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Jones Lang LaSalle Income Property Trust, Inc. – ‘10-12G’ on 4/28/06

On:  Friday, 4/28/06, at 5:31pm ET   ·   Private-to-Public:  Document/Exhibit ¶  –  Release Delayed   ·   Accession #:  1193125-6-93206   ·   File #:  0-51948

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 4/28/06  Jones Lang LaSalle Income Pr… Inc 10-12G¶               15:2.7M                                   Donnelley … Solutions/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 10-12G      Form 10                                             HTML   1.56M 
15: CORRESP   ¶ Comment-Response or Other Letter to the SEC         HTML      3K 
 2: EX-3.1      Amended and Restated Articles of Incorportation     HTML     81K 
 3: EX-3.2      Amended and Restated Bylaws of Excelsior Lasalle    HTML     62K 
                          Property Fund, Inc.                                    
 4: EX-4.1      Form of Subscription Agreement                      HTML     61K 
 5: EX-10.1     Management Agreement                                HTML     66K 
 6: EX-10.2     Management Agreement and Expense Limitation and     HTML     18K 
                          Reimbursement Agreement                                
 7: EX-10.3     Letter Agreement, Dated as of June 16, 2004         HTML     17K 
 8: EX-10.4     Letter Agreement, Dated as of September 8, 2004     HTML     46K 
 9: EX-10.5     Investment Advisory Agreement, Dated December 23,   HTML    156K 
                          2004                                                   
10: EX-10.6     Letter Agreement, Dated as of December 23, 2004     HTML     31K 
11: EX-10.7     Investment Advisory Agreement                       HTML     19K 
12: EX-10.8     Excelsior Lasalle Property Fund, Inc                HTML     18K 
13: EX-10.9     Purchase Agreement                                  HTML    339K 
14: EX-21       Subsidiaries of Excelsior of La Salle Property      HTML     25K 
                          Fund, Inc.                                             

Table of Contents

As filed with the Securities and Exchange Commission on April 28, 2006

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10

GENERAL FORM FOR REGISTRATION OF SECURITIES

PURSUANT TO SECTION 12(b) OR 12(g)

OF THE SECURITIES EXCHANGE ACT OF 1934

Excelsior LaSalle Property Fund, Inc.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:

(203) 352-4400

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Class A Common Stock, $0.01 par value per share

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Cautionary Note Regarding Forward-Looking Statements

This General Form for Registration of Securities on Form 10 (this “Form 10”) may contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), regarding, among other things, our plans, strategies and prospects, both business and financial. Forward-looking statements include, but are not limited to, statements that represent our beliefs concerning future operations, strategies, financial results or other developments. Forward-looking statements can be identified by the use of forward-looking terminology such as, but not limited to, “may,” “should,” “expect,” “anticipate,” “estimate,” “would be,” “believe,” or “continue” or the negative or other variations of comparable terminology. Because these forward-looking statements are based on estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond our control or are subject to change, actual results could be materially different. Although we believe that our plans, intentions and expectations reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this Form 10 is filed with the SEC. Except as required by law, we do not undertake any obligation to update or revise any forward-looking statements contained in this Form 10. Important factors that could cause actual results to differ materially from the forward-looking statements are disclosed in “Item 1A. Risk Factors.”

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Item 1. Business.

GENERAL

Except where the context suggests otherwise, the terms “we,” “us,” “our” and the “Fund” refer to Excelsior LaSalle Property Fund, Inc.

We are filing this Form 10 to register our shares of Class A common stock, $0.01 par value per share (our “Common Stock” or “Shares”), pursuant to Section 12(g) of the Exchange Act. We are subject to the registration requirements of Section 12(g) of the Exchange Act because at December 31, 2005 the aggregate value of our assets exceeded applicable thresholds and our Common Stock was held of record by 500 or more persons. As a result of our obligation to register our securities with the Securities and Exchange Commission (the “SEC”) under the Exchange Act, we will be subject to the requirements of the Exchange Act rules. In particular, we will be required to file Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K, and Current Reports on Form 8-K and otherwise comply with the disclosure obligations of the Exchange Act applicable to issuers filing registration statements pursuant to Section 12(g).

The Fund is a Maryland corporation and was incorporated on May 28, 2004 (“Inception”). We initially issued 1,000 Shares to a sole stockholder, LaSalle U.S. Holdings, Inc. (“LUSHI”). On December 17, 2004, the Fund changed its legal name to Excelsior LaSalle Property Fund, Inc. The Fund was created to provide accredited investors within the meaning of Regulation D promulgated under the Securities Act of 1933 (the “Securities Act”) with an opportunity to participate in a private real estate investment fund that has elected to be taxed as a real estate investment trust (“REIT”) for federal income tax purposes. We are authorized to issue up to 5,000,000 Shares.

From Inception through December 22, 2004, LUSHI was the sole stockholder of the Fund, and the Fund was managed and advised by LaSalle Investment Management, Inc. (“LaSalle”), a Maryland corporation and an affiliate of LUSHI. During this time, we acquired an office building, two industrial buildings, an ownership interest in a retail joint venture and entered into contracts to purchase two additional industrial buildings.

On December 23, 2004, we held an initial closing (the “Initial Closing”) and sold an additional 935,100 Shares for $100 per share to approximately 400 accredited investors. As a result of the Initial Closing, LUSHI received a distribution in an amount equal to the cash flow generated by the Fund while LUSHI was our sole stockholder and the return of excess capital above the $10.0 million LUSHI had committed to invest. See “Item 7. Certain Relationships and Related Transactions” for a description of the LUSHI coinvestment. To give effect to LUSHI’s $10.0 million commitment, LUSHI was issued an additional 99,000 Shares at the Initial Closing at a value of $100 per share. Also on December 23, 2004, our sponsor, U.S. Trust Company, N.A., acting through its investment advisory division, U.S. Trust Company, N.A. Asset Management Division, became the manager of the Fund. On December 16, 2005, UST Advisers, Inc., a wholly-owned subsidiary of U.S. Trust Company, N.A., assumed the duties and responsibilities of U.S. Trust Company, N.A. Asset Management Division and became the manager of the Fund (the “Manager”). The Manager is registered as an investment advisor with the SEC. The Manager has the day-to-day responsibility for our management and administration pursuant to a management agreement between us and the Manager (the “Management Agreement”). On March 31, 2006, U.S. Trust Company, N.A. merged with its affiliate, United States Trust Company, National Association (“U.S. Trust”), with U.S. Trust as the surviving entity. The Manager is a wholly-owned subsidiary of U.S. Trust. U.S. Trust is a wholly-owned subsidiary of U.S. Trust Corporation, which is in turn a wholly-owned subsidiary of The Charles Schwab Corporation, a New York Stock Exchange-listed financial services firm.

The Manager and the Fund contracted with LaSalle to act as our investment advisor (the “Advisor”). The Advisor is registered as an investment advisor with the SEC. The Advisor has broad discretion with respect to our investment decisions and is responsible for selecting our investments and for managing our investment portfolio pursuant to the terms of the Advisory Agreement among the Fund, the Advisor and the Manager (the “Advisory Agreement”). LaSalle is a wholly-owned but operationally independent subsidiary of Jones Lang

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LaSalle Incorporated, a New York Stock Exchange-listed real estate services and money management firm. We have no employees as all operations are overseen and undertaken by the Manager and Advisor.

The Manager has retained The Townsend Group, at the expense of the Manager, to assist the Manager in reviewing the investment activities of the Advisor and the investment performance of the Fund’s assets and monitoring compliance with the Fund’s investment guidelines. The Townsend Group is a consulting firm whose exclusive focus is the asset class of real estate. Founded in 1983 and with offices in Cleveland, Denver and San Francisco, The Townsend Group is a provider of real estate consulting services to institutional investors in the United States.

From time to time since the Initial Closing we have sold additional Shares to accredited investors. As of April 21, 2006, there were 2,147,338 Shares outstanding.

For a description of our properties, see “Item 3. Properties.”

INVESTMENT STRATEGY

Our investment objective is to seek to generate attractive long-term risk-adjusted total returns. We intend to pursue our investment objective by investing in real estate and real estate related assets directly or through subsidiaries (as described below), including joint venture arrangements with third parties. We intend to acquire and manage a portfolio of real estate investments that is diversified by both property sector and by geographic market. Specifically, we intend to pursue investments in well-located, well-leased assets within the office, retail, industrial and apartment sectors in the United States (the “Primary Sectors”). We expect to actively manage the mix of properties and markets over time in response to changing operating fundamentals within each property sector and to changing economies and real estate markets in the cities considered for investment. When consistent with our investment objective, we will also seek to maximize the tax efficiency of our investments through tax-free exchanges and other tax planning strategies. Our investment strategy may be changed from time to time by our board of directors.

We expect that a majority of our total return will be generated from current income. We also expect to have the potential for moderate capital appreciation over a market cycle. We will seek to minimize risk and maintain stability of income and value through broad diversification across property sectors and geographic markets and by balancing tenant lease expirations and debt maturities across the portfolio. We expect to employ debt financing to enhance returns when mortgage interest rates are at attractive levels relative to real estate income yields. To moderate risk, we expect to limit overall portfolio leverage to 65% (portfolio leverage is calculated as our share of the current property debt balance divided by the fair value of all our real estate investments). We expect to rely primarily on fixed-rate financing to lock in favorable spreads between real estate income yields and mortgage interest rates, and expect to maintain a balanced schedule of debt maturities.

We may also seek to enhance overall portfolio returns by selectively investing in higher-risk properties involving more significant leasing and/or capital reinvestment challenges. After our net asset value, or NAV as defined under “Item 9. Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters—Calculation of Share Price—Net Asset Value Calculation” exceeds $300 million, we may invest up to 25% of our assets in investments in sectors other than the Primary Sectors and/or properties located outside of the United States (“Other Investments”). These investments will be considered when the anticipated incremental return outweighs the inherent incremental risk relative to the Primary Sectors. Pursuant to the terms of the Advisory Agreement, the Manager has retained the right to appoint one or more additional advisors with respect to Other Investments.

We intend to adhere to the above investment strategy for the remainder of 2006.

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INVESTMENT POLICIES

Investments in Real Estate or Interests in Real Estate

We may invest directly in real estate or indirectly in real estate through interests in corporations, limited liability companies, partnerships and joint ventures having an equity interest in real property, real estate investment trusts, ground leases, tenant-in-common interests, participating mortgages, convertible mortgages, second mortgages, mezzanine loans or other debt interests convertible into equity interests in real property, options to purchase real estate, real property purchase-and-leaseback transactions and other transactions and investments with respect to real estate. Prior to our NAV reaching $300 million, all real estate investments will be in the United States. After reaching the $300 million NAV threshold, up to 25% of our assets may be located outside the United States.

We intend, where appropriate, to employ leverage to enhance our returns. Long-term non-recourse financing, on a portfolio-wide basis, is not expected to exceed 65% of portfolio value without the approval of our board of directors. Leverage on any single property is not expected to exceed 75% of the property’s fair value without the approval of our board of directors. There is no set limit as to the number of mortgages that may be secured by a single property, as long as the 75% leverage threshold is not exceeded. Also, we have obtained an unsecured line of credit for up to $30 million (expandable to $50 million once our NAV exceeds $300 million, subject to certain financial covenants) for short-term operating and other working capital needs which is excluded from the portfolio leverage limits described above.

The Advisor performs hold/sell analyses for each property as part of the annual strategic planning process. A sale decision may originate at the portfolio level, where diversification objectives relating to property, geographical mix or scheduled lease expirations may indicate the need to rebalance the portfolio. A range of property-specific conditions may also indicate the need to sell, including changing demand fundamentals, potential market oversupply, changing conditions in capital markets, or changes in the asset’s competitive status in its market. Ultimately, the optimal holding period for every property is the period that maximizes return within our risk tolerance objectives. This goal is achieved when:

We have no limitation on the percentage of total assets that may be invested in any asset, nor the concentration of investments in any one geographic location nor to any individual tenant. The Advisory Agreement includes broad investment guidelines that provide for our diversification goals, which include goals for investment style, property type and geographic diversification.

Investment in Real Estate Mortgages

We may invest in real estate mortgages on properties, which may be first or second mortgages that may or may not be insured by a governmental body. We are not limited as to the percentage of total assets that may be invested in any real estate mortgage, nor the concentration of real estate mortgages in any one geographic location nor to any individual borrower though we intend to follow our diversification guidelines when making these investments. We will generally invest only in mortgage loans that provide some type of ownership feature, including participating mortgages, convertible mortgages, second mortgages, mezzanine loans or mortgages with purchase options. We do not intend to originate, service or warehouse real estate mortgages.

Securities of or Interests in Persons Primarily Engaged in Real Estate Activities

We intend to acquire equity interests in entities that own real estate. In this regard, we may invest in the securities of other issuers in connection with acquisitions of indirect interests in properties (normally general or

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limited partnership interests or membership interests in limited liability companies or other special purpose entities owning properties). We may in the future acquire some, all or substantially all of the securities or assets of other REITs or similar entities where that investment would be consistent with our investment policies and the REIT qualification requirements. We have not established limitations on the purchase of securities and interests in entities we may acquire as it would relate to securities listed on exchanges, minimum net income requirements or the period of operation for the issuer. We have not established limitations on the amount or percentage of our total assets that may be invested in any one issuer, other than those imposed by the gross income and asset tests that we must satisfy to qualify as a REIT. However, other than as described in this section, we do not anticipate investing in other issuers of securities for the purpose of exercising control or acquiring any investments primarily for sale in the ordinary course of business or holding any investments with a view to making short-term profits from their sale. In any event, we intend that our investments in securities will not require us to register as an “investment company” under the Investment Company Act of 1940, as amended (the “Investment Company Act”), and we intend to divest securities before any registration would be required.

Investments in Other Securities

We do not intend to invest in securities of persons (e.g., corporations) not engaged in real estate related activities.

POLICIES WITH RESPECT TO CERTAIN ACTIVITIES

The following is a discussion of our policies with respect to certain activities. These policies may be amended or revised, from time to time, at the discretion of our board of directors, without a vote of the stockholders.

To issue more classes or series of common stock

Our board of directors may classify or reclassify any unissued shares of our Common Stock from time to time in one or more classes or series of stock. We may issue various series of common stock in the future. If we issue any new series of common stock, we currently expect that it will have the same legal rights and preferences as our Shares.

To issue senior securities

We have not issued any senior securities and do not anticipate issuing any senior securities in the future.

To borrow money

We have borrowed and will continue to borrow, money to finance acquisitions and cover working capital needs. The Advisor has broad discretion over the financing and re-financing of the real estate investments, as well as borrowing money through the unsecured working capital credit facility. The Advisor may enter into non-recourse debt secured by a real estate investment, as long as the debt is limited to 75% of the fair value of the individual real estate investment. Our overall non-recourse, secured debt is limited to 65% of the fair value of all our real estate investments. Our board of directors has approved the use of an unsecured line of credit, for up to $30 million (expandable to $50 million once our NAV exceeds $300 million). Borrowings under the unsecured credit facility are not included in the 65% secured debt to fair value of all our real estate investments limitation. We may borrow money with variable interest rates and we may employ caps or swaps to limit our exposure to interest rate risk.

To make loans to other persons

We have and may in the future make loans, secured by real estate, to individuals. Such loans will be made when we believe it is in our best interest to gain control of real estate investments that fit within our investment

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guidelines. Loans to other persons (e.g., corporations), secured by real estate, fall under the broad discretion of the Advisor and generally will consist of participating mortgages, convertible mortgages, second mortgages, mezzanine loans or secured debt with a purchase option. We have not made, and will not make, loans to other persons that are not directly related to the acquisition of real estate investments. The Advisor does not have the authority to make loans that are not directly related to real estate investments.

To invest in the securities of other issuers for the purpose of exercising control

We have not invested, but may in the future invest, in securities of other issuers whose line of business relates to the ownership of real estate under the discretion of the Advisor for the purpose of exercising control of those issuers. All decisions to invest in securities of other issuers fall under the broad discretion of the Advisor.

To underwrite securities of other issuers

We have not underwritten, and will not underwrite, the securities of other issuers.

To engage in the purchase and sale (or turnover) of investments

We have and intend to continue to be engaged in the purchase of real estate investments and may, from time to time, invest excess cash in short-term, government-backed securities. We have not sold, but expect in the future to sell, individual real estate investments when the Advisor determines that the prospective returns or risk of the investment are not appropriate for the Fund. All decisions to purchase and sell real estate investments fall under the broad discretion of the Advisor.

To offer securities in exchange for property

We have not offered, but may in the future offer, securities in exchange for real estate investments subject to the consent of both the Manager and Advisor.

To repurchase or otherwise reacquire our Shares or other securities

Pursuant to our Share Repurchase Program, we intend to provide limited liquidity to our stockholders by conducting semi-annual tender offers. See “Item 11. Description of Registrant’s Securities To Be Registered—Share Repurchase Program.”

To make annual or other reports to security holders

We intend to make available to all stockholders audited annual financial statements and unaudited quarterly financial statements. Following effectiveness of this registration statement, we will be required to file annual, quarterly and current reports and other information with the SEC. You may obtain copies of any materials we file at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549, at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the Public Reference Room. The SEC also maintains an Internet website that contains reports, proxy and information statements, registration statements and other information about issuers that file electronically with the SEC. The address of that website is http://www.sec.gov.

COMPETITION

We face competition when attempting to make real estate investments, including competition from domestic and foreign financial institutions, other REITs, life insurance companies, pension funds, partnerships and individual investors. The leasing of real estate is highly competitive. Our properties compete for tenants with similar properties primarily on the basis of location, total occupancy costs (including base rent and operating expenses), services provided, and the design and condition of the improvements.

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SEASONALITY

Our investments are not materially impacted by seasonality, despite certain of our retail tenants being impacted by seasonality. Percentage rents (rents computed as a percentage of tenant sales) that we earn from investments in retail properties may, in the future, be impacted by seasonality.

ENVIRONMENTAL STRATEGIES

As an owner and operator of real estate, we are subject to various environmental laws. Compliance with existing laws has not had a material adverse effect on our financial condition and results of operations, and we do not believe it will have such an impact in the future. However, we cannot predict the impact of unforeseen environmental contingencies or new or changed environmental laws or regulations applicable to our current investments in properties or investments in properties we may make in the future. During our due diligence prior to making investments in properties, we retain qualified environmental consultants to assist us in identifying and quantifying environmental risks associated with such investments.

REPORTABLE SEGMENTS

Financial Accounting Standards Board (“FASB”) Statement No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”), requires disclosure of certain operating and financial data with respect to separate business activities within an enterprise. Our primary business is the ownership and operation of real estate investments. We evaluate cash flow and allocate resources on a property-by-property basis. We aggregate our properties into one reportable segment since all properties are institutional quality commercial real estate. We do not distinguish or group our consolidated operations by property type or on a geographic basis. Accordingly, we have concluded that we currently have a single reportable segment for SFAS 131 purposes. Further, all operations are currently within the United States.

INSURANCE

Although we believe our investments are currently adequately covered by insurance consistent with the level of coverage that is standard in our industry, we cannot predict at this time if we will be able to obtain adequate coverage at a reasonable cost in the future.

FEDERAL INCOME TAX CONSIDERATIONS

The following discussion summarizes the material United States federal income tax consequences of the purchase, ownership and disposition of our Common Stock by persons who hold the securities as capital assets (within the meaning of section 1221 of the Internal Revenue Code (the “Code”)). It does not purport to address the federal income tax consequences applicable to all categories of holders, including holders subject to special treatment under federal income tax laws, such as insurance companies, regulated investment companies, real estate investment trusts, tax-exempt organizations (except as discussed under “—Taxation of Stockholders—Tax-Exempt Stockholders”) or dealers in securities. Except as discussed under “—Taxation of Stockholders—Non-U.S. Stockholders,” this summary also does not address persons who are not U.S. Stockholders (as defined herein).

This summary is based on current provisions of the Code, the Treasury regulations promulgated thereunder and judicial and administrative authorities. All these authorities are subject to change, and any change may be effective retroactively. This summary is not tax advice, and is not intended as a substitute for careful tax planning. WE RECOMMEND THAT OUR STOCKHOLDERS CONSULT THEIR OWN TAX ADVISORS REGARDING THE FEDERAL, STATE, LOCAL OR FOREIGN TAX CONSEQUENCES OF INVESTING IN OUR COMMON STOCK IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES.

General

We are organized in conformity with the requirements for qualification and taxation as a REIT under the Code, and our proposed method of operation, as described in this registration statement and as represented by us, is expected to enable us to meet the requirements for qualification and taxation as a REIT. Our qualification and

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taxation as a REIT will depend upon our ability to meet on a continuous basis, through actual annual operating results, (i) income and asset composition tests, (ii) specified distribution levels, (iii) diversity of beneficial ownership and (iv) various other qualification tests (discussed below) imposed by the Code. No assurance can be given that we actually will satisfy such tests on a continuous basis. See “Failure to Qualify,” below.

The following is a general summary of the material Code provisions that govern the federal income tax treatment of a REIT and its stockholders. These are highly technical and complex provisions that have received only limited administrative and judicial interpretation, and that are subject to change, potentially with retroactive effect.

In general, if we qualify as a REIT, we will not be subject to federal corporate income taxes on the net income that we earn that is distributed currently to our stockholders. This treatment substantially eliminates the “double taxation” (taxation at both the corporation and stockholder levels) that generally results from an investment in stock of a “C” corporation (that is, a corporation generally subject to the full corporate-level tax). We will, however, still be subject to federal income and excise tax in certain circumstances, including the following:

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Requirements for Qualification

The Code defines a REIT as a corporation, trust, or association:

(1) that is managed by one or more trustees or directors;

(2) the beneficial ownership of which is evidenced by transferable shares or by transferable certificates of beneficial interest;

(3) that would be taxable as a domestic corporation, but for Sections 856 through 859 of the Code;

(4) that is neither a financial institution nor an insurance company subject to certain provisions of the Code;

(5) the beneficial ownership of which is held by 100 or more persons;

(6) no more than 50% of the value of the outstanding stock of which is owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include certain entities) during the last half of each taxable year;

(7) that meets certain other tests, described below, regarding the composition of its income and assets; and

(8) whose taxable year is the calendar year.

The first four requirements must be satisfied during the entire taxable year, and the fifth requirement must be satisfied during at least 335 days of a taxable year of 12 months or during a proportionate part of a taxable year of less than 12 months. We will be treated as satisfying the sixth requirement for any taxable year for which we comply with the regulatory requirements to request information from our stockholders regarding their actual ownership of our Shares and we do not know, or exercising reasonable due diligence would not have known, that we failed to satisfy such condition.

We intend to comply with Treasury regulations requiring us to ascertain the actual ownership of our outstanding Shares. Failure to do so will subject us to a fine. In addition, certain restrictions on the transfer of our Shares, imposed by our charter, are meant to help us continue to satisfy the fifth and sixth requirements for qualification described above.

Finally, a corporation may not elect to become a REIT unless its taxable year is the calendar year. Our taxable year is the calendar year.

Income Tests

To remain qualified as a REIT, we must satisfy two gross income tests in each taxable year. First, at least 75% of our gross income (excluding gross income from “prohibited transactions”) must come from real estate sources such as rents from real property (as defined below), dividends and gain from the sale or disposition of shares in other REITs, interest on obligations secured by real property and earnings from certain temporary investments. Second, at least 95% of our gross income (excluding gross income from “prohibited transactions”) must come from real estate sources and from dividends, interest and gain from the sale or disposition of stock or securities (or from any combination of the foregoing).

Rents received by a REIT (which include charges for services customarily furnished or rendered in connection with real property and rent attributable to personal property leased in connection with real property) will generally qualify as “rents from real property” subject to certain restrictions, including:

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If, for any taxable year, we fail to satisfy the 75% gross income test, the 95% gross income test, or both, we may nevertheless preserve our REIT status if we satisfy certain relief provisions under the Code. In general, relief will be available if (i) our failure to meet one or both of the gross income tests is due to reasonable cause rather than willful neglect and (ii) we attach a schedule to our federal corporate income tax return indicating the nature and amount of our non-qualifying income. However, it is impossible to state whether in all circumstances we would be entitled to the benefit of the relief provisions. As discussed above under “General,” even if we qualify for relief, a tax would be imposed with respect to the amount by which we fail the 75% gross income test or the 95% gross income test.

Asset Tests

To maintain our qualification as a REIT we must also satisfy, at the close of each quarter of each taxable year, the following tests relating to the nature of our assets:

We may hold assets (or provide services to tenants) through one or more taxable REIT subsidiaries. To treat a subsidiary as a taxable REIT subsidiary, we and the subsidiary must make a joint election by filing a Form 8875 with the IRS. A taxable REIT subsidiary pays tax at regular corporate rates on its earnings, but such earnings may include types of income that might jeopardize our REIT status if earned by us directly. To prevent the shifting of income and expenses between us and a taxable REIT subsidiary, we will be subject to a tax equal to 100% of certain items of income and expense that are not allocated between us and the taxable REIT subsidiary at arm’s length. The 100% tax is also imposed to the extent we charge a taxable REIT subsidiary interest in excess of a commercially reasonable rate.

We may also hold assets through one or more corporate subsidiaries that satisfy the requirements to be treated as “qualified REIT subsidiaries.” A qualified REIT subsidiary is disregarded for federal income tax purposes, which means, among other things, that for purposes of applying the gross income and assets tests, all

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assets, liabilities and items of income, deduction and credit of the subsidiary will be treated as ours. A subsidiary is a qualified REIT subsidiary if we own all the stock of the subsidiary (and no election is made to treat the subsidiary as a taxable REIT subsidiary). We may also hold assets through other entities that may be disregarded for federal income tax purposes, such as one or more limited liability companies in which we are the sole member.

If we satisfy the asset tests at the close of any quarter, we will not lose our REIT status if we fail to satisfy the asset tests at the end of a later quarter solely because of changes in asset values. If our failure to satisfy the asset tests results, either in whole or in part, from an acquisition of securities or other property during a quarter, the failure can be cured by disposing of sufficient non-qualifying assets within 30 days after the close of that quarter. We intend to maintain adequate records of the value of our assets to ensure compliance with the asset tests and to take such other action within 30 days after the close of any quarter as may be required to cure any noncompliance. In some instances, however, we may be compelled to dispose of assets that we would prefer to retain.

We also will not lose our status as a REIT if we were to violate the asset tests described above as a result of more than 5% of our total assets being invested in the securities of one issuer or as a result of holding more than 10% (by vote or by value) of the securities of any one issuer, under the following circumstances. First, if (i) the value of the assets causing us to violate the 5% or 10% tests does not exceed the lesser of (a) 1% of the value of our assets at the end of the quarter in which the violation occurs, or (b) $10,000,000, and (ii) we cure the violation by disposing of such assets within six months after the end of the quarter in which we identify the failure, then we will not lose our REIT status. Second, if the value of the assets that cause the violation exceeds the foregoing value threshold, then we will still maintain our REIT status provided (i) our failure to satisfy the 5% or 10% tests was due to reasonable cause and was not due to willful neglect, (ii) we file a schedule with the IRS describing the assets causing the violation, (iii) we cure the violation by disposing of the assets within six months after the end of the quarter in which we identify the failure, and (iv) we pay a “penalty tax.” The penalty tax is equal to the greater of (a) $50,000 or (b) the product derived by multiplying the highest federal corporate income tax rate by the net income generated by the non-qualifying assets during the period of the failure. This second rule also applies if less than 75% of our total assets are represented by real estate or if more than 20% of our total assets are represented by the securities of one or more taxable REIT subsidiaries.

Annual Distribution Requirement.

To qualify as a REIT, we must also distribute to our stockholders, dividends (other than capital gain dividends) in an amount at least equal to (i) the sum of (a) 90% of our “REIT taxable income” (computed without regard to the dividends paid deduction and our “net capital gain”) plus (b) 90% of our after-tax net income, if any, from foreclosure property, minus (ii) the sum of certain items of non-cash income (including, among other things, cancellation of indebtedness income and original issue discount). In general, the distributions must be paid during the taxable year to which they relate. We may also satisfy the distribution requirements with respect to a particular year provided we (i) declare a sufficient dividend before timely filing our tax return for that year and (ii) pay the dividend within the 12 month period following the close of the year, and on or before the date of the first regular dividend payment after such declaration.

To the extent we fail to distribute 100% of our net capital gain or we distribute at least 90% but less than 100% of our “REIT taxable income” (as adjusted), we will be subject to tax at regular corporate rates (with respect to the undistributed net capital gain) and at the regular corporate ordinary income tax rates (with respect to the undistributed REIT taxable income). Furthermore, if we fail to distribute during each calendar year at least the sum of (i) 85% of our REIT ordinary income for such year, (ii) 95% of our REIT capital gain income for such year and (iii) any undistributed taxable income from prior periods, we will be subject to a 4% excise tax on the excess of such amounts over the amounts actually distributed.

We intend to make timely dividend distributions sufficient to meet the foregoing annual distribution requirements. It is possible that from time to time, we may not have sufficient cash or other liquid assets to meet

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the 90% distribution requirement. The shortfall may, for example, be due to differences between the time we actually receive income or pay an expense, and the time we must include the income or may deduct the expense for purposes of calculating our REIT taxable income. As a further example, the shortfall may be due to an excess of non-deductible cash outlays such as principal payments on debt and capital expenditures, over non-cash deductions such as depreciation. In such instances, we may arrange for short-term or long-term borrowings so that we can pay the required dividends and meet the 90% distribution requirement.

Under certain circumstances, if we fail to meet the distribution requirement for a taxable year, we may correct the situation by paying “deficiency dividends” to our stockholders in a later year. By paying the deficiency dividend, we may increase our dividends paid deduction for the earlier year, thereby reducing our REIT taxable income for the earlier year. However, if we pay a deficiency dividend, we will have to pay to the IRS interest based on the amount of any deduction taken for such dividend.

Failure to Qualify

If we would otherwise fail to qualify as a REIT because of a violation of one of the requirements described above, our qualification as a REIT will not be terminated if the violation is due to reasonable cause and not willful neglect and we pay a penalty tax of $50,000 for each violation. The immediately preceding sentence does not apply to violations of the income tests described above or violations of the asset tests for which special relief rules (described above) are provided.

If we fail to qualify for taxation as REIT in any taxable year and the relief provisions do not apply, we will be subject to tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Unless we are entitled to relief under specific statutory provisions, we also will be disqualified from taxation as a REIT for the four taxable years following the year during which our qualification was lost. It is not possible to state whether in all circumstances we would be entitled to such statutory relief.

For any year in which we fail to qualify as a REIT, we will not be required to make distributions to our stockholders. Any distributions we do make will not be deductible by us, and will generally be taxable to our stockholders as ordinary income to the extent of our current or accumulated earnings and profits. Subject to certain limitations in the Code, corporate stockholders receiving such distributions may be eligible to claim the dividends received deduction, and such distributions made to non-corporate stockholders may qualify for preferential rates of taxation.

Taxation of Stockholders

U.S. Stockholders

As used in this section, the term “U.S. Stockholder” means a holder of our Common Stock who, for United States federal income tax purposes, is:

If a partnership (including any entity treated as a partnership for U.S. federal income tax purposes) is a stockholder, the tax treatment of a partner in the partnership generally will depend upon the status of the partner and the activities of the partnership. A stockholder that is a partnership, and the partners in such partnership, should consult their own tax advisors concerning the U.S. federal income tax consequences of acquiring, owning and disposing of our Common Stock.

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Dividends

As long as we qualify as a REIT, distributions that are made to our taxable U.S. Stockholders out of current or accumulated earnings and profits (and are not designated as capital gain dividends) will be taken into account by them as ordinary income and will be ineligible for the corporate dividends received deduction. Except in very limited circumstances, such distributions also will not qualify for the new lower rate applicable to certain dividends paid to individuals. Distributions that are designated as capital gain dividends will be taxed as long-term capital gains (to the extent they do not exceed our actual net capital gain for the taxable year) without regard to the period for which a U.S. Stockholder has held our shares. Thus, with certain limitations, capital gain dividends received by a U.S. Stockholder who is an individual may be eligible for preferential rates of taxation. However, U.S. Stockholders that are corporations may be required to treat up to 20% of certain capital gain dividends as ordinary income.

Dividends declared by us in October, November or December of any calendar year and payable to stockholders of record on a specified date in such month, are treated as paid by us and as received by our stockholders on the last day of the calendar year (including for excise tax purposes), provided we actually pay the dividends no later than in January of the following calendar year.

We may elect not to distribute part or all of our net long-term capital gain, and pay corporate tax on the undistributed amount. In that case, a U.S. Stockholder will (i) include in its income, as long-term capital gain, its proportionate share of the undistributed gain, and (ii) claim, as a refundable tax credit, its proportionate share of the taxes paid. In addition, a U.S. Stockholder will be entitled to increase its tax basis in our Shares by an amount equal to its share of the undistributed gain reduced by its share of the corporate taxes paid by us on the undistributed gain.

Distributions in excess of our current and accumulated earnings and profits will be treated as a non-taxable return of capital to a U.S. Stockholder to the extent that they do not exceed the adjusted basis of the stockholder’s stock as to which the distributions were made, and will reduce the adjusted basis of the stockholder’s shares. To the extent these distributions exceed the stockholder’s adjusted basis in its shares, the distributions will be included in the stockholder’s income as long-term capital gain (or short-term capital gain if the shares have been held for one year or less).

Stockholders may not claim any net operating losses or net capital losses that we generate on their individual income tax returns. Distributions with respect to, and gain from the disposition of, our Shares will be treated as “portfolio income” and, therefore, U.S. Stockholders that are subject to the passive activity loss limitations will be unable to claim passive activity losses against such income.

To monitor compliance with the share ownership requirements, we are required to maintain records regarding the actual ownership of our Shares. To do so, we must demand written statements each year from the record holders of specified percentages of our Common Stock in which they are requested to disclose the actual owners of our Shares, i.e., the persons required to include the dividends paid by us in their gross income. A list of those persons failing or refusing to comply with this demand must be maintained as part of our records. A U.S. Stockholder that fails or refuses to comply with this demand is required by Treasury regulations to submit a statement with its tax return disclosing the actual ownership of our Shares and other information.

Sale of Stock

When a U.S. Stockholder sells or otherwise disposes of our Common Stock, the stockholder will recognize capital gain or capital loss for federal income tax purposes in an amount equal to the difference between (a) the amount of cash and the fair market value of any property received on the sale or other disposition, and (b) the stockholder’s adjusted tax basis in the Shares for tax purposes. The gain or loss will be long-term gain or loss if the U.S. Stockholder has held the Shares for more than one year. Long-term capital gain of a non-corporate U.S. Stockholder is generally taxed at preferential rates. In general, any loss recognized by a U.S. Stockholder on a

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disposition of Shares that the stockholder has held for six months or less, after applying certain holding period rules, will be treated as a long-term capital loss, to the extent the stockholder received distributions from us that were treated as long-term capital gains. Limitations are imposed on the deductibility of capital losses.

Backup Withholding

We will report to our U.S. Stockholders and the IRS the amount of dividends paid during each calendar year and the amount of tax withheld, if any, with respect thereto. A U.S. Stockholder may be subject to backup withholding tax (currently at a rate of 28%) with respect to dividends paid unless the stockholder (i) is a corporation or comes within certain other exempt categories and, if required, demonstrates this fact, or (ii) provides a taxpayer identification number and certifies as to no loss of exemption, and otherwise complies with the applicable requirements of the backup withholding rules. An individual U.S. Stockholder may satisfy these requirements by providing us with a properly completed and signed IRS Form W-9. Individual U.S. Stockholders who do not provide us with their correct taxpayer identification numbers may be subject to penalties imposed by the IRS. Any amount withheld will be creditable against the U.S. Stockholder’s income tax liability.

Tax-Exempt Stockholders

The IRS has ruled that amounts distributed as dividends by a REIT generally do not constitute unrelated business taxable income (“UBTI”) if received by a tax-exempt entity. Based on that ruling, dividend income from our Shares generally will not be UBTI to a tax-exempt U.S. Stockholder, provided that the stockholder has not held its Shares as “debt financed property” within the meaning of the Code. Similarly, gain from selling our Shares generally will not constitute UBTI to a tax-exempt U.S. Stockholder unless the stockholder has held our Shares as “debt financed property.”

Notwithstanding the above paragraph, if we are a “pension-held REIT,” then any qualified pension trust that holds more than 10% of our Shares will have to treat dividends paid by us as UBTI in the same proportion that our gross income would be UBTI if earned by the pension trust directly. A qualified pension trust is any trust described in section 401(a) of the Code that is exempt from tax under section 501(a) of the Code. In general, we will be treated as a “pension-held REIT” only if (a) we are predominantly owned by qualified pension trusts (that is, at least one qualified pension trust holds more than 25% of our Shares, or one or more qualified pension trusts, each of which owns more than 10% of our Shares, hold in the aggregate more than 50% of our Shares) and (b) we would not qualify as a REIT if we had to treat our Shares owned by a qualified pension trust as owned by a single individual under the closely-held provisions governing REITS (instead of treating such stock as proportionately owned by the qualified pension trust’s multiple beneficiaries). As a result of certain limitations on the transfer and ownership of shares contained in the Declaration of Trust, we do not expect to be classified as a pension-held REIT.

Tax-exempt stockholders that are social clubs, voluntary employee benefit associations, supplemental unemployment benefit trusts and qualified group legal services plans exempt from federal income taxation under sections 501(c)(7), (c)(17) and (c)(20), respectively, of the Code are subject to different UBTI rules, which generally will require them to characterize our distributions as UBTI unless they comply with certain set-aside or reserve requirements.

Non-U.S. Stockholders

The rules governing the U.S. federal income taxation of stockholders who or which are nonresident alien individuals, foreign corporations, foreign partnerships and estates or trusts that are not subject to U.S. federal income taxation (which we call “non-U.S. Stockholders”), are complex, and no attempt will be made herein to provide more than a limited summary of those rules. The discussion below assumes that the non-U.S. Stockholder’s investment in our Shares is not effectively connected with a trade or business conducted in the United States by the non-U.S. Stockholder or, if a tax treaty applies to the non-U.S. Stockholder, that its

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investment in our Shares is not attributable to a United States permanent establishment maintained by the non-U.S. Stockholder. WE RECOMMEND THAT NON-U.S. STOCKHOLDERS CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE THE IMPACT OF FEDERAL, STATE, LOCAL AND FOREIGN INCOME TAX LAWS AND REPORTING REQUIREMENTS WITH REGARD TO AN INVESTMENT IN OUR SHARES.

Ordinary Dividends

Distributions, other than capital gain dividends and distributions that are treated as attributable to gain from sales or exchanges by us of U.S. real property interests (discussed below), will be treated as ordinary income to the extent that they are made out of our current or accumulated earnings and profits. Such distributions to non-U.S. Stockholders will ordinarily be subject to a withholding tax equal to 30% of the gross amount of the distribution, unless an applicable tax treaty reduces that tax rate. We expect to withhold U.S. income tax at the rate of 30% on the gross amount of any dividends (other than dividends treated as attributable to gain from sales or exchanges of U.S. real property interests and capital gain dividends) paid to a non-U.S. Stockholder, unless we receive the requisite proof that (i) a lower treaty rate applies or (ii) the income is “effectively connected income.” A non-U.S. Stockholder claiming the benefit of a tax treaty may need to satisfy certification and other requirements, such as providing an IRS Form W-8BEN. A non-U.S. Stockholder who wishes to claim that distributions are effectively connected with a United States trade or business may need to satisfy certification and other requirements, such as providing IRS Form W-8ECI. Other requirements, such as providing an IRS Form W-8IMY, may apply to a non-U.S. Stockholders that is a financial intermediary or a foreign partnership.

Return of Capital

Distributions in excess of our current and accumulated earnings and profits that are not treated as attributable to the gain from a disposition of U.S. real property will be treated as a non-taxable return of capital to a non-U.S. Stockholder up to the amount of the non-U.S. Stockholder’s adjusted basis in our Shares. To the extent that such distributions exceed the adjusted basis of a non-U.S. Stockholder’s Shares, they will give rise to tax liability if the non-U.S. Stockholder otherwise would be subject to tax on any gain from the sale or disposition of its Shares, as described below. If it cannot be determined at the time a distribution is made whether the distribution will exceed our current and accumulated earnings and profits, then the distribution will be subject to withholding at the rate applicable to dividends. However, the non-U.S. Stockholder may seek a refund of these amounts from the IRS if it is subsequently determined that the distribution did, in fact, exceed our current and accumulated earnings and profits.

FIRPTA Dividends

Under the Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”), gain from the sale or exchange of U.S. real property interests generally is taxable to non-U.S. persons as if such gain were effectively connected with a U.S. trade or business. Non-U.S. Stockholders will be taxed on our capital gain distributions that are attributable to gains from the distributions of U.S. real property (collectively, “FIRPTA dividends”) at the same capital gain rates applicable to U.S. Stockholders (subject to any applicable alternative minimum tax and special alternative minimum tax in the case of nonresident alien individuals). Corporate non-U.S. Stockholders may be subject to a 30% branch profits tax on FIRPTA dividends unless the stockholder is entitled to treaty relief or other exemption. We will be required to withhold 35% of any FIRPTA dividend, including any distribution that we could designate as a capital gain dividend.

Sales of Shares

Gain recognized by a non-U.S. Stockholder upon a sale or exchange of our Shares generally will not be taxed under FIRPTA provided we are a “domestically controlled REIT.” In general, we will qualify as a domestically controlled REIT if at all times during a designated testing period less than 50% in value of our Shares are held (directly or indirectly) by foreign persons. Gain not subject to FIRPTA nevertheless will be

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subject to a 30% U.S. tax if the non-U.S. Stockholder is an alien individual who is present in the United States for 183 days or more during the taxable year and certain other requirements are met.

We anticipate that we will qualify as a domestically controlled REIT, but, no assurance can be given that we will so qualify. If we are not a domestically controlled REIT, then a non-U.S. Stockholder’s sale of our Shares generally will not be subject to tax under FIRPTA if (a) our Shares are regularly traded on an established securities market (such as the New York Stock Exchange) and (b) the non-U.S. Stockholder has not owned more than 5% of our Shares during a designated testing period. If gain on the sale of Shares are subject to tax under FIRPTA, then a non-U.S. Stockholder will be subject to income and branch profits taxes as described above under “—Taxation of Stockholders—Non-U.S. Stockholders—FIRPTA Dividends,” and the purchaser of such shares may be required to withhold 10% of the gross purchase price.

Federal Estate Taxes

In general, if an individual who is not a citizen or resident (as defined in the Code) of the United States owns (or is treated as owning) our Shares at the date of death, our Shares will be included in the individual’s estate for United States federal estate tax purposes, unless an applicable estate tax treaty provides otherwise.

Backup Withholding and Information Reporting

A non-U.S. Stockholder generally is exempt from backup withholding and information reporting requirements with respect to dividend payments and the payment of the proceeds from the sale of Shares effected at a United States office of a broker, as long as the income associated with these payments is otherwise exempt from United States federal income tax, the payor or broker does not have actual knowledge or reason to know that the stockholder is a United States person and the stockholder has furnished to the payor or broker a valid IRS Form W-8BEN or an acceptable substitute form certifying, under penalties of perjury, that the stockholder is a non-United States person. Payment of the proceeds from the sale of our Shares affected at a foreign office of a broker generally will not be subject to information reporting or backup withholding. However, a sale of our Shares that is effected at a foreign office of a broker will be subject to information reporting and backup withholding if the proceeds are transferred to an account maintained by the non-U.S. Stockholder in the United States, the payment of proceeds or the confirmation of the sale is mailed to the stockholder at a United States address, or the sale has some other specified connection with the United States as provided in U.S. Treasury regulations, unless the broker does not have actual knowledge or reason to know that the stockholder is a United States person and the documentation requirements described above are met or the stockholder otherwise establishes an exemption.

A non-U.S. Stockholder generally may obtain a refund of any amounts withheld under the backup withholding rules that exceed its income tax liability by filing a refund claim with the IRS.

Other Tax Consequences

We and our stockholders may be subject to state or local taxation in various state and local jurisdictions, including those in which we or they transact business or reside. State and local tax laws may not conform to the federal income tax consequences discussed above. Consequently, prospective stockholders should consult their own tax advisors regarding the effect of state and local tax laws on an investment in our Shares.

ERISA CONSIDERATIONS

Fiduciary Investment Considerations under ERISA

Certain of our stockholders may be subject to the fiduciary responsibility and prohibited transaction requirements of ERISA, and/or related provisions of the Code. The following is a summary of some of the material fiduciary investment considerations that may apply to such stockholders under ERISA and the Code.

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This summary is based on the fiduciary responsibility provisions and prohibited transaction restrictions of ERISA, relevant regulations and opinions issued by the United States Department of Labor and court decisions thereunder, and on the pertinent provisions of the Code, relevant regulations, published rulings and procedures of the IRS, and court decisions thereunder.

This summary does not include all of the fiduciary investment considerations relevant to stockholders subject to ERISA and/or Section 4975 of the Code and should not be construed as legal advice or a legal opinion. Prospective stockholders should consult with their own counsel on these matters.

This summary is based on provisions of ERISA and the Code as of the date hereof. This summary does not purport to be complete and is qualified in its entirety by reference to ERISA and the Code. No assurance can be given that future legislation, administrative regulations or rulings in court decisions will not significantly modify the requirements summarized herein. Any such changes may be retroactive and thereby apply to transactions entered into prior to the date of their enactment or release.

Fiduciary Considerations

Before authorizing an investment in our Shares, fiduciaries of an employee benefit plan subject to ERISA should consider: (i) the fiduciary standards imposed by ERISA; (ii) whether an investment in our Shares satisfies the prudence and diversification requirements of ERISA, including whether the investment is prudent in light of limitations on the marketability of the Shares; and (iii) whether such fiduciaries have authority to make the investment under the appropriate plan investment policies and governing instruments. Accordingly, when considering an investment of employee benefit plan assets in our Shares, each employee benefit plan fiduciary should consider the effect of the investment on any applicable fiduciary standards of conduct, prohibited transaction rules, valuation requirements, reporting and disclosure requirements and other related requirements. The sale of Shares to an employee benefit plan is in no respect a representation by the Manager, the Advisor or the Fund that this investment meets all relevant requirements with respect to investments by employee benefit plans generally or any particular employee benefit plan or that this investment is appropriate for an employee benefit plan generally or any particular employee benefit plan.

Definition of Plan Assets

ERISA and the Code impose various duties and restrictions with respect to the investment, management and disposition of plan assets. ERISA and the Code do not, however, define the term “plan assets,” particularly in the context of pooled investment funds and other vehicles in which a plan may invest. The Department of Labor has, however, published regulations relating to the definition of “plan assets,” pursuant to which the assets of an entity in which a plan or plans acquire an equity interest will or will not be deemed “plan assets” (the “Regulation”). The Regulation generally provides that when a plan (including an IRA) acquires an equity interest in an entity that is neither a “publicly-offered security” nor a security issued by an investment company registered under the Investment Company Act, the plan’s assets will include both the equity interest in the entity and an undivided interest in each of the underlying assets of the entity unless it is established that the entity is an “operating company” as defined in the Regulation or that ownership of each class of equity interests in the entity on any date after the most recent acquisition of any equity interest in the entity by “benefit plan investors” (a term that includes various employee benefit and retirement arrangements in addition to ERISA-Covered Plans (e.g., government plans, foreign employee benefit plans and IRAs) has a value in the aggregate of less than 25% of the total value of such class of equity interests that are outstanding (not counting interests held by the manager of the entity and its affiliates).

If the investments we hold are deemed to be “plan assets” of a plan that is a Stockholder, Subtitle A and Parts 1 and 4 of Subtitle B of Title I of ERISA and Section 4975 of the Code will extend to investments made by us. This would result, among other things, in:

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As relevant to us, the Regulation provides that an “operating company” is an entity that is engaged primarily, directly or through a majority-owned subsidiary or subsidiaries, in the production or sale of a product or service other than the investment of capital. In addition, the Regulation provides that the term operating company includes an entity qualifying as a venture capital operating company (a “VCOC”).

An entity will qualify as a VCOC if: (i) on its initial valuation date and on at least one day during each annual valuation period, at least 50% of the entity’s assets, valued at cost, consist of “venture capital investments” and (ii) the entity, in the ordinary course of its business, actually exercises management rights with respect to one or more of its venture capital investments. The Regulation defines the term “venture capital investments” as an investment in an operating company (other than a VCOC) with respect to which the investor obtains “management rights”. “Management rights” is defined to mean “contractual rights directly between the investor and an operating company to substantially participate in, or substantially influence the conduct of, the management of the operating company”.

The Advisor has agreed to use its reasonable best efforts to cause us to qualify as a VCOC and structure our investments in compliance with the requirements for such exemption as set forth in the Regulation. While the Manager and the Advisor believe that we will be able to qualify as a VCOC and will use their reasonable best efforts to structure our investments so as to satisfy the VCOC requirements, there is no assurance that we will be able to continue to qualify as a VCOC at all times, inasmuch as this requires a factual determination that depends on the nature of our investments and the nature of our activities.

Prospective stockholders that are subject to the provisions of ERISA should consult with their counsel and advisors as to the provisions of ERISA applicable to an investment in our Shares, including the fiduciary and prohibited transaction provisions of ERISA and the Code. The fiduciary of an individual retirement account, an individual retirement annuity or employee benefit plan not subject to ERISA should consider that investments are limited to those investors that are authorized by the applicable governing documents and by applicable state law, and should consult with counsel regarding their ability to invest in our Shares.

QUALIFICATION AS A REAL ESTATE INVESTMENT TRUST AND TAXABILITY OF DISTRIBUTIONS

We currently qualify as a real estate investment trust pursuant to the requirements contained in Sections 856-858 of the Code. If, as we contemplate, such qualification continues, we will not be taxed on our real estate investment trust taxable income. During 2005, we distributed 100% of our taxable income to our stockholders as detailed in the following table:

On December 15, 2005, our board of directors declared a $1.75 per Share distribution to Stockholders of record on such date payable on February 3, 2006. This distribution is not included in the $5.25 of distributions described above.

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FINANCIAL INFORMATION

For information regarding our revenues, profits and losses and total assets, see our consolidated financial statements beginning on page F-1 of this Form 10.

GEOGRAPHIC CONCENTRATION

Properties in Virginia, Georgia and Illinois accounted for 44%, 30% and 13%, respectively, of our consolidated revenues during the year ended December 31, 2005. Properties in no other state accounted for more than 10% of our consolidated revenues during 2005. All of our properties are located within the United States.

DEPENDENCE ON SIGNIFICANT TENANTS

For the year ended December 31, 2005, Fannie Mae, Havertys Furniture Companies, Inc. and TNT Logistics North America, Inc. accounted for 44%, 14% and 13% of our consolidated revenues, respectively. During the period from May 28, 2004 (Inception) through December 31, 2004, two tenants, Fannie Mae and Havertys Furniture Companies, Inc., accounted for 84% and 11% of our consolidated revenues, respectively.

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Item 1A. Risk Factors.

You should consider carefully the risks described below and the other information in this Form 10, including our consolidated financial statements and the related notes included elsewhere in this Form 10. If any of the following risks actually occur, they may materially harm our business and our financial condition and results of operations.

We are subject to the risks of commercial real estate ownership that could reduce the value of our properties.

Real estate historically has experienced significant fluctuations and cycles in value that have resulted in reductions in the value of real estate related investments. Real estate will continue to be subject to such fluctuations and cycles in value in the future that may negatively impact the value of our investments. The marketability and value of our investments will depend on many factors beyond our control. The ultimate performance of our investments will be subject to the varying degrees of risk generally incident to the ownership and operation of the underlying real properties. The ultimate value of our investments in the underlying real properties depends upon our ability to operate the properties in a manner sufficient to maintain or increase revenues in excess of operating expenses and debt service. Revenues may be adversely affected by:

In the event that any of the properties underlying our investments experience any of the foregoing events or occurrences, the value of and return on such investment may be negatively impacted.

Our success will be dependent on the availability of, and the degree of competition for, attractive investments, which could materially impair our financial performance.

Our operating results will depend upon the availability of, and the Advisor’s ability to identify, acquire and manage, appropriate real estate investment opportunities. It may take considerable time for us to identify and acquire appropriate investments. In general, the availability of desirable real estate opportunities and our investment returns will be affected by the level and volatility of interest rates, conditions in the financial markets

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and general, national and local economic conditions. No assurance can be given that we will be successful in identifying, underwriting and then acquiring investments which satisfy our return objectives or that such investments, once acquired, will perform as intended. We are engaged in a competitive business and compete for attractive investments with traditional equity sources, both public and private, as well as existing funds, or funds formed in the future, with similar investment objectives. If we cannot effectively compete with these entities for attractive investments, our financial results will be adversely affected.

The past performance of the Manager and the Advisor or any fund connected to either is not a predictor of our future results.

Neither the track record of senior management of the Manager or the Advisor nor the performance of any fund connected to either shall imply or predict (directly or indirectly) any level of our future performance or the future performance of the Manager or the Advisor. The Advisor’s and Manager’s performance and our performance are dependent on future events and are, therefore, inherently uncertain. Past performance cannot be relied upon to predict future events due to a variety of factors, including, without limitation, varying business strategies, different local and national economic circumstances, different supply and demand characteristics, varying degrees of competition, varying circumstances pertaining to the real estate capital markets and the cyclical nature of real estate. We only recently commenced investment operations and have a very short-term performance history.

Conflicts of interest may arise between the Advisor and its affiliates and us, which could impair our financial results.

The Advisor and its affiliates engage in a broad spectrum of activities, including real estate advisory activities, and have extensive investment activities that are independent from, and may from time to time conflict with our investment activities. In the future, there might arise instances where the interests of the Advisor conflict with our interests and/or the interests of our stockholders. Certain affiliates of the Advisor may engage in transactions with, provide services to, invest in, advise, sponsor and/or act as investment manager to portfolio investments, investment vehicles and other persons or entities that may have similar properties and investment objectives and policies to ours and that may compete with us for investment opportunities. The Advisor and its affiliates and their respective clients may themselves invest in investments that would be appropriate for us and may compete with us for such investment opportunities. The Advisor’s interests in such investments may conflict with our interests in related investments at the time of origination or in the event of default or work out of the investment. These conflicts of interest could impair our financial results.

Conflicts of interest may arise between the Manager and us with respect to the management of the Fund, which could impair our financial results.

Conflicts of interest may arise between the Manager and us with respect to the management of the Fund. It is anticipated that the officers and employees of the Manager will devote as much time to us as the Manager deems appropriate. However, officers and employees may have conflicts in allocating their time and services among us and the Manager and its affiliates. Additionally, the Manager or its affiliates may invest in investments that are senior or junior to, participations in, or have rights and interests different from or adverse to, our investment opportunities for the Manager’s or its affiliates’ account or the account of other funds under its management. The Manager’s interests in such investments may conflict with our interests in related investments at the time of origination or in the event of default or restructuring of the investment. These conflicts of interest could impair our financial results.

If we are unable to obtain leverage on favorable terms, our ability to make new investments, our operating costs and ability to make dividend payments may be adversely affected.

Our return on investment is somewhat dependent upon our ability to grow our portfolio of existing and future investments through the use of leverage. Our ability to obtain the leverage necessary on attractive terms

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will ultimately depend upon our ability to maintain interest coverage ratios meeting market underwriting standards which will vary according to lenders’ assessments of our creditworthiness and our ability to comply with the terms of the borrowings. Our failure to obtain leverage at the contemplated levels, or to obtain leverage on attractive terms, could have a material adverse effect on our ability to make new investments, our operating costs and our ability to pay dividends over time.

Our use of leverage could impair our financial performance.

Leverage creates an opportunity for increased return on our investments, but at the same time creates risks. For example, leveraging magnifies changes in our net worth. We will leverage assets only when there is an expectation that leverage will enhance returns, although there can be no assurance that our use of leverage will prove to be beneficial. Moreover, there can be no assurance that we will be able to meet our debt service obligations and, to the extent we cannot, we risk the loss of some or all of our assets or a financial loss if we are required to liquidate assets at a commercially inopportune time.

If the Manager or Advisor were to lose key personnel or we were to lose the services of the Manager or the Advisor, our ability to run our business could be adversely affected.

The Manager’s ability to successfully manage our affairs currently depends on the Manager’s organization and the Advisor’s ability to identify, structure and finance investments. We will also be relying to a substantial extent on the experience, relationships and expertise of the senior management and other key employees of the Manager and the Advisor. Key personnel of the Manager include Lee Gardella and Robert Aufenanger. Key personnel of the Advisor include Peter Schaff, Allan Swaringen and Tony O’Malley. There can be no assurance that these individuals will remain in the employ of the Manager and the Advisor. The loss of the services of the Manager’s organization, the Advisor’s investment advice or any of such individuals could have a material adverse effect on our operations. In addition, under certain circumstances, our board of directors has the right to remove the Manager and the Advisor.

We expect to incur significant costs in connection with Exchange Act compliance and we may become subject to liability for any failure to comply, which could materially impact our financial performance.

As a result of our obligation to register our Common Stock with the SEC under the Exchange Act, we will be subject to Exchange Act rules and related reporting requirements. This compliance with the reporting requirements of the Exchange Act will require timely filing of Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K and Current Reports on Form 8-K, among other actions. Further, recently enacted regulations and standards relating to corporate governance and disclosure requirements applicable to public companies, including the Sarbanes-Oxley Act of 2002 and new SEC regulations relating thereto, have increased the costs of corporate governance, reporting and disclosure practices to which we will be subject to upon the effectiveness of this registration statement. Our efforts to comply with applicable laws and regulations, including requirements of the Exchange Act and the Sarbanes-Oxley Act of 2002, are expected to involve significant, and potentially increasing, costs. In addition, these laws, rules and regulations create new legal bases for administrative, civil and criminal proceedings against us in case of non-compliance, thereby increasing our risk of liability and potential sanctions.

We may not achieve our return objectives, which may adversely affect the value of your investment.

We will make investments based on the Advisor’s estimates or projections of internal rates of return and current returns, which in turn are based on, among other considerations, assumptions regarding the performance of our assets, the amount and terms of available financing and the manner and timing of dispositions, all of which are subject to significant uncertainty. In addition, events or conditions that have not been anticipated may occur and may have a significant effect on our ability to generate attractive long-term risk-adjusted total returns. Moreover, our ability to achieve our objectives may be adversely impacted by any of the factors discussed in this “Risk Factors” section. Our failure to achieve our return objectives may adversely affect the value of your investment.

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If significant tenants were to default on their lease obligations to us, our results of operations and ability to pay dividends to stockholders may be adversely affected.

During the year ended December 31, 2005 Fannie Mae, Havertys Furniture Companies, Inc. and TNT Logistics North America, Inc. accounted for 44%, 14% and 13% of consolidated revenues, respectively. During the period from May 28, 2004 (Inception) through December 31, 2004, Fannie Mae and Havertys Furniture Companies, Inc. accounted for 84% and 11% of consolidated revenues, respectively. If any of these significant tenants were to default on its lease obligation to us, our results of operations and ability to pay dividends to stockholders would be adversely affected.

The costs of compliance with environmental laws and other governmental laws and regulations may adversely affect our results of operations and financial condition and our ability to pay dividends to stockholders.

All real property and the operations conducted on real property are subject to federal, state and local laws and regulations relating to environmental protection and human health and safety. These laws and regulations generally govern wastewater discharges, air emissions, the operation and removal of underground and above-ground storage tanks, the use, storage, treatment, transportation and disposal of solid and hazardous materials, and the remediation of contamination associated with disposals. Some of these laws and regulations may impose joint and several liability on tenants, owners or operators for the costs of investigation or remediation of contaminated properties, regardless of fault or the legality of the original disposal. Under various federal, state and local laws, ordinances and regulations, a current or previous owner, developer or operator of real estate may be liable for the costs of removal or remediation of hazardous or toxic substances at, on, under, or in its property. In addition, the presence of these substances, or the failure to properly remediate these substances, may subject us to claims by private plaintiffs and adversely affect our ability to sell or rent a property or to use the property as collateral for future borrowing.

Some of these laws and regulations have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations, stricter interpretation of existing laws or the future discovery of environmental contamination may require material expenditures by us. We cannot assure that future laws, ordinances or regulations will not impose any material environmental liability, or that the current environmental condition of our properties will not be affected by the operations of the tenants, by the existing condition of the land, by operations in the vicinity of the properties, such as the presence of underground storage tanks, or by the activities of unrelated third parties.

These laws typically allow liens to be placed on the affected property. In addition, there are various local, state and federal fire, health, life-safety and similar regulations with which we may be required to comply and that may subject us to liability in the form of fines and/or damages for noncompliance.

We cannot predict what other environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted, or what environmental conditions may be found to exist in the future. We cannot provide assurance that our business, results of operations, liquidity, financial condition and ability to pay dividends will not be adversely affected by these laws.

Our properties may contain or develop harmful mold, which could lead to liability for adverse health effects and costs of remediation of the problem.

When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins or irritants. Public concern about indoor exposure to mold has been increasing along with awareness that exposure to mold may cause a variety of adverse health effects and symptoms, including allergic or other reactions. As a result, the presence of a significant amount of mold at any of our properties could require us to undertake a costly remediation program to contain or remove the mold from the affected properties. In addition, the presence of mold could expose us to liability from our tenants, employees of our tenants and others if property damage or health concerns arise as a result of the presence of mold in our properties. If we ever

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become subject to significant mold-related liabilities, our business, financial condition, liquidity, results of operations and ability to pay dividends could be materially and adversely affected.

Stockholders may experience dilution.

We expect to sell additional Shares through private placements to accredited investors. Stockholders that do not participate in future private placements will experience dilution in the percentage of their equity investment in the Fund. In addition, depending on the value of our properties at the time of any future sale of our Shares, our stockholders may experience dilution in both the book value and Current Share Price (as defined under “Item 9. Market Price of and Dividends on the Registrant’s Common Equity and Related Stockholder Matters”) of their Shares.

If we are unable to raise additional capital to support our growth through the sale of Shares, our financial results may suffer.

To support our growth and further diversify our portfolio and investments, we expect to raise additional capital by selling Shares to accredited investors in private placement transactions. If we were unable to sell additional Shares due to market forces or other factors, our ability to grow our business may be adversely affected. This may negatively affect our ability to achieve greater diversification and economies of scale in our operations and therefore may adversely affect our financial results.

The impact of the events of September 11, 2001 and its effect on terrorism insurance exposes us to certain risks, which could impair our financial performance.

The terrorist attacks on September 11, 2001 disrupted the U.S. financial markets and negatively impacted the U.S. economy in general. Any future terrorist attacks and the anticipation of any such attacks, or the consequences of the military or other response by the United States and its allies, may have a further adverse impact on the U.S. financial markets, including real estate capital markets, and the economy. It is not possible to predict the severity of the effect that such future events would have on the U.S. financial markets and economy.

It is possible that the economic impact of any future terrorist attacks will adversely affect some of our investments. Some of our investments will be more susceptible to these adverse effects than others. We may suffer losses as a result of the adverse impact of any future attacks and these losses may adversely impact investors’ returns.

In addition, the events of September 11 created significant uncertainty regarding the ability of real estate owners of high profile properties to obtain insurance coverage protecting against terrorist attacks at commercially reasonable rates, if at all. With the enactment of the Terrorism Risk Protection Act of 2002, through the end of 2007, insurers must make terrorism insurance available under their property and casualty insurance policies, but this legislation does not regulate the pricing of such insurance. The absence of affordable insurance coverage may affect the general real estate lending market, lending volume and the market’s overall loss of liquidity may reduce the number of suitable investment opportunities available to us and the pace at which our investments are made.

Insurance on our properties may not adequately cover all losses to our properties, which could reduce stockholder returns if a material uninsured loss occurs.

Our tenants are required to maintain property insurance coverage for the properties under net leases. We maintain a blanket policy on our properties not insured by our tenants. There are various types of losses, generally of a catastrophic nature, such as earthquakes, floods, hurricanes, terrorism or acts of war, that may be uninsurable or not economically insurable. Should an uninsured loss occur, we could lose our capital investment and/or anticipated profits and cash flow from one or more properties. Inflation, changes in building codes and ordinances, environmental considerations, and other factors, including terrorism or acts of war, might make the insurance proceeds insufficient to repair or replace a property if it is damaged or destroyed. In that case, the

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insurance proceeds received might not be adequate to restore our economic position with respect to the affected real property, which could reduce the amounts we have available to pay dividends.

Due to limitations on our ability to redeem our Shares and restrictions on their transfer, an investment in our Shares will be illiquid.

An investment in our Shares requires a long-term commitment, with no certainty of return. Our Shares have not been registered under the Securities Act of 1933 (the “Securities Act”) and unless our Shares are so registered, they may not be offered or sold except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. We do not currently intend to apply for listing of our Common Stock on any securities exchange or arrange for it to be quoted on any automated dealer quotation system. There is no public market for our Shares and none is expected to develop. Our Shares are also subject to other transfer restrictions described under “Item 11. Description Of Registrant’s Securities To Be Registered—Transferability Of Shares.”

Although we intend to provide liquidity to our Stockholders by conducting semi-annual tender offers pursuant to which we expect to offer to repurchase a specific percentage, number or dollar amount of outstanding Shares in July and January of each year, we may not have sufficient available cash to fund the repurchase of Shares. There is no guarantee that cash will be available at any particular time to fund repurchases of Shares, and we are under no obligation to make such cash available through the sale of assets, borrowings or otherwise. In addition, our compliance with the federal income tax rules applicable to REITs and rules under the federal securities laws may affect our ability to repurchase Shares. If the number of Shares tendered by Stockholders exceeds the percentage, number or dollar amount of Shares offered to be repurchased, we might only accept Shares properly tendered on a pro rata basis.

In addition, the repurchase of Shares is subject to regulatory requirements imposed by the SEC. Our repurchase procedures are intended to comply with such requirements. However, in the event that our board of directors determines that our repurchase procedures described above are required to be or appropriately should be amended, the board of directors will adopt revised repurchase procedures as necessary to ensure our compliance with applicable regulations or as the board of directors in its sole discretion deems appropriate. We may terminate, reduce or otherwise change the above share repurchase program. See “Item 11. Description Of Registrant’s Securities To Be Registered—Share Repurchase Program.” Shares should only be acquired by investors able to commit their capital for an indefinite period of time.

Our investments may be illiquid, which may limit your ability to redeem our Shares.

Real estate investments are relatively illiquid. Such illiquidity may limit our ability to vary our portfolio of investments in response to changes in economic and other conditions. Illiquidity may result from the absence of an established market for investments as well as the legal or contractual restrictions on their resale. In addition, illiquidity may result from the decline in value of a property securing one of our investments. There can be no assurances that the fair market value of any of our real property investments will not decrease in the future. The relative illiquidity of our investments may limit your ability to redeem your shares of our Common Stock.

We may not be able to achieve diversification in our investments, which could adversely affect our financial results.

While we intend to diversify our investments both geographically and by property sector, there is no assurance as to the degree of diversification that we will actually achieve. We may not be able to assemble a fully diversified portfolio. Furthermore, we may make investments involving contemplated sales or refinancings that do not actually occur as expected, which could lead to increased risk as a result of our having an unintended long-term investment and reduced diversification. Further diversification consistent with our objectives will be dependent on a number of additional factors, including our ability to raise additional capital, so there can be no assurance that our diversification objectives will be achieved. To the extent we are not able to appropriately diversify our investments, our financial results would be adversely affected if there were a downturn in the

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particular geographic region or property sector in which our investments were concentrated. As of April 21, 2006, 62% of the current value of our real estate portfolio is geographically concentrated in the Western United States. Our diversification of investments by property type, based on current value as of April 21, 2006, consists of 54% in the office property sector, 30% in the retail property sector and 16% in the industrial property sector.

We may not have unilateral control over some of our investments, and we may be unable to take actions to protect our interest in these investments.

In certain situations, we may (a) acquire only a minority interest in a property or other asset in which we invest, (b) rely on independent third party management or strategic partners with respect to the operations of a company or other asset in which we invest or (c) acquire only a participation in an asset underlying an investment, and therefore may not be able to exercise control over the management of such investment. We may also co-invest with third parties through partnerships, joint ventures or other entities, thereby acquiring non-controlling interests in certain investments. For example, we currently share control with unrelated third parties in three of our real estate investments, those being Legacy Village, 111 Sutter Street and Pacific Medical Office Portfolio. These investments may involve risks not present in investments where a third party is not involved, including the possibility that a third party partner or co-venturer may have financial difficulties resulting in a negative impact on such investment, may have economic or business interests or goals that are inconsistent with or adverse to ours, or may be in a position to take action contrary to our investment objectives. In addition, we may in certain circumstances become liable for the actions of our third party partners or co-venturers.

A portion of the Advisor’s and Manager’s fees is based on our ability to generate cash flow from operations, which may result in the Advisor and the Manager having incentives that are different from our stockholders.

A portion of the Advisor’s and Manager’s fees is based on our ability to generate cash flow from operations. Therefore, they may have an incentive to maximize the amount of cash generated from our operations, rather than to maximize appreciation, and to hold properties rather than to sell properties at an otherwise appropriate time for our stockholders.

Stockholders will not participate in our management.

Decisions with respect to our management will be made exclusively by our board of directors, the Manager and the Advisor. Our stockholders have no right or power to take part in our management, other than by electing directors to our board of directors (which will include one nominee affiliated with the Manager and one nominee affiliated with the Advisor, for so long as each serve in such capacity) and voting on certain other matters as provided in our charter and bylaws. Additionally, our stockholders do not receive the detailed financial information issued by the portfolio properties in which we invest, which is available to our board of directors, the Advisor and the Manager.

Stockholders will have limited recourse against our board of directors, the Manager and the Advisor.

Our governing documents, as well as the Management Agreement and Advisory Agreement, limit the circumstances under which our board of directors, the Manager, the Advisor and their respective affiliates, including their officers, partners, employees, stockholders, members, managers and other agents, can be held liable to us and our stockholders. As a result, our stockholders may have a more limited right of action in certain cases than they would have in the absence of such limitations.

Stockholders subject to ERISA may be affected by an investment in our Shares.

Stockholders subject to ERISA should consult their own advisors as to the effect of ERISA on an investment in our Shares. The Advisor will use reasonable best efforts to conduct our operations so that we qualify as a “venture capital operating company” under applicable ERISA regulations. If in the future we were to fail to qualify as a venture capital operating company under ERISA and our investments would be deemed to be “plan assets” of the stockholders which are employee benefit plans subject to ERISA (“Plans”), transactions

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involving our assets with “Parties in Interest” under ERISA or “Disqualified Persons” under the Code with respect to such Plans might be prohibited under Section 406 of ERISA and Section 4975 of the Code.

We may not be able to qualify for exemption from registration under the Investment Company Act, which could limit our ability to use leverage and could materially impair our financial performance.

We do not intend to become regulated as an investment company under the Investment Company Act based upon certain exemptions thereunder. Accordingly, we do not expect to be subject to the restrictive provisions of the Investment Company Act. If we fail to qualify for exemption from registration as an investment company, our ability to use leverage would be substantially reduced and we may be unable to conduct our business as described in this registration statement. Any failure to qualify for an exemption from the Investment Company Act could have a material adverse effect on our operations and expenses. Our efforts to avoid registration as an investment company in reliance on one of the available exemptions may affect the composition of our investment portfolio and the investment and disposition decisions of the Advisor.

Our charter does not permit ownership of over 9.9% of our Common Stock by any individual or entity, and attempts to acquire Shares in excess of the 9.9% limit would be void without the prior approval of our board of directors.

For the purpose of preserving our REIT qualification, our charter prohibits, without the consent of our board of directors, direct or constructive ownership by any individual or entity of more than 9.9% of the lesser of the total number or value of our shares of Common Stock as a means of preventing ownership of more than 50% of our Common Stock by five or fewer individuals. Our charter’s constructive ownership rules are complex and may cause shares of our Common Stock owned by a group of related individuals or entities to be deemed to be constructively owned by one individual. As a result, the acquisition of less than 9.9% of our Common Stock by an individual or entity could cause an individual to own constructively in excess of 9.9% of our Common Stock, and thus be subject to our charter’s ownership limit. Any attempt to own or transfer Shares in excess of the ownership limit without the consent of our board of directors will be void, and will result in those Shares being transferred by operation of law to a charitable trust, and the person who acquired such excess Shares will not be entitled to any distributions thereon or to vote such excess Shares.

There are no assurances of our ability to pay dividends in the future.

We intend to pay quarterly dividends and to make distributions to stockholders in amounts such that all or substantially all of our real estate investment trust taxable income in each year, subject to certain adjustments, is distributed to stockholders. This, along with other factors, should enable us to qualify for the tax benefits accorded to a REIT under the Code. All distributions will be made at the discretion of our board of directors and will depend on our earnings, financial condition, maintenance of our REIT status and such other factors as our board of directors may deem relevant from time to time. There are no assurances as to our ability to pay dividends in the future. There may be little or no cash flow available to investors. In addition, some of our distributions may include a return of capital.

If we do not maintain our qualification as a REIT, we will be subject to tax as a regular corporation and face a substantial tax liability.

We expect to operate so as to qualify as a REIT under the Code. However, qualification as a REIT involves the application of highly technical and complex Code provisions for which only a limited number of judicial or administrative interpretations exist. Even a technical or inadvertent mistake could jeopardize our REIT status. Furthermore, new tax legislation, administrative guidance or court decisions, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to qualify as a REIT. If we fail to qualify as a REIT in any tax year, then:

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Recent tax legislation may cause investments in non-REIT corporations to be relatively more desirable.

Recent tax legislation generally provides for a reduced tax rate for dividends paid to individuals. This reduced rate generally does not apply to dividends paid by REITs. Although this legislation does not adversely affect the tax treatment of REITs, it may cause investments in non-REIT corporations to be relatively more desirable.

Complying with REIT requirements may cause us to forego otherwise attractive investment opportunities.

To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, our sources of income, the nature and diversification of our investments in commercial real estate and related assets, the amounts we distribute to stockholders and the ownership of our Shares. We may also be required to make distributions to stockholders at disadvantageous times or when we do not have capital readily available for distribution. The REIT provisions of the Code may substantially limit our ability to hedge our financial assets and related borrowings. Thus, compliance with REIT requirements may hinder our ability to operate solely on the basis of achieving our investment objectives.

Complying with REIT requirements may force us to liquidate or restructure otherwise attractive investments.

To qualify as a REIT, we must also ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets. The remainder of our investment in securities cannot include more than 10% of the outstanding voting securities of any one issuer or 10% of the total value of the outstanding securities of any one issuer. In addition, no more than 5% of the value of our assets can consist of the securities of any one issuer. If we fail to comply with these requirements, we must dispose of a portion of our assets within 30 days after the end of the calendar quarter to avoid losing our REIT status and suffering adverse tax consequences.

Complying with REIT requirements may force us to borrow to make distributions to stockholders.

From time to time, our taxable income may be greater than our cash flow available for distribution to stockholders. If we do not have other working capital available in these situations, we may be unable to distribute substantially all of our taxable income as required by the REIT provisions of the Code. Thus, we could be required to borrow capital, sell a portion of our assets at disadvantageous prices, issue consent dividends (which will be taxable to stockholders) or find another alternative. These options could increase our costs or reduce our NAV.

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Item 2. Financial Information.

SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

We derived the selected statements of operations and cash flow data for the year ended December 31, 2005 (“2005”) and the period from May 28, 2004 (Inception) through December 31, 2004 (“2004”) and the selected consolidated balance sheet data as of December 31, 2005 and 2004 from our consolidated financial statements audited by Deloitte & Touche LLP, an independent registered public accounting firm, whose report with respect thereto is included elsewhere in this Form 10. You should read the selected financial information and operating data below in conjunction with our consolidated financial statements and the accompanying notes thereto beginning on page F-1 of this Form 10.

The financial and operating data for the year ended December 31, 2005 and the period from May 28, 2004 (Inception) through December 31, 2004 are not necessarily comparable as we acquired five properties in the second half of 2004 which were held throughout 2005 and acquired an additional twenty properties throughout 2005. “See Item 3. Properties.” In addition, we borrowed or assumed approximately $214 million in debt and issued an additional 1,001,843 shares of Common Stock in 2005. See “Item 3. Properties” and “Item 9. Market Price of and Dividends on the Registrants’ Common Equity and Related Stockholder Matters.”

FUNDS FROM OPERATIONS

Consistent with real estate industry and investment community preferences, we consider Funds From Operations (“FFO”) as a supplemental measure of the operating performance for a real estate investment trust

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and a complement to GAAP measures because it facilitates an understanding of the operating performance of our properties and provides useful information to stockholders about our ability to service debt, fund capital expenditures and expand our portfolio. The National Association of Real Estate Investment Trusts (“NAREIT”) defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains or losses from cumulative effects of accounting changes, extraordinary items and sales of properties, plus real estate related depreciation and amortization and after adjustments for our portion of these items related to unconsolidated affiliates.

FFO does not give effect to real estate depreciation and amortization because these amounts are computed to allocate the cost of a property over its useful life. Because values for well-maintained real estate assets have historically increased or decreased based upon prevailing market conditions, we believe that FFO provides investors with a clearer view of our operating performance.

In order to provide a better understanding of the relationship between FFO and GAAP net income, the most directly comparable GAAP financial reporting measure, we have provided a reconciliation of GAAP net income (loss) to FFO. FFO does not represent cash flow from operating activities in accordance with GAAP, should not be considered as an alternative to GAAP net income and is not necessarily indicative of cash available to fund cash needs.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Management Overview

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand our results of operations and financial condition. This MD&A is provided as a supplement to, and should be read in conjunction with, our consolidated financial statements and the accompanying notes to the consolidated financial statements appearing elsewhere in this registration statement. All references to numbered Notes are to specific notes to our Consolidated Financial Statements beginning on page F-1 of this Form 10, and which descriptions are incorporated into the applicable response by reference. References to “base rent” in this Form 10 refer to cash payments made under the relevant lease(s), excluding real estate taxes and certain property operating expenses that are paid by us and are recoverable under the relevant lease(s) and exclude adjustments for straight-line rent revenue and above- and below-market lease accretion (See Note 2).

The discussions surrounding our consolidated properties (our “Consolidated Properties”) refer to our wholly or majority owned and controlled properties, which as of December 31, 2005 were comprised of: Monument IV at Worldgate, Havertys Furniture, Hagemeyer Distribution Center, Georgia Door Sales Distribution Center, TNT Logistics, 105 Kendall Park Lane, Waipio Shopping Center, Marketplace at Northglenn and the Pacific Medical Office Portfolio. Our unconsolidated properties, which are owned through joint venture arrangements (our “Unconsolidated Properties”), consisted of Legacy Village and 111 Sutter Street as of December 31, 2005. Because management’s operating strategies are generally the same whether the properties are consolidated or unconsolidated, we believe that financial information and operating statistics with respect to all properties, both consolidated and unconsolidated, provide important insights into our operating results, including the relative size and significance of these elements to our overall operations. Collectively, we refer to our Consolidated and Unconsolidated Properties as our “Fund Portfolio.”

Our primary business is the ownership and management of a diversified portfolio of retail, office and industrial properties located in the United States. We currently do not own any apartment properties or properties outside the United States, but will look to make strategic investments in these areas in the future. We hire property management companies to provide the on-site, day-to-day management services for our properties. When selecting a property management company for one of our properties, we look for service providers that have a strong local market or industry presence, create portfolio efficiencies, have the ability to develop new business for us and will provide a strong internal control environment that will comply with our Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) internal control requirements. We currently use a mix of property management service providers that include large national real estate service firms and smaller local firms including affiliates of the Advisor. For our three joint ventures, Legacy Village, 111 Sutter Street and the Pacific Medical Office Portfolio, we use either one of our partners in these joint ventures or an independent third party to perform property management services. Our property management service providers are generally hired to perform both property management and leasing services for our properties.

We seek to minimize risk and maintain stability of income and principal value through broad diversification across property sectors and geographic markets and by balancing tenant lease expirations and debt maturities across the portfolio. Our diversification goals also take into account investing in sectors or regions we believe will create returns consistent with our investment objective. Under normal conditions, we intend to pursue investments principally in well-located, well-leased assets within the office, retail, industrial and apartment sectors, which we refer to as the Primary Sectors. We will also pursue investments in certain sub-sectors of the Primary Sectors, for example the medical office sub-sector of the office sector. We expect to actively manage the mix of properties and markets over time in response to changing operating fundamentals within each property sector and to changing economies and real estate markets in the geographic areas considered for investment. When consistent with our investment objectives, we will also seek to maximize the tax efficiency of our investments through tax-free exchanges and other tax planning strategies.

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A key ratio reviewed by management in our investment decision process is the cash flow generated by the proposed investment, from all sources, compared to the amount of cash investment required (the “Cash on Cash Return”). Generally, we look at the Cash on Cash Returns over the one, five and ten-year time horizons and select investments that we believe meet our objectives. We own certain investments that provide us with significant cash flows that do not get treated as revenue under GAAP, but do get factored into our Cash on Cash Return calculations. Examples of such non-revenue generating cash flows include the sales tax sharing agreement at Marketplace at Northglenn (See Note 3 for a description of the Enhanced Sales Tax Incentive Program (“ESTIP”)), the real estate tax reimbursement agreement at TNT Logistics (See Note 5 for a description of the TNT Logistics Tax Increment Financing Note (“TIF Note”)) and the preferred return received from Legacy Village (See Note 4 for a description of the Legacy Village preferred return). For GAAP purposes, cash received from the Marketplace at Northglenn ESTIP and TNT Logistics TIF Note is split between repayment of the principal balance on the notes receivable and interest income earned on those notes. For GAAP purposes, cash received from the Legacy Village preferred return in excess of the net income allocated to us is treated as a return of capital. Additionally, certain GAAP concepts such as straight-line rent and depreciation and amortization, are not factored into our Cash on Cash Returns (See Note 2).

The following tables summarize our diversification by property sector and geographic region based upon our pro rata share of the fair value of the Fund Portfolio. The ten-year lease expiration table represents the lease expirations by both total square feet and pro rata annualized minimum base rents for current tenants of the Fund Portfolio. The ten-year debt repayment schedule represents our pro rata share of debt principal repayments and maturities and the weighted average interest rate of those repayments and maturities for the Fund Portfolio. These tables provide examples of how the Advisor evaluates the Fund Portfolio when making investment decisions.

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We will employ debt financing in an effort to enhance returns when mortgage interest rates are at attractive levels relative to real estate income yields. To moderate risk, Fund Portfolio leverage is expected to be limited to approximately 65%. We rely primarily on long-term fixed-rate financing to lock in favorable spreads between real estate income yields and mortgage interest rates, and strive to maintain a balanced schedule of debt maturities.

We may also seek to enhance overall portfolio returns by investing selectively in higher risk properties involving more significant leasing and/or capital reinvestment challenges. After we reach $300 million in NAV, we may invest up to 25% of our assets in non-Primary Sectors and/or properties located outside of the United States (“Other Investments”). Such investments will be considered when the anticipated incremental return properly compensates us for the inherent incremental risk. As of April 21, 2006, we have not made any Other Investments.

There are several factors that we believe will affect our ability to produce incremental cash flow and net income. These include:

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Operating Statistics

We generally have investments in properties with high occupancy rates leased to quality tenants under long-term, non-cancelable leases that we believe are beneficial to achieving our investment objectives. Occupancy rates and average minimum base rents per square foot for the Fund Portfolio for each of the Primary Sectors as of December 31, 2005 were as follows:

Seasonality

Our investments are not materially impacted by seasonality, despite certain of our retail tenants being impacted by seasonality. Percentage rents (rents computed as a percentage of tenant sales) that we earn from investments in retail properties may, in the future, be impacted by seasonality.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. For example, significant estimates and assumptions have been made with respect to the useful lives of assets, recoverable amounts of receivables, initial valuations and related amortization periods of deferred costs and intangibles, particularly with respect to property acquisitions. Actual results could differ from those estimates.

Critical Accounting Policies

Critical accounting policies are those that are both significant to the overall presentation of our financial condition and results of operations in our consolidated financial statements and require management to make difficult, complex or subjective judgments. Our critical accounting policies are those applicable to the following:

Initial Valuations and Estimated Useful Lives or Amortization Periods for Real Estate Investments and Intangibles

At acquisition, we make an assessment of the value and composition of the assets acquired and liabilities assumed. These assessments consider fair values of the respective assets and liabilities and are primarily

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determined based on estimated future cash flows using appropriate discount and capitalization rates, but may also be based on independent appraisals or other market data. The estimated future cash flows that are used for this analysis reflect the historical operations of the property, known trends and changes expected in current market and economic conditions that would impact the property’s operations, and our plans for such property. These estimates are particularly important as they are used for the allocation of purchase price between depreciable and non-depreciable real estate and other identifiable intangibles, including above, below and at-market leases. As a result, the impact of these estimates on our operations could be substantial. Significant differences in annual depreciation or amortization expense may result from the differing useful life or amortization periods related to such purchased assets and liabilities.

Events or changes in circumstances concerning a property may occur, which could indicate that the carrying values or amortization periods of the assets and liabilities may require adjustment. The resulting recovery analysis also depends on an analysis of future cash flows to be generated from a property’s assets and liabilities. Changes in our overall plans and views on current market and economic conditions may have a significant impact on the resulting estimated future cash flows of a property that are analyzed for these purposes.

Impairment of Long-Lived Assets

Real estate investments are individually evaluated for impairment annually or whenever conditions exist which may indicate that it is probable that the sum of expected future cash flows (on an undiscounted basis) over the anticipated holding period is less than its historical cost. Upon determination that a permanent impairment has occurred, rental properties will be reduced to their fair value.

Our estimate of the expected future cash flows used in testing for impairment is highly subjective and based on, among other things, our estimates regarding future market conditions, rental rates, occupancy levels, costs of tenant improvements, leasing commissions and other tenant concessions, assumptions regarding the residual value of our properties at the end of our anticipated holding period and the length of our anticipated holding period. These assumptions could differ materially from actual results. If our strategy changes or if market conditions otherwise dictate a reduction in the holding period and an earlier sale date, an impairment loss could be recognized and such loss could be material.

Recoverable Amounts of Receivables

We make periodic assessments of the collectibility of receivables (including deferred rent receivable) based on a specific review of the risk of loss on specific accounts or amounts. The receivable analysis places particular emphasis on past-due accounts and considers the nature and age of the receivables, the payment history and financial condition of the payee, the basis for any disputes or negotiations with the payee and other information that may impact collectibility. The analysis considers the probability of collection of the unbilled deferred rent receivable given our experience regarding such amounts. The resulting estimates of any allowance or reserve related to the recovery of these items is subject to revision as these factors change and is sensitive to the effects of economic and market conditions on such payees.

Tenant Improvements versus Lease Incentives

At the inception of a lease, we are often required to expend money to get the leased space ready for tenant occupancy or to induce the tenant to sign the lease. We make subjective judgments based on the facts and circumstances behind each lease to determine whether we have purchased an asset for the Fund as is the case for a tenant improvement or if we have, in essence, paid the tenant an inducement fee to sign the lease. Tenant improvements are recorded as investments in real estate and depreciated over the shorter of the lease life or asset life. Lease incentives are recorded as deferred expenses and are amortized against minimum rent revenue over the life of the lease.

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Acquisitions

Consolidated Properties

Consolidated Property acquisitions completed during 2004 and 2005 are as follows:

2004 Acquisitions

Monument IV at Worldgate is a 228,000 square-foot office building in Herndon, Virginia, a suburb of Washington, D.C. The property is 100% leased under a net lease to Fannie Mae. The lease expires in 2011.

Havertys Furniture is a 511,000 square-foot industrial building located in Jackson County, Georgia, a suburb of Atlanta. The property is 100% leased under a net lease through 2021 to a single-tenant. The property serves as the southeastern United States distribution center for a 125 year-old furniture retailer. The tenant exercised an expansion option during 2005 that will require us to expand the building size by approximately 297,000 square-feet with occupancy beginning in 2006 at an approximate cost of $11.7 million. At December 31, 2005, we had incurred $8.1 million in construction costs attributable to this expansion and had borrowed, via a construction loan, $6.6 million of these costs at a fixed-rate of 6.19%. We expect increased rents from this expansion to generate favorable cash flows for us beginning in 2006.

Hagemeyer Distribution Center is a 300,000 square-foot industrial building located in Barrow County, Georgia, a suburb of Atlanta. The property is 100% leased under a net lease through 2013 to a single tenant, which serves as the southeastern United States regional distribution center for this industrial and commercial supplier.

TNT Logistics is a 722,000 square-foot industrial building located in Monee, Illinois, a suburb of Chicago. The property is 100% leased under a net lease through 2014 to a single tenant, a logistics company that uses the building as a distribution center for a tire manufacturer. The property acquisition was originally structured as a mortgage loan and purchase option, which was exercised by us on March 30, 2006.

2005 Acquisitions

The Georgia Door Sales Distribution Center acquisition was the final part of a three-property acquisition, from one seller, that included Havertys Furniture and the Hagemeyer Distribution Center. This property is a

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254,000 square-foot facility located in Cobb County, Georgia, an active industrial market in the western suburbs of Atlanta. The property is 100% leased under a net lease through 2009 to a single tenant. The property serves as a regional distribution center for a national door manufacturer.

105 Kendall Park Lane is a 409,000 square-foot facility located in Fulton County, Georgia. The property is 100% leased under a net lease through 2017 to a single tenant that is a leading provider of specialty chemical products.

Waipio Shopping Center is a 137,000 square-foot grocery anchored shopping center located in Waipahu, Hawaii. The property’s largest tenants are Calvary Chapel of Pearl Harbor, Foodland grocery store and Outback Steakhouse. The property is 99% leased, with leases expiring through 2034. Tenants of this center pay their pro rata share of the property’s operating expenses.

Marketplace at Northglenn is a 439,000 square-foot power center located in suburban Denver, Colorado. The property’s largest tenants include Bed, Bath & Beyond, Gart Sports, Ross Stores, Office Depot and Marshall’s. The property is 99% leased, with lease expirations through 2020. Tenants of this center pay their pro rata share of the property’s operating expenses.

Pacific Medical Office Portfolio is a 755,000 square-foot medical office building portfolio located mainly on the campuses of Catholic Healthcare West hospitals. The fifteen buildings are located in southern California and Phoenix, Arizona. The portfolio is 94% leased. The property’s largest tenants include Catholic Healthcare West, Facey Medical Group and San Dimas Medical Group, Inc. The portfolio has a mixture of tenants who pay their pro rata share of operating expenses and those that do not pay any operating expenses.

Unconsolidated Properties

Unconsolidated Properties acquired during 2004 and 2005 are as follows:

2004 Acquisition

We have a 46.5% ownership interest in the limited liability company that owns Legacy Village, a 595,000 square-foot lifestyle retail center in Lyndhurst, Ohio, an eastern suburb of Cleveland. The property’s largest tenants include Expo Design Center (the store closed in August 2005, but continues to pay rent under a long-term lease that runs through 2044), Dick’s Sporting Goods, Giant Eagle, Crate & Barrel and Joseph Beth Books. The property is 96% leased with leases expiring between 2008 and 2044. Tenants of this center pay their pro rata share of the property’s operating expenses.

2005 Acquisition

We have an 80% ownership interest in the limited liability company that owns 111 Sutter Street, a 284,000 square-foot office building, located in San Francisco’s Financial District. This acquisition represents our first asset located within a central business district. Many of the existing leases in the building are at rental rates above

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the prevailing market rate, providing strong cash returns as the San Francisco office market continues to strengthen. The property’s largest tenants include Modem Media, Northwestern Mutual Life and Ogilvy Public Relations. The property is 92% leased with leases expiring through 2019. Tenants of this building pay their pro rata share of the property’s operating expenses. See Note 4 for a discussion of factors considered in determining that our investment should not be consolidated.

Results of Operations

General

Our revenues are primarily received from tenants in the form of fixed minimum base rents and recoveries of operating expenses. Our expenses primarily relate to the costs of operating and financing the properties. Due to the fixed nature of the revenue and expense streams in the Fund Portfolio, significant future growth in cash flow and net income will need to be generated through the acquisition of additional properties. Our share of the net income or net loss from Unconsolidated Properties is included in the equity in income of unconsolidated affiliates.

We began operations on May 28, 2004 (Inception), and no properties were owned prior to August 25, 2004 by the Fund or any related entity. Accordingly, our results of operations only cover the year ended December 31, 2005 and the period from May 28, 2004 (Inception) through December 31, 2004.

Results of Operations for the year ended December 31, 2005 and the period from May 28, 2004 (Inception) through December 31, 2004:

Increases in all operating line items from 2004 to 2005 are directly attributable to the acquisition of real estate investments that occurred during 2005 and the impact of owning the acquisitions made in 2004 for the entire year.

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Included in minimum rents, as increases, are SFAS 141 and 142 above- and below-market lease accretion (See Note 2) of $952,745 and $229,682 in 2005 and 2004, respectively. The amount and direction of future above- and below-market lease amortization is entirely dependent upon the in-place leases at future property acquisitions. Also included in minimum rents is straight-line rental income, representing rents recognized prior to being billed and collectible as provided by the terms of the lease, of $881,106 and $142,433 in 2005 and 2004, respectively. The amount of future straight-line rental income will be dependent upon the types of leases in place at future property acquisitions.

Tenant recoveries relate mainly to real estate taxes and certain property operating expenses that are paid by us and are recoverable under the various tenants’ leases. We anticipate that a majority of the real estate taxes and property operating expenses will be recoverable from the tenants as most of the tenants in the Consolidated Properties are net lease tenants. The newly acquired Pacific Medical Office Portfolio contains many gross leases, which require the landlord to pay the expenses normally associated with ownership, such as utilities, repairs, insurance and real estate taxes without reimbursement from the tenants. These gross leases will cause the ratio of tenant recoveries to operating expenses to decrease in future years. The strategy at Pacific Medical Office Portfolio is to convert all expiring gross leases to net leases, which require the lessee to pay much of the expenses that are normally associated with ownership. The successful conversion of the gross leases to net leases will be a key value driver for this investment in the future. The ratio of tenant recoveries to real estate taxes and property operating expenses will change in the future as we acquire real estate investments with differing lease terms.

Our Fund level expenses in 2004 and 2005 are subject to an expense limitation and reimbursement agreement (the “Expense Limitation Agreement”) with the Manager (See Note 9) and relate mainly to our offering costs incurred in 2004 and 2005 and our compliance and administration related costs in 2005. Also included in 2004 Fund level expense is $101,904 related to a proposed acquisition that was not completed as a result of significant issues discovered during the pre-acquisition due diligence process. As of December 31, 2005, additional Fund level expenses of $225,525 are being carried forward by the Manager, as these expenses were in excess of the amounts permitted under the Expense Limitation Agreement. At December 31, 2004, additional Fund level expenses of $365,245 were carried forward, all of which were reimbursed to the Manager by us during 2005. It is anticipated that the carried forward expenses will be charged to the Fund during 2006, to the extent permitted under the terms of the Expense Limitation Agreement. Significant amounts of Fund level expenses are expected to be incurred during the next few years as we will be required to comply with the disclosure rules of the SEC and the heightened internal control requirements of Sarbanes-Oxley. The Expense Limitation Agreement expires on December 23, 2006, after which time we will be responsible for all expenses as incurred, unless renewed by the Manager and the Fund for successive one year terms.

General and administrative expenses increased $2,596,973 to $2,633,470 for 2005 from $36,497 in 2004. General and administrative expenses relate mainly to the fixed and variable management and advisory fees earned by the Manager and Advisor. Fixed fees increase or decrease based on changes in the NAV, but are expected to grow as we continue to sell common stock and acquire additional properties. The variable fee is calculated as a formula of cash flow generated from owning and operating the real estate investments and will fluctuate as future cash flows fluctuate, but is expected to grow as the Fund grows.

Depreciation and amortization expense increased $4,306,043 to $4,794,262 for 2005 from $488,219 in 2004. We expect depreciation and amortization expense to increase as we acquire new real estate investments. Depreciation and amortization expense will be impacted by the values assigned to buildings and in-place lease assets as part of the initial purchase price allocation.

Interest income increased $879,929 to $898,256 for 2005 from $18,327 in 2004, as we invested significant amounts of idle cash in government backed securities prior to closing on certain acquisitions and from interest income earned on the TNT Logistics TIF Note (See Note 5).

We expect interest expense to increase in the future as we acquire new real estate investments using leverage. We intend to maintain an approximate 65% loan to value ratio for the Fund Portfolio, subject to the

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future interest rate environment. The weighted average interest rate for outstanding debt was 5.47% and 5.17% at December 31, 2005 and 2004, respectively. Interest expense includes the amortization of deferred finance fees of $214,960 and $12,466 for 2005 and 2004, respectively. Also included in interest expense in 2005, as a reduction, is amortization of premium associated with the assumption of debt on the Pacific Medical Office Portfolio of $11,995.

Loss allocated to minority interest represents the other owner’s share of the net loss recognized from operations of the Pacific Medical Office Portfolio for our period of ownership, December 21, 2005 through December 31, 2005. The amount of future income or loss allocated to the minority interest owner of the Pacific Medical Office Portfolio will be directly impacted by the net income or net loss recognized by that investment.

Equity in income of unconsolidated real estate affiliates increased $110,496 to $116,067 for 2005 from $5,571 in 2004 and includes the results of operations for Legacy Village for the year ended December 31, 2005 and 111 Sutter Street for the period from March 29, 2005 through December 31, 2005. The results of operations for 2004 consist of Legacy Village for the period from August 25, 2004 through December 31, 2004. Legacy Village provided net income of $271,747 while our share of 111 Sutter Street’s net loss was $155,680 for 2005. Legacy Village provided net income of $5,571 during our ownership period in 2004. Going forward, we will be subject to variability in earnings from our Unconsolidated Properties.

Significant Events

Events at Consolidated Properties

Construction on the Havertys Furniture 297,000 square foot expansion commenced in May 2005. We expect construction to be completed in late April 2006. We expect the projected rent will have a favorable impact on our cash flow in 2006 and going forward. The estimated cost for the Havertys Furniture expansion is approximately $11.7 million. The tenant took occupancy and began paying rent on approximately 156,000 square feet on January 9, 2006, approximately 36,000 square feet on February 15, 2006, approximately 32,000 square feet on March 1, 2006 and it is anticipated that the tenant will take occupancy of the remainder of the building by the end of April 2006. We incurred approximately $8.1 million in construction costs through December 31, 2005. We obtained an $11.5 million construction loan on the expansion in late December 2005, which had an outstanding balance of $6.6 million at December 31, 2005 at a fixed-rate of 6.19%. As part of the building expansion, the tenant extended its lease expiration from 2017 to 2021. As of April 21, 2006, we had incurred approximately $9.9 million in construction expenses and had borrowed a total of approximately $9.0 million on the construction loan.

Events at Unconsolidated Properties

During August 2005, Expo Design Center closed its Legacy Village store as part of a 15 store closure across the country. Expo Design Center is still required to pay full rent through 2044. The store closure triggered co-tenancy provisions in the leases of three tenants of the center, which will reduce rent revenue until the center’s occupancy reaches certain thresholds and could allow certain tenants to terminate their leases early. In 2005, rent revenue at Legacy Village decreased by approximately $311,000 as a result of the triggering of the co-tenancy provisions. Home Depot, Inc., the parent company of Expo Design Center, is looking at various options for their unoccupied space. One alternative under consideration includes sub-leasing the space to one or more retail tenants, which meet certain use criteria, as defined in the lease. The Fund’s cash flow is protected through August 2006 by the preferred return it receives from Legacy Village (See Note 4 for a description of the preferred return), but will be subject to variability after that date.

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Liquidity and Capital Resources

The Fund’s primary uses and sources of cash are as follows:

The sources and uses of cash for the year ended December 31, 2005 and the period from May 28, 2004 (Inception) through December 31, 2004 were as follows:

The increase in cash flows provided by operating activities are directly attributable to the acquisition of real estate investments that occurred during 2005 and the impact of owning the acquisitions made in 2004 for the entire year. Cash used in investing activities increased as a result of a significant increase in acquisition activity in 2005 compared to 2004. Cash provided by financing activities increased as a result of additional Share issuances in 2005 and the Fund placing a significant amount of debt on its 2005 acquisitions.

On April 12, 2006, $30.6 million of subscription commitments were placed in an escrow account with the Manager. Shares will be issued and these funds will be brought into the Fund as needed for investment activities, but no later than July 20, 2006.

Financing

One of our investment strategies is to use leverage in an effort to improve the overall performance of the Fund. Our target is to maintain an overall Fund Portfolio level loan-to-value ratio of approximately 65%, with an individual asset’s long-term loan-to-value ratio not to exceed 75%.

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The following Consolidated Debt table provides information on the outstanding principal balances and the weighted average interest rate at December 31, 2005 and 2004 for such debt. The Unconsolidated Debt table provides information on our pro rata share of the joint venture debt.

Consolidated Debt

Unconsolidated Debt

Given the recent favorable interest rate environment, we have placed mostly fixed-rate financing with terms ranging from 5 to 10 years. The weighted average interest rate for the $273.1 million of outstanding fixed-rate debt at December 31, 2005 is 5.46%. Three loans secured by the Consolidated Properties have floating-rate tranches totaling $5.0 million. The floating-rate tranches are based on LIBOR plus 140 basis points (5.69% and 3.68% at December 31, 2005 and 2004). The floating-rate tranches can be prepaid in whole or in part. We will continue to evaluate the current and projected future interest rate environment coupled with our sources and uses for cash to determine if and when prepaying the variable-rate debt is appropriate.

We anticipate that we will continue to use fixed-rate debt to acquire real estate investments and maintain the 65% loan-to-value ratio on the Fund Portfolio as long as interest rates remain favorable.

Line of Credit

In late 2004, we entered into a $10.0 million line of credit agreement to cover short-term capital needs for acquisitions and working capital. The line of credit bore interest at LIBOR plus 1.50% or the prime rate. The line of credit was increased to $15.0 million on March 29, 2005. On December 21, 2005, we cancelled the existing line of credit and obtained a new $30.0 million line of credit that can be expanded to $50.0 million once the Fund reaches $300 million in NAV, subject to certain financial covenants. The line of credit expires on December 21, 2006, but can be renewed for one year upon the agreement of the borrower and lender. The new line of credit carries interest at rates that approximate LIBOR plus 1.80% or a base rate as determined by the lender. No borrowings were outstanding on our line of credit at December 31, 2005 or 2004. As of April 21, 2006, we had $7.0 million outstanding on our line of credit which was used to fund the acquisition of Metropolitan Park North.

We anticipate that we will need a line of credit throughout the life of the Fund to accomplish our acquisition and operational objectives. In this respect, monies borrowed on our line of credit will be repaid from three sources:

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Off Balance Sheet Arrangements

We are not subject to any off balance sheet arrangements.

Contractual Cash Obligations and Commitments

From time to time, we have entered into contingent agreements for the acquisition of properties. Each acquisition is subject to satisfactory completion of due diligence.

The following table aggregates our contractual obligations and commitments subsequent to December 31, 2005:

Commitments

In February 2005, Havertys Furniture gave us an expansion notice that requires us to expand the building by 297,000 square feet at an approximate cost of $11.7 million. In July 2005, Havertys Furniture signed a lease amendment to extend its lease term through 2021. Construction began in May 2005 and is expected to be completed in late April 2006. On December 30, 2005, we obtained an $11.5 million fixed-rate construction loan, of which $6.6 million had been borrowed at December 31, 2005, the loan matures in nine years bearing interest at a fixed-rate of 6.19%, interest-only for the first four years. We expect to borrow the remaining balance on the loan during the first half of 2006. As of December 31, 2005, we had incurred $8.1 million in construction costs, the remaining $3.6 million is expected to be incurred by the end of April 2006. As of April 21, 2006, we had incurred approximately $9.9 million in construction expenses and had borrowed at total of approximately $9.0 million on the construction loan.

As part of the acquisition of 105 Kendall Park Lane, we entered into an agreement with the tenant to replace a truck parking lot and improve the efficiency of the property’s drainage system. Total cost of these projects is expected to be approximately $300,000.

As part of the acquisition of Pacific Medical Office Portfolio, the limited liability company that we invested in, which owns the portfolio, entered into an option agreement that gives the seller the right to effect a put to sell two medical office buildings to the limited liability company between March 21, 2007 and June 21, 2007. During the same exercise period, the limited liability company will have the right to effect a call to buy the two medical office buildings. The purchase price is equal to the net operating income of the two buildings (projected forward for twelve months, subject to adjustments) divided by a cap rate of 7.75%. No initial investment was required by the limited liability company, but a $500,000 deposit was put up as collateral for the contract. The purchase price is expected to be between $10.4 and $19.1 million depending on the building’s net operating income. If neither

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party exercises the option by the expiration of the agreement, the contract becomes null and void and the deposit will be returned. The deposit will be impounded by the seller if the limited liability company fails to purchase the buildings after the put option notice has been given.

At acquisition, the Pacific Medical Office Portfolio mortgage debt required that we deposit $1.6 million into an escrow account to fund future capital expenditures, tenant improvements and leasing commissions. Additionally, we are required to deposit approximately $590,000 into this escrow account during 2006, which we expect to fund from operating cash flows generated by the Pacific Medical Office Portfolio.

On February 6, 2006 we entered into a purchase agreement to acquire Metropolitan Park North, a 186,000 square foot multi-tenant office building with a five level parking garage located in Seattle, Washington. We placed into escrow a $5.0 million non-refundable deposit on the acquisition, funded by borrowings on our line of credit. On March 28, 2006, we acquired the property for a gross purchase price of approximately $89.2 million including closing costs and acquisition fees.

On February 7, 2006, we placed a $1.2 million non-refundable deposit, funded by borrowings on our line of credit, on a $61.0 million mortgage loan to be secured by Metropolitan Park North, maturing in seven years at a fixed-rate of 5.73%, interest only for the first four years. The acquisition and related financing closed on March 28, 2006. The loan requires that on or before April 1, 2009, we are obligated to post a $3.9 million reserve in escrow to cover costs of certain tenant improvements, leasing commissions, rent concessions, and lost rental income in connection with re-leasing space to a major tenant of the building. If the tenant provides written notice of its intent to exercise its lease renewal option by September 30, 2010, the lender will return the $3.9 million deposit to us. If the tenant fails to provide notice of its renewal, we are obligated to post an additional $2.8 million deposit into the escrow. The lender will return the reserve to us if the following conditions are met: (1) no default has occurred and remains outstanding; and (2) either the tenant has exercised its renewal options or the space has been re-leased to a new tenant(s).

REIT Requirements

To remain qualified as a real estate investment trust for federal income tax purposes, we must distribute or pay tax on 100% of our capital gains and at least 90% of ordinary taxable income to stockholders.

The following factors, among others, will affect operating cash flow and, accordingly, influence the decisions of our board of directors regarding distributions:

We anticipate that operating cash flow, and potential new debt or equity from our future equity offerings, or refinancings will provide adequate liquidity to conduct our operations, fund general and administrative expenses, fund operating costs and interest payments and allow distributions to our stockholders in accordance with the requirements of the Code.

Recently Issued Accounting Pronouncements And Developments

As described in Note 11, new accounting pronouncements have been issued that are effective for the current or subsequent year. Certain new accounting pronouncements have had or are expected to have an impact on our consolidated financial statements.

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Quantitative and Qualitative Disclosures about Market Risk

We have not entered into any transactions using derivative instruments. We are subject to market risk associated with changes in interest rates both in terms of our variable-rate debt and the price of new fixed-rate debt for acquisitions. As of December 31, 2005, we had consolidated debt of $280.4 million, including $5.0 million of variable-rate debt and a $2.3 million premium on the assumption of debt. None of the variable-rate debt is subject to interest rate cap agreements. A 25 basis point movement in the interest rate on the $5.0 million of variable-rate debt would result in an approximately $12,500 annualized increase or decrease in consolidated interest expense and operating cash flows.

All our Unconsolidated Properties are financed with fixed-rate debt, therefore we are not subject to interest rate exposure at these properties.

We are subject to interest rate risk with respect to our fixed-rate financing in that changes in interest rates will impact the fair value of our fixed-rate financing. To determine fair market value, the fixed-rate debt is discounted at a rate based on an estimate of current lending rates, assuming the debt is outstanding through maturity and considering the collateral. At December 31, 2005, the fair value of our mortgage notes payable and other debt payable is estimated to be approximately $1.5 million lower than the carrying value of $280.4 million. If treasury rates were to increase by 25 basis points, the fair value of our mortgage notes payable and other debt payable would be approximately $5.7 million lower than the carrying value.

Item 3. Properties.

DESCRIPTION OF REAL ESTATE:

Our investment in real estate assets as of December 31, 2005 consists of our interest in properties that are consolidated in our consolidated financial statements, including an interest in a mortgage loan secured by real estate and a 95% interest in a joint venture (the “Consolidated Properties”) and interests in two joint ventures that own real estate (the “Unconsolidated Properties”). The following table sets forth the information with respect to our real estate assets as of December 31, 2005 and one property acquisition that was completed prior to the filing of this Form 10:

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