severance benefit will be in a lump sum cash payment, equal to
the annual salary plus the target bonus in the year of the
termination, the sum of which will be multiplied by three.
Mr. Hanson will also receive 100% of the Company’s
paid health insurance coverage as provided immediately prior to
the termination. The health insurance coverage will continue for
two years following termination of employment, or until
Mr. Hanson becomes covered under another employer’s
group health insurance plan, whichever comes first. Also,
Mr. Hanson will become fully vested in his options and
restricted shares. Mr. Hanson’s executive employment
agreement further provides for an additional severance benefit
equal to the lesser of (a) one percent of the amount of
equity from new sources not previously related to the Company or
any of its subsidiaries, for which Mr. Hanson is the
procuring cause in the Company’s fiscal year in which the
date of termination occurs, which equity is actually received by
the Company or any of its subsidiaries during such fiscal year,
for real estate investments sourced by the Company or any of its
subsidiaries, or (b) $250,000, if he is discharged by the
Company without Cause, or he voluntarily resigns for Good
Reason. The additional severance benefit to Mr. Hanson will
be in lieu of the $250,000 special bonus to Mr. Hanson in
respect of the fiscal year in which his termination of
employment occurs.
These severance benefits upon a Change in Control will be paid
60 days after the date of termination, provided the
execution and delivery to the Company of a general release and
Mr. Hanson is not in material breach of any of the
provisions of his executive employment agreement. Any payment
and benefits discussed in this paragraph regarding a termination
associated with a Change in Control will be in lieu of any
payments and benefits that would otherwise be awarded in an
executive’s termination.
If payments or other amounts become due to Mr. Hanson under
his employment agreement or otherwise, and the excise tax
imposed by Section 4999 of the Code applies to such
payments, the Company is required to pay a gross up payment in
the amount of this excise tax plus the amount of income, excise
and other taxes due as a result of the gross up payment. All
determinations required to be made and the assumptions to be
utilized in arriving at such determinations, with certain
exceptions, will be made by the Company’s independent
certified public accountants serving immediately prior to the
Change in Control.
156
Potential
Payments upon Termination or Change in Control
Jeffrey T. Hanson
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not for
|
|
|
Involuntary
|
|
|
Resignation
|
|
|
|
|
|
|
|
|
|
|
Executive Payments
|
|
Voluntary
|
|
|
Early
|
|
|
Normal
|
|
|
Cause
|
|
|
for Cause
|
|
|
for Good
|
|
|
Change in
|
|
|
|
|
|
|
|
|
Upon Termination
|
|
Termination
|
|
|
Retirement
|
|
|
Retirement
|
|
|
Termination
|
|
|
Termination
|
|
|
Reason
|
|
|
Control
|
|
|
Death
|
|
|
Disability
|
|
|
|
|
Severance Payments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,375,000
|
|
|
$
|
—
|
|
|
$
|
1,375,000
|
|
|
$
|
3,625,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Bonus Incentive Compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Long Term Incentive Plan
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Stock Options (unvested and accelerated)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Restricted Stock (unvested and accelerated)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
321,722
|
|
|
|
—
|
|
|
$
|
321,722
|
|
|
$
|
321,722
|
|
|
|
—
|
|
|
|
—
|
|
|
Performance Shares (unvested and accelerated)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Benefit Continuation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
26,358
|
|
|
|
—
|
|
|
$
|
26,358
|
|
|
$
|
26,358
|
|
|
|
—
|
|
|
|
—
|
|
|
Tax
Gross-Up
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,723,080
|
|
|
$
|
—
|
|
|
$
|
1,723,080
|
|
|
$
|
3,973,080
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jacob Van
Berkel
Mr. Van Berkel was promoted to Chief Operating Officer and
Executive Vice President on March 1, 2008 which provides
for an annual base salary of $400,000 per annum. Mr. Van
Berkel is eligible to receive an annual discretionary bonus of
up to 100% of his base salary. Effective December 23, 2008,
Mr. Van Berkel and the Company entered into a change of
control agreement pursuant to which in the event that
Mr. Van Berkel is terminated without Cause or resigns for
Good Reason upon a Change of Control (as defined in the change
of control agreement) or within six months thereafter or is
terminated without Cause or resigns for Good Reason within three
months prior to a Change of Control, in contemplation thereof,
Mr. Van Berkel is entitled to receive two times his base
salary payable in accordance with the Company’s customary
payroll practices, over a twelve month period (subject to the
provisions of Section 409A of the Code) plus an amount
equal to one time his target annual cash bonus payable in cash
on the next immediately following date when similar annual cash
bonus compensation is paid to other executive officers of the
Company (but in no event later than March 15th of the
calendar year following the calendar year to which such bonus
payment relates). In addition, upon a Change of Control, all
then unvested restricted shares automatically vest. The
Company’s payment of any amounts to Mr. Van Berkel
upon his termination upon a Change of Control is contingent upon
his executing the Company’s then standard form of release.
157
Potential
Payments upon Termination or Change of Control
Jacob Van Berkel
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Involuntary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Not for
|
|
|
Involuntary
|
|
|
Resignation
|
|
|
|
|
|
|
|
|
|
|
Executive Payments
|
|
Voluntary
|
|
|
Early
|
|
|
Normal
|
|
|
Cause
|
|
|
for Cause
|
|
|
for Good
|
|
|
Change in
|
|
|
|
|
|
|
|
|
Upon Termination
|
|
Termination
|
|
|
Retirement
|
|
|
Retirement
|
|
|
Termination
|
|
|
Termination
|
|
|
Reason
|
|
|
Control
|
|
|
Death
|
|
|
Disability
|
|
|
|
|
Severance Payments
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,200,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Bonus Incentive Compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Long Term Incentive Plan
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Stock Options (unvested and accelerated)(1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Restricted Stock (unvested and accelerated)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
423,749
|
|
|
|
—
|
|
|
|
—
|
|
|
Performance Shares (unvested and accelerated)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Benefit Continuation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Tax
Gross-Up
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Value
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,623,749
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
of Directors
Pursuant to the FPL Associates Compensation report obtained by
the Board of Directors in contemplation of the Merger,
directors’ compensation was further reviewed and revised in
December 2007.
Only individuals who serve as directors and are otherwise
unaffiliated with the Company (“Outside Directors”)
receive compensation for serving on the Board and on its
committees. Outside Directors are compensated for serving on the
Board with a combination of cash and equity based compensation
which includes annual grants of restricted stock, an annual
retainer fee, meeting fees and chairperson fees. Directors are
also reimbursed for out-of-pocket travel and lodging expenses
incurred in attending Board and committee meetings.
Pursuant to the FPL Associates Compensation report, Board
compensation was adjusted in December 2007 as follows:
(i) an annual retainer fee of $50,000 per annum;
(ii) a fee of $1,500 for each regular meeting of the Board
of Directors attended in person or telephonically; (iii) a
fee of $1,500 for each meeting of a standing committee of the
Board of Directors attended in person or telephonically; and
(iv) $60,000 worth of restricted shares of common stock
issued at the then current market price of the common stock, to
vest ratably in equal annual installments over three years,
except in the event of a change in control, in which event
vesting is accelerated. On March 12, 2008, the Compensation
Committee, in consultation with Christenson Advisors, LLC,
revised the compensation arrangements for the non-executive
Chairman of the Board to provide for an annual retainer fee of
$80,000 in cash, $140,000 worth of restricted shares of the
Company’s common stock per annum to vest pro-rata over
three years, and an annual allowance of $25,000. Outside
Directors are also required to commit to an equity position in
the Company over five years in the amount equal to $250,000
worth of common stock which may include annual restricted stock
grants to the directors.
Effective March 12, 2008, Mr. Carpenter received an
initial grant of 11,958 shares of restricted stock which is
based upon the closing price of the Company’s common stock
on March 12, 2008, which was $6.69.
Effective July 10, 2008, Mr. Murphy received an
initial grant of 19,480 shares of restricted stock which is
based upon the closing price of the Company’s common stock
on July 10, 2008, which was $3.08.
Effective December 10, 2008, each of the Company’s
Outside Directors, Glenn L. Carpenter, Harold H Greene, C.
Michael Kojaian, Robert J. McLaughlin, Devin I. Murphy, D. Fleet
Wallace, and Rodger D. Young received 20,000 shares of
common stock which is based upon the closing price of the
Company’s common stock on December 10, 2008, which was
$1.30. Those shares represent the Company’s annual grant to
its Outside Directors which, pursuant to the Company’s 2006
Omnibus Equity Plan, is set at $60,000 worth of restricted
shares of the Company’s common stock based upon the closing
price of such common stock on the date of the grant. However, in
light of recent market conditions, the Company decided to limit
such amount of grant in 2008 to 20,000 restricted shares of the
Company’s common stock. Gary H. Hunt did not receive an
158
annual restricted stock grant as he is currently serving as the
Company’s Interim Chief Executive Officer and is not
considered an Outside Director.
Director
Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees Earned
|
|
|
|
|
|
|
|
or Paid in
|
|
Stock
|
|
|
|
Director
|
|
Cash(1)
|
|
Awards(2)(3)
|
|
Total
|
|
|
|
Glenn L. Carpenter
|
|
$
|
117,000
|
|
|
$
|
82,915
|
|
|
$
|
199,915
|
|
|
Harold H. Greene
|
|
$
|
117,500
|
|
|
$
|
61,751
|
|
|
$
|
179,251
|
|
|
Gary H. Hunt
|
|
$
|
73,250
|
|
|
$
|
61,751
|
|
|
$
|
135,001
|
|
|
C. Michael Kojaian
|
|
$
|
108,500
|
|
|
$
|
20,040
|
|
|
$
|
128,540
|
|
|
Robert J. McLaughlin
|
|
$
|
134,000
|
|
|
$
|
20,040
|
|
|
$
|
154,040
|
|
|
Devin I. Murphy
|
|
$
|
60,110
|
|
|
$
|
9,666
|
|
|
$
|
69,776
|
|
|
Scott D. Peters(4)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
Anthony W. Thompson(5)
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
D. Fleet Wallace
|
|
$
|
128,500
|
|
|
$
|
61,751
|
|
|
$
|
190,251
|
|
|
Rodger D. Young
|
|
$
|
132,000
|
|
|
$
|
20,040
|
|
|
$
|
152,040
|
|
|
|
|
|
|
(1)
|
|
Represents annual retainers plus all meeting and committee
attendance fees earned by non-employee directors in 2008.
|
|
|
|
(2)
|
|
The amounts shown are the compensation costs recognized by the
Company in 2008 in accordance with SFAS No. 123R.
Mr. Carpenter received a grant of 11,958 shares of
restricted stock on March 12, 2008, which also vest in
three equal installments on each of the next three annual
anniversary dates of the grant. The grant date fair value of the
11,958 shares of restricted stock was $80,000 based on a
value of $6.69 per share on the date of the grant.
Mr. Murphy received a grant of 19,480 shares of
restricted stock on July 10, 2008, which also vest in three
equal installments on each of the next three annual anniversary
dates of the grant. The grant date fair value of the
19,480 shares of restricted stock was $60,000 based on a
value of $3.08 per share on the date of the grant. Each of the
Outside Directors received a grant of 20,000 shares on
December 10, 2008 which vest in three equal increments on
each of the next three annual anniversary dates of the grant.
The grant date fair value of the 20,000 shares of
restricted stock was $26,000 based on a value of $1.30 per share
on the date of grant. Those shares represent the Company’s
annual grant to its Outside Directors which, pursuant to the
Company’s 2006 Omnibus Equity Plan, is set at $60,000 worth
of restricted shares of the Company’s common stock based
upon the closing price of such common stock on the date of the
grant. However, in light of recent market conditions, the
Company decided to limit such amount of grant in 2008 to 20,000
restricted shares of the Company’s common stock.
|
|
|
|
(3)
|
|
The following table shows the aggregate number of unvested stock
awards and option awards granted to non-employee directors and
outstanding as of December 31, 2008:
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Awards
|
|
|
|
|
Options Outstanding
|
|
|
Outstanding at
|
|
|
Director
|
|
at Fiscal Year End
|
|
|
Fiscal Year End
|
|
|
|
|
Glenn L. Carpenter
|
|
|
0
|
|
|
|
45,288
|
|
|
Harold H. Greene
|
|
|
0
|
|
|
|
33,330
|
|
|
Gary H. Hunt
|
|
|
0
|
|
|
|
13,330
|
|
|
C. Michael Kojaian
|
|
|
0
|
|
|
|
25,997
|
|
|
Robert J. McLaughlin
|
|
|
0
|
(i)
|
|
|
25,997
|
|
|
Devin I. Murphy
|
|
|
0
|
|
|
|
39,480
|
|
|
Scott D. Peters(4)
|
|
|
0
|
|
|
|
0
|
|
|
Anthony W. Thompson(5)
|
|
|
0
|
|
|
|
0
|
|
|
D. Fleet Wallace
|
|
|
0
|
|
|
|
33,330
|
|
|
Rodger D. Young
|
|
|
10,000
|
|
|
|
25,997
|
|
|
|
|
|
(i)
|
Mr. McLaughlin exercised his option to purchase
10,000 shares of common stock of the Company on
March 18, 2008, at $2.99 per share.
|
|
|
|
|
|
(4)
|
|
Mr. Peters resigned as Chief Executive Officer and
President of the Company effective July 10, 2008.
|
|
|
|
(5)
|
|
Mr. Thompson resigned from the Board of Directors of the
Company effective February 8, 2008
|
Stock
Ownership Policy for Outside Directors
Under the current stock ownership policy, Outside Directors are
required to accumulate an equity position in the Company over
five years in an amount equal to $250,000 worth of common stock
(the previous policy required an accumulation of $200,000 worth
of common stock over a five year period). Shares of common stock
acquired by Outside Directors pursuant to the restricted stock
grants can be applied toward this equity accumulation
requirement.
Compensation
Committee Interlocks and Insider Participation
The members of the Compensation Committee during the year ended
December 31, 2008 were D. Fleet Wallace, Chair, Glenn L.
Carpenter, Gary H. Hunt, C. Michael Kojaian, Robert J.
McLaughlin, and Rodger D. Young. In February, 2008 when
Mr. Carpenter became Chairman of the Board, replacing
Anthony W. Thompson, he resigned from the Compensation
Committee. In July 2008, when Scott Peters resigned as Chief
Executive Officer and President of the Company, Mr. Hunt
assumed the position as Interim Chief Executive Officer,
subsequently resigned from the Compensation Committee as
Chairman and was replaced by D. Fleet Wallace as the new
Chairman. In addition, Mr. Kojaian also became a member of
the Company’s Compensation Committee. On February 9,
2009, Glenn L. Carpenter was appointed to serve as a member of
the Company’s Compensation Committee and Mr. C.
Michael Kojaian resigned as a member of the Compensation
Committee.
Except for Gary H. Hunt, the current Interim Chief Executive
Officer and a former member of the Compensation Committee, none
of the current or former members of the Compensation Committee
is or was a current or former officer or employee of the Company
or any of its subsidiaries or had any relationship requiring
disclosure by the Company under any paragraph of Item 404
of
Regulation S-K
of the SEC’s Rules and Regulations. During the year ended
December 31, 2008, none of the executive officers of the
Company served as a member of the board of directors or
compensation committee of any other company that had one or more
of its executive officers serving as a member of the
Company’s Board of Directors or Compensation Committee.
160
Compensation
Committee Report
The forgoing Compensation Committee Report is not to be
deemed to be “soliciting material” or to be
“filed” with the SEC or subject to Regulation 14A
or 14C or to the liabilities of Section 18 of the Exchange
Act, except to the extent that the Company specifically requests
that such information be treated as soliciting material or
specifically incorporates it by reference into any filing under
the Securities Act of 1933, as amended (the “Securities
Act”) or the Exchange Act.
The Compensation Committee has reviewed and discussed with the
Company’s management the Compensation Discussion and
Analysis presented in this Annual Report. Based on such review
and discussion, the Compensation Committee has recommended to
the Board of Directors that the Compensation Discussion and
Analysis be included in this Annual Report.
The Compensation Committee
D. Fleet Wallace, Chair
Glenn L. Carpenter
Robert J. McLaughlin
Rodger D. Young
|
|
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
Equity
Compensation Plan Information
This information is included in Part II, Item 5, of
this Annual Report.
Stock
Ownership Table
The following table shows the share ownership as of May 15,
2009 by persons known by the Company to be beneficial holders of
more than 5% of the Company’s outstanding capital stock,
directors, named executive officers, and all current directors
and executive officers as a group. Unless otherwise noted, the
stock listed is
161
common stock, and the persons listed have sole voting and
disposition powers over the shares held in their names, subject
to community property laws if applicable.
|
|
|
|
|
|
|
|
|
|
Name and Address
|
|
Amount and Nature of
|
|
Percent of
|
|
of Beneficial Owner(1)
|
|
Beneficial Ownership
|
|
Class(2)
|
|
|
|
Persons affiliated with Kojaian Holdings LLC(3)
|
|
|
3,616,326
|
|
|
|
5.5
|
%
|
|
Persons affiliated with Kojaian Ventures, L.L.C.(4)
|
|
|
11,700,000
|
|
|
|
17.9
|
%
|
|
Anthony W. Thompson(5)
|
|
|
7,723,043
|
|
|
|
11.8
|
%
|
|
Sharon Thompson(6)
|
|
|
5,209,103
|
|
|
|
8.0
|
%
|
|
Wellington Management Company, LLP(7)
|
|
|
8,863,296
|
|
|
|
13.6
|
%
|
|
Executive Officers and Directors
|
|
|
|
|
|
|
|
|
|
Glenn L. Carpenter
|
|
|
78,354
|
(8)(9)(10)(11)
|
|
|
|
*
|
|
Harold H. Greene
|
|
|
48,796
|
(9)(10)(11)
|
|
|
|
*
|
|
Gary H. Hunt
|
|
|
28,796
|
(9)(10)
|
|
|
|
*
|
|
C. Michael Kojaian
|
|
|
15,345,322
|
(10)(11)(12)
|
|
|
23.5
|
%
|
|
Robert J. McLaughlin
|
|
|
157,801
|
(10)(11)(13)
|
|
|
|
*
|
|
Devin I. Murphy
|
|
|
59,481
|
(11)(14)
|
|
|
|
*
|
|
D. Fleet Wallace
|
|
|
48,796
|
(9)(10)(11)
|
|
|
|
*
|
|
Rodger D. Young
|
|
|
71,241
|
(10)(11)(15)
|
|
|
|
*
|
|
Andrea R. Biller
|
|
|
337,810
|
(16)
|
|
|
|
*
|
|
Jeffrey T. Hanson
|
|
|
578,990
|
(17)
|
|
|
|
*
|
|
Richard W. Pehlke
|
|
|
218,166
|
(18)
|
|
|
|
*
|
|
Scott D. Peters
|
|
|
536,083
|
(19)
|
|
|
|
*
|
|
Jacob Van Berkel
|
|
|
217,600
|
(20)
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
All Current Directors and Executive Officers
as a Group (12 persons)
|
|
|
17,191,153
|
(21)
|
|
|
26.3
|
%
|
* Less than one percent.
|
|
|
|
|
(1)
|
|
Unless otherwise indicated, the address for each of the
individuals listed below is
c/o Grubb &
Ellis Company, 1551 Tustin Avenue, Suite 300, Santa Ana,
California 92705.
|
|
|
|
(2)
|
|
The percentage of shares of capital stock shown for each person
in this column and in this footnote assumes that such person,
and no one else, has exercised any outstanding warrants, options
or convertible securities held by him or her exercisable on
May 15, 2009 or within sixty days thereafter.
|
|
|
|
(3)
|
|
Kojaian Holdings LLC is affiliated with both C. Michael Kojaian,
a director of the Company, and Kojaian Ventures, L.L.C. (See
footnote 12 below). The address for Kojaian Holdings LLC is
39400 Woodward Avenue, Suite 250, Bloomfield Hills,
Michigan 48304.
|
|
|
|
(4)
|
|
Kojaian Ventures, L.L.C. is affiliated with both C. Michael
Kojaian, a director of the Company and Kojaian Holdings LLC (see
footnote 12 below). The address of Kojaian Ventures, L.L.C. is
39400 Woodward Ave., Suite 250, Bloomfield Hills, Michigan 48304.
|
|
|
|
(5)
|
|
Pursuant to a Form 4 filed with the SEC by Anthony Thompson
on May 18, 2009, Mr. Thompson is deemed to be the
beneficial owner of 7,723,043 shares of common stock.
According to such Form 4, of these shares,
5,209,103 shares are held in a brokerage account by Mr. and
Mrs. Thompson as joint tenants with right of survivorship
and, accordingly, Mr. and Mrs. Thompson share voting and
dispositive power with respect to such shares.
Mr. Thompson’s address is
c/o Thompson
Family Office, 1901 Main St., Suite 108, Irvine, California
92614.
|
|
|
|
(6)
|
|
Pursuant to a Form 4 filed by Anthony Thompson on
May 18, 2009, Sharon Thompson may be deemed to be the
beneficial owner of 5,209,103 shares of common stock.
According to such Form 4, these
|
162
|
|
|
|
|
|
|
shares are held in a brokerage account by Mr. and
Mrs. Thompson as joint tenants with a right of survivorship
and, accordingly, Mr. and Mrs. Thompson share voting and
dispositive power with respect to such shares.
Mrs. Thompson’s address is
c/o Thompson
Family Office, 1901 Main St., Suite 108, Irvine, California
92614.
|
|
|
|
(7)
|
|
Wellington Management Company, LLP (“Wellington”), in
its capacity as investment advisor, may be deemed to
beneficially own 8,863,296 shares of the Company which are
held of record by clients of Wellington. Wellington’s
address is 75 State Street, Boston, Massachusetts 02109.
|
|
|
|
(8)
|
|
Beneficially owned shares include 3,986 restricted shares of
common stock that vested on March 12, 2009. Beneficially
owned shares include 3,986 restricted shares of common stock
which vest on March 12, 2010 and 3,986 restricted shares of
common stock which vest on March 12, 2011, such
7,972 shares granted pursuant to the Company’s 2006
Omnibus Equity Plan.
|
|
|
|
(9)
|
|
Beneficially owned shares include 3,667 restricted shares of
common stock which vest on June 27, 2009 and 3,666
restricted shares of common stock which vest on June 27,
2010.
|
|
|
|
|
|
(10)
|
|
Beneficially owned shares include 2,999 restricted shares of
common stock that vest on the first business day following
December 10, 2009 and 2,998 restricted shares of common
stock that vest on the first business day following
December 10, 2010, such 5,998 shares granted pursuant
to the Company’s 2006 Omnibus Equity Plan.
|
|
|
|
(11)
|
|
Beneficially owned shares include 20,000 restricted shares of
common stock which vest in equal
33
1
/
3
portions on each of the first, second, and third anniversaries
of December 10, 2008, such 20,000 shares granted
pursuant to the Company’s 2006 Omnibus Equity Plan.
|
|
|
|
(12)
|
|
Beneficially owned shares include shares directly held by
Kojaian Holdings LLC and Kojaian Ventures, L.L.C. C. Michael
Kojaian, a director of the Company, is affiliated with Kojaian
Ventures, L.L.C. and Kojaian Holdings LLC. Pursuant to rules
established by the SEC, the foregoing parties may be deemed to
be a “group,” as defined in Section 13(d) of the
Exchange Act, and C. Michael Kojaian is deemed to have
beneficial ownership of the shares directly held by Kojaian
Ventures, L.L.C. and the shares directly held by Kojaian
Holdings LLC.
|
|
|
|
(13)
|
|
Beneficially owned shares include 92,241 shares of common
stock held directly by Robert J. McLaughlin and
65,560 shares of common stock held directly by:
(i) Katherine McLaughlin’s IRA (Mr. McLaughlin
wife’s IRA of which Mr. McLaughlin disclaims
beneficial ownership; (ii) Robert J. and Katherine
McLaughlin Trust; and (iii) Louise H. McLaughlin Trust.
|
|
|
|
(14)
|
|
Beneficially owned shares include 19,480 restricted shares of
common stock which vest in equal
33
1
/
3
portions on each first business day following July 10,
2009, 2010 and 2011 granted pursuant to the Company’s 2006
Omnibus Equity Plan.
|
|
|
|
(15)
|
|
Beneficially owned shares include 10,000 shares of common
stock issuable upon exercise of fully vested outstanding options.
|
|
|
|
(16)
|
|
Beneficially owned shares include 35,200 restricted shares of
common stock issuable upon exercise of fully vested outstanding
options. Beneficially owned shares include 8,800 restricted
shares of common stock that vest on June 27, 2009 and
8,800 shares of restricted stock that vest on June 27,
2010.
|
|
|
|
(17)
|
|
Beneficially owned shares include 22,000 shares of common
stock issuable upon exercise of fully vested options.
Beneficially owned shares include 5,866 restricted shares of
common stock that vest on June 27, 2009 and 5,867
restricted shares of common stock that vest on June 27,
2010.
|
|
|
|
(18)
|
|
Beneficially owned shares include 16,666 shares of common
stock issuable upon exercise of fully vested outstanding
options. Beneficially owned shares include 8,334 shares of
Company common stock issuable upon exercise of outstanding
options which do not vest until February 15, 2010.
Beneficially owned shares include 25,000 restricted shares of
common stock that vest on the first business day after
January 24, 2010 and 25,000 restricted shares of common
stock that vest on the first business day after January 24,
2011, all of these 50,000 shares are subject to certain
terms and conditions contained in that certain Restricted Stock
Agreement between the Company and Mr. Pehlke dated
January 24, 2008. In addition, beneficially owned shares
include 119,000 restricted shares of common stock awarded to
Mr. Pehlke pursuant to the Company’s 2006 Omnibus
Equity Plan which will vest in equal thirty-three
|
163
|
|
|
|
|
|
|
and one-third percent
(33
1
/
3
%)
installments on each first business day after the first, second
and third anniversaries of the grant date (December 3,
2008) and are subject to acceleration under certain
conditions.
|
|
|
|
(19)
|
|
Scott D. Peters resigned his position with the Company in July
2008. Mr. Peters, upon resignation, forfeited
308,000 shares of unvested restricted stock. Beneficially
owned shares include 29,333 shares of common stock issuable
upon exercise of fully vested outstanding options.
|
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(20)
|
|
Beneficially owned shares include 120,000 restricted shares of
common stock awarded to Mr. Van Berkel pursuant to the
Company’s 2006 Omnibus Equity Plan which will vest in equal
thirty-three and one-third (33 1/3%) installments on each first
business day after the first, second and third anniversaries of
the grant date (December 3, 2008) and are subject to
acceleration under certain conditions. Beneficially owned shares
also include 26,667 restricted shares of common stock which vest
on the first business day following January 24, 2010 and
26,666 restricted shares of common stock which vest on the first
business day following January 24, 2011. Furthermore
beneficially owned shares include 5,867 shares of
restricted common stock which vest on the first business day
after December 4, 2009 and 5,866 shares of restricted
common stock which vest on the first business day after
December 4, 2010.
|
|
|
|
(21)
|
|
Beneficially owned shares include the following shares of common
stock issuable upon exercise of outstanding options which are
exercisable on May 15, 2009 or within sixty days thereafter
under the Company’s various stock option plans:
Mr. Young — 10,000 shares,
Ms. Biller — 35,200 shares,
Mr. Hanson — 22,000 shares,
Mr. Pehlke — 16,666 shares, and all current
directors and executive officers as a group 83,866 shares.
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Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
Related
Party Transaction Review Policy
The Company recognizes that transactions between the Company and
any of its directors, officers or principal stockholders or an
immediate family member of any director, executive officer or
principal stockholder can present potential or actual conflicts
of interest and create the appearance that Company decisions are
based on considerations other than the best interests of the
Company and its stockholders. The Company also recognizes,
however, that there may be situations in which such transactions
may be in, or may not be inconsistent with, the best interests
of the Company.
The review and approval of related party transactions are
governed by the Code of Business Conduct and Ethics. The Code of
Business Conduct and Ethics is a part of the Company’s
Employee Handbook, a copy of which is distributed to each of the
Company’s employees at the time that they begin working for
the Company, and the Company’s Salespersons Manual, a copy
of which is distributed to each of the Company’s brokerage
professionals at the time that they begin working for the
Company. The Code of Business Conduct and Ethics is also
available on the Company’s website at www.grubb-ellis.com.
In addition, within 60 days after he or she begins working
for the Company and once per year thereafter, the Company
requires that each employee and brokerage professional to
complete an on-line “Business Ethics” training class
and certify to the Company that he or she has read and
understands the Code of Business Conduct and Ethics and is not
aware of any violation of the Code of Business Conduct and
Ethics that he or she has not reported to management.
In order to ensure that related party transactions are fair to
the Company and no worse than could have been obtained through
“arms-length” negotiations with unrelated parties,
such transactions are monitored by the Company’s management
and regularly reviewed by the Audit Committee, which
independently evaluates the benefit of such transactions to the
Company’s stockholders. Pursuant to the Audit
Committee’s charter, on a quarterly basis, management
provides the Audit Committee with information regarding related
party transactions for review and discussion by the Audit
Committee and, if appropriate, the Board of Directors. The Audit
Committee, in its discretion, may approve, ratify, rescind or
take other action with respect to a related party transaction
or, if necessary or appropriate, recommend that the Board of
Directors approve, ratify, rescind or take other action with
respect to a related party transaction.
164
In addition, each director and executive officer annually
delivers to the Company a questionnaire that includes, among
other things, a request for information relating to any
transactions in which both the director, executive officer, or
their respective family members, and the Company participates,
and in which the director, executive officer, or such family
member, has a material interest.
Related
Party Transactions
The following are descriptions of certain transactions since the
beginning of 2008 in which the Company is a participant and in
which any of the Company’s directors, executive officers,
principal stockholders or any immediate family member of any
director, executive officer or principal stockholder has or may
have a direct or indirect material interest.
Grubb &
Ellis Realty Advisors, Inc.
Until its dissolution in 2008, the Company owned approximately
19% of the issued and outstanding common stock of
Grubb & Ellis Realty Advisors, Inc.
(“GERA”), a special purpose acquisition company
organized by the Company to acquire one or more United States
commercial real estate properties
and/or
assets. C. Michael Kojaian, a director of the Company, and
Kojaian Ventures, LLC, an entity with which Mr. Kojaian is
affiliated and in which Mr. Kojaian has a substantial
economic interest, collectively owned approximately 6.4% of the
outstanding common stock of GERA. Mr. Kojaian was also the
Chairman of the Board and Chief Executive Officer of GERA until
its dissolution in April 2008. Mark Rose, the former Chief
Executive Officer of the Company, was also a director and Chief
Executive Officer of GERA and Richard W. Pehlke, the Chief
Financial Officer of the Company, was also the Chief Financial
Officer of GERA until its dissolution in April 2008.
As a result of GERA failing to obtain the requisite consents of
its stockholders, GERA was unable to effect a business
combination within the proscribed deadline of March 3, 2008
in accordance with its charter. Consequently, in April 2008 the
stockholders of GERA approved the dissolution and liquidation of
GERA.
In the first quarter of 2008 the Company wrote-off its
investment in GERA of approximately $5.8 million, including
its stock and warrant purchases, operating advances and third
party costs. The Company also paid third-party legal,
accounting, printing and other costs (other than monies paid to
stockholders of GERA on liquidation) associated with the
dissolution and liquidation of GERA. In addition, the various
exclusive service agreements that the Company had previously
entered into with GERA for transaction services, property and
facilities management, and project management, are no longer of
any force or effect.
Other
Related Party Transactions
A director of the Company, C. Michael Kojaian, is affiliated
with and has a substantial economic interest in Kojaian
Management Corporation and its various affiliated portfolio
companies (collectively, “KMC”). KMC is engaged in the
business of investing in and managing real property both for its
own account and for third parties. During the 2008 calendar
year, KMC paid the Company and its subsidiaries the following
approximate amounts in connection with real estate services
rendered: $9,345,000 for management services, which include
reimbursed salaries, wages and benefits of $4,028,000; $832,000
in real estate sale and leasing commissions; and $90,000 for
other real estate and business services. The Company also paid
KMC approximately $2,970,000, which reflected fees paid by
KMC’s asset management clients for asset management
services performed by KMC, but for which the Company billed the
clients.
The Company believes that the fees and commissions paid to and
by the Company as described above were comparable to those that
would have been paid to or received from unaffiliated third
parties in connection with similar transactions.
In August 2002, the Company entered into an office lease with a
landlord related to KMC, providing for an annual average base
rent of $365,400 over the ten-year term of the lease.
As of August 28, 2006, the Company entered into a written
agreement with 1up Design Studios, Inc. (“1up”), of
which Ryan Osbrink, the son of Robert H. Osbrink, the
Company’s former Executive Vice
165
President and President, Transaction Services (Mr. Osbrink
left the Company in June 2008), is a principal shareholder, to
procure graphic design and consulting services on assignments
provided by brokerage professionals
and/or
employees of the Company. The term of the agreement was for a
period beginning September 1, 2006 ending on
August 31, 2007 and was terminable by either party upon
60 days prior notice. The Agreement provided that the
Company would pay 1up a monthly retainer of $25,000, from which
1up would deduct the cost of its design services. The pricing
for 1up’s design services was fixed pursuant to a price
schedule attached as an exhibit to the agreement. In addition,
at the inception of the agreement, the Company sold certain
computer hardware and software to 1up for a price of $6,500
which was the approximate net book value of such items. The
written agreement with 1up was terminated effective as of
March 1, 2007 at the request of the Audit Committee which
believed that, although the agreement did not violate the
Company’s related party transaction policy, termination of
the agreement was appropriate in order to avoid any appearance
of impropriety that might result from the agreement to pay 1up a
fixed monthly retainer. While the Company is no longer obligated
to pay the monthly retainer to 1up, the Company has continued to
use 1up to provide design and consulting services on an ad hoc
basis. During the 2008 fiscal year, 1up was paid approximately
$168,000 in fees for its services. The Company believes that
amounts paid to 1up for services are comparable to the amounts
that the Company would have paid to unaffiliated, third parties.
GERI owns a 50.0% managing member interest in Grubb &
Ellis Apartment REIT Advisor, LLC. Each of Grubb &
Ellis Apartment Management, LLC and ROC REIT Advisors, LLC own a
25.0% equity interest in Grubb & Ellis Apartment REIT
Advisor, LLC. As of December 31, 2008, Andrea R. Biller,
the Company’s General Counsel, Executive Vice President and
Secretary, owned an equity interest of 18.0% of
Grubb & Ellis Apartment Management, LLC. As of
December 31, 2007, each of Scott D. Peters, the
Company’s former Chief Executive Officer and President, and
Andrea R. Biller owned an equity interest of 18.0% of
Grubb & Ellis Apartment Management, LLC. On
August 8, 2008, in accordance with the terms of the
operating agreement of Grubb & Ellis Apartment
Management, LLC, Grubb & Ellis Apartment Management
LLC tendered settlement for the purchase of the 18.0% equity
interest in Grubb & Ellis Apartment Management LLC
that was previously owned by Mr. Peters. As a consequence,
through a wholly-owned subsidiary, the Company’s equity
interest in Grubb & Ellis Apartment Management, LLC
increased from 64.0% to 82.0% after giving effect to this
purchase from Mr. Peters. As of December 31, 2008 and
December 31, 2007, Stanley J. Olander, Jr., the
Company’s Executive Vice President — Multifamily,
owned an equity interest of 33.3% of ROC REIT Advisors, LLC.
GERI owns a 75.0% managing member interest in Grubb &
Ellis Healthcare REIT Advisor, LLC. Grubb & Ellis
Healthcare Management, LLC owns a 25.0% equity interest in
Grubb & Ellis Healthcare REIT Advisor, LLC. As of
December 31, 2008, each of Ms. Biller and
Mr. Hanson, the Company’s Chief Investment Officer and
GERI’s President, owned an equity interest of 18.0% of
Grubb & Ellis Healthcare Management, LLC. As of
December 31, 2007, each of Mr. Peters, Ms. Biller
and Mr. Hanson owned an equity interest of 18.0% in
Grubb & Ellis Healthcare Management, LLC. On
August 8, 2008, in accordance with the terms of the
operating agreement of Grubb & Ellis Healthcare
Management, LLC, Grubb & Ellis Healthcare Management,
LLC tendered settlement for the purchase of 18.0% equity
interest in Grubb & Ellis Healthcare Management, LLC
that was previously owned by Mr. Peters. As a consequence,
through a wholly-owned subsidiary, the Company’s equity
interest in Grubb & Ellis Healthcare Management, LLC
increased from 46.0% to 64.0% after giving effect to this
purchase from Mr. Peters.
Anthony W. Thompson, former Chairman of the Company and NNN, as
a special member, was entitled to receive up to $175,000
annually in compensation from each of Grubb & Ellis
Apartment Management, LLC and Grubb & Ellis Healthcare
Management, LLC. Effective February 8, 2008, upon his
resignation as Chairman, he was no longer a special member. As
part of his resignation, the Company has agreed to continue to
pay him up to an aggregate of $569,000 through the initial
offering periods related to Apartment REIT, Inc. and Healthcare
REIT, Inc., of which $263,000 remains outstanding as of as of
December 31, 2008.
In connection with his resignation on July 10, 2008,
Mr. Peters is no longer a member of Grubb & Ellis
Apartment Management, LLC and Grubb & Ellis Healthcare
Management, LLC.
166
The grants of membership interests in Grubb & Ellis
Apartment Management, LLC and Grubb & Ellis Healthcare
Management, LLC to certain executives are being accounted for by
the Company as a profit sharing arrangement. Compensation
expense is recorded by the Company when the likelihood of
payment is probable and the amount of such payment is estimable,
which generally coincides with Grubb & Ellis Apartment
REIT Advisor, LLC and Grubb & Ellis Healthcare REIT
Advisor, LLC recording its revenue. Compensation expense related
to this profit sharing arrangement associated with
Grubb & Ellis Apartment Management, LLC includes
distributions of $88,000, $175,000 and $22,000, respectively,
earned by Mr. Thompson, $85,000, $159,000 and $50,000,
respectively, earned by Mr. Peters and $122,000, $159,000
and $50,000, respectively, earned by Ms. Biller for the
years ended December 31, 2008, 2007 and 2006, respectively.
Compensation expense related to this profit sharing arrangement
associated with Grubb & Ellis Healthcare Management,
LLC includes distributions of $175,000 and $175,000,
respectively, earned by Mr. Thompson, $387,000 and
$414,000, respectively, earned by Mr. Peters and $548,000
and $414,000, respectively, earned by each of Ms. Biller
and Mr. Hanson for the years ended December 31, 2008
and 2007, respectively. No distributions were paid in 2006.
As of December 31, 2008 and December 31, 2007, the
remaining 82.0% and 64.0%, respectively, equity interest in
Grubb & Ellis Apartment Management, LLC and the
remaining 64.0% and 46.0%, respectively, equity interest in
Grubb & Ellis Healthcare Management, LLC were owned by
GERI. Any allocable earnings attributable to GERI’s
ownership interests are paid to GERI on a quarterly basis.
Grubb & Ellis Apartment Management, LLC incurred
expenses of $338,000, $492,000 and $182,000 for the years ended
December 31, 2008, 2007 and 2006, respectively, and
Grubb & Ellis Healthcare Management, LLC incurred
expenses of $1,385,000, $882,000 and $0 for the years ended
December 31, 2008, 2007 and 2006, respectively, to Company
employees, which was included in compensation expense in the
consolidated statement of operations.
Mr. Thompson and Mr. Rogers have agreed to transfer up
to 15.0% of the common stock of Realty they own to
Mr. Hanson, assuming he remains employed by the Company in
equal increments on July 29, 2007, 2008 and 2009. The
transfers will be settled with 743,160 shares of the
Company’s common stock (557,370 from Mr. Thompson and
185,790 from Mr. Rogers). Because Mr. Thompson and
Mr. Rogers were affiliates of NNN at the time of such
transfers, NNN and the Company recognized a compensation charge.
Mr. Hanson is not entitled to any reimbursement for his tax
liability or any
gross-up
payment.
On September 20, 2006, the Company awarded Mr. Peters
a bonus of $2.1 million, which was payable in
178,957 shares of the Company’s common stock,
representing a value of $1.3 million and a cash tax
gross-up
payment of $854,000.
The Company’s directors and officers, as well as officers,
managers and employees of the Company’s subsidiaries, have
purchased, and may continue to purchase, interests in offerings
made by the Company’s programs at a discount. The purchase
price for these interests reflects the fact that selling
commissions and marketing allowances will not be paid in
connection with these sales. The net proceeds to the Company
from these sales made net of commissions will be substantially
the same as the net proceeds received from other sales.
Mr. Thompson has routinely provided personal guarantees to
various lending institutions that provided financing for the
acquisition of many properties by the Company’s programs.
These guarantees cover certain covenant payments, environmental
and hazardous substance indemnification and indemnification for
any liability arising from the SEC investigation of Triple Net
Properties. In connection with the formation transactions, the
Company indemnified Mr. Thompson for amounts he may be
required to pay under all of these guarantees to which Triple
Net Properties, Realty or NNN Capital Corp. is an obligor to the
extent such indemnification would not require the Company to
book additional liabilities on the Company’s balance sheet.
In September 2007, NNN acquired Cunningham Lending Group LLC
(“Cunningham”), a company that was wholly-owned by
Mr. Thompson, for $255,000 in cash. Prior to the
acquisition, Cunningham made unsecured loans to some of the
properties under management by GERI. The loans, which bear
interest at rates ranging from 8.0% to 12.0% per annum are
reflected in advances to related parties on the Company’s
balance
167
sheet and are serviced by the cash flows from the programs. In
accordance with FIN No. 46(R), the Company
consolidated Cunningham in its financial statements beginning in
2005.
As of December 31, 2007, advances to a program 30.0% owned
and managed by Anthony W. Thompson, the Company’s former
Chairman, who subsequently resigned in February 2008 but remains
a substantial stockholder of the Company, totaled
$1.0 million including accrued interest. These amounts were
repaid in full during the year ended December 31, 2008 and
as of December 31, 2008 there were no outstanding advances
related to this program. However, as of December 31, 2008,
accounts receivable totaling $310,000 is due from this program.
On November 4, 2008, the Company made a formal written
demand to Mr. Thompson for these monies.
As of December 31, 2008, advances to a program 40.0% owned
and, as of April 1, 2008, managed by Mr. Thompson
totaled $983,000, which includes $61,000 in accrued interest. As
of December 31, 2008, the total outstanding balance of
$983,000 was past due. The total past due amount of $983,000 has
been reserved for and is included in the allowance for
uncollectible advances. On November 4, 2008 and
April 3, 2009, the Company made a formal written demand to
Mr. Thompson for these monies.
NNN was organized in September 2006 to acquire each of Triple
Net Properties, Realty, and NNN Capital Corp, to bring the
businesses conducted by those companies under one corporate
umbrella. On November 30, 2006, NNN completed a
$160.0 million private placement of common stock to
institutional investors and certain accredited investors with
16 million shares of its common stock sold in the offering
at $10.00 per share. Net proceeds from the offering were
$146.0 million. Triple Net Properties was the accounting
acquirer of Realty and NNN Capital Corp.
Independence
of Directors
The Board has determined that seven of its eight current
directors, Messrs. Carpenter, Greene, Kojaian, McLaughlin,
Murphy, Wallace and Young are independent.
For purposes of determining the independence of its directors,
the Board applies the following criteria:
No
Material Relationship
The director must not have any material relationship with the
Company. In making this determination, the Board considers all
relevant facts and circumstances, including commercial,
charitable and familial relationships that exist, either
directly or indirectly, between the director and the Company.
Employment
The director must not have been an employee of the Company at
any time during the past three years. In addition, a member of
the director’s immediate family (including the
director’s spouse; parents; children; siblings; mothers-,
fathers-, brothers-, sisters-, sons- and
daughters-in-law;
and anyone who shares the director’s home, other than
household employees) must not have been an executive officer of
the Company in the prior three years.
Other
Compensation
The director or an immediate family member must not have
received more than $100,000 per year in direct compensation from
the Company, other than in the form of director fees, pension or
other forms of deferred compensation during the past three years.
Auditor
Affiliation
The director must not be a current partner or employee of the
Company’s internal or external auditor. An immediate family
member of the director must not be a current partner of the
Company’s internal or external auditor, or an employee of
such auditor who participates in the auditor’s audit,
assurance or tax compliance (but not tax planning) practice. In
addition, the director or an immediate family member must not
have been within the last three years a partner or employee of
the Company’s internal or external auditor who personally
worked on the Company’s audit.
168
Interlocking
Directorships
During the past three years, the director or an immediate family
member must not have been employed as an executive officer by
another entity where one of the Company’s current executive
officers served at the same time on the compensation committee.
Business
Transactions
The director must not be an employee of another entity that,
during any one of the past three years, received payments from
the Company, or made payments to the Company, for property or
services that exceed the greater of $1 million or 2% of the
other entity’s annual consolidated gross revenues. In
addition, a member of the director’s immediate family must
not have been an executive officer of another entity that,
during any one of the past three years, received payments from
the Company, or made payments to the Company, for property or
services that exceed the greater of $1.0 million or 2% of
the other entity’s annual consolidated gross revenues.
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|
Item 14.
|
Principal
Accountant Fees and Services.
|
Ernst & Young LLP, independent public accountants,
began serving as the Company’s auditors on
December 10, 2007. Ernst & Young also served as
the legacy Grubb & Ellis’ auditors from
January 1, 2007 to December 7, 2007. Ernst &
Young billed the Company and the legacy Grubb & Ellis
the fees and costs set forth below for services rendered during
the years ended December 31, 2008 and 2007, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Audit Fees(1)
|
|
|
|
|
|
|
|
|
|
Audit and quarterly review fees of consolidated financial
statements
|
|
$
|
2,519,287
|
|
|
$
|
1,024,450
|
|
|
SEC filings, including consents and comment letters
|
|
|
8,300
|
|
|
|
236,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Audit Fees
|
|
|
2,527,587
|
|
|
|
1,260,450
|
|
|
|
|
|
|
|
|
|
|
|
|
Audit Related Fees(2)
|
|
|
|
|
|
|
|
|
|
Employee benefit plan audits
|
|
|
28,325
|
|
|
|
25,500
|
|
|
Accounting consultations
|
|
|
113,937
|
|
|
|
318,804
|
|
|
Due diligence services on pending merger
|
|
|
—
|
|
|
|
161,306
|
|
|
Property audits
|
|
|
108,407
|
|
|
|
—
|
|
|
SAS No. 70 attestation reports
|
|
|
115,000
|
|
|
|
85,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Audit-Related Fees
|
|
|
365,669
|
|
|
|
590,610
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax Fees(2)
|
|
|
|
|
|
|
|
|
|
Tax return preparation
|
|
|
250,000
|
|
|
|
69,500
|
|
|
Tax planning
|
|
|
290,487
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Tax Fees
|
|
|
540,487
|
|
|
|
69,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Fees
|
|
$
|
3,433,743
|
|
|
$
|
1,920,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes fees and expenses related to the year-end audit and
interim reviews, notwithstanding when the fees and expenses were
billed or when the services were rendered.
|
|
|
|
(2)
|
|
Includes fees and expenses for services rendered from January
through December of the year, notwithstanding when the fees and
expenses were billed.
|
All audit and non-audit services have been pre-approved by the
Audit Committee.
169
Deloitte & Touche LLP, independent public accountants,
served as NNN’s auditors for the period from
January 1, 2007 to December 7, 2007.
Deloitte & Touche billed NNN the fees and costs set
forth below for services rendered during the year ended
December 31, 2007. Deloitte & Touche billed the
Company $165,000 in connection with services performed related
to the 2008
Form 10-K.
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
Audit Fees(1)
|
|
|
|
|
|
Audit of consolidated financial statements
|
|
$
|
881,297
|
|
|
Timely quarterly reviews
|
|
|
756,970
|
|
|
SEC filings, including comfort letters, consents and comment
letters
|
|
|
—
|
|
|
|
|
|
|
|
|
Total Audit Fees
|
|
|
1,638,267
|
|
|
|
|
|
|
|
|
Audit Related Fees(2)
|
|
|
|
|
|
Audits in connection with acquisitions and other accounting
consultations
|
|
|
373,996
|
|
|
Due diligence services on pending merger
|
|
|
19,798
|
|
|
|
|
|
|
|
|
Total Audit-Related Fees
|
|
|
393,794
|
|
|
|
|
|
|
|
|
Tax Fees(2)
|
|
|
|
|
|
Tax return preparation
|
|
|
61,850
|
|
|
|
|
|
|
|
|
Total Tax Fees
|
|
|
61,850
|
|
|
|
|
|
|
|
|
Total Fees
|
|
$
|
2,093,911
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes fees and expenses related to the year-end audit and
interim reviews, notwithstanding when the fees and expenses were
billed or when the services were rendered.
|
|
|
|
(2)
|
|
Includes fees and expenses for services rendered from January
through December of the year, notwithstanding when the fees and
expenses were billed.
|
170
PART IV.
|
|
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
The
following documents are filed as part of this report:
|
|
|
|
|
|
(a)
|
The following Reports of Independent Registered Public
Accounting Firm and Consolidated Financial Statements are
submitted herewith:
|
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets at December 31, 2008 and 2007
(as restated)
Consolidated Statements of Operations for the years ended
December 31, 2008, 2007 (as restated) and 2006 (as restated)
Consolidated Statements of Stockholders’ Equity for the
years ended December 31, 2008, 2007 (as restated) and 2006
(as restated)
Consolidated Statements of Cash Flows for the years ended
December 31, 2008, 2007 (as restated) and 2006 (as restated)
Notes to Consolidated Financial Statements
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(b)
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Consolidated Financial Statements Schedules
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Schedule II — Valuation and Qualifying Accounts
Schedule III — Real Estate and Accumulated
Depreciation
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(c)
|
Exhibits required to be filed by Item 601 of
Regulation S-K:
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(2) Plan
of Acquisition, Reorganization, Arrangement, Liquidation or
Succession
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2.1
|
Agreement and Plan of Merger, dated as of May 22, 2007,
among NNN Realty Advisors, Inc., B/C Corporate Holdings, Inc.
and the Registrant, incorporated herein by reference to
Exhibit 2.1 to the Registrant’s Current Report on
Form 8-K
filed on May 23, 2007.
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2.2
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Merger Agreement, dated as of January 22, 2009, by and
among the Registrant, GERA Danbury LLC, GERA Property
Acquisition, LLC, Matrix Connecticut, LLC and Matrix Danbury,
LLC, incorporated herein by reference to Exhibit 2.1 to the
Registrant’s Current Report on
Form 8-K
filed on January 29, 2009.
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2.3
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First Amendment to Merger Agreement, dated as of
January 22, 2009, by and among the Registrant, GERA Danbury
LLC, GERA Property Acquisition, LLC, Matrix Connecticut, LLC and
Matrix Danbury, LLC, incorporated herein by reference to
Exhibit 2.2 to the Registrant’s Current Report on
Form 8-K
filed on January 29, 2009.
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2.4
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Second Amendment to Merger Agreement, dated as of May 19,
2009, by and among the Registrant, GERA Danbury LLC, GERA
Property Acquisition, LLC, Matrix Connecticut, LLC and Matrix
Danbury, LLC, incorporated herein by reference to
Exhibit 2.1 to the Registrant’s Current Report on
Form 8-K
filed on May 26, 2009.
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(3) Articles
of Incorporation and Bylaws
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3.1
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Restated Certificate of Incorporation of the Registrant,
incorporated herein by reference to Exhibit 3.2 to the
Registrant’s Annual Report on
Form 10-K
filed on March 31, 1995.
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3.2
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Certificate of Retirement with Respect to 130,233 Shares of
Junior Convertible Preferred Stock of Grubb & Ellis
Company, filed with the Delaware Secretary of State on
January 22, 1997, incorporated herein by reference to
Exhibit 3.3 to the Registrant’s Quarterly Report on
Form 10-Q
filed on February 13, 1997.
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171
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3.3
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Certificate of Retirement with Respect to 8,894 Shares of
Series A Senior Convertible Preferred Stock,
128,266 Shares of Series B Senior Convertible Preferred
Stock, and 19,767 Shares of Junior Convertible Preferred
Stock of Grubb & Ellis Company, filed with the
Delaware Secretary State on January 22, 1997, incorporated
herein by reference to Exhibit 3.4 to the Registrant’s
Quarterly Report on
Form 10-Q
filed on February 13, 1997.
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3.4
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Amendment to the Restated Certificate of Incorporation of the
Registrant as filed with the Delaware Secretary of State on
December 9, 1997, incorporated herein by reference to
Exhibit 4.4 to the Registrant’s Statement on
Form S-8
filed on December 19, 1997 (File
No. 333-42741).
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3.5
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Amended and Restated Certificate of Designations, Number, Voting
Powers, Preferences and Rights of Series A Preferred Stock
of Grubb & Ellis Company, as filed with the Secretary
of State of Delaware on September 13, 2002, incorporated
herein by reference to Exhibit 3.8 to the Registrant’s
Annual Report on
Form 10-K
filed on October 15, 2002.
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3.6
|
Certificate of Designations, Number, Voting Powers, Preferences
and Rights of
Series A-1
Preferred Stock of Grubb & Ellis Company, as filed
with the Secretary of State of Delaware on January 4, 2005,
incorporated herein by reference to Exhibit 2 to the
Registrant’s Current Report on
Form 8-K
filed on January 6, 2005.
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3.7
|
Preferred Stock Exchange Agreement, dated as of
December 30, 2004, between the Registrant and Kojaian
Ventures, LLC, incorporated herein by reference to
Exhibit 1 to the Registrant’s Current Report on
Form 8-K
filed on January 6, 2005.
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3.8
|
Certificate of Designations, Number, Voting Powers, Preferences
and Rights of
Series A-1
Preferred Stock of Grubb & Ellis Company, as filed
with the Secretary of State of Delaware on January 4, 2005,
incorporated herein by reference to Exhibit 2 to the
Registrant’s Current Report on
Form 8-K
filed on January 6, 2005.
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3.9
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Certificate of Amendment to the Amended and Restated Certificate
of Incorporation of Grubb & Ellis Company as filed
with the Delaware Secretary of State on December 7, 2007,
incorporated herein by reference to Exhibit 3.1 to the
Registrant’s Current Report on
Form 8-K
filed on December 13, 2007.
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3.10
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Bylaws of the Registrant, as amended and restated effective
May 31, 2000, incorporated herein by reference to
Exhibit 3.5 to the Registrant’s Annual Report on
Form 10-K
filed on September 28, 2000.
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3.11
|
Amendment to the Amended and Restated By-laws of the Registrant,
effective as of December 7, 2007, incorporated herein by
reference to Exhibit 3.2 to Registrant’s Current
Report on
Form 8-K
filed on December 13, 2007.
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3.12
|
Amendment to the Amended and Restated By-laws of the Registrant,
effective as of January 25, 2008, incorporated herein by
reference to Exhibit 3.1 to Registrant’s Current
Report on
Form 8-K
filed on January 31, 2008.
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3.13
|
Amendment to the Amended and Restated By-laws of the Registrant,
effective as of October 26, 2008, incorporated herein by
reference to Exhibit 3.1 to Registrant’s Current
Report on
Form 8-K
filed on October 29, 2008.
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3.14
|
Amendment to the Amended and Restated By-laws of the Registrant,
effective as of February 5, 2009, incorporated herein by
reference to Exhibit 3.1 to Registrant’s Current
Report on
Form 8-K
filed on February 9, 2009.
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172
(4) Instruments
Defining the Rights of Security Holders, including
Indentures.
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4.1
|
Registration Rights Agreement, dated as of April 28, 2006,
between the Registrant, Kojaian Ventures, LLC and Kojaian
Holdings, LLC, incorporated herein by reference to
Exhibit 99.2 to the Registrant’s Current Report on
Form 8-K
filed on April 28, 2006.
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4.2
|
Warrant Agreement, dated as of May 18, 2009, by and between
the Registrant, Deutsche Bank Trust Company Americas, Fifth
Third Bank, JPMorgan Chase, N.A. and KeyBank, National
Association, incorporated herein by reference to
Exhibit 4.2 to the Registrant’s Annual Report on
Form 10-K
filed on May 27, 2009.
|
On an individual basis, instruments other than Exhibits listed
above under Exhibit 4 defining the rights of holders of
long-term debt of the Registrant and its consolidated
subsidiaries and partnerships do not exceed ten percent of total
consolidated assets and are, therefore, omitted; however, the
Company will furnish supplementally to the Commission any such
omitted instrument upon request.
(10) Material
Contracts
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10.1*
|
Employment Agreement entered into on November 9, 2004,
between Robert H. Osbrink and the Registrant, effective
January 1, 2004, incorporated herein by reference to
Exhibit 10.1 to the Registrant’s Quarterly Report on
Form 10-Q
filed on November 15, 2004.
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10.2*
|
Employment Agreement entered into on March 8, 2005, between
Mark E. Rose and the Registrant, incorporated herein by
reference to Exhibit 10.1 to the Registrant’s Current
Report on
Form 8-K
filed on March 11, 2005.
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10.3*
|
Employment Agreement, dated as of January 1, 2005, between
Maureen A. Ehrenberg and the Registrant, incorporated herein by
reference to Exhibit 1 to the Registrant’s Current
Report on Form
8-K
filed on
June 10, 2005.
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|
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10.4*
|
First Amendment to Employment Agreement entered into between
Robert Osbrink and the Registrant, dated as of September 7,
2005, incorporated herein by reference to Exhibit 10.6 to
the Registrant’s Report on
Form 10-K
filed on September 28, 2005.
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|
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10.5*
|
Form of Restricted Stock Agreement between the Registrant and
each of the Registrant’s Outside Directors, dated as of
September 22, 2005, incorporated herein by reference to
Exhibit 10.15 to Amendment No. 1 to the Registrant’s
Registration Statement on
Form S-1
filed on June 19, 2006 (File
No. 333-133659).
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10.6*
|
Employment Agreement entered into on April 1, 2006, between
Frances P. Lewis and the Registrant, incorporated herein by
reference to Exhibit 10.17 to the Registrant’s Current
Report on
Form 10-K
filed on September 28, 2006.
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|
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10.7*
|
Grubb & Ellis Company 2006 Omnibus Equity Plan
effective as of November 9, 2006, incorporated herein by
reference to Appendix A to the Registrant’s Proxy
Statement for the 2006 Annual Meeting of Stockholders filed on
October 10, 2006.
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10.8
|
Purchase and Sale Agreement between Abrams Office Center Ltd and
GERA Property Acquisition LLC, a wholly-owned subsidiary of the
Registrant, dated as of October 24, 2006, incorporated
herein by reference to Exhibit 99.1 to the
Registrant’s Current Report on Form
8-K
filed on
October 30, 2006.
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|
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10.9*
|
Second Amendment to Employment Agreement entered into between
Robert H. Osbrink and the Registrant, dated as of
November 15, 2006, incorporated herein by reference to
Exhibit 1 to the Registrant’s Current Report on
Form 8-K
filed on November 21, 2006.
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|
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|
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10.10
|
Letter Agreement between Abrams Office Centre and GERA Property
Acquisition LLC, a wholly owned subsidiary of the Registrant,
dated December 8, 2006, incorporated herein
|
173
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|
|
by reference to Exhibit 99.1 to the Registrant’s
Current Report on
Form 8-K
filed on December 14, 2006.
|
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10.11
|
Second Amendment to the Purchase and Sale Agreement between
Abrams Office Centre, Ltd. and GERA Property Acquisition LLC, a
wholly owned subsidiary of the Registrant, dated
December 15, 2006, incorporated herein by reference to
Exhibit 99.1 to the Registrant’s Current Report on
Form 8-K
filed on December 21, 2006.
|
|
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10.12
|
Letter Agreement between Abrams Office Centre, Ltd. and GERA
Property Acquisition LLC, a wholly owned subsidiary of the
Registrant, dated December 29, 2006, incorporated herein by
reference to Exhibit 99.1 to the Registrant’s Current
Report on
Form 8-K
filed on January 5, 2007.
|
|
|
|
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10.13
|
Letter Agreement between Abrams Office Centre, Ltd. and GERA
Property Acquisition LLC, a wholly owned subsidiary of the
Registrant, dated December 29, 2006, incorporated herein by
reference to Exhibit 99.2 to the Registrant’s Current
Report on
Form 8-K
filed on January 5, 2007.
|
|
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10.14
|
Letter Agreement between Abrams Office Centre, Ltd. and GERA
Property Acquisition LLC, a wholly owned subsidiary of the
Registrant, dated January 4, 2007, incorporated herein by
reference to Exhibit 99.3 to the Registrant’s Current
Report on
Form 8-K
filed on January 5, 2007.
|
|
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10.15
|
Letter Agreement between Abrams Office Centre, Ltd. and GERA
Property Acquisition LLC, a wholly owned subsidiary of the
Registrant, dated January 19, 2007, incorporated herein by
reference to Exhibit 99.1 to the Registrant’s Current
Report on
Form 8-K
filed on January 25, 2007.
|
|
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10.16
|
Purchase and Sale Agreement between F/B 6400 Shafer Ct.
(Rosemont), LLC and GERA Property Acquisition LLC, a wholly
owned subsidiary of the Registrant, dated as of February 9,
2007, incorporated herein by reference to Exhibit 99.1 to
the Registrant’s Current Report on
Form 8-K
filed on February 9, 2007.
|
|
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10.17*
|
Employment Agreement between Richard W. Pehlke and the
Registrant, dated as of February 9, 2007, incorporated
herein by reference to Exhibit 99.1 to the
Registrant’s Current Report on
Form 8-K
filed on February 15, 2007.
|
|
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10.18*
|
Amendment No. 1 Employment Agreement between Richard W.
Pehlke and the Registrant, dated as of December 23, 2008,
incorporated herein by reference to Exhibit 10.1 to the
Registrant’s Current Report on Form
8-K
filed on
December 23, 2008.
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|
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10.19
|
Purchase and Sale Agreement between Danbury Buildings Co., L.P.,
Danbury Buildings, Inc. and GERA Property Acquisition LLC, a
wholly owned subsidiary of the Registrant, dated
February 20, 2007, incorporated herein by reference to
Exhibit 99.2 to the Registrant’s Current Report on
Form 8-K
filed on February 22, 2007.
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|
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10.20
|
Letter Agreement between Danbury Buildings Co., L.P., Danbury
Buildings, Inc. and GERA Property Acquisition LLC, a wholly
owned subsidiary of the Registrant, dated March 16, 2007,
incorporated herein by reference to Exhibit 99.1 to the
Registrant’s Current Report on
Form 8-K
filed on March 21, 2007.
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10.21
|
Amendment to Purchase and Sale Agreement between Danbury
Buildings, Inc. and Danbury Buildings Co., L.P. and GERA
Property Acquisition LLC, a wholly owned subsidiary of the
Registrant, dated February 20, 2007, incorporated herein by
reference to Exhibit 99.1 to the Registrant’s Current
Report on
Form 8-K
filed on May 3, 2007.
|
|
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|
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10.22
|
Letter Amendment to Purchase and Sale Agreement between Danbury
Buildings, Inc. and Danbury Buildings Co., L.P. and GERA
Property Acquisition LLC, a wholly owned
|
174
|
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|
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|
|
subsidiary of the Registrant, dated as of April 30, 2007,
incorporated herein by reference to Exhibit 99.2 to the
Registrant’s Current Report on Form
8-K
filed on
May 3, 2007.
|
|
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10.23
|
Form of Voting Agreement between Registrant and certain
stockholders or NNN Realty Advisors, Inc., incorporated herein
by reference to Exhibit 10.1 to the Registrant’s
Current Report on Form
8-K
filed on
May 23, 2007.
|
|
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|
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10.24
|
Form of Voting Agreement between NNN Realty Advisors, Inc. and
certain stockholders of the Registrant, incorporated herein by
reference to Exhibit 10.2 to the Registrant’s Current
Report on Form
8-K
filed on
May 23, 2007.
|
|
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|
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10.25
|
Form of Escrow Agreement between NNN Realty Advisors, Inc.,
Wilmington Trust Company and the Registrant, incorporated
herein by reference to Exhibit 10.3 to the
Registrant’s Current Report on Form
8-K
filed on
May 23, 2007.
|
|
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|
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10.26
|
Deed of Trust, Security Agreement, Assignment of Rents and
Fixture Filing by and among GERA Abrams Centre LLC, Rebecca S.
Conrad, as Trustee for the benefit of Wachovia Bank, National
Association, dated as of June 15, 2007 incorporated herein
by reference to Exhibit 10.1 to the Registrant’s
Current Report on Form
8-K
filed on
June 19, 2007.
|
|
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|
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10.27
|
Commercial Offer to purchase by and between Aurora Health Care,
Inc. and Triple Net Properties, LLC, dated November 21,
2007, incorporated herein by reference to Exhibit 10.1 to
the Registrant’s Current Report on
Form 8-K
filed on December 28, 2007.
|
|
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|
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10.28
|
First Amendment to Offer to Purchase by and between Aurora
Medical Group, Inc. and Triple Net Properties, LLC, dated
November 29, 2007, incorporated herein by reference to
Exhibit 10.2 to the Registrant’s Current Report on
Form 8-K
filed on December 28, 2007.
|
|
|
|
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10.29
|
Form of Lease among NNN Eastern Wisconsin Medical Portfolio, LLC
and Aurora Medical Group, Inc., dated as of December 21,
2007, incorporated herein by reference to Exhibit 10.3 to
the Registrant’s Current Report on
Form 8-K
filed on December 28, 2007.
|
|
|
|
|
10.30
|
Form of Subordination, Non-Disturbance and Attornment Agreement,
between Aurora Medical Group, Inc. and PNC Bank, National
Association dated as of December 21, 2007, incorporated
herein by reference to Exhibit 10.4 to the
Registrant’s Current Report on Form
8-K
filed on
December 28, 2007.
|
|
|
|
|
10.31
|
Form of Estoppel Certificate from Aurora Medical Group, Inc. to
PNC Bank, National Association, dated as of December 21,
2007 incorporated herein by reference to Exhibit 10.5 to
the Registrant’s Current Report on
Form 8-K
filed on December 28, 2007.
|
|
|
|
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10.32
|
Form of Guaranty executed by Aurora Health Care, Inc. in favor
of NNN Eastern Wisconsin Medical Portfolio, LLC dated
December 21, 2007, incorporated herein by reference to
Exhibit 10.6 to the Registrant’s Current Report on
Form 8-K
filed on December 28, 2007.
|
|
|
|
|
10.33
|
Promissory Note for $32,300,000 senior loan of NNN Eastern
Wisconsin Medical Portfolio, LLC to the order of PNC Bank,
National Association, dated December 21, 2007, incorporated
herein by reference to Exhibit 10.7 to the
Registrant’s Current Report on Form
8-K
filed on
December 28, 2007.
|
|
|
|
|
10.34
|
Promissory Note for $3,400,000 mezzanine loan by NNN Eastern
Wisconsin Medical Portfolio, LLC to the order of PNC Bank,
National Association, dated December 21, 2007, incorporated
herein by reference to Exhibit 10.8 to the
Registrant’s Current Report on Form
8-K
filed on
December 28, 2007.
|
|
|
|
|
10.35
|
Mortgage, Security Agreement, Assignment of Leases and Rents and
Fixture Filing by NNN Eastern Wisconsin Medical Portfolio, LLC
in favor of PNC Bank, National
|
175
|
|
|
|
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|
|
Association, dated December 21, 2007, incorporated herein
by reference to Exhibit 10.9 to the Registrant’s
Current Report on
Form 8-K
filed on December 28, 2007.
|
|
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|
|
|
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10.36
|
Agreement for Purchase and Sale of Real Property and Escrow
Instructions, dated as of October 31, 2008, by and between
GERA Danbury LLC and Matrix Connecticut, LLC, incorporated
herein by reference to Exhibit 99.1 to the
Registrant’s Current Report on Form
8-K
filed on
November 5, 2008.
|
|
|
|
|
10.37*
|
Employment Agreement between NNN Realty Advisors, Inc. and Scott
D. Peters incorporated herein by reference to Exhibit 10.26
to the Registrant’s Annual Report on
Form 10-K
filed on March 17, 2008.
|
|
|
|
|
10.38*
|
Employment Agreement between NNN Realty Advisors, Inc. and
Andrea R. Biller incorporated herein by reference to
Exhibit 10.27 to the Registrant’s Annual Report on
Form 10-K
filed on March 17, 2008.
|
|
|
|
|
10.39*
|
Employment Agreement between NNN Realty Advisors, Inc. and
Francene LaPoint incorporated herein by reference to
Exhibit 10.28 to the Registrant’s Annual Report on
Form 10-K
filed on March 17, 2008.
|
|
|
|
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10.40
|
Employment Agreement between NNN Realty Advisors, Inc. and
Jeffrey T. Hanson incorporated herein by reference to
Exhibit 10.29 to the Registrant’s Annual Report on
Form 10-K
filed on March 17, 2008.
|
|
|
|
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10.41
|
Indemnification Agreement dated as of October 23, 2006
between Anthony W. Thompson and NNN Realty Advisors, Inc.,
incorporated herein by reference to Exhibit 10.30 to the
Registrant’s Annual Report on
Form 10-K
filed on March 17, 2008.
|
|
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|
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10.42
|
Indemnification and Escrow Agreement by and among Escrow Agent,
NNN Realty Advisors, Inc., Anthony W. Thompson, Louis J. Rogers
and Jeffrey T. Hanson, together with Certificate as to
Authorized Signatures incorporated herein by reference to
Exhibit 10.31 to the Registrant’s Annual Report on
Form 10-K
filed on March 17, 2008.
|
|
|
|
|
10.43*
|
Form of Indemnification Agreement executed by Andrea R. Biller,
Glenn L. Carpenter, Howard H. Greene, Jeffrey T. Hanson, Gary H.
Hunt, C. Michael Kojaian, Francene LaPoint, Robert J.
McLaughlin, Devin I. Murphy, Robert H. Osbrink, Richard W.
Pehlke, Scott D. Peters, Dylan Taylor, Jacob Van Berkel, D.
Fleet Wallace and Rodger D. Young. incorporated herein by
reference to Exhibit 10.41 to the Registrant’s Annual
Report on
Form 10-K
filed on March 17, 2008.
|
|
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10.44*
|
Change of Control Agreement dated December 23, 2008 by and
between Dylan Taylor and the Registrant, incorporated herein by
reference to Exhibit 10.2 to the Registrant’s Current
Report on
Form 8-K
filed on December 24, 2008.
|
|
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|
|
10.45*
|
Change of Control Agreement dated December 23, 2008 by and
between Jacob Van Berkel and the Company, incorporated herein by
reference to Exhibit 10.3 to the Registrant’s Current
Report on
Form 8-K
filed on December 24, 2008.
|
|
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10.46
|
First Amendment to Agreement for Purchase and Sale of Real
Property and Escrow Instructions, dated as of January 8,
2009, by and between GERA Danbury LLC and Matrix Connecticut,
LLC, incorporated herein by reference to Exhibit 99.1 to
the Registrant’s Current Report on
Form 8-K
filed on January 14, 2009.
|
|
|
|
|
10.47
|
Second Amendment to Agreement for Purchase and Sale of Real
Property and Escrow Instructions, dated as of January 12,
2009, by and between GERA Danbury LLC and Matrix Connecticut,
LLC, incorporated herein by reference to Exhibit 99.2 to
the Registrant’s Current Report on
Form 8-K
filed on January 14, 2009.
|
176
|
|
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|
|
|
10.48
|
Third Amendment to Agreement for Purchase and Sale of Real
Property and Escrow Instructions, dated as of January 14,
2009, by and between GERA Danbury LLC and Matrix Connecticut,
LLC, incorporated herein by reference to Exhibit 99.1 to
the Registrant’s Current Report on
Form 8-K
filed on January 21, 2009.
|
|
|
|
|
10.49
|
Fourth Amendment to Agreement for Purchase and Sale of Real
Property and Escrow Instructions, dated as of January 16,
2009, by and between GERA Danbury LLC and Matrix Connecticut,
LLC, incorporated herein by reference to Exhibit 99.2 to
the Registrant’s Current Report on
Form 8-K
filed on January 21, 2009.
|
|
|
|
|
10.50
|
Fifth Amendment to Agreement for Purchase and Sale of Real
Property and Escrow Instructions, dated as of January 20,
2009, by and between GERA Danbury LLC and Matrix Connecticut,
LLC, incorporated herein by reference to Exhibit 99.3 to
the Registrant’s Current Report on
Form 8-K
filed on January 21, 2009.
|
|
|
|
|
10.51
|
Sixth Amendment to Agreement for Purchase and Sale of Real
Property and Escrow Instructions, dated as of January 21,
2009, by and between GERA Danbury LLC and Matrix Connecticut,
LLC, incorporated herein by reference to Exhibit 99.2 to
the Registrant’s Current Report on
Form 8-K
filed on January 27, 2009.
|
|
|
|
|
10.52
|
Escrow Agreement, dated as of January 22, 2009, by and
among Grubb & Ellis Company, Matrix Connecticut, LLC
and First American Title Insurance Company, incorporated
herein by reference to Exhibit 99.1 to the Registrant’s
Current Report on
Form 8-K/A
filed on January 29, 2009.
|
|
|
|
|
10.53
|
Mortgage, Security Agreement, Assignment of Rents and Fixture
Filing between GERA 6400 Shafer LLC to Wachovia Bank, National
Association dated as of June 15, 2007, incorporated herein
by reference to Exhibit 10.2 to the Registrant’s
Current Report on Form
8-K
filed on
June 19, 2007.
|
|
|
|
|
10.54
|
Open-end Mortgage, Security Agreement, Assignment of Rents and
Fixture Filing between GERA Danbury LLC to Wachovia Bank,
National Association dated as of June 15, 2007,
incorporated herein by reference to Exhibit 10.3 to the
Registrant’s Current Report on Form
8-K
filed on
June 19, 2007.
|
|
|
|
|
10.55
|
Letter Agreement by and among Wachovia Bank, National
Association, GERA Abrams Centre LLC and GERA 6400 Shafer LLC,
dated September 28, 2007, incorporated herein by reference
to Exhibit 10.1 to the Registrant’s Current Report on
Form 8-K
filed on October 4, 2007.
|
|
|
|
|
10.56
|
Letter Agreement by and between Wachovia Bank, National
Association and GERA Danbury, LLC, dated September 28,
2007, incorporated herein by reference to Exhibit 10.2 to
the Registrant’s Current Report on
Form 8-K
filed on October 4, 2007.
|
|
|
|
|
10.57
|
Second Amended and Restated Credit Agreement, dated as of
December 7, 2007, among the Registrant, certain of its
subsidiaries (the “Guarantors”), the
“Lender” (as defined therein), Deutsche Bank
Securities, Inc., as syndication agent, sole book-running
manager and sole lead arranger, and Deutsche Bank
Trust Company Americas, as initial issuing bank, swing line
bank and administrative agent, incorporated herein by reference
to Exhibit 10.1 to Registrant’s Current Report on
Form 8-K
filed on December 13, 2007.
|
|
|
|
|
10.58
|
Second Amended and Restated Security Agreement, dated as of
December 7, 2007, among the Registrant, certain of its
subsidiaries and Deutsche Bank Trust Company Americas, as
administrative agent, for the “Secured Parties” (as
defined therein), incorporated herein by reference to
Exhibit 10.2 to Registrant’s Current Report on Form
8-K
filed on
December 13, 2007.
|
177
|
|
|
|
|
|
10.59
|
First Letter Amendment, dated as of August 4, 2008, by and
among the Registrant, the guarantors named therein, Deutsche
Bank Trust Company Americas, as administrative agent, the
financial institutions identified therein as lender parties,
Deutsche Bank Trust Company Americas, as syndication agent,
and Deutsche Bank Securities Inc., as sole book running manager
and sole lead arranger, incorporated herein by reference to
Exhibit 99.1 to Registrant’s Current Report on
Form 8-K
filed on August 6, 2008.
|
|
|
|
|
10.60
|
Second Letter Amendment to the Registrant’s senior secured
revolving credit facility executed on November 4, 2008, and
dated as of September 30, 2008, incorporated herein by
reference to Exhibit 10.2 to the Registrant’s Quarterly
Report on
Form 10-Q
filed on November 10, 2008.
|
|
|
|
|
10.61
|
Third Amended and Restated Credit Agreement, dated as of
May 18, 2009, among the Registrant, certain of its
subsidiaries (the “Guarantors”), the
“Lender” (as defined therein), Deutsche Bank
Securities, Inc., as syndication agent, sole book-running
manager and sole lead arranger, and Deutsche Bank
Trust Company Americas, as initial issuing bank, swing line
bank and administrative agent, incorporated herein by reference
to Exhibit 10.61 to the Registrant’s Annual Report on
Form 10-K
filed on May 27, 2009.
|
|
|
|
|
10.62
|
Third Amended and Restated Security Agreement, dated as of
May 18, 2009, among the Registrant, certain of its
subsidiaries and Deutsche Bank Trust Company Americas, as
administrative agent, for the “Secured Parties” (as
defined therein), incorporated herein by reference to
Exhibit 10.62 to the Registrant’s Annual Report on
Form 10-K
filed on May 27, 2009.
|
(14) Code
of Ethics
|
|
|
|
|
|
14.1
|
Amendment to Code of Business Conduct and Ethics of the
Registrant, incorporated herein by reference to
Exhibit 14.1 to the Registrant’s Current Report on
Form 8-K
filed on January 31, 2008.
|
(16) Change
in Certifying Accountants
|
|
|
|
|
|
16.1
|
Letter from Deloitte & Touche LLP to the Securities
and Exchange Commission, dated December 14, 2007,
incorporated herein by reference to Exhibit 16.1 to the
Registrant’s Current Report on Form
8-K
filed on
December 14, 2007.
|
(21)† Subsidiaries
of the Registrant
(23) Consent
of Independent Registered Public Accounting Firm
|
|
|
|
|
|
23.1†
|
Consent of Ernst & Young LLP
|
|
|
|
|
23.2†
|
Consent of Deloitte & Touche LLP
|
|
|
|
|
23.3†
|
Consent of PKF
|
(31.1)† Section 302
Certification of Principal Executive Officer
(31.2)† Section 302
Certification of Chief Financial Officer
(32)† Section 906
Certification
|
|
|
|
|
|
99.1
|
Letter of termination from Grubb &Ellis Realty
Advisors, Inc. to the Registrant dated as of February 28,
2008, incorporated herein by reference to Exhibit 99.1 to
the Registrant’s Current Report on
Form 8-K
filed on February 29, 2008.
|
|
|
|
|
|
|
†
|
Filed herewith.
|
|
|
|
|
*
|
Management contract or compensatory plan arrangement.
|
178
SCHEDULE II —
VALUATION AND QUALIFYING ACCOUNTS
GRUBB &
ELLIS COMPANY
December 31,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
Charged
|
|
|
|
|
|
|
|
Beginning
|
|
to
|
|
|
|
Balance at
|
|
|
|
of
|
|
Costs and
|
|
|
|
End
|
(In thousands)
|
|
Period
|
|
Expenses
|
|
Deductions(1)
|
|
of Period
|
|
|
|
Allowance for accounts receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
$
|
1,376
|
|
|
$
|
12,446
|
|
|
$
|
(3,289
|
)
|
|
$
|
10,533
|
|
|
Year Ended December 31, 2007
|
|
$
|
723
|
|
|
$
|
709
|
|
|
$
|
(56
|
)
|
|
$
|
1,376
|
|
|
Year Ended December 31, 2006
|
|
$
|
153
|
|
|
$
|
886
|
|
|
$
|
(316
|
)
|
|
$
|
723
|
|
|
Allowance for advances and notes receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
$
|
1,839
|
|
|
$
|
1,331
|
|
|
$
|
—
|
|
|
$
|
3,170
|
|
|
Year Ended December 31, 2007
|
|
$
|
1,400
|
|
|
$
|
451
|
|
|
$
|
(12
|
)
|
|
$
|
1,839
|
|
|
Year Ended December 31, 2006
|
|
$
|
562
|
|
|
$
|
811
|
|
|
$
|
27
|
|
|
$
|
1,400
|
|
|
|
|
|
|
(1)
|
|
Uncollectible accounts written off, net of recoveries
|
179
Schedule III —
REAL ESTATE AND ACCUMULATED DEPRECIATION
GRUBB &
ELLIS COMPANY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Which
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
|
|
|
|
|
|
|
|
|
in Latest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Costs to Company
|
|
|
Capitalized
|
|
|
|
|
|
|
|
|
Income
|
|
|
Gross Amount at Which Carried at December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
Buildings and
|
|
|
Subsequent to
|
|
|
Date
|
|
|
Date
|
|
|
Statement
|
|
|
|
|
|
Buildings and
|
|
|
|
|
|
Accumulated
|
|
|
(In thousands)
|
|
Encumbrance
|
|
|
Land
|
|
|
Improvements
|
|
|
Acquisition
|
|
|
Constructed
|
|
|
Acquired
|
|
|
is Computed
|
|
|
Land
|
|
|
Improvements
|
|
|
Total
|
|
|
Depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Properties Held for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rocky Mountain Exchange (Office)
|
|
$
|
411
|
|
|
$
|
1,202
|
|
|
$
|
2,559
|
|
|
$
|
505
|
|
|
|
1984
|
|
|
|
6/8/2005
|
|
|
|
N/A
|
|
|
$
|
396
|
|
|
$
|
1,089
|
|
|
$
|
1,485
|
|
|
$
|
366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denver, CO
200 Galleria
|
|
|
84,000
|
|
|
|
7,440
|
|
|
|
64,591
|
|
|
|
571
|
|
|
|
1984
|
|
|
|
1/31/2007
|
|
|
|
N/A
|
|
|
|
5,527
|
|
|
|
50,276
|
|
|
|
55,803
|
|
|
|
4,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Atlanta, GA
The Avallon Complex
|
|
|
53,000
|
|
|
|
7,748
|
|
|
|
54,771
|
|
|
|
628
|
|
|
|
1986-2001
|
|
|
|
7/10/2007
|
|
|
|
N/A
|
|
|
|
4,765
|
|
|
|
34,650
|
|
|
|
39,415
|
|
|
|
1,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Austin, TX
Danbury Corporate Center
|
|
|
78,000
|
|
|
|
3,689
|
|
|
|
58,666
|
|
|
|
9,427
|
|
|
|
1981
|
|
|
|
12/7/2007
|
|
|
|
N/A
|
|
|
|
1,008
|
|
|
|
57,370
|
|
|
|
58,378
|
|
|
|
2,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Danbury, CT
Abrams Centre
|
|
|
20,540
|
|
|
|
3,012
|
|
|
|
14,650
|
|
|
|
1,268
|
|
|
|
1983
|
|
|
|
12/7/2007
|
|
|
|
N/A
|
|
|
|
2,025
|
|
|
|
11,968
|
|
|
|
13,993
|
|
|
|
1,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dallas, TX
6400 Shafer
|
|
|
21,961
|
|
|
|
3,222
|
|
|
|
16,313
|
|
|
|
777
|
|
|
|
1979
|
|
|
|
12/7/2007
|
|
|
|
N/A
|
|
|
|
1,105
|
|
|
|
8,621
|
|
|
|
9,726
|
|
|
|
640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rosemont, IL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
257,912
|
|
|
$
|
26,313
|
|
|
$
|
211,550
|
|
|
$
|
13,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,826
|
|
|
$
|
163,974
|
|
|
$
|
178,800
|
|
|
$
|
11,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The changes in real estate for the year ended December 31,
2008 are as follows:
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
335,957
|
|
|
Acquisitions
|
|
|
144,162
|
|
|
Additions
|
|
|
12,813
|
|
|
Real estate related impairments
|
|
|
(71,488
|
)
|
|
Disposals and deconsolidations
|
|
|
(242,644
|
)
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
178,800
|
|
|
|
|
|
|
|
|
|
|
|
(b)
|
The changes in accumulated depreciation for the year ended
December 31, 2007 are as follows:
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
3,781
|
|
|
Additions
|
|
|
7,760
|
|
|
Disposals and deconsolidations
|
|
|
(149
|
)
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
11,392
|
|
|
|
|
|
|
|
|
|
|
|
(b)
|
The changes in real estate for the year ended December 31,
2007 are as follows:
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
44,325
|
|
|
Acquisitions
|
|
|
671,985
|
|
|
Additions
|
|
|
266
|
|
|
Disposals and deconsolidations
|
|
|
(380,619
|
)
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
335,957
|
|
|
|
|
|
|
|
|
|
|
|
(b)
|
The changes in accumulated depreciation for the year ended
December 31, 2007 are as follows:
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Balance at December 31, 2006
|
|
$
|
230
|
|
|
Additions
|
|
|
3,845
|
|
|
Disposals and deconsolidations
|
|
|
(294
|
)
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
3,781
|
|
|
|
|
|
|
|
180
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.
|
|
|
|
Grubb & Ellis Company
(Registrant)
|
|
|
|
|
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/s/ Richard
W.
Pehlke
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|
November 20, 2009
|
Richard W. Pehlke
Interim Principal Executive Officer
(Principal Executive Officer)
|
|
|
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
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Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
|
/s/
Richard
W. Pehlke
Richard
W. Pehlke
|
|
Chief Financial Officer
(Principal Executive, Financial and Accounting Officer)
|
|
November 20, 2009
|
|
|
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|
/s/
Glenn
L. Carpenter
Glenn
L. Carpenter
|
|
Director
|
|
November 20, 2009
|
|
|
|
|
|
|
|
/s/
Harold
H. Greene
Harold
H. Greene
|
|
Director
|
|
November 20, 2009
|
|
|
|
|
|
|
|
/s/
Gary
H. Hunt
Gary
H. Hunt
|
|
Director
|
|
November 20, 2009
|
|
|
|
|
|
|
|
/s/
C.
Michael Kojaian
C.
Michael Kojaian
|
|
Director
|
|
November 20, 2009
|
|
|
|
|
|
|
|
/s/
Robert
J. McLaughlin
Robert
J. McLaughlin
|
|
Director
|
|
November 20, 2009
|
|
|
|
|
|
|
|
/s/
Devin
I. Murphy
Devin
I. Murphy
|
|
Director
|
|
November 20, 2009
|
|
|
|
|
|
|
|
/s/
D.
Fleet Wallace
D.
Fleet Wallace
|
|
Director
|
|
November 20, 2009
|
|
|
|
|
|
|
|
/s/
Rodger
D. Young
Rodger
D. Young
|
|
Director
|
|
November 20, 2009
|
181
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