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(Registrant’s telephone
number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
Title of each class
Name of each exchange on which registered
Common Stock
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein and will not be contained, to the best
of registrant’s knowledge, in its definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,”“accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act. (Check one):
Large
accelerated
filer o
Accelerated
filer þ
Non-accelerated
filer o
Smaller
reporting
company o
(Do
not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act). Yes
o No þ
The aggregate market value of voting common stock held by
non-affiliates of the registrant as of June 30, 2007 was
approximately $177,270,167.
The number of shares outstanding of the registrant’s common
stock as of March 7, 2008 was 65,094,777 shares.
Grubb & Ellis Company (“the Company” or
“Grubb & Ellis”), a Delaware corporation
founded 50 years ago in Northern California, is one of the
country’s largest and most respected commercial real estate
services and investment management firms. As more fully
described below, on December 7, 2007, the Company effected
a stock merger (the “Merger”) with NNN Realty
Advisors, Inc. (“NNN”), a real estate asset management
company and nationally recognized sponsor of tax deferred tenant
in common (“TIC”) 1031 property exchanges as well
as a sponsor of public non-traded real estate investment trusts
(“REITs”) and other investment programs. Upon the
closing of the Merger, a change of control of the Company
occurred. The former stockholders of NNN acquired approximately
60% of the Company’s issued and outstanding common stock.
With 130 owned and affiliate offices worldwide (57 owned and
approximately 73 affiliates) and more than 6,000 professionals,
including a brokerage sales force of more than 1,800 brokers,
the Company offers property owners, corporate occupants and
program investors comprehensive integrated real estate
solutions, including transactions, management, consulting and
investment advisory services supported by proprietary market
research and extensive local market expertise. The combination
of the established Grubb & Ellis brand with the
innovative real estate investment programs sponsored by the
Company’s subsidiary Grubb & Ellis Realty
Investors, LLC (“GERI”) (formerly Triple Net
Properties, LLC) broadens and strengthens the overall
strategic and financial platform of the Company. As a result,
the Company is now more balanced and diversified in its product
and service offerings, which enhances its financial stability
and better positions the Company to pursue growth opportunities,
both domestically and internationally, as well as to better
serve its clients.
In certain instances throughout this Annual Report phrases such
as “legacy Grubb & Ellis” or similar
descriptions are used to reference, when appropriate, the
Company prior to the Merger. Similarly, in certain instances
throughout this Annual Report the term NNN, “legacy
NNN”, or similar phrases are used to reference, when
appropriate, NNN Realty Advisors, Inc. prior to the Merger.
Business
Segment Reporting
As a result of the Merger in December 2007, the newly combined
Company’s operating segments were evaluated for reportable
segments. As a result, the legacy NNN reportable segments were
realigned into a single operating and reportable segment called
Investment Management. This realignment had no impact on the
Company’s consolidated balance sheet, results of operations
or cash flows.
The Company reports its revenue by three business segments in
accordance with the provisions of Statement of Financial
Accounting Standards (“SFAS”) No. 131,
Disclosures about Segments of an Enterprise and Related
Information: Investment Management, which includes providing
acquisition, financing and disposition services with respect to
its programs, asset management services related to its programs,
and dealer-manager services by its securities broker-dealer,
which facilitates capital raising transactions for its TIC, REIT
and other investment programs; Transaction Services, which
comprises its real estate brokerage operations; Management
Services, which includes property management, corporate
facilities management, project management, client accounting,
business services and engineering services for unrelated third
parties and the properties owned by the programs it sponsors,
and additional information on these business segments can be
found in Note 18 of Notes to Consolidated Financial
Statements in Item 8 of this Report.
For the year ended December 31, 2007, the Company, after
giving pro forma effect to the Merger, as well as other
acquisitions completed during the year, generated combined
revenue of approximately $732.8 million and income from
continuing operations of approximately $2.7 million.
Grubb & Ellis has a 50 year track record of
proven performance in the commercial real estate industry and is
one of the largest real estate brokerage firms in the country,
offering clients the experience of thousands of successful
transactions and the expertise that comes from a nationwide
platform. By focusing on the overall business objectives of its
clients, Grubb & Ellis utilizes its research
capabilities, extensive properties database and expert
negotiation skills to create, buy, sell and lease opportunities
for both users and owners of commercial real estate. With a
comprehensive approach to transactions, Grubb & Ellis
offers a full suite of services to clients, from site selection
and sale negotiations to needs analysis, occupancy projections,
prospect qualification, pricing recommendations, long-term value
consultation, tenant representation and consulting services. As
one of the most active and largest commercial real estate
brokerages in the United States, Grubb & Ellis’
traditional real estate services provide added value to the real
estate investment programs of its affiliates by offering a
comprehensive market view and local area expertise. This
powerful business combination allows the company to identify
attractive investment properties and quickly acquire them for
the benefit of its program investors. In addition, select
brokers will have the opportunity to cross-sell product through
the investment management platform.
The Company actively engages its brokerage force in the
execution of its marketing strategy. Regional and metro-area
managing directors, who are responsible for operations in each
major market, facilitate the development of brokers. Through the
Company’s specialty practice groups, known as
“Specialty Councils,” key personnel share information
regarding local, regional and national industry trends and
participate in national marketing activities, including trade
shows and seminars. This ongoing dialogue among brokers serves
to increase their level of expertise as well as their network of
relationships, and is supplemented by other more formal
education, including recently expanded training programs
offering sales and motivational training and cross-functional
networking and business development opportunities.
In some local markets where the Company does not have owned
offices, it has affiliation agreements with independent real
estate service providers that conduct business under the
Grubb & Ellis brand. The Company’s affiliation
agreements provide for exclusive mutual referrals in their
respective markets, generating referral fees. The Company’s
affiliation agreements are generally multi-year contracts.
Through its affiliate offices, the Company has access to more
than 900 brokers with local market research capabilities.
The Company’s Corporate Services Group provides
comprehensive coordination of all required Grubb &
Ellis services to realize the needs of client’s real estate
portfolios and to maximize their business objectives. These
services include consulting services, lease administration,
strategic planning, project management, account management and
international services. As of December 31, 2007,
Grubb & Ellis had in excess of 1,800 brokers at its
owned and affiliate offices, of which 927 brokers were at its
owned offices, up from 917 at December 31, 2006.
Approximately 47% and 53% of legacy Grubb & Ellis
transaction services revenue were from leasing and sale
transactions, respectively, during 2007.
Management
Services
Grubb & Ellis delivers integrated property, facility,
asset, construction, business and engineering management
services to a host of corporate and institutional clients. The
Company offers customized programs that focus on cost-efficient
operations and tenant retention.
The Company manages a comprehensive range of properties
including headquarters, facilities and class A office space
for major corporations, including many Fortune
500 companies. Grubb & Ellis’ skills extend
to management of industrial, manufacturing and warehousing
facilities as well as data centers, retail outlets and
multi-family properties for real estate users and investors.
Additionally, Grubb & Ellis provides consulting
services, including site selection, feasibility studies, exit
strategies, market forecasts, appraisals, strategic planning and
research services.
The Company is committed to providing unparalleled client
service. In addition to expanding the scope of products and
services offered, it is also focused on ensuring that it can
support client relationships with
best-in-class
service. During 2007, the Company continued to expand the number
of client service relationship managers, which provide a single
point of contact to corporate clients with multi-service needs.
Grubb & Ellis Management Services, the Company’s
management services subsidiary, was recognized as Microsoft
Corporation’s top vendor of 2007 from among more than
15,000 vendors. At December 31, 2007, Grubb &
Ellis managed approximately 216 million square feet, of
which 175 million were from third parties and
41 million related to its investment management programs.
Investment
Management
The Company and its subsidiaries are leading sponsors of real
estate investment programs that provide individuals and
institutions the opportunity to invest in a broad range of real
estate investment vehicles, including tax-deferred 1031 TIC
exchanges; public REITs and real estate investment funds. As of
December 31, 2007, more than $3 billion in investor
equity has been raised for these investment programs; the
Company has more than $5.7 billion of assets under
management related to the various programs that it sponsors. The
Company has completed transaction acquisition and disposition
volume totaling approximately $10.0 billion on behalf of
more than 34,000 program investors since its founding in 1998.
Investment management products are distributed through the
Company’s broker-dealer subsidiary, Grubb & Ellis
Securities Inc. (“GBE Securities”) (formerly NNN
Capital Corp.). GBE Securities is registered with the Securities
and Exchange Commission (the “SEC”), the Financial
Industry Regulatory Authority (“FINRA”) and all
50 states. GBE Securities has agreements with an
extensive network of broker dealers with more than 150 selling
agreements and over 40,000 registered representatives as of
December 31, 2007. Part of the Company’s strategy is
to expand its network of broker-dealers to increase the amount
of equity that it raises in its various investment programs.
GERI, a subsidiary of the Company, is a recognized market leader
in the securitized TIC industry as measured by total equity
raised according to published reports of OMNI Research and
Consulting. This product strategy allows investors to
fractionally own large, institutional-quality real estate assets
with the added advantage of qualifying for deferred tax benefits
on real estate capital gains. The aggregate amount of equity
that has been invested in the TIC industry has grown from less
than $200 million in 2001 to approximately
$2.4 billion in 2007, according to published reports of
Omni Research and Consulting. The Company currently sponsors
more than 150 TIC programs and has taken more than 50 programs
full cycle (from acquisition through disposition). The Company
raised more than $450 million of TIC equity in 2007.
Public non-traded REITs are registered with the SEC but are not
listed on any of the securities exchanges like a traded REIT.
According to the published Stanger Report, Winter 2008, by
Robert A. Stanger and Co., an independent financial advisor,
approximately $11.5 billion was raised in this sector in
2007. The Company sponsors two demographically focused programs
that are actively raising capital, the Grubb & Ellis
Healthcare REIT, Inc. and the Grubb & Ellis Apartment
REIT, Inc. which raised more than $280 million in combined
capital in 2007.
On February 12, 2008, the Company launched its Wealth
Management Platform for high net worth investors. This platform
provides comprehensive real estate investment and advisory
services to high net worth investors, offering qualified
individuals, entities and corporations, the opportunity to
benefit from the potential advantages of real estate investment
through a passive, sole-ownership vehicle that delivers
discretion to the investor. The Wealth Management Platform is
open to all qualified investors seeking to build or expand their
commercial real estate portfolio, whether their investment
objectives are tax-deferred 1031 exchange driven or not. The
Company had $180 million of committed investments through
this platform at the time it was initiated.
The Company intends to start a family of U.S. and global
open and closed end mutual funds that focus on real estate
securities and manage private investment funds exclusively for
qualified investors through its 51% ownership in
Grubb & Ellis Alesco Global Advisors, LLC. The Company
also looks for joint venture opportunities and currently manages
over $475 million of real estate for which it maintains a
minority ownership interest. Through its multi-family platform,
the Company provides investment management services
for TIC and REIT apartment product and currently manages in
excess of 10,000 apartment units through Grubb & Ellis
Residential Management, Inc., the Company’s multi-family
management services subsidiary.
Our
Opportunity
The Company seamlessly integrates its traditional transaction
and management services with the innovative investment programs
of GERI. All functions of the new Company work together to
provide comprehensive service to clients and program investors.
Teamed with a forward-looking investment strategy that seeks to
capitalize on the nation’s changing demographics, the
Company’s various service offerings support its investment
programs to provide clients and program investors with a full
array of solutions for multiple needs. The proprietary research
and demographic investing strategy of the Company establishes a
foundation upon which its investment programs are based. The
real estate brokerage network of the Company offers keen insight
into the available pool of assets nationwide, in order to
maximize acquisition opportunities for program investors. The
professional property and asset management services of the
Company drive value to each of the investment programs from
acquisition through ultimate disposition. Additionally, the
business platform of the post-merger Company is designed to
offer consistent and reliable growth and better withstand the
fluctuations and turbulence of commercial real estate market
cycles. The Company’s management believes that it has the
vision, financial strength, discipline and strategy to deliver
innovative solutions across the full spectrum of commercial real
estate, whether it is a need for space, strategic planning or a
real estate investment product that meets specific return
criteria.
The Company has re-branded its investment programs as
Grubb & Ellis subsequent to the Merger to capitalize
on the strength of the brand name. Its TIC programs are
sponsored by GERI, its REIT investment programs are now
Grubb & Ellis Healthcare REIT, Inc. and
Grubb & Ellis Apartment REIT, Inc. and its FINRA
registered broker-dealer, NNN Capital Corp., is now GBE
Securities, Inc. The Company expects to achieve
$10.0 million of expense synergies in the first twelve
months following the Merger and $18.5 million of synergies
in the first 18 months as a result of expense and revenue
cross-selling opportunities.
The
Merger
Pursuant to an Agreement and Plan of Merger dated May 22,2007 (the “Merger Agreement”) by and among the
Company, NNN, and a wholly-owned merger subsidiary of the
Company, upon the effectiveness of the Merger, NNN would become
a wholly-owned subsidiary of the Company, and in connection
therewith (i) each issued and outstanding share of common
stock of NNN would automatically be converted into a 0.88 of a
share of common stock of the Company, and (ii) each issued
and outstanding stock option of NNN, exercisable for common
stock of NNN, would automatically be converted into the right to
receive stock option exercisable for common stock of the Company
based on the same 0.88 share conversion ratio.
Unless otherwise indicated, all pre-merger NNN share data has
been adjusted to reflect the conversion as a result of the
Merger (see Note 9 of Notes to Consolidated Financial
Statements in Item 8 of this Report for additional
information).
At a special meeting of each of the Company’s and
NNN’s stockholders, both of which were held on
December 6, 2007, stockholders of both companies
representing a majority of each company’s issued and
outstanding common stock voted to adopt the Merger Agreement. In
addition, the stockholders of the Company representing a
majority of the issued and outstanding shares of the
Company’s common stock voted in favor of each of the
following proposals, subject to the consummation of the Merger,
to (i) amend the Company’s amended and restated
certificate of incorporation to increase the authorized number
of shares of the Company’s common stock from
50 million to 100 million; (ii) issue common
stock to the NNN stockholders in connection with the Merger,
(iii) amend the Company’s amended and restated
certificate of incorporation to increase the authorized number
of shares of the Company’s preferred stock from one million
to 10 million; (iv) provide for a classified board of
directors comprising three classes of directors, the first class
of directors, Class A directors, having a term that would
initially expire on the Company’s next annual meeting of
stockholders after the effective date of the Merger, the second
class of directors, Class B directors, having a term that
would initially expire on the Company’s second annual
meeting of stockholders after the
effective date of the Merger, and the third class of directors,
Class C directors, having a term that would initially
expire on the Company’s third annual meeting of
stockholders after the effective date of the Merger, with each
subsequent term of each class of directors being for a three
year period; and (v) elect the following individuals to the
board of directors upon the effectiveness of the Merger: Scott
D. Peters, Harold H. Greene and D. Fleet Wallace as Class A
directors; Gary H. Hunt, Glenn L. Carpenter and Robert J.
McLaughlin as Class B directors; and Anthony W. Thompson,
C. Michael Kojaian and Rodger D. Young as Class C directors.
Accordingly, upon the closing of the Merger, which occurred on
December 7, 2007, the 43,779,740 shares of common
stock of NNN that were issued and outstanding immediately prior
to the Merger were automatically converted into
38,526,171 shares of common stock of the Company, and the
2,249,850 NNN restricted stock and stock options that were
issued and outstanding immediately prior to the Merger were
automatically converted into 1,979,868 shares of restricted
stock and stock options of the Company. The shares of the
Company’s common stock issued in connection with the Merger
were registered under the Securities Act of 1933, as amended
(the “Securities Act”), and the Company’s common
stock, including the shares of common stock issued pursuant to
the Merger, continue to trade on the New York Stock Exchange
(the “NYSE”) under the symbol “GBE”.
Upon the closing of the Merger, each of Mark E. Rose, Anthony G.
Antone and F. Joseph Moravec (a former member of the Audit
Committee) resigned from the Company’s board of directors.
Scott D. Peters became Chief Executive Officer and President and
Andrea Biller became General Counsel, Executive Vice President
and Corporate Secretary. In addition, upon the closing of the
merger C. Michael Kojaian resigned from the position of
chairman of the board of directors of the Company (without
resigning or otherwise affecting his position as a director of
the Company) upon the closing of the merger and Anthony W.
Thompson became chairman of the Company’s board of
directors. Mr. Thompson subsequently resigned as chairman
of the board of directors effective February 8, 2008 and
Glenn L. Carpenter was appointed the Company’s chairman of
the board of directors.
Effective December 7, 2007, the Company amended its amended
and restated certificate of incorporation and bylaws as
contemplated by the Merger Agreement. In addition, the
Company’s bylaws were also amended to comply with the
regulations of the NYSE that before January 1, 2008, the
Company’s by-laws expressly provide for uncertified shares
of stock to be evidenced by a book-entry system, by stock
certificates, or by a combination of both.
Finally, subsequent to the closing of the Merger, in December
2007, the Company relocated its headquarters from Chicago,
Illinois to Santa Ana, California, changed its fiscal year from
June 30 to December 31, and appointed Ernst & Young
LLP (“Ernst & Young”) as its independent
registered public accounting firm to audit financial statements
of the Company going forward.
Secured
Credit Facility
On December 7, 2007, in connection with the Merger, the
Company replaced its existing amended and restated
$60 million senior secured revolving credit facility (the
“Prior Credit Facility”) with a Second Amended and
Restated Credit Agreement (the “New Credit Facility”)
by and among the Company, certain of the Company’s
subsidiaries (the “Guarantors”), the initial lender
named therein, Deutsche Bank Trust Company Americas, as
syndication agent, Deutsche Bank Securities, Inc., as sole
book-running manager and sole lead arranger, and Deutsche Bank
Trust Company Americas (“Deutsche Bank”), as the
initial issuing bank, swing line bank and administrative agent
for the Lenders. Deutsche Bank was the lead bank in the Prior
Credit Facility.
The New Credit Facility increased the overall size of the Prior
Credit Facility from $60 million to $75 million, and
eliminated the currently outstanding $20 million term loan
portion of the Prior Credit Facility. Proceeds from the New
Credit Facility may be used for general corporate purposes,
including the repayment of amounts borrowed under the
Company’s Prior Credit Facility. As of December 31,2007, there was $8.0 million outstanding under the New
Credit Facility. As a condition to the closing of the New Credit
Facility, the existing $25 million unsecured credit
facility of NNN with LaSalle Bank, N.A. was terminated. The New
Credit Facility extends the terms of the Prior Credit Facility
to December 7, 2010 subject to the
Company’s right to extend the term of the New Credit
Facility for an additional twelve (12) months until
December 7, 2011. Other terms and provisions of the Prior
Credit Facility remain substantially unchanged, except for the
revision of various financial and other covenants to give effect
to and to take into account the Merger.
As a condition to entering into the New Credit Facility, the
Company and certain subsidiaries simultaneously entered into a
Second Amended and Restated Security Agreement, dated
December 7, 2007, with Deutsche Bank, in its capacity as
administrative agent, pursuant to which the Company granted a
first priority security interest in substantially all of the
Company’s assets to the “Secured Parties” as that
term is defined in such Second Amended and Restated Security
Agreement.
Certain
Real Estate Held for Sale
During the first half of 2007, the Company acquired three
commercial properties — the Danbury Corporate Center
in Danbury, Connecticut, Abrams Center in Dallas, Texas and 6400
Shafer Court in Rosemont, Illinois — for an aggregate
contract price of $122.2 million, along with acquisition
costs of approximately $1.3 million, and assumed
obligations of approximately $542,000. The Company acquired the
three properties pursuant to its warehousing strategy to
accumulate these assets with the intention to hold them for
future sale to Grubb & Ellis Realty Advisors, Inc.
(“GERA”), the Company’s investment management
affiliate which is a publicly traded special purpose acquisition
company (“SPAC”) formed by the Company in September
2005. The Company funded its equity position in these
acquisitions primarily with borrowings from its Prior Credit
Facility.
Simultaneous with the acquisition of the third property in June
2007, the Company closed two non-recourse mortgage loan
financings with Wachovia Bank, National Association in an
aggregate amount of $120.5 million. The proceeds of the
mortgage loans were used to finance the purchase of this third
property, to fund certain required reserves for all three
properties, to pay the lender’s fees and costs and to repay
certain amounts borrowed by the Company through its credit
facility with respect to the first two properties purchased.
On June 18, 2007, the Company, along with its wholly owned
subsidiary, GERA Property Acquisition, LLC, entered into a
Membership Interest Purchase Agreement (the “Purchase
Agreement”) with GERA which contemplated the transfer of
the three commercial office properties from the Company to GERA
and, if consummated, would constitute GERA’s business
combination. Pursuant to the Purchase Agreement, the Company was
to sell the properties to GERA on a “cost neutral
basis,” plus reimbursement for the actual costs and
expenses paid by the Company with respect to the purchase of the
properties and imputed interest on cash advanced by the Company
with respect to the properties.
Under the terms of the Purchase Agreement, the Purchase
Agreement was subject to termination under certain
circumstances, including but not limited to if GERA failed to
obtain the requisite stockholder consents required under the
laws of the State of Delaware and GERA’s charter to approve
the transactions contemplated by the Purchase Agreement.
On February 28, 2008, at a special meeting of the
stockholders of GERA held to vote on, among other things, the
proposed transaction with the Company, GERA failed to obtain the
requisite consents of its stockholders to approve its proposed
business combination (the transactions contemplated by the
Purchase Agreement). Specifically, of the 23,958,334 shares
of GERA common stock eligible to vote with respect to the
proposed transaction, stockholders holding an aggregate of
22,695,082 shares voted on the transaction. Of those
stockholders voting, 17,144,944 shares were cast against
the proposed business combination, and the holders of all such
17,144,944 shares also elected to convert their shares into
a pro rata share of GERA’s trust account.
4,860,127 shares voted in favor of the proposed business
combination, and the remaining shares did not vote with respect
to the proposed transaction.
As a result thereof, GERA, in accordance with
Section 8.1(f) of the Purchase Agreement, advised the
Company in a letter effective February 28, 2008, that it
was terminating the Purchase Agreement in accordance with its
terms.
As a result of its failure to obtain the requisite stockholder
approvals, GERA is unable to effect a business combination
within the proscribed deadline of March 3, 2008 in
accordance with its charter. Consequently, GERA filed a proxy
statement with the SEC on March 11, 2008 with respect to a
special meeting of its stockholders to vote on the dissolution
and liquidation of GERA. The Company will write-off in the first
quarter of 2008 its investment in GERA of approximately
$5.6 million, including its stock and warrant purchases,
operating advances and third party costs. The Company will also
pay any third-party legal, accounting, printing and other costs
(other than monies to be paid to stockholders of GERA on
liquidation) associated with the dissolution and liquidation of
GERA. In addition to the Company bearing the dissolution and
liquidation costs of GERA, the various exclusive service
agreements that the Company had previously entered into with
GERA for transaction services, property and facilities
management, and project management, will no longer be of any
force or effect. The Company presently intends to market the
three commercial properties so as to effect their sale on or
before September 30, 2008, as required under the terms of
its credit facility.
Industry
and Competition
The U.S. commercial real estate services industry is large
and highly fragmented, with thousands of companies providing
asset management, investment management and brokerage services.
In recent years the industry has experienced substantial
consolidation, a trend that is expected to continue.
The top 25 brokerage companies collectively completed nearly
$842 billion in investment sales and leasing transactions
globally in 2006, according to the latest available survey
published by National Real Estate Investor, which is the most
recent available survey. The Company ranked 12th in this
survey, including transactions in its affiliate offices.
Within the management services business, according to a recent
survey published in 2007 by National Real Estate Investor, the
top 25 companies in the industry manage over
7.5 billion square feet of commercial property. The Company
ranks as the eighth largest property management company in this
survey with 210 million square feet under management at
year end 2006, including property under management in its
affiliate offices. The largest company in the survey had
1.7 billion square feet under management.
The Company competes in a variety of service businesses within
the commercial real estate industry. Each of these business
areas is highly competitive on a national as well as local
level. The Company faces competition not only from other
regional and national service providers, but also from global
real estate providers, boutique real estate advisory firms and
appraisal firms. Although many of the Company’s competitors
are local or regional firms that are substantially smaller than
the Company, some competitors are substantially larger than the
Company on a local, regional, national
and/or
international basis. The Company’s significant competitors
include CB Richard Ellis, Jones Lang LaSalle and
Cushman & Wakefield, all of which have global
platforms. The Company believes that it needs such a platform in
order to effectively compete for the business of large
multi-national corporations that are increasingly seeking a
single real estate services provider. While there can be no
assurances that the Company will be able to continue to compete
effectively, maintain current fee levels or margins, or maintain
or increase its market share, based on its competitive
strengths, the Company believes that it can operate successfully
in the future in this highly competitive industry.
The Company believes there are only limited barriers to entry in
its asset management business. Its programs face competition
generally from REITs, institutional pension plans and other
public and private real estate companies and private real estate
investors for the acquisition of properties and for raising
capital to create programs to make these acquisitions. In
investment management services, it faces competition with other
real estate firms in the acquisition and disposition of
properties, and it also competes with other sponsors of real
estate investment programs for investors to provide the capital
to allow it to make these investments. It also competes against
other real estate companies who may be chosen by a broker-dealer
as an investment platform instead of the Company and with other
broker-dealers and other properties for viable tenants for its
programs’ properties. Finally, GBE Securities faces
competition from institutions that provide or arrange for
other types of financing through private or public offerings of
equity or debt and from traditional bank financings.
Environmental
Regulation
Federal, state and local laws and regulations impose
environmental zoning restrictions, use controls, disclosure
obligations and other restrictions that impact the management,
development, use,
and/or sale
of real estate. Such laws and regulations tend to discourage
sales and leasing activities, as well as the willingness of
mortgage lenders to provide financing, with respect to some
properties. If transactions in which the Company is involved are
delayed or abandoned as a result of these restrictions, the
brokerage business could be adversely affected. In addition, a
failure by the Company to disclose known environmental concerns
in connection with a real estate transaction may subject the
Company to liability to a buyer or lessee of property.
The Company generally undertakes a third-party Phase I
investigation of potential environmental risks when evaluating
an acquisition for a sponsored program. A Phase I investigation
is an investigation for the presence or likely presence of
hazardous substances or petroleum products under conditions that
indicate an existing release, a post release or a material
threat of a release. A Phase I investigation does not typically
include any sampling. The Company’s programs may acquire a
property with environmental contamination, subject to a
determination of the level of risk and potential cost of
remediation.
Various environmental laws and regulations also can impose
liability for the costs of investigating or remediation of
hazardous or toxic substances at sites currently or formerly
owned or operated by a party, or at off-site locations to which
such party sent wastes for disposal. As a property manager, the
Company could be held liable as an operator for any such
contamination, even if the original activity was legal and the
Company had no knowledge of, or did not cause, the release or
contamination. Further, because liability under some of these
laws is joint and several, the Company could be held responsible
for more than its share, or even all, of the costs for such
contaminated site if the other responsible parties are unable to
pay. The Company could also incur liability for property damage
or personal injury claims alleged to result from environmental
contamination, or from asbestos-containing materials or
lead-based paint present at the properties that it manages.
Insurance for such matters may not always be available, or
sufficient to cover the Company’s losses. Certain
requirements governing the removal or encapsulation of
asbestos-containing materials, as well as recently enacted local
ordinances obligating property managers to inspect for and
remove lead-based paint in certain buildings, could increase the
Company’s costs of legal compliance and potentially subject
the Company to violations or claims. Although such costs have
not had a material impact on the Company’s financial
results or competitive position in 2007, the enactment of
additional regulations, or more stringent enforcement of
existing regulations, could cause the Company to incur
significant costs in the future,
and/or
adversely impact the brokerage and management services
businesses. See Note 20 of Notes to Consolidated Financial
Statements in Item 8 of this Report for additional
information.
Seasonality
Notwithstanding the Company’s expanded business platform as
a consequence of the Merger, a substantial portion of the
Company’s revenues are derived from brokerage transaction
services, which are seasonal in nature. As a consequence, the
Company’s revenue stream and the related commission expense
are also subject to seasonal fluctuations. However, the
Company’s non-variable operating expenses, which are
treated as expenses when incurred during the year, are
relatively constant in total dollars on a quarterly basis. The
Company has typically experienced its lowest quarterly revenue
from transaction services in the quarter ending March 31 of each
year with higher and more consistent revenue in the quarters
ending June 30 and September 30. The quarter ending
December 31 has historically provided the highest quarterly
level of revenue due to increased activity caused by the desire
of clients to complete transactions by calendar year-end.
Transaction services revenue represented 42.6% of the
$732.8 million pro forma combined revenue for 2007.
The Company and its brokers, salespersons and, in some
instances, property managers are regulated by the states in
which it does business. These regulations may include licensing
procedures, prescribed professional responsibilities and
anti-fraud provisions. The Company’s activities are also
subject to various local, state, national and international
jurisdictions’ fair advertising, trade, housing and real
estate settlement laws and regulations and are affected bylaws
and regulations relating to real estate and real estate finance
and development. Because the size and scope of real estate sales
transactions have increased significantly during the past
several years, both the difficulty of ensuring compliance with
the numerous state statutory requirements and licensing regimes
and the possible liability resulting from non-compliance have
increased.
Dealer-Manager
Services
The securities industry is subject to extensive regulation under
federal and state law. Broker-dealers are subject to regulations
covering all aspects of the securities business. In general,
broker-dealers are required to register with the SEC and to be
members of FINRA or the NYSE. As a member of FINRA, GBE
Securities’ broker-dealer business is subject to the
requirements of the Securities Exchange Act of 1934 as amended
(the “Exchange Act”) and the rules promulgated
thereunder relating to broker-dealers and to the Rules of Fair
Practice of FINRA. These regulations establish, among other
things, the minimum net capital requirements for GBE
Securities’ broker-dealer business. Such business is also
subject to regulation under various state laws in all
50 states and the District of Columbia, including
registration requirements.
Service
Marks
The Company has registered trade names and service marks for the
“Grubb & Ellis” name and logo and certain
other trade names. The “Grubb & Ellis” brand
name is considered an important asset of the Company, and the
Company actively defends and enforces such trade names and
service marks.
Real
Estate Markets
The Company’s business is highly dependent on the
commercial real estate markets, which in turn are impacted by
numerous factors, including but not limited to the general
economy, interest rates and demand for real estate in local
markets. Changes in one or more of these factors could either
favorably or unfavorably impact the volume of transactions and
prices or lease terms for real estate. Consequently, the
Company’s revenue from transaction services and property
management fees, operating results, cash flow and financial
condition are impacted by these factors, among others.
Employees
As of December 31, 2007, the Company had approximately
4,700 employees including more than 900 transaction
professionals working in 55 owned offices. Nearly
2,400 employees serve as property and facilities management
staff at the Company’s client-owned properties and the
Company’s clients reimburse the Company fully for their
salaries and benefits. The Company considers its relationship
with its employees to be good and has not experienced any
interruptions of its operations as a result of labor
disagreements.
Availability
of this Report
The Company’s internet address iswww.grubb-ellis.com. On the Investor Relations page on this
web site, the Company posts its Annual Report on
Form 10-K,
its Quarterly Reports on
Form 10-Q,
its Current Reports on
Form 8-K
and its proxy statements as soon as reasonably practicable after
it files them electronically with the SEC. All such filings on
the Investor Relations web page are available to be viewed free
of charge. In addition, a copy of this Annual Report on
Form 10-K
is available without charge by contacting Investor Relations,
Grubb & Ellis Company, 1551 North Tustin Avenue,
Suite 300, Santa Ana, California92705.
A
downturn in the general economy or the real estate market would
harm the Company’s business.
The Company’s business is negatively impacted by periods of
economic slowdown or recession, rising interest rates and
declining demand for real estate. These economic conditions
could have a number of effects, including the following:
•
a decline in acquisition, disposition and leasing activity;
•
a decline in the supply of capital invested in commercial real
estate;
•
a decline in the value of real estate and in rental rates, which
would cause the Company to realize lower revenue from:
•
property management fees, which in certain cases are calculated
as a percentage of the revenue of the property under management;
and
•
commissions or fees derived from property valuation, sales and
leasing, which are typically based on the value, sale price or
lease revenue commitment, respectively.
The real estate market tends to be cyclical and related to the
condition of the economy overall and to the perceptions of
investors and users as to the economic outlook. A downturn in
the economy or the real estate markets could have a material
adverse effect on the Company’s business and results of
operations.
The
Company is in a highly competitive business with numerous
competitors, some of which may have greater financial and
operational resources than it does.
The Company competes in a variety of service disciplines within
the commercial real estate industry. Each of these business
areas is highly competitive on a national as well as on a
regional and local level. The Company faces competition not only
from other national real estate service providers, but also from
global real estate service providers, boutique real estate
advisory firms, consulting and appraisal firms. Depending on the
product or service, the Company also faces competition from
other real estate service providers, institutional lenders,
insurance companies, investment banking firms, investment
managers and accounting firms, some of which may have greater
financial resources than the Company does. The Company is also
subject to competition from other large national firms and from
multi-national firms that have similar service competencies to
it. Although many of the Company’s competitors are local or
regional firms that are substantially smaller than it, some of
its competitors are substantially larger than it on a local,
regional, national or international basis. In general, there can
be no assurance that the Company will be able to continue to
compete effectively, to maintain current fee levels or margins,
or maintain or increase its market share.
As a
service-oriented company, the Company depends on key personnel,
and the loss of its current personnel or its failure to hire and
retain additional personnel could harm its
business.
The Company depends on its ability to attract and retain highly
skilled personnel. The Company believes that its future success
in developing its business and maintaining a competitive
position will depend in large part on its ability to identify,
recruit, hire, train, retain and motivate highly skilled
executive, managerial, sales, marketing and customer service
personnel. Competition for these personnel is intense, and the
Company may not be able to successfully recruit, assimilate or
retain sufficiently qualified personnel. The Company’s
ability to attract new employees may be limited by certain
restrictions in its senior secured credit facility, including
limitations on cash bonus payments to new hires and may only
make cash payments that exceed those limits if it receives
approval from the administrative agent, which cannot be
guaranteed. The Company’s failure to recruit and retain
necessary executive, managerial, sales, marketing and customer
service personnel could harm its business and its ability to
obtain new customers.
If the
Company fails to meet its payment or other obligations under its
senior secured credit facility, then the lenders under the
secured credit facility could foreclose on, and acquire control
of, substantially all of its assets.
Any material downturn in the Company’s revenue or increase
in its costs and expenses could impair its ability to meet its
debt obligations. The Company’s lenders under a senior
secured credit facility have a lien on substantially all of its
assets, including its accounts receivable, cash, general
intangibles, investment property and future acquired material
property. If the Company fails to meet its payment or other
obligations under the senior secured credit facility, the
lenders under such credit facility will be entitled to foreclose
on substantially all of the Company’s assets and liquidate
these assets.
Although
the Company intends to declare quarterly dividends, there can be
no assurances when or whether the Company will declare future
dividends or the amount of any dividends that may be declared in
the future.
Although the Company has previously announced that it intends to
declare quarterly dividends, future cash dividends will depend
upon the Company’s results of operations, financial
condition, capital requirements, general business conditions and
other factors that the Company’s board of directors may
deem relevant. Also, there can be no assurance the Company will
pay dividends even if the necessary financial conditions are met
and sufficient cash is available for distribution.
Additionally, certain provisions in the Company credit facility
prohibit the making of distributions or payments of dividends on
its common stock in the event the Company fails to maintain
certain financial covenants.
The
Company plans to expand its business to include international
operations that could subject it to social, political and
economic risks of doing business in foreign
countries.
Although the Company does not currently conduct significant
business outside the United States, the Company intends to
expand its business to include international operations.
Circumstances and developments related to international
operations that could negatively affect the Company’s
business or results of operations include, but are not limited
to, the following factors:
•
difficulties and costs of staffing and managing international
operations;
•
currency restrictions, which may prevent the transfer of capital
and profits to the United States;
•
adverse foreign currency fluctuations;
•
changes in regulatory requirements;
•
potentially adverse tax consequences;
•
the responsibility of complying with multiple and potentially
conflicting laws;
•
the impact of regional or country-specific business cycles and
economic instability;
•
the geographic, time zone, language and cultural differences
among personnel in different areas of the world;
•
political instability; and
•
foreign ownership restrictions with respect to operations in
certain countries.
Additionally, the Company may establish joint ventures with
foreign entities for the provision of brokerage services abroad,
which may involve the purchase or sale of the Company’s
equity securities or the equity securities of the joint venture
participant(s). In these joint ventures, the Company may not
have the right or power to direct the management and policies of
the joint venture and other participants may take action
contrary to the Company’s instructions or requests and
against the Company’s policies and objectives. In addition,
the other participants may become bankrupt or have economic or
other business interests or goals
that are inconsistent with the Company. If a joint venture
participant acts contrary to the Company’s interest, then
it could have a material adverse effect on the Company’s
business and results of operations.
The anti-takeover provisions of Delaware law impose various
impediments on the ability or desire of a third party to acquire
control of the Company, even if a change of control would be
beneficial to its existing stockholders, and the Company will be
subject to these Delaware anti-takeover provisions.
Additionally, the Company’s amended and restated
certificate of incorporation and its restated bylaws contain
provisions that might enable its management to resist a proposed
takeover of the Company. These provisions could discourage,
delay or prevent a change of control of the Company or an
acquisition of the Company at a price that its stockholders may
find attractive. These provisions also may discourage proxy
contests and make it more difficult for the Company’s
stockholders to elect directors and take other corporate
actions. The existence of these provisions could limit the price
that investors might be willing to pay in the future for shares
of the Company’s common stock. The provisions include:
•
the authority of the Company’s board to issue, without
stockholder approval, preferred stock with such terms as the
Company’s board may determine;
a prohibition on holders of less than a majority of the
Company’s outstanding shares of capital stock calling a
special meeting of the Company’s stockholders.
The
Company has the ability to issue blank check preferred stock,
which could adversely affect the voting power and other rights
of the holders of its common stock.
Even though the Company does not have any preferred stock issued
and outstanding, it has the right to issue so-called “blank
check” preferred stock, which may affect the voting rights
of holders of common stock and could deter or delay an attempt
to obtain control of the Company. There are ten million shares
of preferred stock authorized. The Company’s board of
directors will be authorized, without any further stockholder
approval, to issue one or more additional series of preferred
stock. The Company will be authorized to fix and state the
voting rights, powers, designations, preferences and relative
participation or other special rights of each such series of
preferred stock and any qualifications, limitations and
restrictions thereon. Preferred stock typically ranks prior to
the common stock with respect to dividend rights, liquidation
preferences, or both, and may have full, limited, or expanded
voting rights. Accordingly, additional issuances of preferred
stock could further adversely affect the voting power and other
rights of the holders of common stock.
The
Company has registration rights outstanding, which could have a
negative impact on its share price if exercised.
Pursuant to the Company’s registration rights agreement
with Kojaian Ventures, L.L.C. and Kojaian Holdings, LLC, these
entities could, in the future, cause the Company to file
additional registration statements with respect to its shares of
common stock, which could have a negative impact on the
Company’s share price.
Future
sales of the Company’s common stock could adversely affect
its stock price.
As a consequence of the Merger, an aggregate of
24,180,483 shares of the Company’s common stock are
“restricted securities” as that term is defined by
Rule 144 of the Securities Act and may be sold only in
compliance with Rule 144 of the Securities Act or pursuant
to an effective registration statement. Such restricted
securities are held by the Company’s directors, officers,
and their affiliates and 22,957,737 are currently eligible for
sale in accordance with Rule 144. Ordinarily, under
Rule 144, as recently amended, a person who is an
“affiliate” (as that term is defined in
Rule 144) and has beneficially owned restricted
securities for a period of six months may, every three months,
sell in brokerage transactions an amount that
does not exceed the greater of (1) one percent of the
outstanding class of such securities, or (2) the average
weekly trading volume in such securities on all national
exchanges
and/or
reported through the automated quotation system of a registered
securities association during the four weeks prior to the filing
of a notice of sale by a securities holder. A person who is not
a Company affiliate who beneficially owns restricted securities
may, after the expiration of six months, sell unlimited amounts
of such securities provided the Company is in compliance with
the current public information requirements of the Rule, and
after one year a non-affiliate may sell unlimited amounts of
securities without regard to any requirements of Rule 144.
Possible or actual sales of its outstanding common stock by its
stockholders under Rule 144 could cause the price of its
common stock to decline.
In addition, as a consequence of the Merger, there are an
aggregate of 1,755,759 Company shares subject to issuance upon
the exercise of outstanding options. Accordingly, these shares
will be available for sale in the open market, subject to
vesting restrictions, and, in the case of affiliates, certain
volume limitations. The sale of shares either present to the
exercise of outstanding options or as a consequence of the
application of the vesting of certain restricted stock could
also cause the price of the combined company’s common stock
to decline.
As a
consequence of the Merger and the amendments to the
Company’s amended and restated certificate of
incorporation, the Company has a staggered board, which may
entrench management and discourage unsolicited stockholder
proposals that may be in the best interests of
stockholders.
The Company’s amended and restated certificate of
incorporation provides that its board of directors be divided
into three classes, each of which will generally serve for a
term of three years with only one class of directors being
elected in each year. As a result, at any annual meeting, only a
minority of the board of directors will be considered for
election. Since the Company’s “staggered board”
would prevent its stockholders from replacing a majority of its
board of directors at any annual meeting, it may entrench
management and discourage unsolicited stockholder proposals that
may be in the best interests of stockholders.
Failure
to manage future growth effectively may have a material adverse
effect on the Company’s financial condition and results of
operations.
In the event that the Company experiences rapid growth in its
operations, a significant strain may be placed upon management,
administrative, operational and financial infrastructure. In
addition to managing the successful integration of the two
companies’ operations, the Company’s success will
depend in part upon the ability of the executive officers to
manage future growth effectively. The Company’s ability to
grow also depends upon its ability to successfully hire, train,
supervise and manage new employees, obtain financing for its
capital needs, expand its systems effectively, allocate its
human resources optimally, maintain clear lines of communication
between its transactional and management functions and its
finance and accounting functions, and manage the pressures on
its management and administrative, operational and financial
infrastructure. Additionally, managing future growth may be
difficult due to the new geographic locations and business lines
of the Company. There can be no assurance that the Company will
be able to accurately anticipate and respond to the changing
demands it will face as it integrates and continues to expand
its operations, and it may not be able to manage growth
effectively or to achieve growth at all. Any failure to manage
the future growth effectively could have a material adverse
effect on the Company’s business, financial condition and
results of operations.
The
Company may not be able to obtain additional financing when the
Company needs it or on acceptable terms, and any such financing,
or the failure to obtain financing, may adversely affect the
market price of the Company’s common stock.
There can be no assurance that the anticipated cash flow from
operations will be sufficient to meet all of the Company’s
cash requirements. The Company intends to continue to make
investments to support the Company’s business growth and
may require additional funds to respond to business challenges.
Accordingly, the Company may need to complete additional equity
or debt financings to secure additional funds. The
Company cannot assure you that further equity or debt financing
will be available on acceptable terms, if at all. In addition,
the terms of any debt financing may restrict the Company’s
financial and operating flexibility. The Company’s
inability to obtain any needed financing, or the terms on which
it may be available, could have a material adverse effect on the
Company’s business.
The
NYSE may delist the Company’s common stock from quotation
on its exchange which could limit stockholders’ ability to
make transactions in its common stock and subject it to
additional trading restrictions.
The Company cannot provide assurance that its common stock will
continue to be listed on the NYSE in the future. If the NYSE
delists the Company’s common stock from trading on its
exchange, then the Company could face significant material
adverse consequences, including:
•
a limited availability of market quotations for the
Company’s common stock;
•
a more limited amount of news and analyst coverage for the
Company;
•
a decreased ability to issue additional common stock, other
securities or obtain additional financing in the future; and
•
a decreased ability of the Company’s stockholders to sell
their common stock in certain states.
The
Company will not be required to furnish an auditor’s report
on its internal control over financial reporting until December
2008.
Although it would otherwise be required to do so, as a
consequence of the Merger, the Company has received a waiver
from the SEC to comply with the SEC’s rules under
Section 404 of the Sarbanes-Oxley Act of 2002 that it
furnish a report from its independent registered public
accounting firm on its internal control over financial reporting
with respect to the fiscal year ended December 31, 2007,
and it will not have to do so until it files its Annual Report
on
Form 10-K
for the fiscal year ending December 31, 2008.
Risks
Related to the Merger
The
Company may be unable to successfully integrate its operations
with the operations of NNN or to realize the anticipated
benefits of the Merger which could have a material adverse
effect on the business and results of operations and result in a
decline in value of the Company’s common
stock.
Achieving the anticipated benefits of the Merger will depend in
part upon the success of the two companies integrating their
businesses in an efficient and effective manner. The companies
may not be able to accomplish this integration process smoothly
or successfully and integration may result in additional and
unforeseen expenses. The necessity of coordinating
geographically separated organizations, systems and facilities
and addressing possible differences in business backgrounds,
corporate cultures and management philosophies may increase the
difficulties of integration. The companies operate numerous
systems, including those involving management information,
accounting and finance, sales, billing, employee benefits,
payroll and regulatory compliance.
The integration of certain operations following the Merger will
require the dedication of significant management resources,
which may temporarily distract management’s attention from
the day-to-day business of the Company. Employee uncertainty and
lack of focus during the integration process may also disrupt
the business of the Company. The companies may not be able to
achieve the anticipated long-term strategic benefits of the
Merger. An inability to realize the full extent of, or any of,
the anticipated benefits of the Merger, as well as any delays
encountered, or additional costs incurred, in the integration
process, could have a material adverse effect on the business
and results of operations of the Company, which may affect the
value of the shares of the Company’s common stock.
Charges
to earnings resulting from the application of the purchase
method of accounting may adversely affect the market value of
the Company’s common stock.
In accordance with U.S. GAAP, NNN was considered the
acquirer of the Company for accounting purposes. NNN accounted
for the Merger using the purchase method of accounting, which
resulted in charges to the Company’s earnings that could
adversely affect the market value of the Company’s common
stock. Under the purchase method of accounting, NNN allocated
the total purchase price to the assets acquired and liabilities
assumed from the Company based on their fair values as of the
date of the completion of the Merger, and the Company recorded
any excess of the purchase price over those fair values as
goodwill. For certain tangible and intangible assets,
reevaluating their fair values as of the completion date of the
Merger resulted in the Company incurring additional depreciation
and/or
amortization expense that exceeds the combined amounts recorded
by NNN and the Company prior to the Merger. This increased
expense will be recorded by the Company over the useful lives of
the underlying assets. In addition, to the extent the value of
goodwill or intangible assets are to become impaired, the
Company may be required to incur charges relating to the
impairment of those assets.
The
Company incurred significant transaction and merger-related
costs in connection with the Merger.
The Company incurred a number of non-recurring costs associated
with combining the operations of the two companies, the
substantial majority of which were the transaction costs related
to the Merger, facilities and systems consolidation costs and
employment-related costs. Merger related transaction costs of
$6.4 million were incurred by the Company as a result of
completing the transaction. The Company also incurred
transaction fees and costs related to formulating integration
plans. Additional unanticipated costs may be incurred in the
integration of the two companies’ businesses. Although the
Company expects that the elimination of duplicative costs, as
well as the realization of other efficiencies related to the
integration of the businesses should allow it to offset
incremental transaction and merger-related costs over time, this
net benefit may not be achieved in the near term, or at all,
which could have a material adverse effect on the business and
results of operations of the Company.
Risks
Related to the Company’s Transaction Services and
Management Services Business
GERA,
the special purpose acquisition company sponsored by and an
affiliate of the Company, must liquidate and dissolve, which
could damage the Company’s reputation, and will cause the
Company to lose its investment and potential
revenue.
GERA did not obtain the requisite stockholders’ approvals
at its special meeting of stockholders held on February 28,2008 and did not effect a business combination prior to
March 3, 2008, as required by its charter. As a
consequence, GERA is required to dissolve and liquidate, which
could harm the Company because of its association with that
entity. Some of the ways that the Company could be harmed are:
•
It could damage the Company’s reputation, because of its
close association with GERA. The liquidation and
dissolution of GERA could damage the Company’s reputation
and, as a result, may hinder its ability to retain or attract
new customers and clients.
•
The Company will lose its entire investment in
GERA. The Company will write off in the first
quarter of 2008 its investment in GERA of approximately
$5.6 million, including its stock and warrant purchases,
operating advances and third party costs.
•
The Company will continue to own the three commercial
properties and is required to sell them by September 30,2008. As a result of GERA’s liquidation, the
Company will continue to own the three commercial real estate
properties it intended to transfer to GERA. These properties are
subject to mortgage loans provided by Wachovia Bank, N.A. for an
aggregate principal amount of $120.5 million. Under the
terms of its current credit facility, the Company is required to
sell these properties by September 30, 2008.
•
No assurance that the Company will not suffer a loss upon
resale. As noted directly above, the Company is
required under its credit facility to sell the properties by
September 30, 2008. Given the
recent downturn in the credit markets, there can be no
assurances that these properties can be sold for an amount that
will cover the Company’s costs of acquiring and holding the
properties, or that the Company will not suffer a loss on the
disposition of the properties.
•
The Company will lose the opportunity to earn revenues and
fees in accordance with the terms and conditions of its
agreements with GERA.The Company entered
into various agreements with GERA, pursuant to which the Company
was to serve as its exclusive provider of commercial real estate
brokerage and consulting services related to real property
acquisitions, dispositions, project management and agency
leasing, and was to also serve as the sole exclusive managing
agent for all real property acquired by GERA. The liquidation
and dissolution of GERA will prevent the Company from earning
any fees under these agreements.
The
Company’s quarterly operating results are likely to
fluctuate due to the seasonal nature of its business and may
fail to meet expectations, which may cause the price of its
securities to decline.
Historically, the majority of the Company’s revenue has
been derived from the transaction services that it provides.
Such services are typically subject to seasonal fluctuations.
The Company typically experiences its lowest quarterly revenue
in the quarter ending March 31 of each year with higher and more
consistent revenue in the quarters ending June 30 and
September 30. The quarter ending December 31 has
historically provided the highest quarterly level of revenue due
to increased activity caused by the desire of clients to
complete transactions by calendar year-end. However, the
Company’s non-variable operating expenses, which are
treated as expenses when incurred during the year, are
relatively constant in total dollars on a quarterly basis. As a
result, since a high proportion of these operating expenses are
fixed, declines in revenue could disproportionately affect the
Company’s operating results in a quarter. In addition, the
Company’s quarterly operating results have fluctuated in
the past and will likely continue to fluctuate in the future. If
the Company’s quarterly operating results fail to meet
expectations, the price of the Company’s securities could
fluctuate or decline significantly.
If the
properties that the Company manages fail to perform, then its
business and results of operations could be
harmed.
The Company’s success partially depends upon the
performance of the properties it manages. The revenue the
Company generates from its property management business is
generally a percentage of aggregate rent collections from the
properties. The performance of these properties will depend upon
the following factors, among others, many of which are partially
or completely outside of the Company’s control:
•
the Company’s ability to attract and retain creditworthy
tenants;
•
the magnitude of defaults by tenants under their respective
leases;
•
the Company’s ability to control operating expenses;
•
governmental regulations, local rent control or stabilization
ordinances which are in, or may be put into, effect;
•
various uninsurable risks;
•
financial conditions prevailing generally and in the areas in
which these properties are located;
•
the nature and extent of competitive properties; and
•
the general real estate market.
These or other factors may negatively impact the properties that
the Company manages, which could have a material adverse effect
on its business and results of operations.
If the
Company fails to comply with laws and regulations applicable to
real estate brokerage and mortgage transactions and other
business lines, then it may incur significant financial
penalties.
Due to the broad geographic scope of the Company’s
operations and the numerous forms of real estate services
performed, it is subject to numerous federal, state and local
laws and regulations specific to the services performed. For
example, the brokerage of real estate sales and leasing
transactions requires the Company to maintain brokerage licenses
in each state in which it operates. If the Company fails to
maintain its licenses or conduct brokerage activities without a
license, then it may be required to pay fines (including treble
damages in certain states) or return commissions received or
have licenses suspended. In addition, because the size and scope
of real estate sales transactions have increased significantly
during the past several years, both the difficulty of ensuring
compliance with the numerous state licensing regimes and the
possible loss resulting from non-compliance have increased.
Furthermore, the laws and regulations applicable to the
Company’s business, both in the United States and in
foreign countries, also may change in ways that increase the
costs of compliance. The failure to comply with both foreign and
domestic regulations could result in significant financial
penalties which could have a material adverse effect on the
Company’s business and results of operations.
The
Company may have liabilities in connection with real estate
brokerage and property and facilities management
activities.
As a licensed real estate broker, the Company and its licensed
employees and independent contractors that work for it are
subject to statutory due diligence, disclosure and
standard-of-care obligations. Failure to fulfill these
obligations could subject the Company or its employees to
litigation from parties who purchased, sold or leased properties
that the Company or they brokered or managed. The Company could
become subject to claims by participants in real estate sales
claiming that the Company did not fulfill its statutory
obligations as a broker.
In addition, in the Company’s property and facilities
management businesses, it hires and supervises third-party
contractors to provide construction and engineering services for
its managed properties. While the Company’s role is limited
to that of a supervisor, it may be subject to claims for
construction defects or other similar actions. Adverse outcomes
of property and facilities management litigation could have a
material adverse effect on the Company’s business and
results of operations.
Environmental
regulations may adversely impact the Company’s business
and/or cause the Company to incur costs for cleanup of hazardous
substances or wastes or other environmental
liabilities.
Federal, state and local laws and regulations impose various
environmental zoning restrictions, use controls, and disclosure
obligations which impact the management, development, use,
and/or sale
of real estate. Such laws and regulations tend to discourage
sales and leasing activities, as well as mortgage lending
availability, with respect to some properties. A decrease or
delay in such transactions may adversely affect the results of
operations and financial condition of the Company’s real
estate brokerage business. In addition, a failure by the Company
to disclose environmental concerns in connection with a real
estate transaction may subject it to liability to a buyer or
lessee of property.
In addition, in its role as a property manager, the Company
could incur liability under environmental laws for the
investigation or remediation of hazardous or toxic substances or
wastes at properties it currently or formerly managed, or at
off-site locations where wastes from such properties were
disposed. Such liability can be imposed without regard for the
lawfulness of the original disposal activity, or the
Company’s knowledge of, or fault for, the release or
contamination. Further, liability under some of these laws may
be joint and several, meaning that one liable party could be
held responsible for all costs related to a contaminated site.
The Company could also be held liable for property damage or
personal injury claims alleged to result from environmental
contamination, or from asbestos-containing materials or
lead-based paint present at the properties it manages. Insurance
for such matters may not be available.
Certain requirements governing the removal or encapsulation of
asbestos-containing materials, as well as recently enacted local
ordinances obligating property managers to inspect for and
remove lead-based paint in
certain buildings, could increase the Company’s costs of
legal compliance and potentially subject it to violations or
claims. Although such costs have not had a material impact on
its financial results or competitive position during fiscal year
2006 or 2007, the enactment of additional regulations, or more
stringent enforcement of existing regulations, could cause it to
incur significant costs in the future,
and/or
adversely impact its brokerage and management services
businesses.
Risks
Related to the Company’s Asset Management and Broker-Dealer
Business
The
Company currently provides its transaction and management
services primarily to its programs. Its revenue depends on the
number of its programs, on the price of the properties acquired
or disposed of by these programs, and on the revenue generated
by the properties under its management.
The Company derives fees for investment management services
based on a percentage of the price of the properties acquired or
disposed of by its programs and for management services based on
a percentage of the rental amounts of the properties in its
programs. The Company is responsible for the management of all
of the properties owned by its programs, but as of
December 31, 2007 it had subcontracted the property
management of approximately 28.0% of its programs’ office,
healthcare office and retail properties (based on square
footage) and of its programs’ multi-family apartment units
to third parties. As a result, if any of the Company’s
programs are unsuccessful, both its transaction services and
management services fees will be reduced, if any are paid at
all. In addition, failures of the Company’s programs to
provide competitive investment returns could significantly
impair its ability to market future programs. The Company’s
inability to spread risk among a large number of programs could
cause it to be over-reliant on a limited number of programs for
its revenues. The Company cannot make an assurance that it will
maintain current levels of transaction and management services
for its programs’ properties.
The
Company may be unable to grow its programs, which would cause it
to fail to satisfy its business strategy.
A significant element of the Company business strategy is the
growth in the number of its programs. The consummation of any
future program will be subject to raising adequate capital for
the investment, identifying appropriate assets for acquisition
and effectively and efficiently closing the transactions. The
Company cannot make an assurance that it will be able to
identify and invest in additional properties or will be able to
raise adequate capital for new programs in the future. If the
Company is unable to consummate new programs in the future, it
will not be able to continue to grow the revenue it receives
from either transaction or management services.
The
inability to access investors for the Company’ programs
through broker-dealers or other intermediaries could have a
material adverse effect on its business.
The Company’s ability to source capital for its programs
depends significantly on access to the client base of securities
broker-dealers and other financial investment intermediaries
that may offer competing investment products. The Company
believes that its future success in developing its business and
maintaining a competitive position will depend in large part on
its ability to continue to maintain these relationships as well
as finding additional securities broker-dealers to facilitate
offerings by its programs or to find investors for the
Company’s TIC programs. The Company cannot be sure that it
will continue to gain access to these channels. In addition,
competition for capital is intense, and the Company may not be
able to obtain the capital required to complete a program. The
inability to have this access could have a material adverse
effect on its business and results of operations.
The
termination of any of the Company’s broker-dealer
relationships, especially given the limited number of key
broker-dealers, could have a material adverse effect on its
business.
The Company’s securities programs are sold through
third-party broker-dealers who are members of its selling group.
While the Company has established relationships with its selling
group, it is required to enter into a new agreement with each
member of the selling group for each new program it offers. In
addition, the
Company’s programs may be removed from a selling
broker-dealer’s approved program list at any time for any
reason. The Company cannot assure you of the continued
participation of existing members of its selling group nor can
the Company make an assurance that its selling group will
expand. While the Company continues to diversify and add new
investment channels for its programs, a significant portion of
the growth in recent years in the number of TIC programs it
sponsors and in its REITs has been as a result of capital raised
by a relatively limited number of broker-dealers. Loss of any of
these key broker-dealer relationships, or the failure to develop
new relationships to cover the Company’s expanding business
through new investment channels, could have a material adverse
effect on its business and results of operations.
Misconduct
by third-party selling broker-dealers or the Company’s
sales force, could have a material adverse effect on its
business.
The Company relies on selling broker-dealers and the
Company’s sales force to properly offer its securities
programs to customers in compliance with its selling agreements
and with applicable regulatory requirements. While these persons
are responsible for their activities as registered
broker-dealers, their actions may nonetheless result in
complaints or legal or regulatory action against the Company.
A
significant amount of the Company’s revenue is derived from
fees earned through the transaction structuring and property
management of its TIC programs, which programs rely primarily on
Section 1031 of the Internal Revenue Code to provide for
deferral of capital gains taxes to make these programs
attractive. A change in this tax code section or a complete
revocation of this section as it relates specifically to TICs
could result in a loss of a significant part of the
Company’s business, and as a result, a significant amount
of revenue.
Section 1031 of the Internal Revenue Code provides for the
deferral of capital gains taxes which would ordinarily arise
from the sale of real estate through a tax-deferred exchange of
property, which defers the recognition of capital gains tax
until such time as the replacement property is sold in a taxable
transaction. These transactions are referred to as 1031
exchanges. In 2002, the Internal Revenue Service, or IRS, issued
advance ruling guidelines outlining the requirements for
properly structured TIC arrangements, which the Company believes
validate the TIC structure generally and as it employs it.
However, as recently as May 2006, the Senate Finance Committee
proposed a bill in the negotiations over the budget
reconciliation tax-cutting package to modify Section 1031
treatment for TICs as a way to raise additional tax revenue. The
proposal was unsuccessful, but the Company cannot assure you
that in the future there will not be attempts to limit or
disallow the tax deferral benefits for TIC transactions. For the
year ended December 31, 2007, approximately 12% of the
Company’s total revenue was derived from TIC acquisition
fees. If the Company were no longer able to structure TIC
programs as 1031 exchanges for its investors, it would lose a
significant amount of revenue in the future, which would
materially affect its results of operations. Moreover, any
attempt to limit or disallow the tax deferral benefits of the
1031 exchange generally would have a material adverse effect on
the real estate industry generally and on the Company’s
business and results of operations.
A
significant amount of the Company’s programs are structured
to provide favorable tax treatment to investors or REITs. If a
program fails to satisfy the requirements necessary to permit
this favorable tax treatment, the Company could be subject to
claims by investors and its reputation for structuring these
transactions would be negatively affected, which would have an
adverse effect on its financial condition and results of
operations.
The Company structures TIC programs and public non-traded REITs
to provide favorable tax treatment to investors. For example,
its TIC investors are able to defer the recognition of gain on
sale of investment or business property if they enter into a
1031 exchange. Similarly, qualified REITs generally are not
subject to federal income tax at corporate rates, which permits
REITs to make larger distributions to investors (i.e.
without reduction for federal income tax imposed at the
corporate level). If the Company fails to properly structure a
TIC transaction or if a REIT fails to satisfy the complex
requirements for qualification and taxation as a REIT under the
Internal Revenue Code, the Company could be subject to claims by
investors as a result of additional tax they may be required to
pay or because they are unable to receive the distributions they
expected at the time they made their investment. In addition,
any failure to satisfy applicable tax regulations in structuring
its programs would negatively affect the Company’s
reputation, which would in turn affect its ability to earn
additional fees from new programs. Claims by investors could
lead to losses and any reduction in the Company’s fees
would have a material adverse effect on its revenues.
Any
future co-investment activities the Company undertakes could
subject it to real estate investment risks which could lead to
the need for substantial capital contributions, which may impact
its cash flows and financial condition and, if it is unable to
make them, could damage its reputation and result in adverse
consequences to its holdings.
The Company may from time to time invest its capital in certain
real estate investments with other real estate firms or with
institutional investors such as pension plans. Any co-investment
will generally require the Company to make initial capital
contributions, and some co-investment entities may request
additional capital from the Company and its subsidiaries holding
investments in those assets. These contributions could adversely
impact the Company’s cash flows and financial condition.
Moreover, the failure to provide these contributions could have
adverse consequences to the Company’s interests in these
investments. These adverse consequences could include damage to
the Company’s reputation with its co-investment partners as
well as dilution of ownership and the necessity of obtaining
alternative funding from other sources that may be on
disadvantageous terms, if available at all.
Geographic
concentration of program properties may expose the
Company’s programs to regional economic downturns that
could adversely impact their operations and, as a result, the
fees the Company is able to generate from them, including fees
on disposition of the properties as the Company may be limited
in its ability to dispose of properties in a challenging real
estate market.
The Company’s programs generally focus on acquiring assets
satisfying particular investment criteria, such as type or
quality of tenants. There is generally no or little focus on the
geographic location of a particular property. The Company cannot
guarantee, however, that its programs will have, or will be able
to maintain, a significant amount of geographic diversity.
Although the Company’s property programs are located in
30 states, a majority of these properties (by square
footage) are located in Texas, California, Florida and Colorado.
Geographic concentration of properties exposes the
Company’s programs to economic downturns in the areas where
the properties are located. A regional recession or other major,
localized economic disruption in a region, such as earthquakes
and hurricanes, in any of these areas could adversely affect the
Company’s programs’ ability to generate or increase
their operating revenues, attract new tenants or dispose of
unproductive properties. Any reduction in program revenues would
effectively reduce the fees the Company generates from them,
which would adversely affect the Company’s results of
operations and financial condition.
The
failure of Triple Net Properties, LLC, recently renamed
Grubb & Ellis Realty Investors, LLC (“GERI”)
and Triple Net Properties Realty, Inc. (“Realty”),
subsidiaries of the Company acquired in the Merger, to hold
certain required real estate licenses may subject Realty and the
Company to penalties, such as fines, restitution payments and
termination of management agreements, and to the suspension or
revocation of certain broker licenses.
Although Realty was required to have real estate licenses in
states in which it acted as a broker for NNN’s investment
programs and received real estate commissions prior to 2007,
Realty did not hold a license in certain of those states when it
earned fees for those services. In addition, almost all of
GERI’s revenue was based on an arrangement with Realty to
share fees from NNN’s programs. GERI did not hold a real
estate license in any state, although most states in which
properties of NNN’s programs were located may have required
GERI to hold a license in order to share fees. As a result,
Realty and the Company may be subject to penalties, such as
fines (which could be a multiple of the amount received),
restitution payments and termination of management agreements,
and to the suspension or revocation of certain of Realty’s
real estate broker licenses.
If
third-party managers providing property management services for
the Company’s programs’ office, healthcare office,
retail and multi-family properties are negligent in their
performance of, or default on, their management obligations, the
tenants may not renew their leases or the Company may become
subject to unforeseen liabilities. If this occurs, it could have
an adverse effect on the Company’s financial condition and
operating results.
The Company has entered into agreements with third-party
management companies to provide property management services for
a significant number of the Company’s programs’
properties, and the Company expects to enter into similar
third-party management agreements with respect to properties the
Company’s programs acquire in the future. The Company does
not supervise these third-party managers and their personnel on
a day-to-day basis and the Company cannot assure you that they
will manage the Company’s programs’ properties in a
manner that is consistent with their obligations under the
Company’s agreements, that they will not be negligent in
their performance or engage in other criminal or fraudulent
activity, or that these managers will not otherwise default on
their management obligations to the Company. If any of the
foregoing occurs, the relationships with the Company’s
programs’ tenants could be damaged, which may cause the
tenants not to renew their leases, and the Company could incur
liabilities resulting from loss or injury to the properties or
to persons at the properties. If the Company is unable to lease
the properties or the Company become subject to significant
liabilities as a result of third-party management performance
issues, the Company’s operating results and financial
condition could be substantially harmed.
The
Company or its new programs may be required to incur future
indebtedness to raise sufficient funds to purchase
properties.
One of the Company’s business strategies is to develop new
programs. The development of a new program requires the
identification and subsequent acquisition of properties when the
opportunity arises. In some instances, in order to effectively
and efficiently complete a program, the Company may provide
deposits for the acquisition of property or actually purchase
the property and warehouse it temporarily for the program. If
the Company does not have cash on hand available to pay these
deposits or fund an acquisition, the Company or the
Company’s programs may be required to incur additional
indebtedness, which indebtedness may not be available on
acceptable terms. If the Company incurs substantial debt, the
Company could lose its interests in any properties that have
been provided as collateral for any secured borrowing, or the
Company could lose its assets if the debt is recourse to it. In
addition, the Company’s cash flow from operations may not
be sufficient to repay these obligations upon their maturity,
making it necessary for the Company to raise additional capital
or dispose of some of its assets. The Company cannot assure you
that it will be able to borrow additional debt on satisfactory
terms, or at all.
The
Company may be required to repay loans the Company guaranteed
that were used to finance properties acquired by the
Company’s programs.
From time to time the Company provides guarantees of loans for
properties under management. As of December 31, 2007, there
were 143 properties under management with loan guarantees of
approximately $3.4 billion in total principal outstanding
with terms ranging from one to 30 years, secured by
properties with a total aggregate purchase price of
approximately $4.6 billion at December 31, 2007. The
Company’s guarantees consisted of the following as of
December 31, 2007.
December 31,
(In thousands)
2007
Non-recourse/carve-out guarantees of debt of properties under
management(1)
$
3,167,447
Non-recourse/carve-out guarantees of the Company’s debt(1)
A “non-recourse/carve-out” guaranty imposes personal
liability on the guarantor in the event the borrower engages in
certain acts prohibited by the loan documents.
Management evaluates these guarantees to determine if the
guarantee meets the criteria required to record a liability in
accordance with FASB Financial Interpretation No. 45,
Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others (“FIN No. 45”). The liability was
insignificant as of December 31, 2007.
The
revenue streams from the Company’s management services may
be subject to limitation or cancellation.
The agreements under which the Company provides advisory and
management services to public non-traded REITs may generally be
terminated by each REIT following a notice period, with or
without cause. The Company cannot assure you that these
agreements will not be terminated. In addition, if the Company
has a significant amount of TIC programs selling their
properties or public non-traded REITs liquidating in the same
period, the Company’s revenues would decrease unless it is
able to find replacement programs to generate new fees. The
Company is currently in the process of liquidating two of its
public non-traded REITs and, as a result, the Company’s
management fees from these REITs have been reduced due to the
number of properties that have been sold. Any decrease in the
Company’s fees, as a result of termination of a contract or
customary close out or liquidation of a program, could have a
material adverse effect on the Company’s business, results
of operations and financial condition.
The
Company’s revenue is subject to volatility in capital
raising efforts by it.
The potential growth in revenue from the Company’s
transaction and management services depends in large part on
future capital raising in existing or future programs, as well
as on the Company’s ability to make resultant acquisitions
on behalf of its programs, both of which are subject to
uncertainty, including uncertainty with respect to capital
market and real estate market conditions. This uncertainty can
create volatility in the Company’s earnings because of the
resulting increased volatility in transaction and management
services revenues. The Company’s revenue may be negatively
affected by factors that include not only the Company’s
inability to increase its portfolio of properties under
management, but also changes in valuation of those properties
and sales (through planned liquidation or otherwise) of
properties.
Future
pressures to lower, waive or credit back the Company’s fees
could reduce the Company’s revenue and
profitability.
The Company has on occasion waived or credited its fees for real
estate acquisitions and financings for the Company’s TIC
programs to improve projected investment returns and attract TIC
investors. There has also been a trend toward lower fees in some
segments of the third-party asset management business, and fees
paid for the management of properties in the Company’s TIC
programs or public non-traded REITs could follow these trends.
In order for the Company to maintain its fee structure in a
competitive environment, the Company must be able to provide
clients with investment returns and service that will encourage
them to be willing to pay such fees. The Company cannot assure
you that it will be able to maintain its current fee structures.
Fee reductions on existing or future new business could have a
material adverse impact on the Company’s revenue and
profitability.
Regulatory
uncertainties related to the Company’s broker-dealer
services could harm the Company’s business.
The securities industry in the United States is subject to
extensive regulation under both federal and state laws.
Broker-dealers are subject to regulations covering all aspects
of the securities business. The SEC, FINRA, and other
self-regulatory organizations and state securities commissions
can censure, fine, issue
cease-and-desist
orders to, suspend or expel a broker-dealer or any of its
officers or employees. The ability to comply with applicable
laws and rules is largely dependent on an internal system to
ensure compliance, as well as the ability to attract and retain
qualified compliance personnel. The Company could be subject to
disciplinary or other actions in the future due to claimed
noncompliance with these securities regulations, which could
have a material adverse effect on the Company’s operations
and profitability.
The
Company depends upon its programs’ tenants to pay rent, and
their inability to pay rent may substantially reduce the fees
the Company receives which are based on gross rental
amounts.
The Company’s programs are subject to varying degrees of
risk that generally arise from the ownership of real estate. For
example, the income the Company is able to generate from
management fees is derived from the gross rental income on the
properties in its programs. The rental income depends upon the
ability of the tenants of the Company’s programs’
properties to generate enough income to make their lease
payments to the Company. Changes beyond the Company’s
control may adversely affect the tenants’ ability to make
lease payments or could require them to terminate their leases.
Either an inability to make lease payments or a termination of
one or more leases could reduce the management fees the Company
receives. These changes include, among others, the following:
•
downturns in national or regional economic conditions where the
Company’s programs’ properties are located, which
generally will negatively impact the demand and rental rates;
•
changes in local market conditions such as an oversupply of
properties, including space available by sublease or new
construction, or a reduction in demand for properties in the
Company’s programs, making it more difficult for the
Company’s programs to lease space at attractive rental
rates or at all;
•
competition from other available properties, which could cause
the Company’s programs to lose current or prospective
tenants or cause them to reduce rental rates; and
•
changes in federal, state or local regulations and controls
affecting rents, prices of goods, interest rates, fuel and
energy consumption.
Due to these changes, among others, tenants and lease
guarantors, if any, may be unable to make their lease payments.
Defaults by tenants or the failure of any guarantors of
tenants’ guarantor to fulfill their obligations, or other
early termination of a lease could, depending upon the size of
the leased premises and the Company’s ability as property
manager to successfully find a substitute tenant, have a
material adverse effect on the Company’s revenue.
Conflicts
of interest inherent in transactions between the Company’s
programs and the Company, and among its programs, could create
liability for the Company that could have a material adverse
effect on its results of operations and financial
condition.
These conflicts include but are not limited to the following:
•
the Company experiences conflicts of interests with certain of
its directors, officers and affiliates from time to time with
regard to any of its investments, transactions and agreements in
which it holds a direct or indirect pecuniary interest;
•
since the Company receives both management fees and acquisition
and disposition fees for its programs’ properties, the
Company could be in conflict with its programs over whether
their properties should be sold or held by the program and the
Company may make decisions or take actions based on factors
other than in the best interest of investors of a particular
sponsored investor program;
•
a component of the compensation of certain of the Company’s
executives is based on the performance of particular programs,
which could cause the executives to favor those programs over
others;
•
the Company may face conflicts of interests as to how it
allocates property acquisition opportunities or prospective
tenants among competing programs;
•
the Company may face conflicts of interests if programs sell
properties to each other or invest in each other;
•
all agreements and arrangements, including those relating to
compensation, among the Company and its programs, are generally
not the result of arm’s-length negotiations; and
the Company’s executive officers will devote only as much
of their time to a program as they determine is reasonably
required, which may be substantially less than their full time;
during times of intense activity in other programs, these
officers may devote less time and fewer resources to a program
than are necessary or appropriate to manage the program’s
business.
The Company cannot assure you that one or more of these
conflicts will not result in claims by investors in its
programs, which could have a material adverse effect on its
results of operations and financial condition.
The
ongoing SEC investigation of Triple Net Properties and its
affiliates could adversely impact the Company’s ability to
conduct its real estate investment programs.
On September 16, 2004, Triple Net Properties learned that
the SEC Los Angeles Enforcement Division, (the “SEC
Staff”), was conducting an investigation referred to as
“In the matter of Triple Net Properties, LLC.”The SEC Staff requested information from Triple Net
Properties relating to disclosure in public and private
securities offerings sponsored by Triple Net Properties and its
affiliates prior to 2005 (the “Triple Net Securities
Offerings”). The SEC Staff also requested information from
NNN Capital Corp., (“Capital Corp”), the
dealer-manager for the Triple Net Securities Offerings. The SEC
Staff requested financial and other information regarding the
Triple Net Securities Offerings and the disclosures included in
the related offering documents from each of Triple Net
Properties and Capital Corp.
Triple Net Properties and Capital Corp. are engaged in
settlement negotiations with the SEC staff regarding this
matter. Based on these negotiations, the Company believes that
the conclusion to this matter will not result in a material
adverse affect to its results of operations, financial condition
or ability to conduct its business and NNN accrued a loss
contingency of $600,000 at December 31, 2006 on behalf of
Triple Net Properties and Capital Corp. on a consolidated basis,
compared to $1.0 million accrued for the same period in
2005. The $600,000 is being held in escrow pending final
approval of the settlement agreement. The settlement
negotiations are continuing, however, and any settlement
negotiated with the SEC Staff must be approved by the
Commissioners. Since the matter is not concluded, it remains
subject to the risk that the SEC may seek additional remedies,
including substantial fines and injunctive relief that, if
obtained, could materially adversely affect the Company’s
ability to conduct its program offerings. Additionally, any
resolution of this matter that reflects negatively on the
Company’s reputation could materially and adversely affect
the willingness of the Company’s existing programs to
continue to use the Company’s management services and of
potential investors to invest in the Company’s future
programs. The matters that are the subject of this investigation
could also give rise to claims against the Company by investors
in the Company’s programs. At this time, the Company cannot
assess how or when the outcome of the matter will be ultimately
determined.
To the extent that the Company pays the SEC an amount in excess
of $1.0 million in connection with any settlement or other
resolution of this matter, Anthony W. Thompson, NNN’s
founder and former Chairman of the Company, has agreed to
forfeit to the Company up to 1,064,800 shares of the
Company’s common stock. In connection with this
arrangement, the Company has entered into an escrow agreement
with Mr. Thompson and an independent escrow agent, pursuant
to which the escrow agent holds these 1,064,800 shares of
Company common stock that are otherwise issuable to
Mr. Thompson in connection with the NNN formation
transactions to secure Mr. Thompson’s obligations to
the Company. Mr. Thompson’s liability under this
arrangement will not exceed the value of the shares in the
escrow. The above indemnification expires upon the entry of a
final settlement order in connection with the SEC matter.
The
offerings conducted to raise capital for the Company’s TIC
programs are done in reliance on exemptions from the
registration requirements of the Securities Act. A failure to
satisfy the requirements for the appropriate exemption could
void the offering or, if it is already completed, provide the
investors with rescission rights, either of which would have a
material adverse effect on the Company’s reputation and as
a result its business and results of operations.
The securities of the Company’s TIC programs are offered
and sold in reliance upon a private placement offering exemption
from registration under the Securities Act and applicable state
securities laws. If the Company or its dealer-manager failed to
comply with the requirements of the relevant exemption and an
offering were in process, the Company may have to terminate the
offering. If an offering was completed, the investors may have
the right, if they so desired, to rescind their purchase of the
securities. A rescission offer could also be required under
applicable state securities laws and regulations in states where
any securities were offered without registration or
qualification pursuant to a private offering or other exemption.
If a number of holders sought rescission at one time, the
applicable program would be required to make significant
payments which could adversely affect its business and as a
result, the fees generated by the Company from such program. If
one of the Company’s programs was forced to terminate an
offering before it was completed or to make a rescission offer,
the Company’s reputation would also likely be significantly
harmed. Any reduction in fees as a result of a rescission offer
or a loss of reputation would have a material adverse effect on
the Company’s business and results of operations.
An
increase in interest rates may negatively affect the equity
value of the Company’s programs or cause the Company to
lose potential investors to alternative investments, causing the
fees the Company receives for transaction and management
services to be reduced.
In the last two years, interest rates in the United States have
generally increased. If interest rates were to continue to rise,
the Company’s financing costs would likely rise and the
Company’s net yield to investors may decline. This downward
pressure on net yields to investors in the Company’s
programs could compare poorly to rising yields on alternative
investments. Additionally, as interest rates rise, valuations of
commercial real estate properties typically decline. A decrease
in both the attractiveness of the Company’s programs and
the value of assets held by these programs could cause a
decrease in both transaction and management services revenues,
which would have an adverse effect on the Company’s results
of operations.
Increasing
competition for the acquisition of real estate may impede the
Company’s ability to make future acquisitions which would
reduce the fees the Company generates from these programs and
could adversely affect the Company’s operating results and
financial condition.
The commercial real estate industry is highly competitive on an
international, national and regional level. The Company’s
programs face competition from REITs, institutional pension
plans, and other public and private real estate companies and
private real estate investors for the acquisition of properties
and for raising capital to create programs to make these
acquisitions. Competition may prevent the Company’s
programs from acquiring desirable properties or increase the
price they must pay for real estate. In addition, the number of
entities and the amount of funds competing for suitable
investment properties may increase, resulting in increased
demand and increased prices paid for these properties. If the
Company’s programs pay higher prices for properties,
investors may experience a lower return on investment and be
less inclined to invest in the Company’s next program which
may decrease the Company’s profitability. Increased
competition for properties may also preclude the Company’s
programs from acquiring properties that would generate the most
attractive returns to investors or may reduce the number of
properties the Company’s programs could acquire, which
could have an adverse effect on the Company’s business.
Illiquidity
of real estate investments could significantly impede the
Company’s ability to respond to adverse changes in the
performance of the Company’s programs’ properties and
harm the Company’s financial condition.
Because real estate investments are relatively illiquid, the
Company’s ability to promptly facilitate a sale of one or
more properties or investments in the Company’s programs in
response to changing economic, financial and investment
conditions may be limited. In particular, these risks could
arise from weakness in the market for a property, changes in the
financial condition or prospects of prospective purchasers,
changes in regional, national or international economic
conditions, and changes in laws, regulations or fiscal policies
of jurisdictions in which the property is located. Fees from the
disposition of properties would be materially affected if the
Company were unable to facilitate a significant number of
property dispositions for the Company’s programs.
Uninsured
and underinsured losses may adversely affect
operations.
The Company carries commercial general liability, fire and
extended coverage insurance with respect to the Company’s
programs’ properties. The Company obtains coverage that has
policy specifications and insured limits that the Company
believes are customarily carried for similar properties. The
Company cannot assure you, however, that particular risks that
are currently insurable will continue to be insurable on an
economic basis or that current levels of coverage will continue
to be available. In addition, the Company generally does not
obtain insurance against certain risks, such as floods.
Should a property sustain damage or an occupant sustain an
injury, the Company may incur losses due to insurance
deductibles, co-payments on insured losses or uninsured losses.
In the event of a substantial property loss or personal injury,
the insurance coverage may not be sufficient to pay the full
damages. In the event of an uninsured loss, the Company could
lose some or all of its capital investment, cash flow and
anticipated profits related to one or more properties.
Inflation, changes in building codes and ordinances,
environmental considerations, and other factors also might make
it not feasible to use insurance proceeds to replace a property
after it has been damaged or destroyed. Under these
circumstances, the insurance proceeds the Company receives, if
any, might not be adequate to restore the Company’s
economic position with respect to the property. In the event of
a significant loss at one or more of the properties in the
Company’s programs, the remaining insurance under the
applicable policy, if any, could be insufficient to adequately
insure the remaining properties. In this event, securing
additional insurance, if possible, could be significantly more
expensive than the current policy. A loss at any of these
properties or an increase in premium as a result of a loss could
decrease the income from or value of properties under management
in the Company’s programs, which in turn would reduce the
fees the Company receives from these programs. Any decrease or
loss in fees could have a material adverse effect on the
Company’s financial condition or results of operations.
Item 1B.
Unresolved
Staff Comments
Not Applicable
Item 2.
Properties
The Company leases all of its office space through
non-cancelable operating leases. The terms of the leases vary
depending on the size and location of the office. As of
December 31, 2007, the Company leased over
751,000 square feet of office space in 65 locations under
leases which expire at various dates through February 28,2017. For those leases that are not renewable, the Company
believes that there are adequate alternatives available at
acceptable rental rates to meet its needs, although there can be
no assurances in this regard. See Note 20 of Notes to
Consolidated Financial Statements in Item 8 of this Report
for additional information, which is incorporated herein by
reference.
Item 3.
Legal
Proceedings
SEC
Investigation
On September 16, 2004, Triple Net Properties, which became
a subsidiary of Grubb & Ellis as part of the merger
with NNN, learned that the SEC Staff was conducting an
investigation referred to as “In the matter of Triple
Net Properties, LLC.”The SEC Staff requested
information from Triple Net Properties relating to disclosure in
the Triple Net Securities Offerings. The SEC Staff also
requested information from Capital Corp., the dealer-manager for
the Triple Net Securities Offerings. Capital Corp. also became a
subsidiary of Grubb & Ellis as part of the merger with
NNN. The SEC Staff requested financial and other information
regarding the Triple Net Securities Offerings and the
disclosures included in the related offering documents from each
of Triple Net Properties and Capital Corp. Triple Net Properties
and Capital Corp. believe they have cooperated fully with the
SEC Staff’s investigation.
Triple Net Properties and Capital Corp. are engaged in
settlement negotiations with the SEC staff regarding this
matter. Based on these negotiations, management believes that
the conclusion to this matter will not result in a material
adverse affect to its results of operations, financial condition
or ability to conduct its
business. NNN accrued a loss contingency of $600,000 at
December 31, 2007 and 2006 on behalf of Triple Net
Properties and Capital Corp. on a consolidated basis. The
$600,000 is being held in escrow pending final approval of the
settlement agreement.
To the extent that Triple Net Properties and Capital Corp pay
the SEC an amount in excess of $1.0 million in connection
with any settlement or other resolution of this matter, Anthony
W. Thompson, NNN’s founder and former Chairman of the
Board, has agreed to forfeit to NNN up to 1,064,800 shares
of the Company’s common stock. In connection with this
arrangement, NNN entered into an escrow agreement with
Mr. Thompson and an independent escrow agent, pursuant to
which the escrow agent holds these 1,064,800 shares of
common stock that are otherwise issuable to Mr. Thompson in
connection with the NNN formation transactions to secure
Mr. Thompson’s obligations to NNN.
Mr. Thompson’s liability under this arrangement will
not exceed the value of the shares in the escrow.
General
Grubb & Ellis and its subsidiaries are involved in
various claims and lawsuits arising out of the ordinary conduct
of its business, as well as in connection with its participation
in various joint ventures and partnerships, many of which may
not be covered by the Company’s insurance policies. In the
opinion of management, the eventual outcome of such claims and
lawsuits is not expected to have a material adverse effect on
the Company’s financial position or results of operations.
Item 4.
Submission
of Matters to a Vote of Security Holders
The Company held a Special Meeting in Lieu of Annual Meeting of
its stockholders on December 6, 2007 (the “Special
Meeting”). At the Special Meeting, the Company’s
stockholders voted upon and approved each of the following
matters:
1. the amendment to the Company’s amended and restated
certificate of incorporation, immediately prior to the effective
time of the Merger, to increase the authorized number of shares
of the Company’s common stock from 50 million to
100 million;
2. the amendment to the Company’s amended and restated
certificate of incorporation, immediately prior to the effective
time of the Merger, to increase the authorized number of shares
of the Company’s preferred stock from one million to
10 million;
3. the amendment to the Company’s amended and restated
certificate of incorporation, immediately prior to the effective
time of the Merger, to provide for a classified board of
directors comprising three classes of directors, the first class
of directors, Class A directors, having a term that would
initially expire on the Company’s next annual meeting of
stockholders after the effective date of the Merger, the second
class of directors, Class B directors, having a term that
would initially expire on the Company’s second annual
meeting of stockholders after the effective date of the Merger,
and the third class of directors, Class C directors, having
a term that would initially expire on the Company’s third
annual meeting of stockholders after the effective date of the
Merger, with each subsequent term of each class of directors
being for a three year period;
4. the issuance of shares of the Company’s common
stock to stockholders of NNN, on the terms and conditions set
out in the Merger Agreement;
5. the election of the following individuals to the board
of directors upon the effectiveness of the Merger: Scott D.
Peters, Harold H. Greene and D. Fleet Wallace as Class A
directors; Gary H. Hunt, Glenn L. Carpenter and Robert J.
McLaughlin as Class B directors; and Anthony W. Thompson,
C. Michael Kojaian and Rodger D. Young as Class C
directors; and
6. the adjournment or postponement of the Special Meeting,
including, if necessary, to solicit additional proxies in favor
of matter 1-5 above if there are not sufficient votes for
matters 1-5 above.
With respect to matter number 1: 22,107,710 votes were
cast in favor; 186,456 votes were cast against; there were 3,001
abstentions; and there were no broker non-votes.
With respect to matter number 2: 16,795,259 votes were cast
in favor; 5,331,933 votes were cast against; there were 169,975
abstentions; and there were no broker non-votes.
With respect to matter number 3: 15,933,895 votes were cast
in favor; 6,193,322 votes were cast against; there were 169,950
abstentions; and there were no broker non-votes.
With respect to matter number 4: 22,109,777 votes were cast in
favor; 183,345 votes were cast against; there were
4,045 abstentions; and there were no broker non-votes.
With respect to matter number 5: 21,781,429 votes were cast in
favor; 271,010 votes were cast against; there were 244,728
abstentions; and there were no broker non-votes.
With respect to matter number 6: 17,232,852 votes were cast in
favor; 4,907,042 votes were cast against; there were 157,273
abstentions; and there were no broker non-votes.
Market
for Registrant’s Common Equity and Related Stockholder
Matters
Market
and Price Information
The principal market for the Company’s common stock is the
NYSE. Prior to June 29, 2006, the Company’s common
stock traded on the over-the-counter market (“OTC”).
The following table sets forth the high and low sales prices of
the Company’s common stock on the respective market for
each quarter of the years ended December 31, 2007 and 2006.
2007
2006
High
Low
High
Low
First Quarter
$
11.90
$
10.23
$
14.20
$
9.04
Second Quarter
$
13.25
$
10.69
$
14.50
$
9.00
Third Quarter
$
12.15
$
7.00
$
10.21
$
7.91
Fourth Quarter
$
9.57
$
4.95
$
12.61
$
8.76
As of March 7, 2008, there were 1,010 registered holders of
the Company’s common stock and 65,094,777 shares of
common stock outstanding. Sales of substantial amounts of common
stock, including shares issued upon the exercise of warrants or
options, or the perception that such sales might occur, could
adversely affect prevailing market prices for the common stock.
The Company declared quarterly cash dividends in 2007 for an
aggregate of $0.36 per share for the year, and a single fourth
quarter cash dividend in 2006 of $0.10 per share.
Sales of
Unregistered Securities
On March 8, 2007, pursuant to an Employment Agreement dated
March 8, 2005 and a Restricted Share Agreement dated
March 8, 2005, the Company granted to its former Chief
Executive Officer, Mark E. Rose, 71,158 restricted shares of the
Company’s common stock which vest in equal, annual
installments of thirty-three and one-third percent
(331/3%)
on each of the first, second and third anniversaries of
March 8, 2007 and had a fair market value of $750,000 on
the trading day immediately preceding the date of grant. On
September 20, 2007, pursuant to the Company’s 2006
Omnibus Equity Plan, the Company granted to its then outside
directors an aggregate of 21,164 restricted shares of the
Company’s common stock which were scheduled to vest
one-third on each of the first, second and third anniversaries
of the date of grant and had an aggregate fair market value of
$200,000 on the trading day immediately preceding the date of
grant. These shares, as well as any unvested restricted shares
held by Mr. Rose, fully vested on December 7, 2007, as
a result of a change in control provisions contained in the
awards. Additionally after consummation of the Merger, on
December 10, 2007, pursuant to the Company’s 2006
Omnibus Equity Plan, the Company granted to its outside
directors an aggregate of 62,972 restricted shares of the
Company’s common stock which vest one-third on each of the
first, second and third anniversaries of the date of grant and
had an aggregate fair market value of $420,000 on the date of
grant.
On June 27, 2007, pursuant to its 2006 Long-Term Incentive
Plan, NNN granted an aggregate of 576,400
restricted shares of its common stock to NNN’s independent
directors and executive officers which are scheduled to vest
one-third on each of the first, second and third anniversaries
of the date of grant and had an aggregate fair market value of
$6,547,904 on the date of grant.
The issuances by the Company and NNN of restricted shares in the
transactions described above were exempt from the registration
requirements of Section 5 of the Securities Act, as such
transactions did not involve a public offering by the Company.
The following section entitled, “Grubb & Ellis
Stock Performance” is not to be deemed to be
“soliciting material” or to be “filed” with
the SEC or subject to Regulation 14A or 14C or to the
liabilities of Section 18 of the Exchange Act, except to
the extent that the Company specifically requests that such
information be treated as soliciting material or specifically
incorporates it by reference into any filing under the
Securities Act or the Exchange Act.
The graph below compares the cumulative
54-month
total return to shareholders on the Company’s common stock
versus the cumulative total returns of the S&P 500 index,
and a customized peer group of three companies that includes: CB
Richard Ellis Group Inc., Grubb & Ellis Company and
Jones Lang LaSalle Inc. The graph assumes that the value of the
investment in the company’s common stock, in the peer
group, and the index (including reinvestment of dividends) was
$100 on
6/30/2003
and tracks it through
12/31/2007.
COMPARISON
OF 54-MONTH
CUMULATIVE TOTAL RETURN*
Among
Grubb & Ellis Company, The S&P 500 Index
And A Peer
Group
*
$100 invested on 6/30/03 in stock
or index-including reinvestment of dividends. Fiscal year ending
December 31.
The following tables set forth the selected historical
consolidated financial data for Grubb & Ellis and its
subsidiaries, as of and for the years ended, December 31,2007, 2006, 2005, 2004 and 2003. GERI (formerly Triple Net
Properties) was the accounting acquirer of Realty and Capital
Corp. The selected historical consolidated financial data as of
and for the years ended December 31, 2007, 2006 and 2005
has been derived from the audited financial statements included
in Item 8. of this Report. The selected historical
financial data as of and for the years ended December 31,2004 and 2003 have been derived from the audited consolidated
financial statements not included in this Report. Historical
results are not necessarily indicative of the results that may
be expected for any future period.
Consolidated Balance Sheet Data (at end of period):
Total assets
$
969,412
$
328,043
$
86,336
$
42,911
$
31,380
Line of credit
8,000
—
8,500
3,545
2,535
Notes payable
137,411
4,933
17,242
—
19
Senior and participating notes
16,277
10,263
2,300
4,845
6,345
Redeemable preferred liability
—
—
6,077
5,717
5,564
Stockholders’ equity
408,645
221,944
28,777
16,783
7,154
(1)
Based on Generally Accepted Accounting Principles (GAAP), the
operating results for the year ended December 31, 2007
includes the results of legacy NNN for the full periods
presented and the results of the legacy Grubb & Ellis
business for the period from December 8, 2007 through
December 31, 2007.
Includes a full year of operating results of GERI, one and
one-half months of Realty (acquired on November 16,2006) and one-half month of GBE Securities (formerly NNN
Capital Corp.) (acquired on December 14, 2006). GERI was
treated as the acquirer in connection with these transactions.
(3)
Based on GAAP, reflects operating results of GERI.
(4)
Income from continuing operations before cumulative effect of
change in accounting principle of $18,000 related to adoption of
Statement of Financial Accounting Standards No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity
(SFAS No. 150”) issued in May 2003, which
established standards for how an issuer classifies and measures
certain financial instruments with characteristics of both
liabilities and equity. SFAS No. 150 requires that an
issuer classify a financial instrument that is within its scope,
which may have previously been reported as equity, as a
liability (or an asset in some circumstances). This statement
was effective for financial instruments entered into or modified
after May 31, 2003 and otherwise was effective at the
beginning of the first interim period beginning after
June 15, 2003, except for mandatory redeemable financial
instruments of nonpublic companies for which the effective date
was the fiscal period beginning after December 15, 2004.
Management elected to adopt SFAS No. 150 effective
July 1, 2003. NNN, accordingly, recorded a cumulative
effect of a change in accounting principle of $18,000 relating
to the reclassification of its redeemable preferred membership
interests. These interests were reported as liabilities in the
December 31, 2003 consolidated balance sheet, and
thereafter, in accordance with SFAS No. 150.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Note
Regarding Forward-Looking Statements
This Annual Report contains statements that are
forward-looking and as such are not historical facts. Rather,
these statements constitute projections, forecasts or
forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. You should not place
undue reliance on these statements. Forward-looking statements
include information concerning the Company’s liquidity and
possible or assumed future results of operations, including
descriptions of the Company’s business strategies. These
statements often include words such as “believe,”“expect,”“anticipate,”“intend,”“plan,”“estimate”“seek,”“will,”“may” or similar expressions. These
statements are based on certain assumptions that the Company has
made in light of its experience in the industry as well as its
perceptions of the historical trends, current conditions,
expected future developments and other factors the Company
believes are appropriate under these circumstances.
All such forward-looking statements speak only as of the date
of this Annual Report. The Company expressly disclaims any
obligation or undertaking to release publicly any updates or
revisions to any forward-looking statements contained herein to
reflect any change in the Company’s expectations with
regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
As you read this Annual Report, you should understand that
these statements are no guarantees of performance or results.
They involve risks, uncertainties and assumptions. You should
understand the risks and uncertainties discussed in
“Item 1A — Risk Factors” and elsewhere
in this Annual Report, could affect the Company’s actual
financial results and could cause actual results to differ
materially from those expressed in the forward-looking
statements. Some important factors include, but are not limited
to:
•
changes in general economic and business conditions, including
interest rates, the cost and availability of capital for
investment in real estate, clients’ willingness to make
real estate commitments and other factors impacting the value of
real estate assets;
•
our ability to retain major clients and renew related contracts;
•
the failure of properties managed by us to perform as
anticipated;
•
our ability to compete in specific geographic markets or
business segments that are material to us;
•
an economic downturn in the real estate market;
•
significant variability in our results of operations among
quarters;
•
our ability to retain our senior management and attract and
retain qualified and experienced employees;
•
our ability to comply with the laws and regulations applicable
to real estate brokerage and mortgage transactions;
•
our exposure to liabilities in connection with real estate
brokerage and property management activities;
•
changes in the key components of revenue growth for large
commercial real estate services companies, including
consolidation of client accounts and increasing levels of
institutional ownership of commercial real estate;
•
reliance of companies on outsourcing for their commercial real
estate needs;
•
liquidity and availability of additional or continued sources of
financing for the Company’s investment programs;
•
trends in use of large, full-service real estate providers;
trends in pricing for commercial real estate services; and
•
the effect of implementation of new tax and accounting rules and
standards.
Overview
and Background
Grubb & Ellis Company (the “Company”), is a
commercial real estate services and investment management firm.
On December 7, 2007, NNN Realty Advisors, Inc.
(“NNN”) effected a stock merger (the
“Merger”) with the legacy Grubb & Ellis
Company, a 50 year old commercial real estate services
firm. Upon the closing of the Merger, a change of control of the
Company occurred, as the former stockholders of NNN acquired
approximately 60% of the Company’s issued and outstanding
common stock. Pursuant to the Merger, each issued and
outstanding share of NNN automatically converted into a 0.88 of
a share of common stock of the Company. Based on accounting
principles generally accepted in the United States of America
(“GAAP”), the Merger was accounted for using the
purchase method of accounting, and although structured as a
reverse merger, NNN is considered the accounting acquirer of
legacy Grubb & Ellis. As a consequence, the operating
results for the twelve months ended December 31, 2007
includes the full year operating results of NNN and the
operating results of legacy Grubb & Ellis for the
period from December 8, 2007 through December 31,2007. The years ended December 31, 2006 and 2005 include
solely the operating results of NNN.
Unless otherwise indicated, all pre-merger NNN share data have
been adjusted to reflect the conversion as a result of the
Merger (see Note 9 of Notes to Consolidated Financial
Statements in Item 8 of this Report for additional
information).
NNN is a real estate investment management company and sponsor
of tax deferred tenant in common (“TIC”) 1031 property
exchanges as well as a sponsor of public non-traded real estate
investment trusts (“REITs”) and other investment
programs. Pursuant to the merger, the Company now sponsors under
the Grubb & Ellis brand, Grubb & Ellis
Realty Investors, LLC (“GERI”), (formerly Triple Net
Properties, LLC), real estate investment programs to provide
investors with the opportunity to engage in tax-deferred
exchanges of real property and to invest in other real estate
investment vehicles and continues to offer full-service real
estate asset management services. GERI raises capital for these
programs through an extensive network of broker-dealer
relationships. GERI structures, acquires, manages and disposes
of real estate for these programs, earning fees for each of
these services.
Legacy Grubb & Ellis business units provide a full
range of real estate services, including transaction, which
comprises its brokerage operations, management and consulting
services for both local and multi-location clients, which
includes third-party property management, corporate facilities
management, project management, client accounting, business
services and engineering services.
NNN was organized in September 2006 to acquire each of Triple
Net Properties, LLC, (“Triple Net Properties”), Triple
Net Properties Realty, Inc., (“Realty”), and NNN
Capital Corp., or (“Capital Corp”), and to bring the
businesses conducted by those companies under one corporate
umbrella. On November 30, 2006, NNN completed a
$160.0 million private placement of common stock to
institutional investors and certain accredited investors with
14.1 million shares of the Company’s common stock sold
in the offering at $11.36 per share. Net proceeds from the
offering were $146.0 million. Triple Net Properties was the
accounting acquirer of Realty and Capital Corp.
In certain instances throughout this Annual Report phrases such
as “legacy Grubb & Ellis” or similar
descriptions are used to reference, when appropriate, the
Company prior to the Merger. Similarly, in certain instances
throughout this Annual Report the term NNN, “legacy
NNN”, or similar phrases are used to reference, when
appropriate, NNN Realty Advisors, Inc. prior to the Merger.
The Company’s consolidated financial statements have been
prepared in accordance with GAAP. Certain accounting policies
are considered to be critical accounting policies, as they
require management to make assumptions about matters that are
highly uncertain at the time the estimate is made and changes in
the accounting estimate are reasonably likely to occur from
period to period. The Company believes that the following
critical accounting policies reflect the more significant
judgments and estimates used in the preparation of its
consolidated financial statements.
Revenue
Recognition
Transaction
Services
Real estate sales commissions are recognized at the earlier of
receipt of payment, close of escrow or transfer of title between
buyer and seller. Receipt of payment occurs at the point at
which all Company services have been performed, and title to
real property has passed from seller to buyer, if applicable.
Real estate leasing commissions are recognized upon execution of
appropriate lease and commission agreements and receipt of full
or partial payment, and, when payable upon certain events such
as tenant occupancy or rent commencement, upon occurrence of
such events. All other commissions and fees are recognized at
the time the related services have been performed and delivered
by the Company to the client, unless future contingencies exist.
Investment
Management
The Company earns fees associated with its transactions by
structuring, negotiating and closing acquisitions of real estate
properties to third-party investors. Such fees include
acquisition and disposition fees. Acquisition and disposition
fees are earned and recognized when the acquisition or
disposition is closed. Organizational marketing expense
allowance (“OMEA”), fees are earned and recognized
from gross proceeds of equity raised in connection with
offerings and are used to pay formation costs, as well as
organizational and marketing costs. The Company is entitled to
loan advisory fees for arranging financing related to properties
under management. These fees are collected and recognized upon
the closing of such loans.
The Company earns captive asset and property management fees
primarily for managing the operations of real estate properties
owned by the real estate programs, REITs and limited liability
companies that invest in real estate or value funds it sponsors.
Such fees are based on pre-established formulas and contractual
arrangements and are earned as such services are performed. The
Company is entitled to receive reimbursement for expenses
associated with managing the properties; these expenses include
salaries for property managers and other personnel providing
services to the property. Each property in the Company’s
TIC programs is charged an accounting fee for costs associated
with preparing financial reports. The Company is also entitled
to leasing commissions when a new tenant is secured and upon
tenant renewals. Leasing commissions are recognized upon
execution of leases.
Through its dealer-manager, the Company facilitates capital
raising transactions for its programs its dealer-manager acts as
a dealer-manager exclusively for the Company’s programs and
does not provide securities services to any third party. The
Company’s wholesale dealer-manager services are comprised
of raising capital for its programs through its selling
broker-dealer relationships. Most of the commissions, fees and
allowances earned for its dealer-manager services are passed on
to the selling broker-dealers as commissions and to cover
offering expenses, and the Company retains the balance.
Management
Services
Management fees are recognized at the time the related services
have been performed by the Company, unless future contingencies
exist. In addition, in regard to management and facility service
contracts, the owner of the property will typically reimburse
the Company for certain expenses that are incurred on behalf of
the owner, which are comprised primarily of
on-site
employee salaries and related benefit costs. The amounts
which are to be reimbursed per the terms of the services
contract, are recognized as revenue by the Company in the same
period as the related expenses are incurred.
Purchase
Price Allocation
In accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 141, Business Combinations,
the purchase price of acquired properties is allocated to
tangible and identified intangible assets and liabilities based
on their respective fair values. The allocation to tangible
assets (building and land) is based upon determination of the
value of the property as if it were vacant using discounted cash
flow models similar to those used by independent appraisers.
Factors considered include an estimate of carrying costs during
the expected
lease-up
periods considering current market conditions and costs to
execute similar leases. Additionally, the purchase price of the
applicable property is allocated to the above or below market
value of in-place leases and the value of in-place leases and
related tenant relationships.
The value allocable to the above or below market component of
the acquired in-place leases is determined based upon the
present value (using a discount rate which reflects the risks
associated with the acquired leases) of the difference between
(i) the contractual amounts to be paid pursuant to the
lease over its remaining term, and (ii) the Company’s
estimate of the amounts that would be paid using fair market
rates over the remaining term of the lease. The amounts
allocated to above market leases are included in identified
intangible assets and below market lease values are included in
identified intangible
liabilities-net
in the accompanying consolidated financial statements and are
amortized to rental revenue over the weighted-average remaining
term of the acquired leases with each property.
The total amount of identified intangible assets acquired is
further allocated to in-place lease costs and the value of
tenant relationships based on management’s evaluation of
the specific characteristics of each tenant’s lease and the
Company’s overall relationship with that respective tenant.
Characteristics considered in allocating these values include
the nature and extent of the credit quality and expectations of
lease renewals, among other factors. These allocations are
subject to change within one year of the date of purchase based
on information related to one or more events identified at the
date of purchase that confirm the value of an asset or liability
of an acquired property.
Impairment
of Long-Lived Assets
In accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, long-lived
assets are periodically evaluated for potential impairment
whenever events or changes in circumstances indicate that their
carrying amount may not be recoverable. In the event that
periodic assessments reflect that the carrying amount of the
asset exceeds the sum of the undiscounted cash flows (excluding
interest) that are expected to result from the use and eventual
disposition of the asset, the Company would recognize an
impairment loss to the extent the carrying amount exceeded the
fair value of the property. The Company estimates the fair value
using available market information or other industry valuation
techniques such as present value calculations. No impairment
losses were recognized for the years ended December 31,2007, 2006 and 2005.
The Company recognizes goodwill in accordance with
SFAS No. 142, Goodwill and Other Intangible Assets
(“SFAS No. 142”). Under
SFAS No. 142, goodwill is recorded at its carrying
value and is tested for impairment at least annually or more
frequently if impairment indicators exist at a level of
reporting referred to as a reporting unit. Goodwill impairment
is deemed to exist if the net book value of a reporting unit
exceeds its estimated fair value. If a potential impairment
exists, then an impairment loss is recognized to the extent the
carrying value of goodwill exceeds the difference between the
fair value of the reporting unit and the fair value of its other
assets and liabilities. The Company recognizes goodwill in
accordance with SFAS No. 142 and tests the carrying
value for impairment during the fourth quarter of each year. No
impairment indicators were identified for the year ended
December 31, 2007.
The Company has maintained partially self-insured and deductible
programs for, general liability, workers’ compensation and
certain employee health care costs. In addition, the Company
assumed liabilities at the date of the Merger representing
reserves related to a self insured errors and omissions program
of the acquired company. Reserves for all such programs are
included in accrued claims and settlements and compensation and
employee benefits payable, as appropriate. Reserves are based on
the aggregate of the liability for reported claims and an
actuarially-based estimate of incurred but not reported claims.
As of the date of the Merger, the Company entered into a premium
based insurance policy for all error and omission coverage on
claims arising after the date of the Merger. Claims arising
prior to the date of the Merger continue to be applied against
the previously mentioned liability reserves assumed relative to
the acquired company.
The Company is also subject to various proceedings, lawsuits and
other claims related to commission disputes and environmental,
labor and other matters, and is required to assess the
likelihood of any adverse judgments or outcomes to these
matters. A determination of the amount of reserves, if any, for
these contingencies is made after careful analysis of each
individual issue. New developments in each matter, or changes in
approach such as a change in settlement strategy in dealing with
these matters, may warrant an increase or decrease in the amount
of these reserves.
Recently
Issued Accounting Pronouncements
In September 2006, the FASB issued Statement No. 157
(“SFAS No. 157”), Fair Value
Measurements. SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about
fair value measurements. In February 2008, the FASB issued FASB
Staff Position
No. FAS 157-2,
“Effective Date of FASB Statement No. 157” (the
“FSP”). The FSP amends SFAS 157 to delay the
effective date of SFAS No. 157 for nonfinancial assets
and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial
statements on a recurring basis (that is, at least annually).
For items within its scope, the FSP defers the effective date of
SFAS No. 157 to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal
years. The Company does not believe adoption will have a
material effect on its financial condition, results of
operations and cash flow.
In February 2007, the FASB issued Statement No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(“SFAS No. 159”). SFAS No. 159
permits entities to choose to measure many financial instruments
and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the
opportunities to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions.
SFAS No. 159 is effective as of the beginning of an
entity’s first fiscal year that begins after November, 15,
2007. The Company is currently evaluating the effect, if any,
the adoption of SFAS No. 159 will have on its
financial condition, results of operations and cash flow.
In December 2007, the FASB issued revised Statement
No. 141, Business Combinations
(“SFAS No. 141R”).
SFAS No. 141R will change the accounting for business
combinations. Under SFAS No. 141R, an acquiring entity
will be required to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition-date
fair value with limited exceptions. SFAS No. 141R will
change the accounting treatment and disclosure for certain
specific items in a business combination.
SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or
after December 15, 2008. SFAS No. 141R will have
an impact on accounting for business combinations once adopted
but the effect is dependent upon acquisitions at that time.
In December 2007, the FASB issued Statement No. 160,
Noncontrolling Interests in Consolidated Financial
Statements — An Amendment of ARB No. 51
(“SFAS No. 160”). SFAS No. 160
establishes new accounting and reporting standards for the
non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 is
effective for fiscal years beginning on or after
December 15, 2008. The
Company is currently evaluating the effect if any, the adoption
of SFAS No. 160 will have impact on its consolidated
financial position, results of operations and cash flows.
RESULTS
OF OPERATIONS
Overview
The Company reported revenue of $231.4 million for the year
ended December 31, 2007, compared with revenue of
$108.3 million for the same period of 2006. Approximately
$53.8 million of the increase was attributed to revenue
from Grubb & Ellis’ legacy Transaction Services
and Management Services businesses and the operations of the
assets warehoused for GERA from December 8 through
December 31, 2007. The remaining $69.3 million of the
increase was attributed primarily to legacy NNN’s
Investment Management business, including $19.0 million
from increased rental related revenue, a $17.3 million
increase resulting from operations of the Company’s
broker-dealer acquired in December 2006, higher captive
management revenue from additional assets under management
year-over-year and higher investment management fees resulting
from a larger period-over-period equity raise.
As a result of the Merger in December 2007, the newly combined
Company’s operating segments were evaluated for reportable
segments. As a result, the legacy NNN reportable segments were
realigned into a single operating and reportable segment called
Investment Management. This realignment had no impact on the
Company’s consolidated balance sheet, results of operations
or cash flows.
The Company reports its revenue by three business segments in
accordance with the provisions of Statement of Financial
Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information
(“SFAS 131”). Transaction Services, which
comprises its real estate brokerage operations; Investment
Management which includes providing acquisition, financing and
disposition services with respect to its programs, asset
management services related to its programs, and dealer-manager
services by its securities broker-dealer, which facilitates
capital raising transactions for its TIC, REIT and other
investment programs; and Management Services, which includes
property management, corporate facilities management, project
management, client accounting, business services and engineering
services for unrelated third parties and the properties owned by
the programs it sponsors. Additional information on these
business segments can be found in Note 18 of Notes to
Consolidated Financial Statements in Item 8 of this Report.
Equity in earnings (losses) of unconsolidated entities
(339
)
491
(830
)
(169.0
)
Interest income
2,994
713
2,281
319.9
Other
(650
)
—
(650
)
—
Total other income
2,005
1,204
801
66.5
Income from continuing operations before minority interest and
income tax provision
34,859
12,176
22,683
186.3
Minority interest in income (losses) of consolidated entities
459
(308
)
767
249.0
Income from continuing operations before income tax provision
(benefit)
35,318
11,868
23,450
197.6
Income tax provision (benefit)
14,268
(4,230
)
18,498
437.3
Income from continuing operations
21,050
16,098
4,952
30.8
Discontinued Operations
Loss from discontinued operations — net of taxes
(460
)
(72
)
(388
)
(538.9
)
Gain on disposal of discontinued operations — net of
taxes
252
68
184
270.6
Total loss from discontinued operations
(208
)
(4
)
(204
)
(5100.0
)
Net Income
$
20,842
$
16,094
$
4,748
29.5
(1)
Based on GAAP, the operating results for twelve months ended
December 31, 2007 includes the results of NNN for the full
periods presented and the results of the legacy
Grubb & Ellis business for the period from
December 8, 2007 through December 31, 2007.
(2)
Based on GAAP, the operating results for the twelve months ended
December 31, 2006 represents legacy NNN business.
Revenue
Transaction
Services
The Company earns revenue from the delivery of transaction and
management services to the commercial real estate industry.
Transaction fees include commissions from leasing, acquisition
and disposition, and agency leasing assignments as well as fees
from appraisal and consulting services. Management fees, which
include reimbursed salaries, wages and benefits, comprise the
remainder of the Company’s services revenue,
and include fees related to both property and facilities
management outsourcing as well as project management and
business services.
Transaction services segment was acquired from the legacy
Grubb & Ellis on December 7, 2007 which includes
brokerage commission, valuation and consulting revenue. At
December 31, 2007, legacy Grubb & Ellis had 927
brokers, up from 917 at December 31, 2006.
Investment
Management
Investment management revenue of $149.4 million for the
year ended December 31, 2007, which includes transaction,
captive management and dealer-manager businesses, was comprised
primarily of transaction fees of $81.4 million, asset and
property management fees of $45.9 million and
dealer-manager fees of $18.0 million.
Transaction related fees increased $24.5 million, or 43.0%,
for the year ended December 31, 2007, primarily due to
increases of $21.0 million in real estate acquisition fees,
$2.5 million in real estate disposition fees and
$1.4 million in OMEA fees, partially offset by a net
decrease of approximately $400,000 in other transaction related
fees.
Acquisition fees increased $21.0 million, or 82.0%, to
$46.5 million for the year ended December 31, 2007,
compared to $25.5 million for the same period in 2006. Net
fees as a percentage of aggregate acquisition price increased to
2.6% for the twelve months ended December 31, 2007,
compared to 2.1% for the same period in 2006, which resulted in
$7.7 million in additional fees earned during 2007. During
the year ended December 31, 2007, the Company acquired 77
properties (including six which were still owned as of
December 31, 2007) on behalf of its sponsored programs
for an approximate aggregate total of $2.0 billion,
compared to 45 properties for an approximate aggregate total of
$1.4 billion during the same period in 2006. This increase
in acquisition volume in 2007 resulted in an additional
$11.9 million in net fees. Also contributing to the
increase in net fees during 2007 was $1.6 million in
recognition of fees that were deferred in 2006.
The $2.5 million increase in real estate disposition fees
for the year ended December 31, 2007 was primarily due to
an increase in fees realized from the sales of properties, with
$18.2 million in net fees realized from the disposition of
28 properties, with an average sales price of $31.3 million
per property for the year ended December 31, 2007, compared
to $15.7 million in fees realized from the disposition of
22 properties for the same period in 2006 with an average sales
price of $37.9 million per property. Included in the fees
realized from the sales of properties were $5.7 million in
fees earned as a result of the continuing liquidation of
G REIT, Inc. (“G REIT”) for the year ended
December 31, 2007, compared to $5.3 million for the
same period in 2006. Reducing the disposition fees during the
year ended December 31, 2007 and 2006 was $3.2 million
and $410,000, respectively, as a result of amortizing the
identified intangible contract rights associated with the
acquisition of Realty as they represent the right to future
disposition fees of a portfolio of real properties under
contract. Fees on dispositions as a percentage of aggregate
sales price was 2.4% for the year ended December 31, 2007,
compared to 1.9% for the same period in 2006 (excluding one
property sold in 2006 for which the Company waived the entire
amount of the disposition fee), primarily due to a change in the
mix of properties sold.
OMEA fees increased $1.4 million, or 18.2%, to
$9.1 million for the twelve months ended December 31,2007, compared to $7.7 million for the same period in 2006.
OMEA fees as a percentage of equity raised for the year ended
December 31, 2007 was 2.0%, compared to 1.5% for the same
period in 2006. The increase in OMEA fees earned was primarily
due to $2.5 million in non-recurring credits issued in 2006
partially offset by $0.9 million due to lower TIC equity
raised in 2007 of $451.0 million, compared to
$510.0 million in TIC equity raised in 2006.
The diversified platform created as a result of the merger is
already beginning to generate new revenue opportunities. The
Company’s largest TIC investment during the fourth quarter
of 2007 was generated from the net proceeds of a Transaction
Services client that was re-invested on a tax deferred basis
through GERI’s TIC platform.
The Company completed a total of 77 acquisitions and 30
dispositions on behalf of the investment programs it sponsors at
values in excess of $2.0 billion and $880.0 million,
respectively, during 2007. The net acquisitions from the
Investment Management business allowed the Company to grow its
captive assets under management by more than 27.0% during 2007.
At December 31, 2007, the value of the Company’s
assets under management was in excess of $5.7 billion.
The $7.3 million, or 18.8%, increase in captive management
revenue was primarily due to an increase in property and asset
management fees of $6.2 million, or 18.6%, to
$39.5 million for the year ended December 31, 2007,
compared to $33.3 million for 2006. This increase was
primarily the result of the growth in recurring revenue, as
total square footage of assets under management increased to an
average of approximately 29.4 million for the year ended
December 31, 2007, compared to approximately
26.2 million for the same period in 2006. Property and
asset management fees per average square foot were $1.35 for the
year ended December 31, 2007, compared to $1.27 for the
same period in 2006. The increase in property and asset
management fees per average square foot was primarily due to a
change in product mix. During 2007, assets managed under TIC
programs and within Grubb & Ellis Healthcare REIT,
Inc. (“Healthcare REIT”) and Grubb & Ellis
Apartment REIT, Inc. (“Apartment REIT”) increased to
approximately 83.7% of average assets under management compared
to 75.7% in 2006, while assets managed under G REIT and
T REIT, Inc. (“T REIT”) decreased to
approximately 5.7%, compared to 17.6% in 2006 as a result of the
liquidation of those entities. Property and asset management
fees in TIC programs earn up to 6% and in Healthcare REIT and
Apartment REIT earn up to approximately 4% plus 1% of each
REIT’s average invested assets, while G REIT and
T REIT programs earn approximately 4%.
Management
Services
Management Services revenue includes asset and property
management fees as well as reimbursed salaries, wages and
benefits from the Company’s third party property management
and facilities outsourcing services, along with business
services fees. Revenue was $16.4 million from
December 8, 2007 through December 31, 2007. Following
the closing of the merger, Grubb & Ellis Management
Services assumed management of nearly 23 million square
feet of NNN’s 41.7 million-square-foot captive
investment management portfolio. The Company expects to transfer
6 million square feet of outsourced property management
during the first half of 2008. At December 31, 2007, the
Company managed 216 million square feet of property.
Rental
Rental revenue includes revenue from the warehousing of
properties held for sale primarily to the Company’s
Investment Management programs and for GERA. These line items
also include pass-through revenue for the master lease
accommodations related to the Company’s TIC programs.
Operating
Expense Overview
Operating expenses increased $101.2 million, or 104.0%, for
the year ended December 31, 2007, compared to the same
period in 2006. Of the $101.2 million, $49.5 million
was due to the Grubb & Ellis legacy business from
December 8, 2007 to December 31, 2007. The remaining
$51.7 million of the increase was attributed to legacy
NNN’s Investment Management business, including
$11.4 million in rental related expense, $10.2 million
resulting from operations of the Company’s broker-dealer
acquired in December 2006, $5.5 million in compensation
related costs, $7.5 million in non-cash stock based
compensation, $6.4 million in merger related costs,
$6.5 million in depreciation and amortization and
$4.7 million in interest expense activity primarily related
to two properties for sale that are currently reflected in
properties held for sale on the balance sheet, offset by a net
decrease of approximately $500,000 in other operating costs.
Compensation
costs
Compensation costs increased $54.7 million, or 110.5%, to
$104.1 million for the year ended December 31, 2007,
compared to $49.4 million for the same period in 2006.
Approximately $41.7 million of
the increase was attributed to compensation costs from legacy
Grubb & Ellis’ operations from December 8 through
December 31, 2007. The remaining $13.0 million of the
increase was related to the investment management business which
increased to $62.5 million, or 26.3%, for the year ended
December 31, 2007, compared to $49.5 million for the
same period in 2006. The increase of $5.5 million, or
11.1%, in compensation related costs, which included
$2.1 million in reimbursable salaries, wages and benefits,
was primarily due to an increase in full-time equivalent
employees of approximately 89%. Contributing to the increase in
compensation costs was $7.5 million in non-cash stock based
compensation.
General
and Administrative
General and administrative expense increased $13.7 million,
or 44.9%, to $44.3 million for the year ended
December 31, 2007, compared to $30.5 million for the
same period in 2006. Approximately $4.7 million of the
increase was attributed to general and administration expenses
from the legacy Grubb & Ellis operations from
December 8, 2007 through December 31, 2007. The
remaining $9.0 million of the increase was related to the
investment management business which increased to
$39.5 million for the year ended December 31, 2007,
compared to $30.5 million for the same period in 2006. The
increase was primarily due to $10.2 million resulting from
operations of the Company’s broker-dealer acquired in
December 2006, partially offset by decrease of $1.2 million
related to non-recurring credits granted to certain investors in
2006.
Depreciation
and Amortization
Depreciation and amortization increased $7.5 million, or
357.5%, to $9.5 million for the year ended
December 31, 2007, compared to $2.1 million for the
same period in 2006. Approximately $1.0 million was
attributed to depreciation and amortization expense from the
legacy Grubb & Ellis operations from December 8
through December 31, 2007. The remaining $6.5 million
of the increase was related to the investment management
business which increased to $8.6 million for the year ended
December 31, 2007, compared to $2.1 million for the
same period in 2006. The increase in activity was primarily
related to two properties for sale that are currently reflected
in properties held for investment on the balance sheet.
Rental
Expense
Rental expense includes the related expense from the warehousing
of properties held for sale primarily to the Company’s
Investment Management programs and for GERA. These line items
also include pass-through expenses for master lease
accommodations related to the Company’s TIC programs.
Interest
Expense
Interest expense increased $5.4 million, or 85.5%, to
$11.6 million for the year ended December 31, 2007,
compared to $6.2 million for the same period in 2006.
Approximately $607,000 was attributed to interest expense from
the legacy Grubb & Ellis operations from December 8
through December 31, 2007. The remaining $4.7 million
of the increase was related to the investment management
business which increased to $11.0 million for the year
ended December 31, 2007, compared to $6.2 million for
the same period in 2006. The increase in activity was primarily
related to two properties held for investment on the balance
sheet.
Discontinued
Operations
In 2007, GERI acquired 13 properties to resell to its sponsored
programs. In accordance with SFAS No. 144, for the
year ended December 31, 2007, discontinued operations
included the net income (loss) of one property and its
associated limited liability company (“LLC”) entity
sold to a joint venture, two properties and the associated LLCs
resold to Healthcare REIT and ten properties and their
associated LLCs classified as held for sale as of
December 31, 2007 (See Note 19 of Notes to
Consolidated Financial Statements in Item 8 of this Report
for additional information).
The Company incurred a tax provision of $14.3 million for
the year ended December 31, 2007, compared to a tax benefit
of $4.2 million for the same period in 2006. Effective with
the close of NNN’s 144A private equity offering on
November 16, 2006, GERI became a wholly-owned subsidiary,
which caused a change in GERI’s tax status from a
non-taxable partnership to a taxable C corporation. The change
in tax status required NNN to recognize a one time income tax
benefit of $2.9 million for the future tax effects
attributable to temporary differences between GAAP basis and tax
accounting principles as of the effective date of
November 15, 2006. The $18.5 million increase in tax
expense was primarily a result of the nonrecurring tax benefit
noted above coupled with the inclusion of 12 months of book
income in 2007 versus six weeks of book income in 2006 due to
the change in tax status. In addition, the Company is subject to
the highest federal income tax rate of 35% in 2007, compared to
a 34% statutory tax rate in 2006. (See Note 24 of Notes to
Consolidated Financial Statements in Item 8 of this Report
for additional information).
Net
Income
As a result of the above items, net income increased
$4.7 million to $20.8 million, or $0.54 per fully
diluted share, for the year ended December 31, 2007,
compared to net income of $16.1 million, or $0.82 per fully
diluted share, for the same period in 2006.
Income from continuing operations before minority interest and
income tax provision
12,176
18,124
(5,948
)
(32.8
)
Minority interest in income (losses) of consolidated entities
(308
)
—
(308
)
—
Income from continuing operations before income tax provision
(benefit)
11,868
18,124
(6,256
)
(34.5
)
Income tax provision (benefit)
(4,230
)
—
(4,230
)
—
Income from continuing operations
16,098
18,124
(2,026
)
(11.2
)
Discontinued Operations
Loss from discontinued operations — net of taxes
(72
)
—
(72
)
—
Gain on disposal of discontinued operations — net of
taxes
68
—
68
—
Total loss from discontinued operations
(4
)
—
(4
)
—
Net Income
$
16,094
$
18,124
$
(2,030
)
(11.2
)%
(1)
Includes a full year of operating results of GERI, one and
one-half months of Realty (acquired on November 16,2006) and one-half month of GBE Securities (formerly NNN
Capital Corp.) (acquired on December 14, 2006).
(2)
Includes operating results of GERI.
Revenue
Investment
Management
Investment management revenue increased $10.0 million in 2006 to
$99.1 million in 2006 from $89.1 million in 2005.
The $849,000, or 1.5%, increase in transaction related fees in
2006, was primarily due to increases of $2.9 million, or
7.5%, in real estate acquisition and disposition fees and
$3.9 million in other revenue primarily due to
$2.8 million in incentive fees in 2006 paid to NNN at
disposition. These increases were partially offset by decreases
of $3.7 million in OMEA fees and $2.0 million in loan
advisory fees associated with arranging financing for the
properties acquired.
The net increase in real estate acquisition and disposition fees
for the year ended December 31, 2006 was primarily due to a
$6.1 million, or 63.5%, increase in fees realized from the
sales of properties, with $15.7 million in fees realized
from the disposition of 22 properties, including
$5.3 million in fees earned as a result of the liquidation
of G REIT for the year ended December 31, 2006,
compared to $9.6 million from the disposition of 28
properties for the same period in 2005. Included in this
increase was $686,000 in net fees earned as a result of the
acquisition of Realty (from the acquisition date,
November 16, 2006 through December 31, 2006).
Partially offsetting the increase in disposition fees was a
reduction of $410,000 as a result of amortizing the identified
intangible contract rights associated with the acquisition of
Realty. Fees on dispositions as a percentage of aggregate sales
price (excluding one property sold in 2006 and five properties
sold in 2005 for which the entire amount of the disposition fee
was waived) was 1.9% for the year ended December 31, 2006,
compared to 1.6% for the same period in 2005.
Acquisition fees decreased $3.2 million, or 11.2%, for the
year ended December 31, 2006, compared to the same period
in 2005. During 2006, NNN acquired 45 properties (including five
which were consolidated as of December 31, 2006) on behalf
of its sponsored programs for an approximate aggregate total of
$1.4 billion, compared to 40 properties for an approximate
aggregate total of $1.6 billion during 2005. The decrease
in aggregate asset size resulted in reduced fees of $716,000.
Also contributing to the decrease in acquisition fees was
$1.2 million in non-recurring credits granted to certain
investors between July and
September 2006 and $1.6 million in deferred fees due to
consolidation of properties held for sale at December 31,2006; $893,000 of these deferred fees were earned in the first
quarter of 2007 with the remaining $725,000 expected to be
earned in the second quarter of 2007. Partially offsetting the
decrease in fees was $321,000 as a result of a slight increase
on fees as a percentage of aggregate acquisition price, which
was 1.8% for the year ended December 31, 2006, compared to
1.8% for the same period in 2005.
OMEA fees decreased $3.7 million, or 32.5%, to
$7.7 million for the year ended December 31, 2006,
compared to $11.4 million for the same period in 2005. The
decrease in these fees was primarily due to a $3.4 million
reduction in fees for programs upon close of TIC equity into the
program and $774,000 in non-recurring credits granted to certain
investors between July and September 2006, partially offset by
an increase of $380,000 as a result of additional capital raised
of $15.3 million in 2006. The OMEA fees earned from the
offerings are used to pay legal and formation costs as well as
marketing related costs associated with these programs as
reflected in operating and administrative expense.
Loan advisory fees decreased $2.0 million, or 31.1%, to
$4.5 million for the year ended December 31, 2006,
compared to $6.5 million for the same period in 2005,
primarily due to a decrease in the aggregate total loan balance
of properties acquired on behalf of NNN’s programs which
resulted in an approximate $1.5 million decrease in loan
advisory fees and $547,000 in credits granted to investors
between July and September 2006 in two of its programs.
Transaction related fees increased $849,000, or 1.5%, to
$56.9 million, or 59.1% as a percentage of total
transaction related and captive management revenue for the year
ended December 31, 2006, compared to $56.0 million, or
64.3% as a percentage of total transaction related and captive
management revenue for the same period in 2005.
Captive management services increased $7.6 million, or
24.3%, to $38.6 million for 2006, compared to
$31.1 million for 2005. The increase was primarily due to
an increase in property and asset management fees of
$6.6 million, or 24.6%, to $33.3 million for 2006,
compared to $26.7 million for 2005. This increase was
primarily the result of the growth in recurring revenue, as
total square footage of assets under management increased to an
average of approximately 26.2 million for the year ended
December 31, 2006, compared to approximately
22.9 million for the same period in 2005. Property and
asset management fees per average square foot was $1.27 for the
year ended December 31, 2006, compared to $1.17 for the
same period in 2005. The increase in property and asset
management fees per average square foot was primarily due to a
change in product mix. During 2006 assets managed under
TIC/other private/value added programs, which earn fees up to
6.0% of gross income, increased to approximately 85.0% of assets
under management in 2006 compared to 72.0% in 2005, while assets
managed for G REIT and T REIT, which earn up to 4.0% of
gross income, decreased as a result of the continuing
liquidation of G REIT and T REIT to approximately 14.0% of
assets under management in 2006 compared to 27.0% in 2005.
Captive management services revenue also increased to 39.0% as a
percentage of total investment management revenue for the year
ended December 31, 2006, compared to 34.9% as a percentage
of total services revenue for the same period in 2005.
As a result of the completion of the acquisition of GBE
Securities on December 14, 2006, the Company earned
$722,000 in dealer-manager revenue from the acquisition date
through December 31, 2006.
Interest income increased $713,000 primarily due to a $645,000
increase in interest on advances for deposits on properties
acquired and $202,000 in interest on advances to properties.
Rental
Rental revenue increased to $9.2 million for the year ended
December 31, 2006, compared to $3.8 million in the
same period in 2005 primarily due to the acquisition of a
property in June 2005 and rents received under sub-leases with
third parties which commenced in the second half of 2005.
Total expense increased $23.1 million, or 31.2%, to
$97.3 million for the year ended December 31, 2006,
compared to $74.2 million for the same period in 2005.
During 2006, NNN incurred approximately $12.5 million in
non-recurring items and one-time expenses primarily due to the
completion of the 144A private equity offering and its formation
transactions, compared to $5.0 million in non-recurring
items in 2005 due to expenses associated with an SEC
investigation. These non-recurring items primarily consisted of
$4.0 million in additional credits granted to investors,
$1.2 million in documentary and transfer taxes for one of
its programs, $978,000 in other non-recurring costs,
$2.7 million in costs associated with the early redemption
of the $27.5 million participating loan credit agreement
with Wachovia Bank and $544,000 associated with the redemption
of Triple Net Properties’ redeemable preferred membership
units. Additionally, in September 2006, NNN awarded a
non-recurring bonus of $2.1 million to its Chief Executive
Officer, which was payable in 283,165 membership units of Triple
Net Properties (converted to 202,368 shares of common stock
of NNN), or $1.3 million, and cash of $854,000. NNN also
paid a sign-on bonus of $750,000 and incurred $333,000 in non
cash stock-based compensation expense related to one of its
executives in 2006.
Investment
Management Expense
Transaction related expense increased $15.9 million, or
58.4%, to $43.2 million for the year ended
December 31, 2006, compared to $27.3 million for the
same period in 2005, due to an increase of $11.5 million in
compensation related costs and $4.4 million in operating
and administrative expense.
Compensation costs increased $11.5 million, or 90.2%, to
$24.3 million for the year ended December 31, 2006,
compared to $12.8 million for the same period in 2005 and
included an increase of $6.1 million in salary related
costs, $3.0 million in bonuses and $1.8 million in
stock compensation expense associated with the non cash
stock-based compensation as a result of restricted stock and
stock options issued on November 16, 2006 and $333,000 in
non cash stock-based compensation expense related to one of its
executives in 2006. The increase in salary related costs was
primarily due to an overall increase of approximately 45.0% in
full-time equivalent employees, with approximately
202 full-time equivalent employees associated with
transaction related services as of December 31, 2006,
compared to 141 full-time equivalent employees as of
December 31, 2005. Contributing to the increase in salary
related costs included an additional $552,000 as a direct result
of hiring additional personnel in preparing for strategic
initiatives for 2006 and 2007, including Apartment REIT and
Healthcare REIT, as well as Strategic Office Fund I, L.P.
The increase in bonuses in 2006 was primarily due to
$1.1 million allocated to transaction services for a
non-recurring bonus awarded to NNN’s Chief Executive
Officer in the form of stock prior to the transaction (as
described in the Services Expense Overview section of the
MD&A) and a sign-on bonus of $750,000 ($612,000 of this
bonus was accelerated as a result of the transaction).
Operating and administrative expense increased by
$4.4 million, or 30.4%, to $19.0 million for the year
ended December 31, 2006, compared to $14.5 million for
the same period in 2005, primarily due to $4.0 million in
non-recurring credits granted to investors in the fourth quarter
of 2006, $1.6 million in documentary and transfer taxes and
closing and other transaction related costs that NNN agreed to
pay for programs it sponsored, $1.4 million of which was
related to one of its programs in the last half of 2006,
$720,000 in incentive fees associated with the disposition of
properties, $624,000 in rent expense due to leasing additional
space in NNN’s corporate headquarters building and
$1.3 million in other transaction related costs due to its
overall growth as it prepares its strategic platform related to
its new programs such as Apartment REIT and Healthcare REIT, as
well as Strategic Office Fund I, L.P. These increases were
partially offset by a decrease of $4.0 million, or 36.8%,
in OMEA related costs. The OMEA fees earned from the offerings
are used to pay legal and formation costs as well as marketing
related costs associated with these programs.
Captive
Management Services Expense
Captive management services related expense increased
$3.0 million, or 10.3%, to $32.7 million for the year
ended December 31, 2006, compared to $29.6 million for
the same period in 2005, primarily due to an
increase of $7.1 million in compensation related costs,
offset by a decrease of $4.1 million in operating and
administrative expense.
Compensation costs increased $7.1 million, or 42.3%, to
$23.9 million for the year ended December 31, 2006,
compared to $16.8 million for the same period in 2005 and
included an increase of $3.1 million in salary related
costs, $2.0 million in bonus and $1.8 million in stock
compensation expense associated with the non cash stock-based
compensation as a result of restricted stock and stock options
issued on November 16, 2006. The increase in salary related
costs was primarily due to an overall increase of approximately
16.0% in full-time equivalent employees. As of December 31,2006 there were approximately 216 full-time equivalent
employees associated with management related services, compared
to 186 as of December 31, 2005. Contributing to the
increase in salary related costs included an additional $544,000
as a direct result of hiring additional personnel in preparing
for strategic initiatives for 2006 and 2007, including Apartment
REIT and Healthcare REIT, as well as Strategic Office
Fund I, L.P. Contributing to the increase in bonuses in
2006 was $1.1 million allocated to management services for
a non-recurring bonus awarded to NNN’s Chief Executive
Officer in the form of stock prior to the transaction (as
described in the Services Expense Overview section of the
MD&A).
Operating and administrative expense decreased
$4.1 million, or 31.5%, to $8.8 million for the year
ended December 31, 2006, compared to $12.9 million for
the same period in 2005, primarily due to a $4.0 million
decrease in bad debt expense and $427,000 in operating expense,
partially offset by an increase of $524,000 in rent expense due
to leasing additional space in NNN’s corporate headquarters
building.
Dealer-Manager
Services Expense
As a result of the completion of the acquisition of GBE
Securities on December 14, 2006, NNN incurred $559,000 in
dealer-manager expense from the acquisition date through
December 31, 2006.
Other
Operating Expense
Other operating expense increased $3.6 million, or 20.6%,
to $20.8 million for the year ended December 31, 2006,
compared to $17.3 million for the same period in 2005. The
net increase was primarily due to $5.2 million, or 117.5%,
in rental related expense attributable rental related costs
under leases with third parties which commenced in the second
half of 2005.
Also contributing to the increase was $4.6 million, or
287.1%, in interest expense primarily due to a $2.0 million
prepayment penalty associated with the early redemption of the
$27.5 million participating loan credit agreement with
Wachovia Bank entered into in September 2006 and repaid with the
proceeds from NNN’s 144A private equity offering as well as
$1.0 million in interest on this participating loan,
$666,000 for a full year of interest associated with notes
payable on the acquired Colorado property, and a $544,000
prepayment penalty for the early redemption of the
$6.1 million redeemable preferred liability. These
increases were partially offset by a decrease of
$4.6 million, or 117.9%, in reserves and other, which
consisted of a $2.9 million charge in June 2005 as a result
of the reduced valuation of a Colorado property NNN decided to
acquire from investors and a reduction of $700,000 in Triple Net
Properties’ loss contingency related to the SEC
investigation. As of December 31, 2006, $300,000 was
accrued by Triple Net Properties and $300,000 was accrued by
Capital Corp compared to $1.0 million accrued by Triple Net
Properties as of December 31, 2005. Other decreases in
operating expense included $1.1 million in general and
administrative costs and $739,000 in depreciation and
amortization expense.
Operating
Income
Operating income (operating revenue minus operating expense) for
the year ended December 31, 2006 of $11.0 million was
10.1% of total revenue, compared to $18.6 million, or 20.1%
of total revenue, for the year ended December 31, 2005. The
lower year-over-year operating income was a result of
non-recurring items and one time expenses that primarily
resulted from the completion of NNN’s 144A private equity
offering and formation transaction.
During 2006, NNN incurred approximately $15.0 million in
non-recurring items and one time expenses that primarily
resulted from the completion of its 144A private equity offering
and formation transactions, as well as a reduction of
disposition fees of $410,000 as a result of amortizing the
identified intangible contract rights associated with the
acquisition of Realty, compared to $5.0 million in
non-recurring items in 2005 due to expenses associated with the
SEC investigation.
Discontinued
Operations
During 2006, NNN acquired four properties to resell to one of
its sponsored programs. In accordance with
SFAS No. 144, for the year ended December 31,2006, discontinued operations included the net income (loss) of
one property and its associated LLC entity resold to a joint
venture and three properties and their associated LLC entities
classified as held for sale as of December 31, 2006 (See
Note 19 of Notes to Consolidated Financial Statements in
Item 8 of this Report for additional information).
Income
Tax Benefit
NNN recognized a tax benefit of $4.2 million for the year
ended December 31, 2006. Effective with the close of
NNN’s 144A private equity offering, Triple Net Properties
became a wholly-owned subsidiary, which caused a change in
Triple Net Properties’ tax status from a non-taxable
partnership to a taxable C corporation. The change in tax
status required NNN to recognize an income tax benefit of
$2.9 million for the future tax effects attributable to
temporary differences between GAAP basis and tax accounting
principles as of the effective date of November 15, 2006.
Net
Income
As a result of the above items, net income decreased
$2.0 million to $16.1 million for the year ended
December 31, 2006, compared to net income of
$18.1 million for the same period in 2005.
Liquidity
and Capital Resources
During 2007, cash and cash equivalents decreased by
$53.2 million, although the Company generated
$33.6 million from net operating activities. The Company
used $232.2 million for net investing activities related
primarily to its real estate investment activities. The
Company’s investing activities also included
$53.2 million used in connection with acquisitions of
identified intangible and other assets held for sale during the
year. Net financing activities provided cash of
$145.4 million, primarily from the funding of mortgage
loans and notes payable related to real estate investment
activities. Financing activities also included a net repayment
of $30.0 million on the Company’s credit facility debt
and dividend payments of $16.4 million during 2007.
Current
Sources of Capital and Liquidity
The Company seeks to create and maintain a capital structure
that allows for financial flexibility and diversification of
capital resources. Primary sources of liquidity to fund
dividends are from operating reserves and borrowing capacity
under a line of credit.
Primary uses of cash are to fund deposits for the acquisitions
of properties on behalf of investors sponsored programs and to
fund dividends to stockholders.
The Company believes that it will have sufficient capital
resources to satisfy its liquidity needs over the next
twelve-month period. The Company expects to meet its short-term
liquidity needs, which may include principal repayments of debt
obligations, capital expenditures and dividends to stockholders,
through current and retained earnings, borrowings under its
$75.0 million line of credit with Deutsche Bank
Trust Company and the sale of real estate held for sale.
In February 2007, the Company entered into a $25.0 million
revolving line of credit with LaSalle Bank N.A. This line
of credit consisted of $10.0 million for use in property
acquisitions and $15.0 million for
general corporate purposes and bears interest at prime plus
0.50% or three-month LIBOR plus 1.50%, at the Company’s
option, on each drawdown.
On December 7, 2007, the Company entered into a
$75.0 million Second Amended and Restated Credit Agreement
with Deutsche Bank Trust Company (the “Credit
Facility”) to replace its revolving line of credit with
LaSalle Bank N.A. The Credit Facility is for general corporate
purposes and generally bears interest at LIBOR plus an
applicable margin ranging from 1.50% to 2.50%. As of
December 31, 2007, the Company had $8.0 million
outstanding under the Credit Facility.
Long-Term
Liquidity Needs
The Company expects to meet its long-term liquidity
requirements, which may include investments in various real
estate investor programs and institutional funds, through
retained cash flow, borrowings under its line of credit,
additional long-term secured and unsecured borrowings and
proceeds from the potential issuance of debt or equity
securities.
Factors
That May Influence Future Sources of Capital and
Liquidity
On September 16, 2004, Triple Net Properties, which became
a subsidiary of Grubb & Ellis as part of the merger
with NNN, learned that the SEC Los Angeles Enforcement Division
(the “SEC Staff”), is conducting an investigation
referred to as “In the matter of Triple Net Properties,
LLC.”The SEC Staff requested information from Triple
Net Properties relating to disclosure in public and private
securities offerings sponsored by Triple Net Properties and its
affiliates prior to 2005 (the “Triple Net Securities
Offerings”). The SEC Staff also requested information from
Capital Corp., the dealer-manager for the Triple Net Securities
Offerings. Capital Corp. also became a subsidiary of
Grubb & Ellis as part of the merger with NNN. The SEC
Staff requested financial and other information regarding the
Triple Net Securities Offerings and the disclosures included in
the related offering documents from each of Triple Net
Properties and Capital Corp. Triple Net Properties and Capital
Corp. believe they have cooperated fully with the SEC
Staff’s investigation.
Triple Net Properties and Capital Corp. are engaged in
settlement negotiations with the SEC staff regarding this
matter. Based on these negotiations, management believes that
the conclusion to this matter will not result in a material
adverse effect to its results of operations, financial condition
or ability to conduct its business and NNN accrued a loss
contingency of $600,000 at December 31, 2006 on behalf of
Triple Net Properties and Capital Corp. on a consolidated basis,
compared to $1.0 million accrued for the same period in
2005. The $600,000 payment in the fourth quarter of 2007 is
being held by outside counsel pending final approval of the
settlement agreement.
To the extent that the Company pays the SEC an amount in excess
of $1.0 million in connection with any settlement or other
resolution of this matter, Anthony W. Thompson, the Company
founder and former Chairman, has agreed to forfeit to up to
1,064,800 shares of Company common stock. In connection
with this arrangement, NNN has entered into an escrow agreement
with Mr. Thompson and an independent escrow agent, pursuant
to which the escrow agent holds these 1,064,800 shares of
Company common stock that are otherwise issuable to
Mr. Thompson in connection with NNN formation transactions
to secure Mr. Thompson’s obligations to the Company.
Mr. Thompson’s liability under this arrangement will
not exceed the value of the shares in the escrow. The above
indemnification expires upon the entry of a final settlement
order in connection with the SEC matter.
Although Realty was required to have real estate licenses in all
of the states in which it acted as a broker for NNN’s
programs and received real estate commissions prior to 2007,
Realty did not hold a license in certain of those states when it
earned fees for those services. In addition, almost all of
Triple Net Properties’ revenue was based on an arrangement
with Realty to share fees from NNN’s programs. Triple Net
Properties did not hold a real estate license in any state,
although most states in which properties of NNN’s programs
were located may have required Triple Net Properties to hold a
license in order to share fees. As a result, Realty and the
Company may be subject to penalties, such as fines (which could
be a multiple of the amount received), restitution payments and
termination of management agreements, and to the suspension or
revocation of certain of Realty’s real estate broker
licenses. As of December 31, 2007, no liabilities have been
accrued for the failure to hold real estate licenses. To the
extent that Realty or the Company incurs any liability arising
from the failure to comply with real estate broker licensing
requirements in certain states, Anthony W. Thompson, Louis J.
Rogers and Jeffrey T. Hanson have agreed to forfeit to the
Company up to an aggregate of 4,124,120 shares of the
Company common stock. In addition, Mr. Thompson has agreed
to indemnify the Company, to the extent the liability incurred
by the Company for such matters exceeds the deemed $46,865,000
value of these shares, up to an additional $9,435,000 in cash.
These shares are held in escrow in connection with an
independent escrow agreement entered into on November 14,2006 between NNN, Messrs. Thompson and Rogers and the
escrow agent. The above indemnifications expire on
November 16, 2009. Since Mr. Hanson is entitled over
time to receive up to 743,160 shares from
Messrs. Thompson and Rogers (557,370 from Mr. Thompson
and 185,790 from Mr. Rogers) from the shares held in the
indemnification and escrow agreement, he is a party to it as
well and his liability is limited to those shares. If
Mr. Hanson’s right to receive the shares vests, then
to the extent shares attributable to his ownership are
available, and not subject to potential claims, under the
indemnification and escrow agreement, he will be permitted to
remove 88,000 shares on each of January 1, 2008 and
2009 to pay taxes.
On November 16, 2007the Company completed the acquisition
of a 51% membership interest in Grubb & Ellis Alesco
Global Advisors, LLC (“Alesco”). Pursuant to the
Intercompany Agreement between the Company and Alesco, dated as
of November 16, 2007, the Company committed to invest
$15.0 million in seed capital into the open and closed end
real estate funds that Alesco expects to launch during 2008.
Additionally, upon achievement of certain earn-out targets, the
Company required to purchase up to an additional 27% interest in
Alesco for $15.0 million. The Company is allowed to use the
$15.0 million seed capital to fund the earn-out payments.
The Company has announced its intention to pay a $0.41 per share
dividend per annum, which equates to approximately
$26.5 million on an annual basis. The dividend payment is
subject to quarterly review by the Board of Directors and is
limited to 50% of the Company’s Net Income Plus
Depreciation and Amortization, as defined in the Deutsche Bank
Trust Company Line of Credit Agreement.
The Company has approximately $308.3 million of certain
assets held for sale or investment at December 31, 2007 for
which the Company has in excess of $50.0 million of its
equity invested in these assets. The assets consist of three
properties that were purchased for re-sale to GERA and two
additional assets that were purchased for re-sale to an
institutional fund. Upon sale of these assets to a joint
venture, third party or other sponsored investment program, the
Company expects to recoup a significant amount of this equity
and reflect it as cash and cash equivalents on the
Company’s balance sheet.
Net cash provided by operating activities increased
$18.4 million to $33.6 million for the year ended
December 31, 2007, compared to $15.2 million for the
same period in 2006. Net cash provided by operating activities
included an increase in net income of $4.7 million adjusted
for an increase in non-cash reconciling items, the most
significant of which was $5.2 million in stock-based
compensation, $7.6 million in depreciation and amortization
primarily related to two properties purchased in 2007,
$2.8 million as a result of amortizing the identified
intangible contract rights associated with the acquisition of
Realty, partially offset by a $982,000 increase in deferred
taxes. Also contributing to this increase was cash provided by
net changes in other operating assets and liabilities of
$3.8 million. This increase in cash from operating
activities was partially offset by a $6.3 million increase
in accounts receivable from related parties which consisted
primarily of accrued management, leasing and transaction fees
from the Company’s various sponsored programs.
Net cash used in investing activities increased
$175.1 million to $232.2 million for the year ended
December 31, 2007, compared to $57.1 million for the
same period in 2006. This increase in cash used in investing
activities was primarily related to $142.3 million of cash
used in the acquisition and related improvements to two office
properties held for investment and $454.2 million for asset
purchases of GERI’s sponsored programs, to facilitate the
reselling of such assets to its TIC programs and REITs,
partially offset by
$440.9 million in proceeds from the sales of these assets
and $19.1 million in restricted cash of properties held for
sale.
Net cash provided by financing activities increased
$1.8 million to $145.4 million for the year ended
December 31, 2007, compared to $143.6 million for the
same period in 2006. The increase was primarily due to
$140.0 million in mortgage notes payable related to
properties acquired and held for investment in 2007,
$13.4 million in contributions from minority interest
stakeholders in properties acquired and held for sale in 2007, a
year-over-year reduction of $11.6 million in dividends paid
and $4.8 million in principal payments of amounts
outstanding under mortgage loans payable in 2007. Partially
offsetting the year-over-year increase in cash provided by
financing activities of was $146.0 million in net proceeds
in November 2006 as a result of the issuance of NNN’s
common stock through the 144A private equity offering, and
$21.5 million in additional repayments under the
Company’s credit facility in 2007.
Net cash provided by operating activities decreased
$8.3 million to $15.2 million for the year ended
December 31, 2006, compared to net cash provided by
operating activities of $23.5 million for the same period
in 2005. The decrease was primarily due to lower cash provided
by net income of $16.1 million adjusted for non-cash
reconciling items, the most significant of which was a
$4.9 million tax benefit primarily due to the conversion
from a non-taxable partnership to a taxable C corporation in
November, 2006, $3.9 million in stock based compensation
and $2.6 million in receivables from related parties which
primarily consisted of property management fees and lease
commissions owed Realty.
Net cash used in investing activities increased
$21.9 million for the year ended December 31, 2006 to
$57.1 million, compared to net cash used in investing
activities of $35.2 million for the same period in 2005.
The increase was primarily due to $7.4 million for the
acquisition of Realty and GBE Securities in 2006, funds used for
asset purchases of NNN’s sponsored programs, which included
$10.0 million to Apartment REIT, $80.6 million for its
properties/intangible assets held for sale to facilitate the
reselling of such assets to one of its TIC programs, Healthcare
REIT and a joint venture, partially offset by $31.7 million
in proceeds from the sale of one of these properties to a joint
venture. Other uses of cash included $15.9 million used for
real estate deposits and pre-acquisition costs, offset by
$33.8 million in proceeds from collection of real estate
deposits and pre-acquisition costs. NNN also invested
$2.4 million in marketable equity securities in 2006.
Net cash provided by financing activities increased
$133.3 million to $143.6 million for the year ended
December 31, 2006, compared to $10.3 million for the
same period in 2005. The increase was primarily due to net
proceeds of $146.0 million received from the issuance of
NNN’s common stock through the 144A private equity offering
in November 2006, proceeds from issuance of NNN’s Senior
Notes Program of $10.3 million, proceeds of
$71.1 million from issuance of mortgage loans payable
secured by properties held for sale, offset by
$24.2 million in repayments of mortgage loans payable
secured by properties held for sale. The net increase was
partially offset by $28.1 million in dividends paid, the
repayment of amounts outstanding under NNN’s line of credit
of $8.5 million, and $12.3 million in repayments of
notes payable primarily due to the repayment of
$11.3 million in mezzanine debt on NNN 3500 Maple, LLC in
2006, and $5.5 million for the early redemption of
redeemable preferred membership units in September 2006.
Commitments,
Contingencies and Other Contractual Obligations
Contractual
Obligations
The Company leases office space throughout the country through
non-cancelable operating leases, which expire at various dates
through February 28, 2017.
The following table summarizes contractual obligations as of
December 31, 2007 and the effect that such obligations are
expected to have on the Company’s liquidity and cash flow
in future periods. This table does not reflect any available
extension options.
Payments Due by Period
Less Than
More Than
1 Year
1-3 Years
3-5 Years
5 Years
(In thousands)
2008
(2009-2010)
(2011-2012)
(After 2012)
Total
Principal — unsecured debt
$
—
$
8,000
$
—
$
—
$
8,000
Interest — unsecured debt
620
1,207
—
—
1,827
Principal — properties held for investment
30,096
278
37
107,000
137,411
Interest — properties held for investment
7,488
13,036
13,013
20,737
54,274
Principal — properties held for sale
211,520
—
—
—
211,520
Interest — properties held for sale
13,757
—
—
—
13,757
Principal — senior notes
—
—
16,277
—
16,277
Interest — senior notes
1,424
2,848
843
—
5,115
Operating lease obligations — others
9,535
20,605
21,884
30,822
82,846
Operating lease obligations — general
19,898
29,905
19,813
18,166
87,782
Capital lease obligations
351
415
24
—
790
Total
$
294,689
$
76,294
$
71,891
$
176,725
$
619,599
Off-Balance Sheet Arrangements. From time to
time the Company provides guarantees of loans for properties
under management. As of December 31, 2007, there were 143
properties under management with loan guarantees of
approximately $3.4 billion in total principal outstanding
with terms ranging from one to 30 years, secured by
properties with a total aggregate purchase price of
approximately $4.6 billion at December 31, 2007. As of
December 31, 2006, there were 107 properties under
management with loans that were guaranteed of approximately
$2.4 billion in total principal outstanding secured by
properties with a total aggregate purchase price of
approximately $3.4 billion.
A “non-recourse/carve-out” guaranty imposes personal
liability on the guarantor in the event the borrower engages in
certain acts prohibited by the loan documents.
Management evaluates these guarantees to determine if the
guarantee meets the criteria required to record a liability in
accordance with FASB Financial Interpretation No. 45,
Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others (“FIN No. 45”), which was
insignificant as of December 31, 2007, December 31,2006 and 2005.
Quantitative
and Qualitative Disclosures About Market Risk
Interest
Rate Risk
Derivatives — The Company’s credit
facility debt obligations and mortgage loan obligations are
floating rate obligations whose interest rate and related
monthly interest payments vary with the movement in LIBOR
and/or prime
lending rates. As of December 31, 2007, the outstanding
principal balances on the credit facility debt obligations
totaled $8.0 million and on the mortgage loan debt
obligations totaled $211.5 million. Since interest payments
on any future obligation will increase if interest rate markets
rise, or decrease if interest rate markets decline, the Company
will be subject to cash flow risk related to these debt
instruments. In order to mitigate this risk, the terms of the
Company’s amended credit agreement required the Company to
maintain interest rate hedge agreements against 50 percent
of all variable interest debt obligations. To fulfill this
requirement, the Company holds two interest rate cap agreements
with Deutsche Bank AG, which provide for quarterly payments to
the Company equal to the variable interest amount paid by the
Company in excess of 6.0% of the underlying notional amounts. In
addition, the terms of certain mortgage loan agreements required
the Company to purchase two-year interest rate caps on
30-day LIBOR
with a LIBOR strike price of 6.0%, thereby locking the maximum
interest rate on borrowings under the mortgage loans at 7.70%
for the initial two year term of the mortgage loans.
The Company’s earnings are affected by changes in
short-term interest rates as a result of the variable interest
rates incurred on its line of credit. The Company’s line of
credit debt obligation is secured by its assets, bears interest
at the bank’s prime rate or LIBOR plus applicable margins
based on the Company’s financial performance and matures in
December 2010. Since interest payments on this obligation will
increase if interest rate markets rise, or decrease if interest
rate markets decline, the Company is subject to cash flow risk
related to this debt instrument as amounts are drawn under the
line of credit.
Additionally, the Company’s earnings are affected by
changes in short-term interest rates as a result of the variable
interest rate incurred on the mezzanine portion of the
outstanding mortgages on its real estate held for investment and
held for sale. As of December 31, 2007, the outstanding
principal balance on these debt obligations was
$169.3 million, with a weighted average interest rate of
8.23% per annum. Since interest payments on these obligations
will increase if interest rates rise, or decrease if interest
rates decline, the Company is subject to cash flow risk related
to these debt instruments. As of December 31, 2007, for
example, a 0.8% increase in interest rates would have increased
the Company’s overall annual interest expense by
approximately $1.4 million, or 9.72%. This sensitivity
analysis contains certain simplifying assumptions, for example,
it does not consider the impact of changes in prepayment risk.
During the fourth quarter of 2006, GERI entered into several
interest rate lock agreements with commercial banks aggregating
to approximately $400.0 million, with interest rates
ranging from 6.15% to 6.19% per annum. As of December 31,2007, $6.3 million in rate lock funds remained available at
an interest rate of 6.45%. GERI paid $2.0 million in
refundable deposits in connection with these agreements, which
will be refunded if the total available loan amount is utilized
for property purchases. If the total available loan amount is
not utilized, then some of the deposits will be forfeited.
Except for the acquisition of Grubb & Ellis Alesco
Global Advisors, LLC, as previously described, the Company does
not utilize financial instruments for trading or other
speculative purposes, nor does it utilize leveraged financial
instruments.
The Board of Directors and Shareholders of Grubb &
Ellis Company
We have audited the accompanying consolidated balance sheet of
Grubb & Ellis Company and subsidiaries as of
December 31, 2007, and the related consolidated statements
of operations, stockholders’ equity, and cash flows for the
year then ended. Our audit also included the financial statement
schedules listed in the index at Item 15. These financial
statements and financial statement schedules are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements and schedules based on our audit. We did not audit
the financial statements of Grubb & Ellis Securities,
Inc. (f.k.a. NNN Capital Corp.), a wholly-owned subsidiary,
which statements reflect total assets of $20,584,000 as of
December 31, 2007 and total revenues of $18,315,000 for the
year then ended. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar
as it relates to the amounts included for Grubb &
Ellis Securities, Inc. (f.k.a. NNN Capital Corp.), is based
solely on the report of the other auditors.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. We were not engaged to perform an
audit of the Company’s internal control over financial
reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audit and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other
auditors, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of Grubb & Ellis Company and subsidiaries at
December 31, 2007, and the consolidated results of their
operations and their cash flows for the year then ended in
conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the financial statement
schedules referred to above, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Grubb &
Ellis Company:
We have audited the accompanying consolidated balance sheet of
Grubb & Ellis Company (formerly NNN Realty
Advisors, Inc.) and subsidiaries (the “Company”) as of
December 31, 2006, and the related consolidated statements
of operations, stockholders’ equity, and cash flows for
each of the two years in the period ended December 31,2006. Our audits also included the financial statement schedules
listed in the Index at Item 15. These financial statements
and financial statement schedules are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Grubb & Ellis Company and subsidiaries as of
December 31, 2006, and the results of their operations and
their cash flows for each of the two years in the period ended
December 31, 2006, in conformity with accounting principles
generally accepted in the United States of America. Also, in our
opinion, such financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as
a whole, present fairly in all material respects the information
set forth therein.
Preferred stock: $0.01 par value; 50,000,000 and 4,400,000,
shares authorized as of December 31, 2007 and 2006,
respectively; no shares issued and outstanding as of
December 31, 2007 and 2006
—
—
Common stock: $0.01 par value; 100,000,000 and
83,600,000 shares authorized; 64,824,777 and
37,282,438 shares issued and outstanding as of
December 31, 2007 and 2006, respectively
648
373
Additional paid-in capital
393,665
212,685
Retained earnings
15,381
8,912
Other comprehensive loss
(1,049
)
(26
)
Total stockholders’ equity
408,645
221,944
Total liabilities, minority interest and stockholders’
equity
$
969,412
$
328,043
See accompanying notes to consolidated financial statements.
FOR THE
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
1.
ORGANIZATION
Grubb & Ellis Company (the “Company” or
“Grubb & Ellis”), is a commercial real
estate services and investment management firm. On
December 7, 2007, NNN Realty Advisors, Inc.
(“NNN”) effected a stock merger (the
“Merger”) with the Grubb & Ellis Company
(“legacy Grubb & Ellis”), a
50-year old
commercial real estate services firm. Upon the closing of the
Merger a change of control of the Company occurred, as the
former stockholders of NNN acquired approximately 60% of the
Company’s issued and outstanding common stock. Pursuant to
the Merger, each issued and outstanding share of NNN
automatically converted into a 0.88 of a share of common stock
of the Company. Based on accounting principles generally
accepted in the United States of America (“GAAP”), the
Merger was accounted for using the purchase method of
accounting, and although structured as a reverse merger, NNN is
considered the accounting acquirer of legacy Grubb &
Ellis. As a consequence, the operating results for the twelve
months ended December 31, 2007 includes the full year
operating results of NNN and the operating results of legacy
Grubb & Ellis for the period from December 8,2007 through December 31, 2007. The years ended
December 31, 2006 and 2005 include solely the operating
results of NNN.
NNN is a real estate investment management company and sponsor
of tax deferred tenant in common (“TIC”) 1031 property
exchanges as well as a sponsor of public non-traded real estate
investment trusts (“REITs”) and other investment
programs. Pursuant to the Merger, the Company now sponsors,
under the Grubb & Ellis brand, Grubb & Ellis
Realty Investors, LLC (“GERI”) (formerly Triple Net
Properties, LLC), real estate investment programs to provide
investors with the opportunity to engage in tax-deferred
exchanges of real property and to invest in other real estate
investment vehicles and continues to offer full-service real
estate asset management services. GERI raises capital for these
programs through an extensive network of broker-dealer
relationships. GERI structures, acquires, manages and disposes
of real estate for these programs, earning fees for each of
these services.
In certain instances throughout these Financial Statements
phrases such as “legacy Grubb & Ellis” or
similar descriptions are used to reference, when appropriate,
the Company prior to the Merger. Similarly, in certain instances
throughout these Financial Statements the term NNN, “legacy
NNN”, or similar phrases are used to reference, when
appropriate, NNN Realty Advisors, Inc. prior to the Merger.
Legacy Grubb & Ellis business units provide a full
range of real estate services, including transaction services,
which comprises its brokerage operations, management and
consulting services for both local and multi-location clients,
which includes third-party property management, corporate
facilities management, project management, client accounting,
business services and engineering services.
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of
Consolidation — The consolidated financial
statements include the accounts of the Company and its
wholly-owned and majority-owned controlled subsidiaries’
variable interest entities (“VIEs”) in which the
Company is the primary beneficiary and partnerships/LLCs in
which the Company is the managing member or general partner and
the other partners/members lack substantive rights (hereinafter
collectively referred to as the (“Company”). All
significant intercompany accounts and transactions have been
eliminated in consolidation. For acquisitions of an interest in
an entity or newly formed joint venture or limited liability
company, the Company evaluates the entity to determine if the
entity is deemed a VIE, and if the Company is deemed to be the
primary beneficiary, in accordance with Financial Accounting
Standards Board (“FASB”) Interpretation
No. 46(R), Consolidation of Variable Interest Entities
(“FIN No. 46(R)”).
The Company consolidates entities that are VIEs when the Company
is deemed to be the primary beneficiary of the VIE. For entities
in which (i) the Company is not deemed to be the primary
beneficiary,
(ii) the Company’s ownership is 50.0% or less and
(iii) the Company has the ability to exercise significant
influence, the Company uses the equity accounting method (i.e.
at cost, increased or decreased by the Company’s share of
earnings or losses, plus contributions less distributions). The
Company also uses the equity method of accounting for
jointly-controlled tenant in common interests. As events occur,
the Company will reconsider its determination of whether an
entity is a VIE and who the primary beneficiary is to determine
if there is a change in the original determinations.
Use of Estimates — The preparation of financial
statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses during the period.
Actual results could differ from those estimates.
Cash and cash equivalents — Cash and cash
equivalents consist of all highly liquid investments with a
maturity of three months or less when purchased. Short-term
investments with remaining maturities of three months or less
when acquired are considered cash equivalents.
Restricted Cash — Restricted cash is comprised
primarily of cash and loan impound reserve accounts for property
taxes, insurance, capital improvements, and tenant improvements
related to consolidated properties. As of December 31, 2007
and 2006, the restricted cash was $27.3 million and
$4.0 million, respectively.
Accounts Receivable from Related Parties —
Accounts receivable from related parties consist of fees earned
from syndicated entities and properties under management,
including property and asset management fees. Property and asset
management fees are collected from the operations of the
underlying real estate properties.
Allowance for Uncollectible Receivables —
Receivables are carried net of management’s estimate of
uncollectible receivables. Management’s determination of
the adequacy of these allowances is based upon evaluations of
historical loss experience, operating performance of the
underlying properties, current economic conditions, and other
relevant factors.
Real Estate Deposits and Pre-acquisition
Costs — Real estate deposits and pre-acquisition
costs are incurred when the Company evaluates properties for
purchase and syndication. Pre-acquisition costs are capitalized
as incurred. Real estate deposits may become nonrefundable under
certain circumstances. The majority of the real estate deposits
outstanding as of December 31, 2007 and 2006, were either
refunded to the Company during the subsequent year or used to
purchase property and subsequently reimbursed from the
syndicated equity. Costs of abandoned projects represent
pre-acquisition costs associated with properties no longer
sought for acquisition by the Company and are included in
general and administrative expense in the Company’s
consolidated statement of operations.
Payments to obtain an option to acquire real property are
capitalized as incurred. All other costs related to a property
that are incurred before the property is acquired, or before an
option to acquire it is obtained, are capitalized if all of the
following conditions are met and otherwise are charged to
expense as incurred:
•
the costs are directly identifiable with the specific property;
•
the costs would be capitalized if the property were already
acquired; and
•
acquisition of the property or an option to acquire the property
is probable. This condition requires that the Company is
actively seeking to acquire the property and have the ability to
finance or obtain financing for the acquisition and that there
is no indication that the property is not available for sale.
Purchase Price Allocation — In accordance with
SFAS No. 141, Business Combinations
(“SFAS No. 141”), the purchase price of
acquired businesses or properties is allocated to tangible and
identified intangible assets and liabilities based on their
respective fair values. In the case of real estate
acquisitions, the allocation to tangible assets (building and
land) is based upon determination of the value of the property
as if it were vacant using discounted cash flow models similar
to those used by independent appraisers. Factors considered
include an estimate of carrying costs during the expected
lease-up
periods considering current market conditions and costs to
execute similar leases. Additionally, the purchase price of the
applicable property is allocated to the above or below market
value of in-place leases and the value of in-place leases and
related tenant relationships.
The value allocable to the above or below market component of
the acquired in-place leases is determined based upon the
present value (using a discount rate which reflects the risks
associated with the acquired leases) of the difference between
(i) the contractual amounts to be paid pursuant to the
lease over its remaining term, and (ii) our estimate of the
amounts that would be paid using fair market rates over the
remaining term of the lease. The amounts allocated to above
market leases are included in identified intangible
assets — net and below market lease values are
included in liabilities of real estate properties in the
accompanying consolidated financial statements and are amortized
to rental revenue over the weighted-average remaining term of
the acquired leases with each property.
The total amount of identified intangible assets acquired is
further allocated to in-place lease costs and the value of
tenant relationships based on management’s evaluation of
the specific characteristics of each tenant’s lease and our
overall relationship with that respective tenant.
Characteristics considered in allocating these values include
the nature and extent of the credit quality and expectations of
lease renewals, among other factors. These allocations are
subject to change within one year of the date of purchase based
on information related to one or more events identified at the
date of purchase that confirm the value of an asset or liability
of an acquired property.
Identified Intangible Assets — Costs related to
the development of internal use software are capitalized only
after a determination has been made as to how the development
work will be conducted. Any costs incurred in the preliminary
project stage prior to this determination are expensed when
incurred. Also, once the software is substantially complete and
ready for its intended use, any further costs related to the
software, such as training or maintenance activities, are also
expensed as incurred. Amortization of the development costs of
internal use software programs begins when the related software
is ready for its intended use. All software costs are amortized
using a straight-line method over their estimated useful lives,
ranging from three to seven years.
Properties Held for Investment — Properties
held for investment are carried at the lower of historical cost
less accumulated depreciation, net of any impairments. The cost
of these properties include the cost of land, completed
buildings, and related improvements. Expenditures that increase
the service life of properties are capitalized; the cost of
maintenance and repairs is charged to expense as incurred. The
cost of buildings and improvements is depreciated on a
straight-line basis over the estimated useful lives of the
buildings and improvements, ranging primarily from 15 to
39 years, and the shorter of the lease term or useful life,
ranging from one to ten years for tenant improvements.
Property Held for Sale — In accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets
(“SFAS No. 144”), at the time a property
is held for sale, such property is carried at the lower of
(i) its carrying amount or (ii) fair value less costs
to sell. In addition, no depreciation or amortization of tenant
origination cost is recorded for a property classified as held
for sale. The Company classifies operating properties as
property held for sale in the period in which all of the
required criteria are met.
SFAS No. 144 requires, in many instances, that income
statements for both current and prior periods report the results
of operations of any component of an entity which has either
been disposed of, or is classified as held for sale, as
discontinued operations. In instances when a company expects to
have significant continuing involvement in the component beyond
the date of sale, the operations of the component instead
continue to be fully recorded within the continuing operations
of the Company through the date of sale. In accordance with this
requirement, the Company records any results of operations
related to its real estate held for sale as discontinued
operations only when the Company expects not to have significant
continuing involvement in the real estate after the date of sale.
Property, Equipment and Leasehold
Improvements — Property and equipment are stated
at cost, less accumulated depreciation and amortization.
Depreciation and amortization are recorded on a straight-line
basis over the estimated useful lives of the related assets,
which range from three to seven years. Leasehold improvements
are amortized on a straight-line basis over the life of the
related lease or the estimated service life of the improvements,
whichever is shorter. Maintenance and repairs are expensed as
incurred, while betterments are capitalized. Upon the sale or
retirement of depreciable assets, the related accounts are
relieved, with any resulting gain or loss included in operations.
Impairment of Long-Lived Assets — In accordance
with SFAS No. 144, long-lived assets are periodically
evaluated for potential impairment whenever events or changes in
circumstances indicate that their carrying amount may not be
recoverable. In the event that periodic assessments reflect that
the carrying amount of the asset exceeds the sum of the
undiscounted cash flows (excluding interest) that are expected
to result from the use and eventual disposition of the asset,
the Company would recognize an impairment loss to the extent the
carrying amount exceeded the fair value of the property. The
Company estimates the fair value using available market
information or other industry valuation techniques such as
present value calculations. No impairment losses were recognized
for the years ended December 31, 2007, 2006 and 2005.
The Company recognizes goodwill in accordance with
SFAS No. 142, Goodwill and Other Intangible Assets
(“SFAS No. 142”). Under
SFAS No. 142, goodwill is recorded at its carrying
value and is tested for impairment at least annually or more
frequently if impairment indicators exist, at a level of
reporting referred to as a reporting unit. Goodwill impairment
is deemed to exist if the net book value of a reporting unit
exceeds its estimated fair value. If a potential impairment
exists, an impairment loss is recognized to the extent the
carrying value of goodwill exceeds the difference between the
fair value of the reporting unit and the fair value of its other
assets and liabilities. The Company identified no impairment
indicators for the years ended December 31, 2007 and 2006.
The Company recognizes goodwill in accordance with
SFAS No. 142 and tests its carrying value for
impairment during the fourth quarter of each year.
Revenue
Recognition
Transaction
Services
Real estate commissions are recognized when earned which is
typically the close of escrow. Receipt of payment occurs at the
point at which all Company services have been performed, and
title to real property has passed from seller to buyer, if
applicable. Real estate leasing commissions are recognized upon
execution of appropriate lease and commission agreements and
receipt of full or partial payment, and, when payable upon
certain events such as tenant occupancy or rent commencement,
upon occurrence of such events. All other commissions and fees
are recognized at the time the related services have been
performed and delivered by the Company to the client, unless
future contingencies exist.
Investment
Management
The Company earns fees associated with its transactions by
structuring, negotiating and closing acquisitions of real estate
properties to third-party investors. Such fees include
acquisition and disposition fees. Acquisition and disposition
fees are earned and recognized when the acquisition or
disposition is closed. Organizational Marketing Expense
Allowance (“OMEA”), fees are earned and recognized
from gross proceeds of equity raised in connection with
offerings and are used to pay formation costs, as well as
organizational and
marketing costs. The Company is entitled to loan advisory fees
for arranging financing and refinancing related to properties
under management. These fees are collected and recognized upon
the closing of such loans.
The Company earns captive asset and property management fees
primarily for managing the operations of real estate properties
owned by the real estate programs, REITs and limited liability
companies that invest in real estate or value funds it sponsors.
Such fees are based on pre-established formulas and contractual
arrangements and are earned as such services are performed. The
Company is entitled to receive reimbursement for expenses
associated with managing the properties; these expenses include
salaries for property managers and other personnel providing
services to the property. Each property in the Company’s
TIC programs is charged an accounting fee for costs associated
with preparing financial reports. The Company is also entitled
to leasing commissions when a new tenant is secured and upon
tenant renewals. Leasing commissions are recognized upon
execution of leases.
Through its dealer-manager, the Company facilitates capital
raising transactions for its programs its dealer-manager acts as
a dealer-manager exclusively for the Company’s programs and
does not provide securities services to any third party. The
Company’s wholesale dealer-manager services are comprised
of raising capital for its programs through its selling
broker-dealer relationships. Most of the commissions, fees and
allowances earned for its dealer-manager services are passed on
to the selling broker-dealers as commissions and to cover
offering expenses, and the Company retains the balance.
Management
Services
Management fees are recognized at the time the related services
have been performed by the Company, unless future contingencies
exist. In addition, in regard to management and facility service
contracts, the owner of the property will typically reimburse
the Company for certain expenses that are incurred on behalf of
the owner, which are comprised primarily of
on-site
employee salaries and related benefit costs. The amounts, which
are to be reimbursed per the terms of the services contract, are
recognized as revenue by the Company in the same period as the
related expenses are incurred.
Professional Service Contracts — The Company
holds multi-year service contracts with certain key transaction
professionals for which cash payments were made to the
professionals upon signing, the costs of which are being
amortized over the lives of the respective contracts, which are
generally two to five years. Amortization expense relating to
these contracts of approximately $443,000 was recorded for the
year ended December 31, 2007, no such amortization was
recorded in prior years, and is included in depreciation and
amortization expense in the Company’s consolidated
statement of operations.
Fair Value of Financial Instruments —
SFAS No. 107, Disclosures About Fair Value of
Financial Instruments (“SFAS No. 107”),
requires disclosure of fair value of financial instruments,
whether or not recognized on the face of the balance sheet, for
which it is practical to estimate that value.
SFAS No. 107 defines fair value as the quoted market
prices for those instruments that are actively traded in
financial markets. In cases where quoted market prices are not
available, fair values are estimated using present value or
other valuation techniques. The fair value estimates are made at
the end of each year based on available market information and
judgments about the financial instrument, such as estimates of
timing and amount of expected future cash flows. Such estimates
do not reflect any premium or discount that could result from
offering for sale at one time the Company’s entire holdings
of a particular financial instrument, nor do they consider that
tax impact of the realization of unrealized gains or losses. In
many cases, the fair value estimates cannot be substantiated by
comparison to independent markets, nor can the disclosed value
be realized in immediate settlement of the instrument.
The Company believes that at December 31, 2007 and 2006,
and interest rates associated with notes payable, senior notes,
mortgage loans and lines of credit approximate market interest
rates for similar types of
debt instruments. As such, the carrying values of the
Company’s notes payable and lines of credit approximate
their fair values. Accounts receivable, and accounts payable and
accrued liabilities are recorded at fair value due to their
short-term nature.
Stock-Based Compensation — In December 2004,
the FASB issued SFAS No. 123 — Revised,
Share Based Payment,
(“SFAS No. 123R”). SFAS No. 123R
requires the measurement of compensation cost at the grant date,
based upon the estimated fair value of the award, and requires
amortization of the related expense over the employee’s
requisite service period. Effective January 1, 2006, the
Company adopted SFAS No. 123R under the modified
perspective transition method.
Earnings per share — Basic earnings per share
is computed by dividing net income by the weighted average
number of common shares outstanding during each period. The
computation of diluted earnings per share further assumes the
dilutive effect of stock options, stock warrants and
contingently issuable shares. Contingently issuable shares
represent non-vested stock awards and unvested stock fund units
in the deferred compensation plan. In accordance with
SFAS No. 128, Earnings Per Share, these shares
are included in the dilutive earnings per share calculation
under the treasury stock method. Unless otherwise indicated, all
pre-merger NNN share data have been adjusted to reflect the
conversion as a result of the Merger (see Note 9 of Notes
to Consolidated Financial Statements in Item 8 of this
Report for additional information).
Concentration of Credit Risk — Financial
instruments that potentially subject the Company to a
concentration of credit risk are primarily uninsured
cash-in-bank
balances and accounts receivable. The Company currently
maintains substantially all of its cash with several major
financial institutions. At times, cash balances may be in excess
of the amounts insured by the Federal Deposit Insurance
Corporation.
Accrued Claims and Settlements — The Company
has maintained partially self-insured and deductible programs
for general liability, workers’ compensation and certain
employee health care costs. In addition, the Company assumed
liabilities at the date of the Merger representing reserves
related to self insured errors and omissions program of the
acquired company. Reserves for all such programs are included in
accrued claims and settlements and compensation and employee
benefits payable, as appropriate. Reserves are based on the
aggregate of the liability for reported claims and an
actuarially-based estimate of incurred but not reported claims.
As of the date of the Merger, the Company entered into a premium
based insurance policy for all error and omission coverage on
claims arising after the date of the Merger. Claims arising
prior to the date of the Merger continue to be applied against
the previously mentioned liability reserves assumed relative to
the acquired company.
Income Taxes — Income taxes are accounted for
under the asset and liability method in accordance with
SFAS No. 109, Accounting for Income Taxes
(“SFAS No. 109”). Deferred tax assets
and liabilities are determined based on temporary differences
between the financial reporting and the tax basis of assets and
liabilities and operating loss and tax credit carry forwards.
Deferred tax assets and liabilities are measured by applying
enacted tax rates and laws and are released in the years in
which the temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date. Valuation allowances are provided
against deferred tax assets when it is more likely than not that
some portion or all of the deferred tax asset will not be
realized.
In evaluating the need for a valuation allowance at
December 31, 2007, the Company evaluated both positive and
negative evidence in accordance with the requirements of
SFAS No. 109. Given the historical earnings of the
Company, management believes that it is more likely than not
that the entire federal net operating loss of $3.2 million
will be used in the foreseeable near future, and therefore has
recorded no valuation allowance against the deferred tax asset
for the federal net operating losses carryforwards. As of
December 31, 2007, the Company recorded state NOLs net of a
$3.1 million valuation allowance to reflect the portion of
the NOLs which were not expected to be realized prior to their
respective expiration.
In July 2006, the Financial Accounting Standards Board (FASB)
issued Interpretation No. 48 (“FIN 48”),
Accounting for Uncertainty in Income Taxes — an
interpretation of SFAS No. 109. FIN 48, which was
effective on January 1, 2007, applies to all tax positions
within the scope of SFAS 109 and establishes a single
approach in which a recognition and measurement threshold is
used to determine the amount of tax benefit that should be
recognized in the financial statements. Specifically,
FIN 48 establishes a “more-likely-than-not”
criterion for evaluating uncertain tax positions for financial
statement purposes, based upon the technical merits of the
position. The Company adopted FIN 48 as of January 1,2007. The adoption of FIN 48 did not materially impact the
Company’s consolidated financial position.
Marketable Securities — The Company accounts
for investments in marketable debt and equity securities in
accordance with SFAS No. 115, Accounting for
Certain Investments in Debt and Equity Securities
(“SFAS No. 115”). The Company determines
the appropriate classification of debt and equity securities at
the time of purchase and reevaluates such designation as of each
balance sheet date. Marketable securities acquired are
classified with the intent to generate a profit from short-term
movements in market prices as trading securities. Debt
securities are classified as held to maturity when there is a
positive intent and ability to hold the securities to maturity.
Marketable equity and debt securities not classified as trading
or held to maturity are classified as available for sale.
In accordance with SFAS No. 115, trading securities
are carried at their fair value with realized and unrealized
gains and losses included in net income. The available for sale
securities are carried at their fair market value and any
difference between cost and market value is recorded as
unrealized gain or loss, net of income taxes, and is reported as
accumulated other comprehensive income in the consolidated
statement of stockholders’ equity. Premiums and discounts
are recognized in interest income using the effective interest
method. Realized gains and losses and declines in value expected
to be other-than-temporary on available for sale securities are
included in other income. The cost of securities sold is based
on the specific identification method. Interest and dividends on
securities classified as available for sale are included in
interest income.
Comprehensive Income — Pursuant to
SFAS No. 130, Reporting Comprehensive Income,
the Company has included a calculation of comprehensive income
(loss) in its accompanying consolidated statements of
stockholders’ equity for the years ended December 31,2007, 2006 and 2005. Comprehensive income includes net income
adjusted for certain revenues, expenses, gains and losses that
are excluded from net income.
Guarantees — The Company accounts for its
guarantees in accordance with FASB Interpretation No. 45,
Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others (“FIN No. 45”).
FIN No. 45 elaborates on the disclosures to be made by
the guarantor in its interim and annual financial statements
about its obligations under certain guarantees that it has
issued. It also requires that a guarantor recognize, at the
inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. Management
evaluates these guarantees to determine if the guarantee meets
the criteria required to record a liability.
Segment Disclosure — As a result of the Merger
in December 2007, the newly combined Company’s operating
segments were evaluated for reportable segments. As a result,
the legacy NNN reportable segments were realigned into a single
operating and reportable segment called Investment Management.
This realignment had no impact on the Company’s
consolidated balance sheet, results of operations or cash flows.
In accordance with the provisions of Statement of Financial
Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information
(“SFAS 131”), the Company divides its
services into three primary business segments, transaction
services, investment management and management services.
Derivative Instruments and Hedging Activities —
The Company applies the provisions of SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain
Hedging Activities, an Amendment of FASB Statement
No. 133 and SFAS No. 149 Amendment of Statement
133 on Derivative Instruments and Hedging Activities
(“SFAS No. 133”). SFAS No. 133
requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value, while changes in
that fair value may increase or decrease reported net income or
stockholders’ equity, depending on interest rate levels and
computed “effectiveness” of the derivatives, as that
term is defined by SFAS No. 133, but will have no
effect on cash flows. The Company’s derivatives consist
solely of four interest rate cap agreements with third parties,
which were executed in relation to its credit agreement or
mortgage note obligations. These cap agreements were not
accounted for as effective hedges as of December 31, 2007.
Recently
Issued Accounting Pronouncements
In September 2006, the FASB issued Statement No. 157
(“SFAS No. 157”), Fair Value
Measurements. SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about
fair value measurements. In February 2008, the FASB issued FASB
Staff Position
No. FAS 157-2,
“Effective Date of FASB Statement No. 157” (the
“FSP”). The FSP amends SFAS 157 to delay the
effective date of SFAS No. 157 for nonfinancial assets
and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial
statements on a recurring basis (that is, at least annually).
For items within its scope, the FSP defers the effective date of
SFAS No. 157 to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal
years. The Company does not believe adoption will have a
material effect on its financial condition, results of
operations and cash flow.
In February 2007, the FASB issued Statement No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(“SFAS No. 159”). SFAS No. 159
permits entities to choose to measure many financial instruments
and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the
opportunities to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without
having to apply complex hedge accounting provisions.
SFAS No. 159 is effective as of the beginning of an
entity’s first fiscal year that begins after November, 15,
2007. The Company is currently evaluating the effect, if any,
the adoption of SFAS No. 159 will have on its
financial condition, results of operations and cash flow.
In December 2007, the FASB issued revised Statement
No. 141, Business Combinations
(“SFAS No. 141R”).
SFAS No. 141R will change the accounting for business
combinations. Under SFAS No. 141R, an acquiring entity
will be required to recognize all the assets acquired and
liabilities assumed in a transaction at the acquisition-date
fair value with limited exceptions. SFAS No. 141R will
change the accounting treatment and disclosure for certain
specific items in a business combination.
SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or
after December 15, 2008. SFAS No. 141R will have
an impact on accounting for business combinations once adopted
but the effect is dependent upon acquisitions at that time.
In December 2007, the FASB issued Statement No. 160,
Noncontrolling Interests in Consolidated Financial
Statements — An Amendment of ARB No. 51
(“SFAS No. 160”). SFAS No. 160
establishes new accounting and reporting standards for the
non-controlling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 is
effective for fiscal years beginning on or after
December 15, 2008. The Company is currently evaluating the
effect if any, the adoption of SFAS No. 160 will have
on its consolidated financial position, results of operations
and cash flows.
Sales of equity securities resulted in realized gains of
$1.2 million and realized losses of $(1.0) million for
the year ended December 31, 2007. There were no sales of
equity securities for the years ended December 31, 2006 and
2005.
Investments
in Limited Partnerships
The Company through its subsidiary, Grubb & Ellis
Alesco Global Advisors, LLC (“Alesco”), serves as
general partner and investment advisor to four hedge fund
limited partnerships three of which are required to be
consolidated, AGA Strategic Realty Fund, L.P. (“Strategic
Realty”), AGA Global Realty Fund LP (“Global
Realty”) and AGA Realty Income Partners LP (“Realty
Partners”).
In accordance with EITF Issue
No. 04-05
“Determining Whether a General Partner, or the General
Partners as a Group Controls a Limited Partnership of Similar
Entity When the Limited Partners Have Certain Rights,”Alesco consolidates all three partnerships as the rights of
the limited partners do not overcome the rights of the general
partner.
Alesco allocated the limited partners’ income or loss to
minority interest. For the year ended December 31, 2007,
these limited partnerships had investment losses of
approximately $680,000 which were allocated entirely to minority
interest. Alesco earned approximately $15,000 of management fees
based on ownership interest under the agreements. At
December 31, 2007, these limited partnerships had assets of
approximately $6.0 million consisting primarily of exchange
traded marketable securities, including equity securities and
foreign currencies.
The following table reflects trading securities. The original
cost, estimated market value and gross unrealized appreciation
and depreciation of equity securities are presented in the
tables below:
The Company makes advances to affiliated real estate entities
under management in the normal course of business. Such advances
are uncollateralized, have payment terms of one year or less,
and generally bear interest at 6.0% to 12.0% per annum. The
advances consisted of the following:
As of December 31, 2007 and 2006, advances with accrued
interest included $1.0 million and $3.6 million
respectively, to a program solely managed by the Company’s
Chairman.
Notes
Receivable From Related Party
In December 2007, the Company advanced $10.0 million to
Grubb & Ellis Apartment REIT, Inc (“Apartment
REIT”). The unsecured note matures on June 20, 2008
and bears interest at a fixed rate of 7.46% per annum. The
unsecured note requires monthly interest only payments beginning
on January 1, 2008 and provides for a default interest rate
in an event of default equal to 9.46% per annum. The balance
owed to the Company as of December 31, 2007 consisted of
$7.6 million in principal.
In June 2007, the Company advanced $3.3 million to
Apartment REIT. The unsecured note was scheduled to mature on
December 29, 2007 and bore interest at a fixed rate of
6.85% per annum. The unsecured note required monthly interest
only payments beginning on August 1, 2007 and provided for
a default interest rate in an event of default equal to 8.85%
per annum. The unsecured note and all accrued interest was
repaid in full during the third quarter of 2007.
In December 2006, the Company advanced $10.0 million to
Apartment REIT. The unsecured note was scheduled to mature on
June 28, 2007 and bore interest at a fixed rate of 6.86%
per annum. The unsecured note and all accrued interest were
repaid in full during the second quarter of 2007.
As of December 31, 2007the Company had investments in two
properties totaling $1.7 million and $4.1 million,
respectively, which represents approximately 32.0% and 41.0%
ownership interest in each property, respectively.
The Company owns approximately 5.9 million shares of common
stock of Grubb & Ellis Realty Advisors, Inc.
(“GERA”), a special purpose acquisition company, or
approximately 19% of the outstanding common stock of GERA. The
Company also owns approximately 4.6 million GERA warrants
which are exercisable into additional GERA common stock, subject
to certain conditions. The Company recorded each of these
investments at fair value at December 7, 2007, the date
they were acquired, at a total investment of approximately
$4.5 million. The market price of the warrants declined
slightly to $0.16 per warrant as of December 31, 2007,
resulting in an unrealized loss on the investment totaling
approximately $223,000 (net of taxes) for the year ended
December 31, 2007. This unrealized loss is included in
accumulated other comprehensive income within stockholders’
equity as of December 31, 2007.
All of the officers of GERA are also officers or directors of
the Company, although such persons have not initially received
compensation from GERA. Due to the Company’s current
ownership position and influence over the operating and
financial decisions of GERA, the Company’s investment in
GERA is accounted for within the Company’s consolidated
financial statements under the equity method of accounting. The
Company’s combined carrying value of these GERA investments
as of December 31, 2007, totals approximately
$4.1 million and is included in investments in
unconsolidated entities in the Company’s consolidated
balance sheet.
In the event GERA does not complete a transaction prior to March
2008, having a value of at least 80% of its net assets at the
time of the transaction, GERA will liquidate and dissolve. The
Company has waived its right to receive any proceeds in any such
liquidation and dissolution. In the event the liquidation does
occur, the Company will lose its entire investment in the common
stock and warrants of GERA, and may not recover a substantial
portion of its operating advances (See Note 26).
As of December 31, 2006the Company had an investment in
the property at Mt. Moriah and Royal 400 totaling
$4.4 million and $4.0 million, which represented
approximately 29.0% and 19.0% ownership interest in the
properties, respectively.
As of December 31, 2007 and 2006the Company had interests
in certain variable interest entities, of which the Company was
not considered the primary beneficiary. Accordingly, such VIEs
were not consolidated in the financial statements.
A summary of the balance sheet information for properties held
for investment is as follows:
December 31,
Useful Life
2007
2006
(In thousands)
Building and capital improvement
39 years
$
116,585
$
2,697
Tenant Improvement
1-8 years
5,903
163
Accumulated depreciation
(3,982
)
(227
)
Total
118,506
2,633
Land
16,388
1,202
Properties held for investment — net
$
134,894
$
3,835
The Company recognized $3,756,000, $148,000, $61,000 of
depreciation expense related to the properties held for
investment for the years ended December 31, 2007, 2006 and
2005, respectively.
8.
PROPERTY,
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Property and equipment consisted of the following:
The Company recognized $1.8 million, $1.8 million and
$2.7 million of depreciation expense for the years ended
December 31, 2007, 2006 and 2005, respectively. During
2005, the Company revised the estimated useful life of certain
computer equipment from five years to three years, which
resulted in additional depreciation expense of $513,000.
9.
BUSINESS
COMBINATIONS AND GOODWILL
Merger
of Grubb & Ellis Company with NNN
On December 7, 2007, the Company effected the Merger with
NNN, a real estate asset management company and sponsor of tax
deferred TIC 1031 property exchanges as well as a sponsor of two
non-traded REITs and other investment programs.
On December 7, 2007, pursuant to the Merger Agreement
(i) each issued and outstanding share of common stock of
NNN was automatically converted into 0.88 of a share of common
stock of the Company, and (ii) each issued and outstanding
stock options of NNN, exercisable for common stock of NNN, was
automatically converted into the right to receive stock options
exercisable for common stock of the Company
based on the same 0.88 share conversion ratio. Therefore,
43,779,740 shares of common stock of NNN that were issued
and outstanding immediately prior to the Merger were
automatically converted into 38,526,171 shares of common
stock of the Company, and the 739,850 NNN stock options that
were issued and outstanding immediately prior to the Merger were
automatically converted into 651,068 stock options of the
Company. The prior year share and option amounts have been
retroactively adjusted to reflect the 0.88 conversion.
Under the purchase method of accounting, the Merger
consideration of $172.2 million was determined based on the
closing price of the Company’s common stock of $6.43 per
share on the date the merger closed, applied to the
26,195,655 shares of the Company’s common stock
outstanding plus the fair value of vested options outstanding of
approximately $3.8 million. The fair value of these vested
options was calculated using the Black-Scholes option-pricing
model which incorporated the following assumptions: weighted
average exercise price of $7.02 per option, volatility of
105.11%, a 5 year expected life of the awards, risk-free
interest rate of 3.51% and no expected dividend yield.
The results of operations of legacy Grubb & Ellis have
been included in the consolidated results of operations since
December 8, 2007 and the results of operations of NNN have
been included in the consolidated results of operations for the
full year ended December 31, 2007.
The purchase price was allocated to the assets acquired and
liabilities assumed based on the estimated fair value of net
assets as of the acquisition date as follows (in thousands):
Current assets
$
189,214
Other assets
29,797
Identified intangible assets acquired
86,600
Goodwill: excess purchase price over fair value of net assets
acquired
107,507
Total assets
413,118
Current liabilities
233,894
Other liabilities
7,022
Total liabilities
240,916
Total purchase price
$
172,202
As a result of the merger, the Company incurred
$6.4 million in merger related expenses during 2007 as
reflected on the Company’s consolidated statement of
operations. Additionally, as a result of the Merger, the Company
recorded $3.6 million as a purchase accounting liability
for severance for certain executives as part of a change in
control provision in the related employment agreements.
Acquisition
of NNN/ROC Apartment Holdings, LLC
On July 1, 2007, the Company completed the acquisition of
the remaining 50.0% membership interest in NNN/ROC Apartment
Holdings, LLC (“ROC”). ROC holds contract rights
associated with a fee sharing agreement between ROC Realty
Advisors and NNN with respect to certain fee streams (including
an interest in net cash flows associated with subtenant leases
(as Landlord) in excess of expenses from the Master Lease
Agreement (as tenant) and related multi-family property
acquisitions where ROC Realty Advisors, LLC sourced the deals
for placement into the TIC investment programs. The aggregate
purchase price for the acquisition of 50.0% membership interest
of ROC was approximately $1.7 million in cash.
On November 16, 2007, the Company completed the acquisition
of the 51.0% membership interest in Alesco. Alesco is a
registered investment advisor focused on real estate securities
and manages private investment funds exclusively for qualified
investors. Alesco holds several investment advisory contracts
right and it the general partner of several domestic mutual fund
investments limited partnerships. Alesco is also an investment
advisor to one offshore hedge fund. The Company’s purpose
of acquiring Alesco was to create a global leader in real estate
securities management within open and closed end mutual funds,
and hedge funds. The aggregate purchase price was approximately
$3.0 million in cash. Additionally, upon achievement of
certain earn-out targets, the Company is required to purchase up
to an additional 27% interest in Alesco for $15.0 million.
The Company is allowed to use the $15.0 million seed
capital to fund the earn-out payments.
Acquisition
of Triple Net Properties, Realty, and Capital
Corp.
NNN was organized as a corporation in the State of Delaware in
September 2006 and was formed to acquire each of GERI (formerly
Triple Net Properties, LLC), Triple Net Properties Realty, Inc.
(“Realty”) and Grubb & Ellis Securities,
Inc. (“GBE Securities” formerly NNN Capital Corp.) and
its other subsidiaries (collectively, NNN), to bring the
businesses conducted by those companies under one corporate
umbrella and to facilitate an offering pursuant to
Rule 144A of the Securities Act (“the 144A
offering”), which transactions are collectively referred to
as “the formation transactions.” On November 16,2006, NNN completed a $160.0 million private placement of
common stock to institutional investors and certain accredited
investors with 14.1 million shares of the Company’s
common stock sold in the offering at $11.36 per share. Triple
Net Properties was the accounting acquirer of Realty and Capital
Corp.
Concurrently with the close of the 144A offering, the following
transactions occurred:
•
TNP Merger Sub, LLC, a Delaware limited liability company and
wholly-owned subsidiary of NNN, entered into an agreement and
plan of merger with Triple Net Properties, a Virginia limited
liability company owned by Anthony W. Thompson (former Chairman
of the Board), Scott D. Peters (executive officer and director),
Louis J. Rogers (former director and former executive officer of
Triple Net Properties) and a number of other employees and
third-party investors. In connection with the merger agreement,
NNN entered into contribution agreements with the holders of a
majority of the common membership interests of Triple Net
Properties. Under the merger agreement and the contribution
agreements, NNN issued 17,372,438 shares of the
Company’s common stock (to the accredited investor members)
and $986,000 in cash (to the unaccredited investor members in
lieu of 0.5% of the shares of the Company’s common stock
they would otherwise be entitled to receive, which was valued at
the $11.36 offering price to investors in the 144A offering) in
exchange for all the common member interests. Concurrently with
the closing of the 144A offering on November 16, 2006,
Triple Net Properties became a wholly-owned subsidiary of NNN.
For accounting purposes, Triple Net Properties was considered
the acquirer of Realty and Capital Corp.
•
NNN entered into a contribution agreement with Mr. Thompson
and Mr. Rogers pursuant to which they contributed all of
the outstanding shares of Realty, to the Company in exchange for
4,124,120 shares of the Company’s common stock and,
with respect to Mr. Thompson, $9.4 million in cash in
lieu of the shares of NNN he would otherwise be entitled to
receive, which was valued at the $11.36 offering price to
investors in the 144A offering. Concurrently with the closing of
the 144A offering on November 16, 2006, Realty became a
wholly-owned subsidiary of NNN.
•
NNN entered into a contribution agreement with
Mr. Thompson, Mr. Rogers and Kevin K. Hull pursuant to
which they contributed all of the outstanding shares of Capital
Corp. to the Company in exchange for 1,164,680 shares of
the Company’s common stock and, with respect to
Mr. Thompson,
$2.7 million in cash in lieu of the shares of NNN he would
otherwise be entitled to receive, which was valued at the $11.36
offering price to investors in the 144A offering. Capital Corp.
became a wholly-owned subsidiary of NNN on December 14,2006.
In connection with these transactions, the owners of Realty and
Capital Corp have agreed to indemnify NNN for a breach of any
representations and for certain other losses, subject to a
maximum aggregate limit on the amount of their liability of
$12.0 million. Mr. Thompson and Mr. Rogers also
agreed to escrow shares of NNN’s common stock and indemnify
NNN for certain other matters. Except for these escrow
arrangements, NNN has no assurance that any contributing party
providing these limited representations or indemnities will have
adequate capital to fulfill its indemnity obligations.
The acquisitions were accounted for under the purchase method of
accounting, and accordingly all assets and liabilities were
adjusted to and recorded at their estimated fair values as of
the acquisition date. Goodwill and other intangible assets
represent the excess of purchase price over the fair value of
net assets acquired. In accordance with SFAS No. 141,
the Company recorded goodwill for a purchase business
combination to the extent that the purchase price of the
acquisition exceeded the net identifiable assets and intangible
assets of the acquired companies.
The purchase accounting adjustments for the acquisition of
Realty and Capital Corp. were recorded in the accompanying
consolidated financial statements as of, and for periods
subsequent to the acquisition dates. The excess purchase price
over the estimated fair value of net assets acquired has been
recorded to goodwill, which is not deductible for tax purposes.
The final valuation of the net assets acquired is complete.
The aggregate purchase price for the acquisition of Realty and
Capital Corp. was approximately $72.2 million, which
included: (1) issuance of 5,288,800 shares of the
Company’s common stock, valued at $11.36 per share (the
offering price upon the close of the 144A); and
(2) $12.1 million in cash paid to Mr. Thompson in
lieu of the shares of the Company’s common stock he would
otherwise be entitled to receive, valued at $11.36 per share. As
of December 31, 2006, the total purchase price has been
paid.
The following represents the calculation of the purchase price
of Realty and the excess purchase price over the estimated fair
value of the net assets acquired:
(In thousands except share and per share data)
Purchase of shares of Realty for cash
$
9,435
Purchase of shares of Realty for stock
46,865
Total purchase price
56,300
Adjusted beginning equity
$
1,733
Adjustment for fair value of intangible contract rights
(20,538
)
Adjustment to goodwill to reflect deferred tax liability arising
from allocation of purchase price to intangible contract rights
8,214
Less: fair value of net assets acquired
(10,591
)
Goodwill: Excess purchase price over fair value of net assets
acquired
The issuance of the Company’s common stock to the owners of
Realty was based upon the following:
Realty fair value
$
56,300
Cash payment toward purchase
(9,435
)
Value of shares issued
$
46,865
Price per share issued
$
10.00
Shares issued to Realty owners
4,686,500
The following represents the calculation of the purchase price
of GBE Securities and the excess purchase price over the
estimated fair value of the net assets acquired:
(In thousands, except share and per share data)
Purchase of shares of GBE Securities for cash
$
2,665
Purchase of shares of GBE Securities for stock
13,235
Total purchase price
15,900
Less: fair value of net assets acquired
(1,426
)
Goodwill: Excess purchase price over fair value of net assets
acquired
The issuance of the Company’s common stock to the owners of
GBE Securities was based upon the following:
GBE Securities fair value
$
15,900
Cash payment toward purchase
(2,665
)
Value of shares issued
$
13,235
Price per share issued
$
10.00
Shares issued to GBE Securities owners
1,323,500
Acquisition
of Properties Held For Investment
During the year ended December 31, 2007, the Company also
completed the acquisition of two office properties. The
aggregate purchase price including closing costs of these
properties was $141.5 million, of which $123.0 million
was financed with mortgage debt.
Supplemental
information (unaudited)
Unaudited pro forma results, assuming the above mentioned 2007
acquisitions had occurred as of January 1, 2006 for
purposes of the 2007 and 2006 pro forma disclosures, are
presented below. The unaudited pro forma results have been
prepared for comparative purposes only and do not purport to be
indicative of what operating results would have been had all
acquisitions occurred on January 1, 2006, and may not be
indicative of future operating results.
The fair values of the assets and liabilities recorded on the
date of acquisition related to the Merger are preliminary and
subject to refinement as additional valuation information is
received. The goodwill recorded in connection with the
acquisition has not yet been assigned to the individual
reporting units pursuant to FASB Statement No. 142.
10.
PROPERTY
ACQUISITIONS
2007
Acquisitions
During the year ended December 31, 2007, the Company
completed the acquisition of sixteen office properties and three
residential properties. The Company classified these properties
as property held for sale upon acquisition. The aggregate
purchase price including the closing costs of these properties
was $294.0 million, of which $254.8 million was
financed with mortgage debt. The Company’s discontinued
operations include the combined results of these acquisitions.
As of December 31, 2007, twelve of these properties have
been sold and four properties remain held for sale as follows:
Park Central, acquired November 29, 2007, Emberwood
Apartments, acquired December 4, 2007, Woodside, acquired
December 13, 2007 and Exchange South, acquired
December 13, 2007. In addition, two office properties were
acquired and held for investment during the year.
2006
Acquisitions
During the year ended December 31, 2006, the Company
completed the acquisition of four office properties. The
aggregate purchase price including closing costs of the
properties was $81.2 million, of which $71.2 million
was financed with mortgage debt. The Company’s discontinued
operations include the combined results of Lavaca Plaza from
August 28, 2006 (date of acquisition) through
October 25, 2006 (date of disposition), Southpointe Office
Park from August 18, 2006 (date of acquisition) through
December 31, 2006, Crawfordsville from September 12,2006 (date of acquisition) through December 31, 2006 and
1600 Parkwood from December 28, 2006 (date of acquisition)
through December 31, 2006.
In accordance with SFAS No. 141, the Company allocated
the purchase price to the fair value of the assets acquired and
the liabilities assumed, including the allocation of the
intangibles associated with the in-place leases considering the
following factors: lease origination costs and tenant
relationships; on all acquisitions, with the exception of
Crawfordsville, the Company also recorded lease intangible
liabilities related to the acquired below market leases.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of
acquisition for the properties that are included in properties
held for sale as of December 31, 2007 and 2006:
Pro forma statement of operations data is not required as all
results of operations for properties held for sale are included
in discontinued operations in the Company’s consolidated
statement of operations.
The allocation of the purchase price to assets and liabilities
for the 2007 acquisitions listed above are only preliminary
allocations based on estimates of fair values and will change
when estimates are finalized. Therefore, this information is
subject to change pending the final allocation of purchase price.
Pro forma statement of operations data is not required as all
results of operations for properties held for sale are included
in discontinued operations in the Company’s consolidated
statement of operations.
11.
IDENTIFIED
INTANGIBLE ASSETS
Identified intangible assets consisted of the following:
Amortization expense recorded for the contract rights was
$3,111,000, $410,000 and $0 for the years ended
December 31, 2007, 2006 and 2005, respectively.
Amortization expense was charged as a reduction to investment
management revenue in each respective period. During the period
of future real property sales, the amortization of the contract
rights for intangible asset will be applied based on the net
relative value of disposition fees realized.
Amortization expense recorded for the other identified
intangible assets was $338,000, $0 and $0 for the years ended
December 31, 2007, 2006 and 2005, respectively.
Amortization expense was included as part of operating expense
in the accompanying consolidated statement of operations.
December 31,
(In thousands)
Useful Life
2007
2006
Identified intangible assets — properties
In place leases and tenant relationships,
42 to 102 months
14,737
270
Above market leases
42 months
2,472
99
17,209
369
Accumulated amortization — properties
(3,622
)
(191
)
Identified intangible assets, net— properties
13,587
178
Total identified intangible assets, net
$
119,060
$
20,306
Amortization expense recorded for the in-place leases and tenant
relationships was $2,776,000, $78,000, and $55,000, for the
years ended December 31, 2007, 2006 and 2005, respectively.
Amortization expense was included as part of operating expense
in the accompanying consolidated statement of operations.
Amortization expense recorded for the above-market and in-place
leases was $655,000, $32,000, and $26,000, for the years ended
December 31, 2007, 2006 and 2005, respectively.
Amortization expense was charged as a reduction to rental
related revenue in the accompanying consolidated statement of
operations.
Property management fees and commissions due to third parties
4,491
975
Other
3,591
—
Dividends
1,733
3,813
Organizational marketing expense allowance (“OMEA”)
related costs
1,219
1,495
Total
$
101,147
$
33,601
Accrued liabilities include total due to programs sponsored by
GERI as of December 31, 2006 of $4.1 million consisted
primarily of certain non-recurring credits to investors of
$2.7 million, and $300,000 of property management fees
refund due to related parties.
Mezzanine debt payable to financial institutions, with variable
interest rates based on London Interbank Offered Rate
(“LIBOR”) (ranging from 11.31% to 12.00% per annum at
December 31, 2007), require monthly interest only payments,
maturing from February 29, 2008 to April 15, 2008
$
30,000
$
—
Mortgage loan payables to financial institutions, secured by two
properties acquired in 2007, with fixed interest rates (ranging
from 5.95% to 6.32% per annum as of December 31, 2007),
require monthly interest only payments, maturing on
July 10, 2014 and February 11, 2017, respectively
107,000
—
Mortgage loan payable to a financial institution, secured by a
property acquired in 2005, with variable interest paid monthly
(7.90% as of December 31, 2006) and default interest
of 5.00%. The debt was extinguished at February 2007
—
4,400
Unsecured notes payable to third-party investors with fixed
interest at 6.00% per annum and matures on December 2011.
Principal and interest is due quarterly beginning March 31,2006. Scheduled principal payments are $96 for the year ended
December 31, 2008, $135 in 2009, $143 in 2010 and $37 in
2011
411
533
Capital leases obligations
790
585
Total
138,201
5,518
Less portion classified as current
(30,447
)
(4,675
)
Non-current portion
$
107,754
$
843
During the fourth quarter of 2006, GERI entered into several
interest rate lock agreements with commercial banks aggregating
to approximately $400.0 million, with interest rates
ranging from 6.15% to 6.19% per annum, $200.0 million of
which were fully utilized as of December 31, 2006. As of
December 31, 2007, $6.3 million in rate lock funds
remained available at an interest rate of 6.45%. GERI paid
$2.0 million in refundable deposits in connection with
these agreements, which will be refunded if the total available
loan amount is utilized for property purchases. If the total
available loan amount is not utilized, then some of the deposits
will be forfeited.
As of December 31, 2007, the principal payments due on
notes payable for each of the next five years ending December 31
and thereafter are summarized as follows
Mortgage debt payable to various financial institutions for real
estate held for sale. Fixed interest rates range from 6.14% to
6.79% per annum. The notes mature at various dates through
January 2018. As of December 31, 2007, all notes require
monthly interest-only payments
$
72,230
$
31,660
Mezzanine debt payable to various financial institutions for
real estate held for sale, fixed and variable interest rates
range from 6.86% to 10.23% per annum. Notes mature at various
dates through December 2008. As of December 31, 2007, all
notes require monthly interest-only payments
18,790
15,246
Mortgage debt payable to various financial institutions for real
estate held for sale, which bear interest at LIBOR plus
250 basis points and include an interest rate cap for LIBOR
at 6.00% (approximately 7.24% per annum as of December 31,2007)
120,500
—
Total
$
211,520
$
46,906
15.
LINES OF
CREDIT
In September 2006, the Company entered into a $27.5 million
credit agreement with Wachovia Bank, N.A. The facility’s
fixed interest was 6.0% per annum plus a contingent interest
equal to 24.9% of the Company’s adjusted net income for
each period, less any amount of fixed interest paid in such
period, with a maturity date in April 2016. The proceeds from
this loan were used to redeem in full $5.5 million of
preferred interests that were issued to preferred members as
disclosed in Note 17, plus a related $1.4 million
redemption premium, to make a distribution of $10.0 million
to the common members of GERI and the remainder was used for
working capital and other general corporate purposes, including
paying down the Company’s line of credit and making
acquisition deposits on a number of properties that were
acquired by the Company’s programs. This debt was repaid in
November 2006 with proceeds from NNN’s 144A private equity
offering.
In September 2006, GERI entered into a $10.0 million
revolving line of credit with LaSalle Bank N.A. to replace its
then existing $8.5 million revolving line of credit with
Bank of America, N.A. This new line of credit consists of
$7.5 million for use in property acquisitions and
$2.5 million for general corporate purposes and bears
interest at either prime rate plus 0.50% or three-month LIBOR
plus 3.25% per annum, at the
Company’s option on each drawdown, and matures in March
2008. As of September 11, 2006, GERI had drawn an aggregate
of $6.5 million under this line of credit, which was used
to repay in full amounts due, including accrued interest, under
the Company’s revolving line of credit with Bank of
America, N.A. On September 15, 2006, the Company repaid
this line of credit in full from proceeds of the Wachovia loan
in November 2006 and there was no outstanding balance as of
December 31, 2006.
In February 2007, the Company entered into a $25.0 million
revolving line of credit with LaSalle Bank N.A. to replace the
$10.0 million revolving line of credit. This line of credit
consists of $10.0 million for acquisitions and
$15.0 million for general corporate purposes and bears
interest at prime rate plus 0.50% or three-month LIBOR plus
1.50%, at the Company’s option and matures
February 20, 2010. The Company paid $100,000 in loan fees
relating to the revolving line of credit.
In December 2007, the Company terminated the $25.0 million
line of credit with LaSalle Bank N.A. and entered into a
$75.0 million credit agreement with Deutsche Bank. The
Company is restricted to solely use the line of credit for
investments, acquisitions, working capital, equity interest
repurchase or exchange, and other general corporate purposes.
The line bears interest at either the prime rate or LIBOR based
rates, as the Company may choose on each of its borrowings, plus
an applicable margin based on the Company’s Debt/Earnings
Before Interest, Taxes, Depreciation and Amortization
(“EBITDA”) ratio as defined in the credit agreement.
The line matures on December 7, 2010 with a one-year
extension.
The Company’s line of credit is secured by substantially
all of the Company’s assets and requires the Company to
meet certain minimum loan to value, debt service coverage, and
performance covenants, including the timely payment of interest.
The outstanding balance on the line of credit was
$8.0 million as of December 31, 2007 and carried an
average weighted interest rate of 7.75%. The Company was in
compliance with all debt covenants pertaining to the credit
agreement as of December 31, 2007.
16.
SENIOR
NOTES
On August 1, 2006, NNN Collateralized Senior Notes, LLC
(the “Senior Notes Program”), the Senior Notes Program
began offering $50,000,000 in aggregate principal amount of
8.75% per annum Senior Notes due 2011. Interest on the notes is
payable monthly in arrears on the first day of each month,
commencing on the first day of the month occurring after
issuance. The notes will mature five years from the date of
first issuance of any of such notes, with two one-year options
to extend the maturity date of the notes at the Senior Notes
Program’s option. The interest rate will increase to 9.25%
per annum during any extension. The Senior Notes Program has the
right to redeem the notes, in whole or in part, at:
(1) 102.0% of their principal amount plus accrued interest
any time after January 1, 2008; (2) 101.0% of their
principal amount plus accrued interest any time after
July 1, 2008; and (3) par value after January 1,2009. The notes are the Senior Notes Program’s senior
obligations, ranking pari passu in right of payment with
all other senior debt incurred and ranking senior to any
subordinated debt it may incur. The notes are effectively
subordinated to all present or future debt secured by real or
personal property to the extent of the value of the collateral
securing such debt. The notes will be secured by a pledge of the
Senior Notes Program’s membership interest in NNN Series A
Holdings, LLC, which is the Senior Notes Program’s
wholly-owned subsidiary for the sole purpose of making the
investments. Each note is guaranteed by GERI. The guarantee is
secured by a pledge of GERI membership interest in the Senior
Notes Program. The Program was closed in January 2007. The total
amount raised from this program was $16.3 million.
As of December 31, 2007 and 2006, the Senior Notes
Program’s balance is reflected in the table below:
There were no preferred membership units outstanding as of
December 31, 2007 and 2006 due to early redemption of these
units on September 19, 2006 (the
“Redemption Date”). The Company accrued $881,000
through the Redemption, related to cumulative unpaid
distributions and accretion of the pro-rata portion of the 35.0%
redemption premium payable at maturity. Changes in the accreted
balance and dividends paid are reflected as interest expense and
totaled $1.1 million (including a prepayment penalty of
$544,000 for early redemption) and $857,000 for the years ended
December 31, 2006 and 2005, respectively.
18.
SEGMENT
DISCLOSURE
In conjunction with the Merger, management re-evaluated its
reportable segments and determined that the Company’s
reportable segments consist of Transaction Services, Investment
Management, and Management Services. The Company’s
Investment Management segment includes all of NNN’s
historical business units and, therefore, all historical data
have been conformed to reflect the reportable segments as a
combined company.
Transaction Services — Transaction services
advise buyers, sellers, landlords and tenants on the sale,
leasing and valuation of commercial property and includes the
Company’s national accounts group and national affiliate
program operations
Investment Management — Investment Management
includes all of NNN’s historical business units, which
includes services for acquisition, financing and disposition
services with respect to the Company’s programs, asset
management services related to the Company’s programs, and
dealer-manager services by its securities broker-dealer, which
facilitates capital raising transactions for its TIC and REIT
programs.
Management Services — Management services
provide property management and related services for owners of
investment properties and facilities management services for
corporate owners and occupiers.
The Company also has certain corporate level activities
including interest income from notes and advances, property
rental related operations, legal administration, accounting,
finance, and management information systems which are not
considered separate operating segments.
The Company evaluates the performance of its segments based upon
operating income. Net operating income is defined as operating
revenue less compensation and operating and administrative costs
and excludes other rental related, rental expense, interest
expense, depreciation and amortization, and corporate general
and administrative expenses. The accounting policies of the
reportable segments are the same as those described in the
Company’s summary of significant accounting policies (See
Note 2).
The net income (loss) from certain properties held for sale are
reflected in income from continuing operations through the dates
of sale in the consolidated statements of operations. In
instances when the Company expects to have significant ongoing
cash flows or significant continuing involvement in the
component beyond the date of sale, the operations of the
component instead continue to be fully recorded within the
continuing operations of the selling company through the date of
sale.
The net results of discontinued operations and the net gain on
dispositions of properties sold or classified as held for sale
as of December 31, 2007, in which the Company has no
significant ongoing cash flows or significant continuing
involvement are reflected in the consolidated statement of
operations as discontinued operations. The Company will receive
certain fee income from these properties on an ongoing basis
that is not considered significant when compared to the
operating results of such properties.
The following table summarizes the income (loss) and expense
components-
net of taxes that comprised discontinued operations for the
years ended December 31, 2007, 2006 and 2005:
Interest expense (including amortization of deferred financing
costs)
(5,703
)
(857
)
—
Tax benefit
306
61
—
Loss from discontinued
operations-net
of taxes
(460
)
(72
)
—
Gain on disposal of discontinued
operations-net
of taxes
252
68
—
Total loss from discontinued operations
$
(208
)
$
(4
)
$
—
20.
COMMITMENTS
AND CONTINGENCIES
Operating Leases — The Company has
non-cancelable operating lease obligations for office space and
certain equipment ranging from one to ten years, and sublease
agreements under which the Company acts as sublessor.
The office space leases often times provide for annual rent
increases, and typically require payment of property taxes,
insurance and maintenance costs.
Rent expense under these operating leases approximated
$4.3 million, $2.2 million, and $1.3 million for
the years ended December 31, 2007, 2006 and 2005,
respectively. Rent expense is included in general and
administrative expense in the accompanying consolidated
statements of operations.
As of December 31, 2007, future minimum amounts payable
under operating leases are as follows for the years ending
December 31:
(In thousands)
2008
$
19,898
2009
17,055
2010
12,850
2011
10,662
2012
9,151
Thereafter
18,166
$
87,782
Operating Leases — Other — The
Company is a master lessee of seven multi-family residential
properties in various locations under non-cancelable leases. The
leases which commenced in various months and expire from June
2015 through March 2016, require minimum monthly payments
averaging $795,000 over the
10-year
period. Rent expense under these operating leases approximated
$8.6 million, $4.6 million and $2.2 million, for
the years ended December 31, 2007, 2006 and 2005
respectively As of December 31, 2007, rental related
expense, based on contractual amounts due, are as follows for
the years ending December 31:
Rental Related
Expense
(In thousands)
2008
$
9,535
2009
9,793
2010
10,812
2011
10,942
2012
10,942
Thereafter
30,822
$
82,846
The Company subleases this residential space to third parties.
Rental income from these subleases was $16.4 million,
$8.9 million and $3.6 million for the years ended
December 31, 2007, 2006 and 2005 respectively. As
residential leases are executed for no more than one year, the
Company is unable to project the future minimum receivable.
Capital Lease Obligations — The Company leases
computers, copiers, and postage equipment that are accounted for
as capital leases (See Note 13 of for additional
information).
SEC Investigation — On September 16, 2004,
Triple Net Properties, which became a subsidiary of
Grubb & Ellis as part of the merger with NNN, learned
that the SEC Los Angeles Enforcement Division (the “SEC
Staff”), is conducting an investigation referred to as
“In the matter of Triple Net Properties, LLC.”
The SEC Staff requested information from Triple Net Properties
relating to disclosure in public and private securities
offerings sponsored by Triple Net Properties and its affiliates
prior to 2005 ( Triple Net Securities Offerings”). The SEC
Staff also requested information from Capital Corp., the
dealer-manager for the Triple Net Securities Offerings. Capital
Corp. also became a subsidiary of Grubb & Ellis as
part of the merger with
NNN. The SEC Staff requested financial and other information
regarding the Triple Net Securities Offerings and the
disclosures included in the related offering documents from each
of Triple Net Properties and Capital Corp. Triple Net Properties
and Capital Corp. believe they have cooperated fully with the
SEC Staff’s investigation.
Triple Net Properties and Capital Corp. are engaged in
settlement negotiations with the SEC staff regarding this
matter. Based on these negotiations, management believes that
the conclusion to this matter will not result in a material
adverse affect to its results of operations, financial condition
or ability to conduct its business. NNN accrued a loss
contingency of $600,000 at December 31, 2006 on behalf of
Triple Net Properties and Capital Corp. on a consolidated basis.
The $600,000 is being held in escrow pending final approval of
the settlement agreement.
To the extent that Triple Net Properties and Capital Corp pay
the SEC an amount in excess of $1.0 million in connection
with any settlement or other resolution of this matter, Anthony
W. Thompson, NNN’s founder and former Chairman of the
Board, has agreed to forfeit to NNN up to 1,064,800 shares
of the Company’s common stock. In connection with this
arrangement, NNN entered into an escrow agreement with
Mr. Thompson and an independent escrow agent, pursuant to
which the escrow agent holds these 1,064,800 shares of
common stock that are otherwise issuable to Mr. Thompson in
connection with the NNN formation transactions to secure
Mr. Thompson’s obligations to NNN.
Mr. Thompson’s liability under this arrangement will
not exceed the value of the shares in the escrow.
General
The Company is involved in various claims and lawsuits arising
out of the ordinary conduct of its business, as well as in
connection with its participation in various joint ventures and
partnerships, many of which may not be covered by the
Company’s insurance policies. In the opinion of management,
the eventual outcome of such claims and lawsuits is not expected
to have a material adverse effect on the Company’s
financial position or results of operations.
Guarantees — From time to time the Company
provides guarantees of loans for properties under management. As
of December 31, 2007, there were 143 properties under
management with loan guarantees of approximately
$3.4 billion in total principal outstanding with terms
ranging from one to 30 years, secured by properties with a
total aggregate purchase price of approximately
$4.6 billion at December 31, 2007. As of
December 31, 2006, there were 107 properties under
management with loans that were guaranteed of approximately
$2.4 billion in total principal outstanding secured by
properties with a total aggregate purchase price of
approximately $3.4 billion.
A “non-recourse/carve-out” guarantee imposes personal
liability on the guarantor in the event the borrower engages in
certain acts prohibited by the loan documents.
Management evaluates these guarantees to determine if the
guarantee meets the criteria required to record a liability in
accordance with FIN No. 45. The liability was
insignificant as of December 31, 2007 and 2006.
Environmental Obligations — In the
Company’s role as property manager, it could incur
liabilities for the investigation or remediation of hazardous or
toxic substances or wastes at properties the Company currently
or formerly managed or at off-site locations where wastes were
disposed. Similarly, under debt financing arrangements on
properties owned by sponsored programs, the Company has agreed
to indemnify the lenders for environmental liabilities and to
remediate any environmental problems that may arise. The Company
is not aware of any environmental liability or unasserted claim
or assessment relating to an environmental liability that the
Company believes would require disclosure or the recording of a
loss contingency.
Real Estate Licensing Issues — Although Realty
was required to have real estate licenses in all of the states
in which it acted as a broker for NNN’s programs and
received real estate commissions prior to 2007, Realty did not
hold a license in certain of those states when it earned fees
for those services. In addition, almost all of Triple Net
Properties’ revenue was based on an arrangement with Realty
to share fees from NNN’s programs. Triple Net Properties
did not hold a real estate license in any state, although most
states in which properties of the NNN’s programs were
located may have required Triple Net Properties to hold a
license. As a result, Realty and the Company may be subject to
penalties, such as fines (which could be a multiple of the
amount received), restitution payments and termination of
management agreements, and to the suspension or revocation of
certain of Realty’s real estate broker licenses. To date
there have been no claims, and the Company cannot assess or
estimate whether it will incur any losses as a result of the
foregoing.
To the extent that the Company incurs any liability arising from
the failure to comply with real estate broker licensing
requirements in certain states, Mr. Thompson,
Mr. Rogers and Mr. Hanson have agreed to forfeit to
the Company up to an aggregate of 4,124,120 shares of the
Company’s common stock, and each share will be deemed to
have a value of $11.36 per share in satisfying this obligation.
Mr. Thompson has agreed to indemnify the Company, to the
extent the liability incurred by the Company for such matters
exceeds the deemed $46,865,000 value of these shares, up to an
additional $9,435,000 in cash. In connection with this
arrangement, NNN has entered into an indemnification and escrow
agreement with Mr. Thompson, Mr. Rogers,
Mr. Hanson, an independent escrow agent and NNN, pursuant
to which the escrow agent will hold 4,124,120 shares of the
Company’s common stock that are otherwise issuable to
Mr. Thompson and Mr. Rogers in connection with the
NNN’s formation transactions (2,885,520 shares for
Mr. Thompson and 1,238,600 shares for Mr. Rogers)
to secure Mr. Thompson’s and Mr. Rogers’
obligations to the Company with respect to these matters.
Mr. Thompson’s and Mr. Rogers’ liability
under this arrangement will not exceed the sum of the value of
their shares in the escrow except to the extent
Mr. Thompson may be obliged to indemnify the Company for
excess liabilities up to an additional $9,435,000 in cash. Since
Mr. Hanson is entitled over time to receive up to
743,160 shares from Messrs. Thompson and Rogers
(557,370 from Mr. Thompson and 185,790 from
Mr. Rogers) from the shares held in the indemnification and
escrow agreement, he is a party to it as well and his liability
is limited to those shares. If Mr. Hanson’s right to
receive the shares vests, then to the extent shares attributable
to his ownership are available, and not subject to potential
claims, under the indemnification and escrow agreement, he will
be permitted to remove 88,000 shares on each of
January 1, 2008 and 2009 to pay taxes.
21.
EARNINGS
PER SHARE
The Company computes earnings per share in accordance with
SFAS No. 128, Earnings Per Share
(“SFAS No. 128”). Under the provisions
of SFAS No. 128, basic net income per share is
computed using the
weighted-average number of common shares outstanding during the
period less unvested restricted shares. Diluted net income per
share is computed using the weighted-average number of common
and common equivalent shares of stock outstanding during the
periods utilizing the treasury stock method for stock options
and unvested restricted stock.
Unless otherwise indicated, all pre-merger NNN share data have
been adjusted to reflect the .88 conversion as a result of the
Merger.
On December 7, 2007, pursuant to the Merger Agreement
(i) each issued and outstanding share of common stock of
NNN was automatically converted into 0.88 of a share of common
stock of the Company, and (ii) each issued and outstanding
stock option of NNN, exercisable for common stock of NNN, was
automatically converted into the right to receive stock option
exercisable for common stock of the Company based on the same
0.88 share conversion ratio. All prior periods were
retroactively changed to reflect the 0.88 conversion. Therefore,
43,779,740 shares of common stock of NNN that were issued
and outstanding immediately prior to the Merger were
automatically converted into 38,526,171 shares of common
stock of the Company, and the 739,850 NNN stock options that
were issued and outstanding immediately prior to the Merger were
automatically converted into 651,068 stock options of the
Company.
The following is a reconciliation between weighted-average
shares used in the basic and diluted earnings per share
calculations:
Common membership units of Grubb & Ellis Realty
Investors, LLC of 27,488,000 as December 31, 2005, are
converted to the Company’s common shares for earnings per
share disclosure purpose.
(2)
Shares of NNN’s common stock as December 31, 2006, are
converted to the Company’s common shares outstanding by
applying December 7, 2007 merger exchange ratio for
earnings per share disclosure purpose.
(3)
Excluded from the calculation of diluted weighted-average common
shares were approximately 2.0 million and
181,000 shares of options and restricted stock that have an
anti-dilutive effect when applying the treasury stock method as
of December 31, 2007 and 2006, respectively.
22.
OTHER
RELATED PARTY TRANSACTIONS
Due to Related Parties — The Company, through
its consolidated subsidiaries Grubb & Ellis Apartment
REIT Advisor, LLC, and Grubb & Ellis Healthcare REIT
Advisor, LLC, bears certain general and administrative expenses
in its capacity as advisor of Apartment REIT and Healthcare
REIT, and is reimbursed for these expenses. However, Apartment
REIT and Healthcare REIT will not reimburse the Company for any
operating expenses that, in any four consecutive fiscal
quarters, exceed the greater of 2.0% of average invested assets
(as defined in their respective advisory agreements) or 25.0% of
the respective REIT’s net income for such year, unless the
board of directors of the respective REITs approve such excess
as justified based on unusual or nonrecurring factors. All
unreimbursable amounts are expensed by the Company.
Management Fees — The Company provides both
transaction and management services to parties, which are
related to a principal stockholder and director of the Company,
Kojaian affiliated entities (collectively, “Kojaian
Companies”). In addition, the Company also paid asset
management fees to the Kojaian Companies related to properties
the Company manages on their behalf. Revenue, including
reimbursable expenses related to salaries, wages and benefits,
earned by the Company for services rendered to these affiliates,
including joint ventures, officers and directors and their
affiliates, was $530,000, $0, and $0, respectively for the years
ended December 31, 2007, 2006 and 2005.
Other Related Party — GERI, which is wholly
owned by the Company, owns a 50.0% managing member interest in
Grubb & Ellis Apartment REIT Advisor, LLC.
Grubb & Ellis Apartment Management, LLC owns a 25.0%
equity interest in Grubb & Ellis Apartment REIT
Advisor, LLC and each of Scott D. Peters, the Company’s
Chief Executive Officer and President, Louis J Rogers, former
President of GERI and former director of NNN, and Andrea R.
Biller, the Company’s General Counsel, Executive Vice
President and Secretary, received an equity interest of 18.0% of
Grubb & Ellis Apartment Management, LLC. In April
2007, Grubb & Ellis Apartment Management, LLC redeemed
Mr. Rogers’ membership interest in connection with the
termination of his employment with NNN and GERI’s
membership interest increased by the amount of
Mr. Rogers’ redeemed membership interest to 64.0%.
GERI owns a 75.0% managing member interest in Grubb &
Ellis Healthcare REIT Advisor, LLC. Grubb & Ellis
Healthcare Management, LLC owns a 25.0% equity interest in
Grubb & Ellis Healthcare REIT Advisor, LLC and each of
Mr. Peters, Ms. Biller and Jeffery T. Hanson, the
Company’s Chief Investment Officer and GERI’s
President, received an equity interest of 18.0% of
Grubb & Ellis Healthcare Management, LLC.
Anthony W. Thompson, former Chairman of the Company and NNN, as
a special member, is entitled to receive up to $175,000 annually
in compensation from each of Grubb & Ellis Apartment
Management, LLC and Grubb & Ellis Healthcare
Management, LLC.
The grants of these membership interests in Grubb &
Ellis Apartment Management, LLC and Grubb & Ellis
Healthcare Management, LLC to certain executives are being
accounted for by the Company as a profit
sharing arrangement. Compensation expense is recorded by the
Company when the likelihood of payment is probable and the
amount of such payment is estimable, which generally coincides
with Grubb & Ellis Apartment REIT Advisor, LLC and
Grubb & Ellis Healthcare REIT Advisor, LLC recording
its revenue. Compensation expense related to this profit sharing
arrangement associated with Grubb & Ellis Apartment
Management, LLC includes cash distributions based on membership
interests of $175,000 and $22,000 earned by Mr. Thompson
and $159,418 and $50,000 earned by each of Mr. Peters and
Ms. Biller from Grubb & Ellis Apartment
Management, LLC for each of the calendar years ended
December 31, 2007 and 2006, respectively. No cash
distributions were paid in 2005. Compensation expense related to
this profit sharing arrangement associated with
Grubb & Ellis Healthcare Management, LLC includes cash
distributions based on membership interests of $175,000 earned
by Mr. Thompson and $413,546 earned by each of
Messrs. Peters and Hanson and Ms. Biller from
Grubb & Ellis Healthcare Management, LLC for the
calendar year ended December 31, 2007. No cash
distributions were paid in 2006 or 2005.
As of December 31, 2007 and 2006, the remaining 64.0% and
46.0%, respectively, equity interest in Grubb & Ellis
Apartment Management, LLC and the remaining 46.0% equity
interest in Grubb & Ellis Healthcare Management, LLC
were owned by GERI; however, the Partnership agreements require
that any allocable earnings attributable to GERI’s
ownership interests be paid out as performance bonuses to
Company employees. As such, Grubb & Ellis Apartment
Management, LLC incurred $492,000, $182,000 and $0 for the years
ended December 31, 2007, 2006 and 2005, respectively, and
Grubb & Ellis Healthcare Management, LLC incurred
$882,000, $0 and $0 for the years ended December 31, 2007,
2006 and 2005, respectively, to other Company employees, which
was included in compensation expense in the consolidated
statement of operations.
In connection with the SEC investigation, as described in
Note 20, to the extent that the Company pays the SEC an
amount in excess of $1.0 million in connection with any
settlement or other resolution of this matter, Mr. Thompson
has agreed to forfeit to the Company up to 1,064,800 shares
of its common stock. In connection with this arrangement, NNN
has entered into an escrow agreement with Mr. Thompson and
an independent escrow agent, pursuant to which the escrow agent
holds 1,064,800 shares of the Company’s common stock
that were otherwise assumable to Mr. Thompson in connection
with the NNN formation transactions to secure
Mr. Thompson’s obligations to the Company.
Mr. Thompson’s liability under this arrangement will
not exceed the shares in the escrow. The Company cannot make any
assurance as to the value of the shares at the time of any claim
under this agreement.
Mr. Thompson has transferred the following amounts of his
common stock owned in Capital Corp. to each of Mr. Rogers,
our former director (25.0%) and to Kevin K. Hull, the Chief
Executive Officer and President of Capital Corp. (25.0%). The
transfers to Mr. Rogers were made as follows: 10.0% in
November 2005, for a value of $84,000; 5.0% in August 2006, for
a value of $169,000; and 10.0% in September 2006 for a value of
$337,000. The transfers to Mr. Hull were made as follows:
5.0% in February 2006 for a value of $42,000; and 20.0% in
September 2006 for a value of $675,000. Because
Mr. Thompson was an affiliate of Capital Corp. at the time
of these transfers, these transfers resulted in compensation
charges to Capital Corp. In addition, NNN agreed to pay the
income taxes (including an associated
“gross-up”
payment to cover the tax on the tax payment) incurred by
Mr. Rogers ($467,000) and Mr. Hull (as to only
approximately one-half of such liability, or $191,000) in such
transactions.
Mr. Thompson has transferred 25.0% of his common stock
interest in Realty to Mr. Rogers as follows: 12.0% in
January 2005, for a value of $1.5 million; 4.0% in August
2005, for a value of $685,000; 4.0% in August 2006, for a value
of $1.1 million; and 5.0% in September 2006, for a value of
$1.4 million. Because Mr. Thompson was an affiliate of
Realty at the time of these transfers, these transfers resulted
in compensation charges to Realty. In addition, NNN agreed to
pay the income taxes (including an associated
gross-up
payment) aggregating $2.0 million, incurred by
Mr. Rogers in such transactions.
Mr. Thompson and Mr. Rogers have agreed to transfer up
to 15.0% of the common stock of Realty they own to
Mr. Hanson, assuming he remains employed by the Company in
equal increments on July 29, 2007, 2008 and 2009. The
transfers will be settled with 743,160 shares of the
Company’s common stock (557,370 from Mr. Thompson and
185,790 from Mr. Rogers). Because Mr. Thompson and
Mr. Rogers were affiliates of NNN at the time of such
transfers, NNN and the Company recognized a compensation charge
(See Note 23). Mr. Hanson is not entitled to any
reimbursement for his tax liability or any
gross-up
payment.
On September 20, 2006, the Company awarded Mr. Peters
a bonus of $2.1 million, which was payable in
178,957 shares of the Company’s common stock,
representing a value of $1.3 million and a cash tax
gross-up
payment of $854,000.
G REIT, Inc. had agreed to pay Mr. Peters and
Ms. Biller, retention bonuses in connection with its
stockholder approved liquidation of $50,000 and $25,000,
respectively, upon the filing of each of G REIT’s
annual and quarterly reports with the SEC during the period of
the liquidation process, beginning with the annual report for
the year ending December 31, 2005. These retention bonuses
were agreed to by the independent directors of G REIT and
approved by the stockholders of G REIT in connection with
G REIT’s stockholder approved liquidation. As of each
of December 31, 2007 and December 31, 2006,
Mr. Peters and Ms. Biller have received retention
bonuses of $200,000 and $100,000 from G REIT, respectively.
On January 28, 2008, G REIT’s remaining assets
and liabilities were transferred to G REIT Liquidating
Trust. Effective January 30, 2008, and March 4, 2008,
respectively, Mr. Peters and Ms. Biller irrevocably
waived their rights to receive all future retention bonuses from
G REIT Liquidating Trust. Additionally, Mr. Peters and
Ms. Biller, each were entitled to a performance-based bonus
of $100,000 upon the receipt by GERI of net commissions
aggregating $5,000,000 or more from the sale of G REIT
properties. As of December 31, 2007, Mr. Peters and
Ms. Biller have received their performance-based bonuses of
$100,000 each from GERI.
T REIT, Inc. had paid performance bonuses in connection with its
shareholder approved liquidation to Ms. Biller of $25,000
in August 2005 and $35,000 in March 2006. On July 20, 2007,
T REIT’s remaining assets and liabilities were transferred
to T REIT Liquidating Trust.
The Company’s directors and officers, as well as officers,
managers and employees have purchased, and may continue to
purchase, interests in offerings made by the Company’s
programs at a discount. The purchase price for these interests
reflects the fact that selling commissions and marketing
allowances will not be paid in connection with these sales. The
net proceeds to the Company from these sales made net of
commissions will be substantially the same as the net proceeds
received from other sales.
Mr. Thompson has routinely provided personal guarantees to
various lending institutions that provided financing for the
acquisition of many properties by our programs. These guarantees
cover certain covenant payments, environmental and hazardous
substance indemnification and indemnification for any liability
arising from the SEC investigation of Triple Net Properties. In
connection with the formation transactions, the Company
indemnified Mr. Thompson for amounts he may be required to
pay under all of these guarantees to which Triple Net
Properties, Realty or Capital Corp. is an obligor to the extent
such indemnification would not require the Company to book
additional liabilities on the Company’s balance sheet.
In September 2007, NNN acquired Cunningham Lending Group LLC
(“Cunningham”), a company that was wholly-owned by
Mr. Thompson, for $255,000 in cash. Prior to the
acquisition, Cunningham made unsecured loans to some of the
properties under management by GERI. The loans, which bear
interest at rates ranging from 8.0% to 12.0% per annum are
reflected in advances to related parties on the Company’s
balance sheet and are serviced by the cash flows from the
programs. In accordance with FIN No. 46R, the Company
consolidated Cunningham in its financial statements beginning in
2005.
The Company has made advances totaling $1.0 million and
$3.3 million as of December 31, 2007 and
December 31, 2006, respectively to Colony Canyon, a
property 30.0% owned by Mr. Thompson. The advances
bear interest at 10.0% per annum and are required to be repaid
within one year (although the repayments can and have been
extended from time to time).
NNN was organized in September 2006 to acquire each of Triple
Net Properties, Realty, and Capital Corp, to bring the
businesses conducted by those companies under one corporate
umbrella. On November 30, 2006, NNN completed a
$160.0 million private placement of common stock to
institutional investors and certain accredited investors with
14.1 million shares of the Company’s common stock sold
in the offering at $11.36 per share. Net proceeds from the
offering were $146.0 million. Triple Net Properties was the
accounting acquirer of Realty and Capital Corp.
23.
EMPLOYEE
BENEFIT PLANS
Stock
Incentive Plans
Unless otherwise indicated, all pre-merger NNN share data have
been adjusted to reflect the conversion as a result of the
Merger (see Note 9).
2006 Omnibus Equity Plan — In September 2006,
the NNN’s board of directors and then sole stockholder
approved and adopted the 2006 Long-Term Incentive Plan (the
“2006 Plan”). As a result of the merger of the Company
and NNN all issued and outstanding stock option awards under the
2006 Plan were merged into and are subject to the general
provisions of the 2006 Omnibus Equity Plan (the “Omnibus
Plan”). Awards previously issued pursuant to the 2006 Plan
maintain all of the specific rights and characteristics as they
held when originally issued, except for the number of shares
represented within each award. The numbers of shares contained
in awards issued under the 2006 Plan have been multiplied by a
conversion factor of 0.88 to calculate a post-merger equivalent
share amount for each award. In addition, the exercise price of
any option award originally granted under the 2006 Plan has been
divided by the same conversion factor of 0.88 to achieve a
post-merger equivalent exercise price. All tables contained
within this Note 23 of Notes to Consolidated Financial
Statements have been retroactively restated to reflect the above
conversion factors, effective as if the conversion had been
calculated as of January 1, 2005, the earliest date
presented.
A total of 2,898,184 shares of common stock (plus
restricted shares issuable to outside directors pursuant to a
formula contained in the plan) remained eligible for future
grant under the Omnibus Plan as of December 31, 2007.
Non-Qualified Stock Options. Non-qualified
stock options, or NQSOs, provide for the right to purchase
shares of common stock at a specified price not less than its
fair market value on the date of grant, and usually will become
exercisable (in the discretion of the administrator) in one or
more installments after the grant date, subject to the
completion of the applicable vesting service period or the
attainment of pre-established performance goals.
In terms of vesting periods, 1,105,219 stock options were
granted and vested at the date of merger. Other stock options
granted during the year ended December 31, 2007; vest in
equal annual increments over the three years following the date
of grant. Of the stock options granted during the year ended
December 31, 2006, 60,133 options vested and were
exercisable on the date of grant. The remaining options vest in
equal annual increments over the two years following the date of
grant.
These NQSOs are subject to a maximum term of ten years from the
date of grant and are subject to earlier termination under
certain conditions. Because these stock option awards were
granted to the Company’s senior executive officers, no
forfeiture rate was assumed.
Restricted Stock. Restricted stock may be
issued at such price, if any, and may be made subject to such
restrictions (including time vesting or satisfaction of
performance goals), as may be determined by the administrator.
Restricted stock typically may be repurchased by the Company at
the original purchase price, if any, or forfeited, if the
vesting conditions and other restrictions are not met.
For the years ended December 31, 2007 and 2006, the Company
granted restricted stock awards of 1,449,372 shares and
541,200 shares, respectively. Of the 541,200 shares of
restricted stock awarded to executive officers and directors
during 2006, 456,133 shares were vested as of
December 31, 2007. Total compensation expense recognized
for restricted stock awards was $5.5 million,
$1.7 million, and $0 for the years ended December 31,2007, 2006 and 2005, respectively. The related income tax
benefit for the years ended December 31, 2007, 2006 and
2005 was $2.2 million, $681,000 and $0, respectively. As of
December 31, 2007, there was $12.5 million of
unrecognized compensation expense related to unvested
SFAS No. 123R requires companies to estimate the fair
value of equity awards on the date of grant using an
option-pricing model. The Company uses the Black-Scholes
option-pricing model. The determination of the fair value of
option-based awards using the Black-Scholes model incorporates
various assumptions including exercise price, fair value at date
of grant, volatility, and expected life of awards, risk-free
interest rates and expected dividend yield. The expected
volatility is based on the historical volatility of comparable
publicly traded companies in the real estate sector over the
most recent period commensurate with the estimated expected life
of the Company’s stock options. The expected life of the
Company’s stock options represents the average between the
vesting and contractual term, pursuant to SAB No. 107.
The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants during
the years ended December 31, 2007 and 2006. No options were
granted for the year ended December 31, 2005:
Option valuation models require the input of subjective
assumptions including the expected stock price volatility and
expected life. For the years ended December 31, 2007, 2006,
and 2005, the Company recognized
stock-based compensation related to stock option awards of
$619,000 , $281,000 and $0, respectively. The related income tax
benefit for the years ended December 31, 2007, 2006 and
2005 was $248,000, $110,000 and $0, respectively. The total fair
value of stock options that vested for the years ended
December 31, 2007, 2006 and 2005 was $189,000, $250,000 and
$0 respectively. As of December 31, 2007, there was
$1.1 million in unrecognized compensation expense related
to stock option awards that the Company expects to recognize as
follows: $634,000 in 2008, $466,000 in 2009 and $29,000 in 2010.
Employment Agreements. In October 2006, the
Company entered into employment agreements with each of
Mr. Peters, Mr. Rogers, Ms. Biller, Francene
LaPoint, the Company’s Executive Vice President, Accounting
and Finance, Mr. Hanson and Mr. Hull. These agreements
provide that each of these executives agree to devote
substantially all of his or her full working time to NNN’s
business. The agreements have a term of three years, and provide
for an annual base salary and bonus targets under the
performance bonus program. Additional benefits include health
benefits and other fringe benefits as the board or compensation
committee determines. Mr. Hanson’s employment
agreement further provides for a special bonus based on his
ability to procure new sources of equity, and
Mr. Peters’ new employment arrangement with the
combined company provides for a $1.0 million payment for a
second residence in California following the close of the Merger
and the purchase of a second residence. In January, 2008,
Mr. Peters irrevocably waived his right to receive the
$1.0 million payment for a second residence in California.
Other stock award. On September 20, 2006,
the Company awarded Mr. Peters a bonus of
$2.1 million, which was payable in 178,083 shares of
the Company’s common stock for a value of
$1.3 million, and cash of $854,000.
Other Equity Awards — In accordance with
SFAS No. 123R, share-based payments awarded to an
employee of the reporting entity by a related party, or other
holder of an economic interest in the entity, as compensation
for services provided to the entity are share-based payment
transactions to be accounted for under this Statement unless the
transfer is clearly for a purpose other than compensation for
services to the reporting entity. The economic interest holder
is one who either owns 10.0% or more of an entity’s common
stock or has the ability, directly or indirectly, to control or
significantly influence the entity. The substance of such a
transaction is that the economic interest holder makes a capital
contribution to the reporting entity, and that entity makes a
share-based payment to its employee in exchange for services
rendered. SFAS No. 123R also requires that the fair
value of unvested stock options or awards granted by an acquirer
in exchange for stock options or awards held by employees of the
acquiree shall be determined at the consummation date of the
acquisition. The incremental compensation cost shall be
(1) the portion of the grant-date fair value of the
original award for which the requisite service is expected to be
rendered (or has already been rendered) at that date plus
(2) the incremental cost resulting from the acquisition
(the fair market value at the consummation date of the
acquisition over the fair value of the original grant).
On July 29, 2006, Mr. Thompson and Mr. Rogers
agreed to transfer up to 15.0% of the outstanding common stock
of Realty to Mr. Hanson, assuming he remained employed by
the Company, in equal increments on July 29, 2007, 2008 and
2009. Due to the acquisition of Realty, the transfers were
settled with 743,160 shares of the Company’s common
stock (557,370 shares from Mr. Thompson and
185,790 shares from Mr. Rogers). Since Mr. Thompson
and Mr. Rogers were affiliates who owned more than 10.0% of
Realty’s common stock and had the ability, directly or
indirectly, to control or significantly influence the entity,
and the award was granted to Mr. Hanson in exchange for
services provided to Realty which are vested upon completion of
the respective service period, the fair value of the award was
accounted for as stock-based compensation in accordance with
SFAS No. 123R. These shares included rights to
dividends or other distributions declared on or prior to
July 29, 2009. As a result, the Company recognized
$2.7 million and $333,000 in stock-based compensation and a
related income tax benefit (deferred tax asset) of
$1.1 million and $130,000 for the years ended
December 31, 2007 and 2006, respectively. As of
December 31, 2007, there
was $4.2 million of unrecognized stock-based compensation
related to the unvested portion of the award that the Company
expects to recognize as follows: $2.7 million in 2008 and
$1.5 million in 2009.
On December 7, 2007, Mr. Thompson transferred
528,000 shares of his own Company common stock to
Mr. Peters, which vests in equal annual increments over the
five years following the date of grant Since Mr. Thompson
was affiliate who owned more than 10.0% of the Company’s
common stock and had the ability, directly or indirectly, to
control or significantly influence the entity, and the award was
granted to Mr. Peters in exchange for services provided to
the Company which are vested upon completion of the respective
service period, the fair value of the award was accounted for as
stock-based compensation in accordance with
SFAS No. 123R. These shares included rights to
dividends or other distributions declared. As a result, the
Company recognized $48,000 in stock-based compensation and a
related income tax benefit (deferred tax asset) of $19,000 for
the year ended December 31, 2007. As of December 31,2007, there was $3.3 million of unrecognized stock-based
compensation related to the unvested portion of the award that
the Company expects to recognize as follows: $680,000 in 2008,
$678,000 in 2009, $678,000 in 2010, $678,000 in 2011, and
$632,000 in 2012.
401k Plan — The Company adopted a 401(k) plan
(the “Plan”) for the benefit of its employees. The
Plan covers employees of the Company and eligibility begins the
first of the month following the hire date. For the years ended
December 31, 2007, 2006 and 2005, the Company contributed
$764,000, $525,000 and $409,000 to the Plan, respectively.
24.
INCOME
TAXES
Effective December 7, 2007, NNN became a wholly owned
subsidiary of the Company in a reverse merger under Internal
Revenue Code §368(a). As of the merger date, the Company
recorded
non-amortizable
goodwill, and both amortizable and
non-amortizable
intangible assets. Accordingly, the Company recorded a deferred
tax liability of $34.6 million for the value of the
intangible assets acquired in the transaction.
As a result of the merger the Company has combined taxable
income of $49.6 million and is subject to the highest
federal statutory tax rate of 35%. The beginning deferred tax
balances of the Company have been adjusted to reflect the 35%
tax rate at which the deferred tax balances are expected to be
realized, with the appropriate adjustment recorded to either
income tax expense or Goodwill based upon which of the merged
companies generated such beginning deferred tax balances in
accordance with SFAS No. 109 and SFAS No. 141.
Prior to the 144A offering, GERI was organized and operated as a
partnership for income tax purposes. Accordingly, its members,
rather than GERI, were subject to federal and state income taxes
on their respective share of GERI’s taxable income.
Accordingly, there was no income tax provision recorded for the
periods prior to November 15, 2006 for GERI.
The components of income tax expense (benefit) from continuing
operations for the years ended December 31, 2007, 2006 and
2005 consisted of the following:
Year Ended December 31,
(In thousands)
2007
2006
2005
Current:
Federal
$
16,991
$
375
$
—
State
3,195
331
—
20,186
706
—
Deferred:
Federal
(5,313
)
(3,956
)
—
State
(605
)
(980
)
—
(5,918
)
(4,936
)
—
$
14,268
$
(4,230
)
$
—
The Company recorded prepaid taxes totaling approximately
$2.4 million as of December 31, 2007, comprised
primarily of tax refund receivables, prepaid tax estimates and
tax effected operating loss carrybacks related to state tax
filings. The Company also received net tax refunds of
approximately $0.3 million during 2007.
Grubb & Ellis Company generated a federal net
operating loss (NOL) of approximately $8.2 million for the
taxable period of the acquired entity ending on the merger date.
This NOL carryforward is subject to an annual limitation under
IRC section 382 because the merger caused a change of
ownership of the Company of greater than 50%. The annual
limitation is approximately $7.3 million. At
December 31, 2007, federal net operating loss carryforwards
were available to the Company in the amount of approximately
$9.1 million which expire from 2008 to 2027.
In evaluating the need for a valuation allowance at
December 31, 2007, the Company evaluated both positive and
negative evidence in accordance with the requirements of
SFAS No. 109, “Accounting for Income Taxes”.
Given the historical earnings of the Company, management
believes that it is more likely than not that the entire federal
net operating loss of $9.1 million will be used in the
foreseeable near future, and therefore has recorded no valuation
allowance against the deferred tax asset for the federal NOL
carryforwards. As of the date of the merger, Grubb &
Ellis Company also had state net operating loss carryforwards
although a substantial portion of these deferred assets were
offset by a valuation allowance totaling $3.0 million, as
the future utilization of these state NOLs is uncertain. The
Company also recorded an increase to the valuation allowance of
$0.08 million in the current period to reflect the net
realizable value of the state NOLs at December 31, 2007.
The differences between the total income tax provision or
(benefit) of the Company for financial statement purposes and
the income taxes computed using the applicable federal income
tax rate of 35.0% for 2007 and 34% for 2006 and 2005 were as
follows (in thousands):
Year Ended December 31,
(In thousands)
2007
2006
2005
Federal income taxes at the statutory rate
$
12,366
$
4,035
$
—
Income of properties not subject to corporate income tax(1)
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting and income tax purposes. The
significant components of deferred tax assets and liabilities as
of December 31, 2007 consisted of the following:
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting and income tax purposes. The
significant components of deferred tax assets and liabilities as
of December 31, 2006 consisted of the following:
The Company increased its net deferred tax liabilities by
approximately $21.8 million during calendar year 2007
primarily related to an increase in deferred tax liabilities
associated with the intangible assets acquired as a result of
the merger. These GAAP basis intangible assets are not
amortizable for income tax purposes. The deferred tax
liabilities are offset by increases in its deferred tax assets
pertaining to federal and state NOL carryforwards and stock
compensation expense under FAS 123R.
Effective January 1, 2007, the Company adopted
FIN No. 48 which defines the methodology for
recognizing the benefits of tax return positions as well as
guidance regarding the measurement of the resulting tax
benefits. FIN No 48 requires an enterprise to recognize the
financial statement effects of a tax position when it is more
likely than not (defined as a likelihood of more than 50%),
based on the technical merits, that the position will be
sustained upon examination. In addition, FIN No. 48
provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure, and
transition. The evaluation of whether a tax position meets the
more-likely-than-not recognition threshold requires a
substantial degree of judgment by management based on the
individual facts and circumstances. Actual results could differ
from these estimates.
As a result of the implementation of FIN No. 48, the
Company had no additional liability that was required to be
recorded; accordingly, no charge was taken to opening retained
earnings on January 1, 2007 upon adoption of
FIN No. 48.
The Company classified estimated interest and penalties related
to unrecognized tax benefits in our provision for income taxes.
As of December 31, 2007, the Company remains subject to
examination by certain tax jurisdictions for the tax years ended
December 31, 2003 through 2007. There were no significant
changes in the accrued liability related to uncertain tax
positions during the year ended December 31, 2007, nor does
the Company anticipate significant changes during the next
12-month
period.
On February 28, 2008, at a special meeting of the
stockholders of GERA held to vote on, among other things, the
proposed transaction with the Company, GERA failed to obtain the
requisite consents of its stockholders to approve its proposed
business combination (the transactions contemplated by the
Purchase Agreement). Specifically, of the 23,958,334 shares
of GERA common stock eligible to vote with respect to the
proposed transaction, stockholders holding an aggregate of
22,695,082 shares voted on the transaction. Of those
stockholders voting, 17,144,944 shares were cast against
the proposed business combination, and the holders of all such
17,144,944 shares also elected to convert their shares into
a pro rata share of GERA’s trust account.
4,860,127 shares voted in favor of the proposed business
combination, and the remaining shares did not vote with respect
to the proposed transaction.
As a result thereof, GERA, in accordance with
Section 8.1(f) of the Purchase Agreement, advised the
Company in a letter effective February 28, 2008, that it
was terminating the Purchase Agreement in accordance with its
terms.
As a result of its failure to obtain the requisite stockholder
approvals, GERA, in accordance with its charter, will proceed to
liquidation having failed to effect a business combination
within the proscribed deadline of March 3, 2008. As a
consequence, the Company will write-off in the first quarter of
2008 its investment in GERA of approximately $5.6 million,
including $4.1 million related to stock and warrant
purchases and $1.5 million related to operating advances
and third party costs. In addition, the various exclusive
service agreements that the Company had previously entered into
with GERA for transaction services, property and facilities
management, and project management, will no longer be of any
force or effect. The Company presently intends to market the
three commercial properties so as to affect their sale on or
before September 30, 2008, as required under the terms of
its credit facility.
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
Changes
in Registrant’s Certifying Accountant
As previously disclosed by the Company, in its Current Report on
Form 8-K
filed December 13, 2007, the Company effected its merger
with NNN, pursuant to which NNN became a wholly owned subsidiary
of the Company. The closing of the Merger constituted a change
of control of the Company, as the former stockholders of NNN in
the aggregate own approximately 60% of the issued and
outstanding common stock of the Company immediately subsequent
to the Merger. In addition, the composition of the
Company’s board of directors and executive management also
changed upon the consummation of the Merger. The Merger was
accounted for using the purchase method of accounting under
generally accepted accounting principles, and under the purchase
method of accounting, NNN is considered the acquirer of the
Company.
On December 10, 2007, the audit committee of the Company
chose to dismiss Deloitte & Touche LLP
(“Deloitte & Touche”), the independent
registered public accounting firm that was previously engaged to
audit the financial statements of NNN. In the past two years, no
report on the financial statements of NNN issued by
Deloitte & Touche contained an adverse opinion or a
disclaimer of opinion, or was qualified or modified as to
uncertainty, audit scope or accounting principles. In addition,
during NNN’s two most recent fiscal years and any
subsequent interim period preceding the dismissal of
Deloitte & Touche, there were no disagreements with
Deloitte & Touche on any matter of accounting
principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreement(s), if not
resolved to the satisfaction of Deloitte & Touche,
would have caused it to make reference to the subject matter of
the disagreement(s) in connection with its report.
Except as described below, there were no reportable events under
Item 304(a)(1)(v) of
Regulation S-K
that occurred during the fiscal years ended December 31,2005 and December 31, 2006 and through December 10,2007. The audit committee of the board of directors of the
Company has discussed the material weakness described below with
Deloitte & Touche, and the Company has authorized
Deloitte & Touche to respond fully to the inquiries of
a successor auditor concerning the subject matter below.
In connection with Deloitte & Touche’s audit of
the annual financial statements of NNN for the year ended
December 31, 2006, Deloitte & Touche advised NNN
that it believed the following matter constituted a material
weakness:
Material weakness related to stock based
compensation — NNN did not timely record a stock
compensation charge related to an equity award granted to an
employee by principal shareholders in exchange for services to
be provided to NNN. There is more than a remote likelihood that
a material misstatement could have occurred due to the existence
of this material weakness in internal control. The misstatement
resulted from a deficiency in the operation of internal control
over financial reporting.
On December 10, 2007, the audit committee of the Company
appointed Ernst & Young who was previously engaged by
the Company as its independent registered public accounting
firm, to audit financial statements of the Company going
forward. During the years ended December 31, 2005 and 2006,
and during the transition period from January 1, 2007
through December 10, 2007, the Company did not consult with
Ernst & Young in regards to NNN with respect to any of
(i) the application of accounting principles to a specified
transaction, either completed or proposed; (ii) the type of
audit opinion that might be rendered on the Company’s
financial statements; or (iii) any matter that was either
the subject of a disagreement or a reportable event.
The Company has established controls and procedures to ensure
that material information relating to the Company is made known
to the officers who certify the Company’s financial reports
and to the members of senior management and the Board of
Directors.
Based on management’s evaluation as of December 31,2007, the Principal Executive Officer and the Principal
Financial Officer have concluded that the Company’s
disclosure controls and procedures (as defined in
Rules 13a-15(c)
and
15d-15(e)
under the Exchange Act) are effective to ensure that
information required to be disclosed by the Company is recorded,
processed, summarized, and reported within the time periods
specified in the SEC’s rules and forms.
Changes
in Internal Controls over Financial Reporting
There were no changes to the Company’s controls over
financial reporting during the fourth quarter ended
December 31, 2007 that have materially affected, or are
reasonably likely to materially affect, the Company’s
internal controls over financial reporting.
No
Management’s Report on Internal Control over Financial
Reporting
Although it would otherwise be required to do so, as a
consequence of the Merger, the Company has received a waiver
from the SEC to comply with the SEC’s rules under
Section 404 of the Sarbanes-Oxley Act of 2002 that it
furnish a report on its internal control over financial
reporting with respect to the fiscal year ended
December 31, 2007, and it will not have to do so until it
files its Annual Report on
Form 10-K
for the fiscal year ending December 31, 2008.
No
Auditor’s Report on Internal Control
This annual report does not include an attestation report of the
Company’s registered public accounting firm regarding
internal control over financial reporting. Although it would
otherwise be required to do so, as a consequence of the Merger,
the Company has received a waiver from the SEC to comply with
the SEC’s rules under Section 404 of the
Sarbanes-Oxley Act of 2002 that it furnish a report from its
independent registered public accounting firm on its internal
control over financial reporting with respect to the fiscal year
ended December 31, 2007, and it will not have to do so
until it files its Annual Report on
Form 10-K
for the fiscal year ending December 31, 2008. See
“Risk Factors — Risks Related to the Company
in General — The Company will not be required tofurnish an auditor’s report on its internal control overfinancial reporting until December 2008.”
Directors,
Executive Officers and Corporate Governance
Information
about the Directors
The Company’s Board is comprised of three Classes of
directors. The term of office of each Class A director
extends until the first annual meeting of Company stockholders
following the special meeting held December 6, 2007 (the
“Special Meeting”) and until his successor is elected
and qualified. The term of office of each Class B director
extends until the second annual meeting of Company stockholders
following the Special Meeting and until his successor is elected
and qualified. The term of office of each Class C director
extends until the annual meeting of Company stockholders in 2010
and until his successor is elected and qualified. Thereafter,
the term of each Class shall be three years from the applicable
annual meeting.
Class A directors
Scott D. Peters
50, has served as the Company’s Chief Executive Officer and
President and as a director of the Company since December 2007.
Mr. Peters joined NNN’s predecessor, GERI, in
September 2004 as Executive Vice President and Chief Financial
Officer. Mr. Peters served as Chief Executive Officer and
President of NNN since November 2006, a director since September
2006 and Chairman since December 2007. Mr. Peters has also
served as Chairman, President and Chief Executive Officer of
Grubb & Ellis Healthcare REIT, Inc. since April 2006,
Executive Vice President and a director of Grubb &
Ellis Apartment REIT, Inc. since January 2006 and April 2007,
respectively, and President and Chief Executive Officer of
G REIT, Inc., from December 2005 to January 2008, having
previously served as that company’s Executive Vice
President and Chief Financial Officer from September 2004 to
December 2005. Mr. Peters served as Senior Vice President
and Chief Financial Officer and a director of Golf
Trust America, Inc., a publicly traded real estate
investment trust, from February 1997 to February 2007.
Harold H. Greene
69, has served as a director of the Company since December 2007.
Mr. Greene also has served as a director of NNN from
November 2006 to December 2007. Mr. Greene is a
40-year
veteran of the commercial and residential real estate lending
industry. He most recently served as the Managing Director for
Bank of America’s California Commercial Real Estate
Division from 1998 to his retirement in 2001, where he was
responsible for lending to commercial real estate developers in
California and managed an investment portfolio of approximately
$2.6 billion. From 1990 to 1998, Mr. Greene was the
Executive Vice President of SeaFirst Bank in Seattle, Washington
and prior to that he served as the Vice Chairman of MetroBank
from 1989 to 1990 and in various positions, including Senior
Vice President in charge of the Asset Based Finance Group, with
Union Bank, where he worked for 27 years. Mr. Greene
currently serves as a director of Gary’s and Company
(men’s clothing retailer), as a director and member of the
audit committee of Paladin Realty Income Properties, Inc., and
as a director and member of the audit, compensation and
nominating and corporate governance committees of William Lyon
Homes.
D. Fleet Wallace
40, has served as a director of the Company since December 2007.
Mr. Wallace also has served as a director of NNN from
November 2006 to December 2007. Mr. Wallace is a principal
and co-founder of McCann Realty Partners, LLC, an apartment
investment company focusing on garden apartment properties in
the Southeast formed in October 2004. Mr. Wallace also
serves as principal of
Greystone Capital Management, LLC, formed in September 2001, and
helps manage Greystone Fund, L.P. Greystone Fund, L.P. is a
professionally managed opportunity fund invested primarily in
promising venture capital opportunities and distressed assets.
From April 1998 to August 2001, Mr. Wallace served as
corporate counsel and assistant secretary of United Dominion
Realty Trust, Inc., a publicly-traded real estate investment
trust. From September 1994 to April 1998, Mr. Wallace was
in the private practice of law with McGuire Woods in Richmond,
Virginia. Mr. Wallace has also served as a Trustee of
G REIT Liquidating Trust since January 2008.
Class B directors
Robert J. McLaughlin
75, has served as a director of the Company since July 2004.
Mr. McLaughlin previously served as a director of the
Company from September 1994 to March 2001. He founded The Sutter
Group in 1982, a management consulting company that focuses on
enhancing shareholder value, and currently serves as its
President. Previously, Mr. McLaughlin served as President
and Chief Executive Officer of Tru-Circle Corporation, an
aerospace subcontractor, from November 2003 to April 2004, and
as Chairman of the Board of Directors of Imperial Sugar Company
from August 2001 to February 2003, and as Chairman and Chief
Executive Officer from October 2001 to April 2002. He is also a
director of Imperial Sugar Company.
Gary H. Hunt
59, has served as a director of the Company since December 2007.
Mr. Hunt also has served as a director of NNN from November
2006 to December 2007. Mr. Hunt has served as the managing
partner of California Strategies, LLC, a privately held
consulting firm in Irvine, California that works with large
homebuilders, real estate companies and government entities
since 2001. Prior to serving with California Strategies,
Mr. Hunt was the executive vice president and served on the
board of directors and on the Executive Committee of the Board
of The Irvine Company, a
110-year-old
privately held company that plans, develops and invests in real
estate primarily in Orange County, California for 25 years.
He also serves on the board of directors of Glenair Inc., The
Beckman Foundation and William Lyon Homes. Mr. Hunt has
also served as a Trustee of G REIT Liquidating Trust since
January 2008.
Glenn L. Carpenter
65, has served as a director of the Company since December 2007
and has served as Chairman of the Board of the Company since
February 8, 2008. Mr. Carpenter also has served as a
director of NNN from November 2006 to December 2007. Since
August 2001, Mr. Carpenter has served as the Chief
Executive Officer, President and Chairman of FountainGlen
Properties, LP, a privately held company in Newport Beach,
California, that develops, owns and operates apartment
communities for active seniors. Prior to serving with
FountainGlen, from 1994 to 2001, Mr. Carpenter was the
Chief Executive Officer and founder of Pacific Gulf Properties
Inc., a publicly traded REIT that developed and operated
industrial business parks and various types of apartment
communities. From 1970 to 1994, Mr. Carpenter served as
Chief Executive Officer and President, and other officer
positions of Santa Anita Realty Enterprises Inc., a publicly
traded REIT that owned and managed industrial office buildings,
apartments and shopping centers. He has received numerous honors
in the real estate field including the 2000 Real Estate Man of
the Year Award and was voted the 1999 Orange County Entrepreneur
of the Year for real estate. Mr. Carpenter sits on the
board of councilors of the School of Gerontology at the
University of Southern California and is a
council and executive board member of the American Seniors
Housing Association.
Class C directors
C. Michael Kojaian
46, has served as a director of the Company since December 1996,
and served as the Chairman of the Board of Directors of the
Company from June 2002 until December 7, 2007. He has been
the President of Kojaian Ventures, L.L.C. and also Executive
Vice President, a director and a shareholder of Kojaian
Management Corporation, both of which are investment firms
headquartered in Bloomfield Hills, Michigan, since 2000 and
1985, respectively. He is also a director of Arbor Realty Trust,
Inc. Mr. Kojaian has also served as the Chairman of the
Board of Directors of Grubb & Ellis Realty Advisors,
Inc., an affiliate of the Company, since its inception in
September 2005, and as its Chief Executive Officer since
December 13, 2007.
Rodger D. Young
61, has served as a director of the Company since April 2003.
Mr. Young has been a name partner of the law firm of
Young & Susser, P.C. since its founding in 1991,
a boutique firm specializing in commercial litigation with
offices in Southfield, Michigan and New York City, since its
founding in 1991. In 2001, Mr. Young was named Chairman of
the Bush Administration’s Federal Judge and U.S. Attorney
Qualification Committee by Governor John Engler and
Michigan’s Republican Congressional Delegation.
Mr. Young is a member of the American College of Trial
Lawyers and was listed in the 2007 edition of Best Lawyers of
America. Mr. Young was named by Chambers International
and by Best Lawyers in America as one of the top commercial
litigators in the United States.
Communications
with the Directors
Stockholders, employees and others interested in communicating
with the Chairman of the Board may do so by writing to Glenn L.
Carpenter,
c/o Corporate
Secretary, Grubb & Ellis Company, 1551 North
Tustin Avenue, Suite 300, Santa Ana, California92705.
Stockholders, employees and others interested in communicating
with any of the other directors of the Company may do so by
writing to such director,
c/o Corporate
Secretary, Grubb & Ellis Company, 1551 North
Tustin Avenue, Suite 300, Santa Ana, California92705.
Information
About Executive Officers
Scott Peters has served as the Company’s Chief Executive
Officer and President since December 2007. For information on
Mr. Peters see “Information about the Directors”
above. In addition, to Mr. Peters, the following are the
current executive officers of the Company:
Andrea R. Biller
58, has served as Executive Vice President, General Counsel and
Secretary of the Company since December 2007. She joined GERI in
March 2003 as General Counsel and served as NNN’s General
Counsel, Executive Vice President and Secretary since November
2006 and director since December 2007. Ms. Biller also has
served as Executive Vice President and Secretary of
Grubb & Ellis Healthcare REIT, Inc. since April 2006,
Secretary of Grubb & Ellis Apartment REIT, Inc. since
January 2006. Ms. Biller served as Executive Vice President
of G REIT, Inc. from December 2005 to January 2008 and
Secretary of G REIT from June 2004 to January 2008.
Ms. Biller served as Special Counsel at the Securities and
Exchange Commission, Division of Corporate Finance, in
Washington D.C. from
1995-2000,
and as a private attorney specializing in corporate and
securities law from
1990-1995
and
2000-2002.
Ms. Biller is licensed to practice law in California,
Virginia, and Washington, D.C.
Jeffrey T. Hanson
37, has served as Chief Investment Officer of the Company since
January 2008. He has served as Chief Investment Officer of NNN
since November and joined NNN in July 2006 as the President and
Chief Executive Officer of Realty. From 1996 to July 2006,
Mr. Hanson was a Senior Vice President with the Grubb and
Ellis Institutional Investment Group in Grubb &
Ellis’ Newport Beach office. Mr. Hanson served as a
real estate broker with CB Richard Ellis from 1996 to 1997.
Mr. Hanson is a member of the Sterling College Board of
Trustees and formerly served as a member of the
Grubb & Ellis President’s Counsel and
Institutional Investment Group Board of Advisors.
Francene LaPoint
43, has served as the Company’s Executive Vice President,
Accounting and Finance since December 2007. She has served as
Chief Financial Officer of NNN since November 2006 and director
since December 2007. Ms. LaPoint joined GERI as Senior Vice
President and Controller in July 2004 and was named Executive
Vice President and Controller in August 2005. Ms. LaPoint
served as Senior Vice President and Corporate Controller of
Hawthorne Savings, FSB (Hawthorne Financial Corporation), a
publicly traded financial institution, from June 1999 to June
2004. From January 1996 to June 1999, Ms. LaPoint served
with PricewaterhouseCoopers from where she obtained her CPA
license.
Robert H. Osbrink
61, has served as Executive Vice President of the Company since
December 2001 and was named President of Transaction Services in
February 2004. During the five years prior to December 2001,
Mr. Osbrink served in a progression of regional managerial
positions in the Los Angeles and Southwestern United States
areas for the Company. Mr. Osbrink also acted as a Co-Chief
Executive Officer of the Company from April 2003 until March
2005.
Richard W. Pehlke
54, has served as the Executive Vice President and Chief
Financial Officer of the Company since February 2007. Prior to
joining the Company, Mr. Pehlke served as Executive Vice
President and Chief Financial Officer and a member of the board
of directors of Hudson Highland Group, a publicly held global
professional staffing and recruiting business, from 2003 to
2005. From 2001 to 2003, Mr. Pehlke operated his own
consulting business specializing in financial strategy and
leadership development. In 2000, he was Executive Vice President
and Chief Financial Officer of ONE, Inc. a privately held
software implementation business. Prior to 2000, Mr. Pehlke
held senior financial positions in the telecommunications,
financial services and food and consumer products industries.
Dylan Taylor
37, has served as Executive Vice President of the Company since
January 2008, and President of its Corporate Services Group
since October 2007. He was named Acting President of Global
Client Services and Grubb and Ellis Management Services, Inc. in
January 2008. Mr. Taylor joined the Company in 2005 as
Executive Vice President, Regional Managing Director, Corporate
Services. Prior to joining the Company, Mr. Taylor spent
more than five years as Senior Vice President, Corporate
Solutions at Jones Lang LaSalle.
Section 16(a) of the Exchange Act requires our directors,
executive officers and stockholders holding ten percent (10%) or
more of our voting securities (“Insiders”) to file
with the SEC reports showing their
ownership and changes in ownership of Company securities, and to
send copies of these filings to us. To our knowledge, based upon
review of copies of such reports furnished to us and upon
written representations that the Company has received to the
effect that no other reports were required during the six months
ended December 31, 2007, the Insiders complied with all
Section 16(a) filing requirements applicable to them.
Code of
Ethics
The Company has adopted, and revised effective January 25,2008, a code of business conduct and ethics (“Code of
Business Conduct and Ethics”) that applies to all of the
Company’s directors, officers, employees and independent
contractors, including the Company’s principal executive
officer, principal financial officer and controller and complies
with the requirements of the Sarbanes-Oxley Act of 2002 and the
NYSE listing requirements. The January 25, 2008 revision
was effected to make the Code of Business Conduct and Ethics
consistent with the amendment of even date to the Company’s
by-laws so as to provide that members of the board of directors
who are not an employee or executive officer of the Company
(“Non-Management Directors”) have the right to
directly or indirectly engage in the same or similar business
activities or lines of business as the Company, or any of its
subsidiaries, including those business activities or lines of
business deemed to be competing with the Company or any of its
subsidiaries. In the event that the Non-Management Director
acquires knowledge, other than as a result of his or her
position as a director of the Company, of a potential
transaction or matter that may be a corporate opportunity for
the Company, or any of its subsidiaries, such Non-Management
Director shall be entitled to offer such corporate opportunity
to the Company as such Non-Management Director deems appropriate
under the circumstances in their sole discretion.
The Company’s Code of Business Conduct and Ethics is
designed to deter wrongdoing, and to promote, among other
things, honest and ethical conduct, full, timely, accurate and
clear public disclosures, compliance with all applicable laws,
rules and regulations, the prompt internal reporting of
violations of the code, and accountability. In addition, the
Company maintains an Ethics Hotline with an outside service
provider in order to assure compliance with the so-called
“whistle blower” provisions of the Sarbanes Oxley Act
of 2002. This toll-free hotline and confidential web-site
provide officers, employees and independent contractors with a
means by which issues can be communicated to management on a
confidential basis. A copy of the Company’s Code of
Business Conduct and Ethics is available on the company’s
website at
www.grubb-ellis.com
and upon request and without charge by contacting Investor
Relations, Grubb & Ellis Company, 1551 North Tustin
Avenue, Suite 300, Santa Ana, California92705.
Corporate
Governance Guidelines
Effective July 6, 2006, the Board adopted corporate
governance guidelines to assist the Board in the performance of
its duties and the exercise of its responsibilities. The
Company’s Corporate Governance Guidelines are available on
the Company’s website at www.grubb-ellis.com and printed
copies may be obtained upon request by contacting Investor
Relations, Grubb & Ellis Company, 1551 North
Tustin Avenue, Suite 300, Santa Ana, California92705.
Audit
Committee
The Audit Committee of the Board is a separately-designated
standing audit committee established in accordance with
Section 3(a)(58)(A) of the Securities Exchange Act of 1934
as amended (the “Exchange Act”) and the rules
thereunder. The Audit Committee operates under a written charter
adopted by the Board of Directors. The charter of the Audit
Committee was last revised effective January 28, 2008 and
is available on the Company’s website at
www.grubb-ellis.com and printed copies of which may be obtained
upon request by contacting Investor Relations, Grubb &
Ellis Company, 1551 North Tustin Avenue, Suite 300,
Santa Ana, California92705. The current members of the Audit
Committee are Robert McLaughlin, Chair, Harold H. Greene and D.
Fleet Wallace. The Board has determined that the members of the
Audit Committee are independent under the NYSE listing
requirements and the Exchange Act and the rules thereunder, and
that Mr. McLaughlin is an audit committee financial expert
in accordance with rules established by the SEC.
The functions of the Company’s Corporate Governance and
Nominating Committee are to assist the Board with respect to:
(i) director qualification, identification, nomination,
independence and evaluation; (ii) committee structure,
composition, leadership and evaluation; (iii) succession
planning for the CEO and other senior executives; and
(iv) corporate governance matters. The Corporate Governance
and Nominating Committee operates under a written charter
adopted by the Board, which is available on the Company’s
website at www.grubb-ellis.com access and printed copies of
which may be obtained upon request by contacting Investor
Relations, Grubb & Ellis Company, 1551 North Tustin
Avenue, Suite 300, Santa Ana, California92705. The current
members of the Corporate Governance and Nominating Committee are
Rodger D. Young, Chair, Gary H. Hunt and Harold H. Greene. The
Board has determined that Messrs. Young, Hunt and Greene
are independent under the NYSE listing requirements and the
Exchange Act and the rules thereunder.
Certifications
On December 17, 2007, the Company’s General Counsel
certified to the NYSE that she was not aware of any violation by
the Company of the corporate governance listing standards of the
NYSE. The Company has filed with the SEC, as an exhibit to this
Annual Report, the certifications required by Section 302
of the Sarbanes-Oxley Act of 2002.
This compensation discussion and analysis describes the
governance and oversight of the Company’s executive
compensation programs and the material elements of compensation
paid or awarded to those who served as the Company’s
principal executive officer, the Company’s principal
financial officer, and the three other most highly compensated
executive officers of the Company during the period from
January 1, 2007 through December 31, 2007
(collectively, the “named executive officers” or
“NEOs” and individually, a “named executive
officer” or “NEO”). The specific amounts and
material terms of such compensation paid, payable or awarded are
disclosed in the tables and narrative included in this section
of this annual report on
Form 10-K.
In accordance with generally accepted accounting principles, as
a consequence of the Merger, the operating results of the
Company for the twelve months ended December 31, 2007,
including these relating to executive compensation, set forth in
the consolidated financial statements in Item 8 of this
Report, reflect the full year operating results of the NNN
legacy business and the operating results of Grubb &
Ellis legacy business for the period December 8, 2007
through December 31, 2007. Notwithstanding this financial
disclosure of the Company’s operating results (which
includes compensation expense) in Item 8 as a consequence
of the Merger, certain of the compensation disclosure in this
Item 11 is broader than provided in the financial
statements with respect to those instances where the Company
believes that such broader disclosure provides stockholders with
more complete and relevant disclosure. For instance, the
compensation disclosure provided with respect to the
Company’s NEOs and directors with respect to calendar years
2007 and 2006 represent their full year’s compensation for
each of those years, incurred by either NNN or legacy
Grubb & Ellis, as applicable, with respect to calendar
year 2006, and incurred by either NNN or legacy
Grubb & Ellis, as applicable, with respect to the
entire 2007 calendar year, except for the period
December 8, 2007 through December 31, 2007, for which
three (3) week stub period the Company incurred the entire
compensation to all NEOs and directors.
Compensation
Committee Overview
The Board of Directors has delegated to the Compensation
Committee oversight responsibilities for the Company’s
executive compensation programs.
The Compensation Committee determines the policy and strategies
of the Company with respect to executive compensation taking
into account certain factors that the Compensation Committee
deems appropriate such as (a) compensation elements that
will enable the Company to attract and retain executive officers
who are in a position to achieve the strategic goals of the
Company which are in turn designed to enhance stockholder value,
and (b) the Company’s ability to compensate its
executives in relation to its profitability and liquidity.
The Compensation Committee approves, subject to further, final
approval by the full Board of Directors, (a) all
compensation arrangements and terms of employment, and any
material changes to the compensation arrangements or terms of
employment, for the NEOs and certain other key employees
(including employment agreements and severance arrangements),
and (b) the establishment of, and changes to, equity-based
awards programs. In addition, each calendar year, the
Compensation Committee approves the annual incentive goals and
objectives of each NEO and certain other key employees,
evaluates the performance of each NEO and certain other key
employees against the approved performance goals and objectives
applicable to him or her, determines whether and to what extent
any incentive awards have been earned by each NEO, and makes
recommendations to the Company’s Board of Directors
regarding the approval of incentive awards.
Consistent with the Compensation Committee’s objectives,
the Company’s overall compensation program is structured to
attract, motivate and retain highly qualified executives by
paying them competitively and tying their compensation to the
Company’s success as a whole and their contribution to the
Company’s success.
The Compensation Committee also provides general oversight of
the Company’s employee benefit and retirement plans.
The Compensation Committee operates under a written charter
adopted by the full Board and revised effective
December 10, 2007, which is available on the Company’s
website at www.grubb-ellis.com. Printed copies may be
obtained upon request by contacting Investor Relations,
Grubb & Ellis Company, 1551 North Tustin Avenue,
Suite 300, Santa Ana, California92705.
Use of
Consultants
Under its Charter, the Compensation Committee has the power to
select, retain, compensate and terminate any compensation
consultant it determines is useful in the fulfillment of the
Committee’s responsibilities. The Committee also has the
authority to seek advice from internal or external legal,
accounting or other advisors.
In the fourth quarter of 2007, and in anticipation of the
closing of the Merger, the Company engaged the services of FPL
Associations Compensation, an outside consulting firm, to
provide a comprehensive compensation study of the merged
companies for the Compensation Committee and the board of
directors with respect to an analysis of, and proposed designs
and recommendations for, compensation arrangements primarily for
the NEO’s, other lay service executives, directors, brokers
and the board.
The Company has previously engaged the services of Ferguson
Partners, an affiliate of FPL Associates Compensation. In
February 2007, Ferguson Partners managed the search for the
Company’s Chief Financial Officer which resulted in the
hiring of the Company’s Chief Financial Officer, Richard W.
Pehlke in February 2007. In conjunction with the search,
Ferguson Partners advised the Committee with respect to
Mr. Pehlke’s compensation arrangements and terms of
employment. Similarly, the Compensation Committee has used the
services of Ferguson Partners in the past in connection with the
search and establishment of the compensation arrangements and
terms of employment for the other executive officers. In each
instance, and in connection with the study conducted by its
affiliate, FPL Associates Compensation in the fourth quarter of
2007, Ferguson Partners and FPL Associates Compensation provided
to the Compensation Committee and the board with information
regarding comparative market compensation arrangements.
Role of
Executives in Establishing Compensation
In advance of each Compensation Committee meeting, the Chief
Executive Officer and the Chief Operating Officer work with the
Compensation Committee Chairman to set the meeting agenda. The
Compensation Committee periodically consults with the Chief
Executive Officer of the Company with respect
to the hiring and the compensation of the other NEOs and certain
other key employees. Members of management, typically the Chief
Executive Officer, the Chief Financial Officer and General
Counsel, regularly participate in non-executive portions of
Compensation Committee meetings.
Certain
Compensation Committee Activity
The Compensation Committee met five times during the year ended
December 31, 2007 and in fulfillment of its obligations,
among other things, determined on December 10, 2007, based
upon a compensation study prepared by FPL Associates
Compensation that had been commissioned by the Company in
contemplation of the Merger, that the annual compensation for
independent, outside directors should be as follows: (i) an
annual retainer fee of $50,000 per annum; (ii) a fee of
$1,500 for each regular meeting of the board of directors
attended in person or telephonically; (iii) a fee of $1,500
for each standing committee member of the board of directors
attended in person or telephonically; and (iv) $60,000
worth of restricted shares of common stock issued at the then
current market price of the common stock, to vest ratably in
equal annual installments over three years, except in the event
of a change in control, in which event vesting is accelerated.
In addition, on March 12, 2007 the Compensation Committee,
in consultation with FPL Associates Compensation, revised the
compensation arrangements for the non-executive Chairman of the
Board to provide for an annual aggregate retainer fee of
$100,000, an aggregate of $140,000 worth of restricted stock per
annum and an expense allowance of $25,000 per annum. Outside
directors are also required to commit to an equity position in
the Company over five years in the amount equal to $250,000
worth of common stock which may include annual restricted stock
grants to the directors. The directors are also to be reimbursed
for lodging and travel expenses in connection with attending
meetings of the board.
Compensation
Philosophy, Goals and Objectives
As a commercial real estate services company, the Company is a
people oriented business which strives to create an environment
that supports its employees in order to achieve its growth
strategy and other goals established by the board so as to
increase stockholder value over the long term.
The primary goals and objectives of the Company’s
compensation programs are to:
•
Compensate management, key employees, independent contractors
and consultants on a competitive basis to attract, motivate and
retain high quality, high performance individuals who will
achieve the Company’s short-term and long term goals; and
The Compensation Committee established these goals in order to
enhance stockholder value.
•
Motivate and reward executive officers whose knowledge, skill
and performance are critical to the Company’s success;
•
Align the interests of the Company’s executive officers and
stockholders through equity-based long-term incentive awards
that motivate executive officers to increase stockholder value
and reward executive officers when stockholder value increases;
and
•
Ensure fairness among the executive management team by
recognizing contributions each executive officer makes to the
company’s success.
The Company believes that it is important for variable
compensation, i.e. where an NEO has a significant portion of his
or her total “cash compensation” as risk, to
constitute a significant portion of total compensation and that
such variable compensation be designed so as to reward effective
team work (through the achievement of Company-wide financial
goals) as well as the achievement of individual goals (through
the achievement of business unit/functional goals and individual
performance goals and objectives). The Company believes that
this dual approach best aligns the individual NEO’s
interest with the interests of the stockholders.
Compensation
During Term of Employment
The Company’s compensation program for NEOs is comprised of
five key elements — base salary, annual bonus
incentive compensation, long-term cash incentives, stock-based
compensation and incentives and a
retirement plan — that are intended to balance the
goals of achieving both short-term and long-term results which
the Company believes will effectively align management with
stockholders.
Base
Salary
Amounts paid to NEOs as base salaries are included in the column
captioned “Salary” in the Summary Compensation Table
below. The base salary of each NEO is determined based upon
their position, responsibility, qualifications and experience,
and reflects consideration of both external comparison to
available market data and internal comparison to other executive
officers.
The base salary for an NEO is typically established at the time
of the negotiation of his or her respective employment
agreement. In the cases of each of the Company’s Chief
Financial Officer and Executive Vice President, Richard W.
Pehlke, General Counsel Andrea R. Biller, Executive Vice
President and Secretary former Chief Executive Officer, Mark E.
Rose, Executive Vice President, Accounting and Finance, Francene
LaPoint, Chief Investment Officer, Jeffrey T. Hanson, and former
Executive Vice President and President of Global Client
Services, Maureen E. Ehrenberg, the compensation of each of
these executives has not been adjusted since the inception of
their current respective employment agreements. Pursuant to the
Merger Agreement, upon the closing of the Merger, the base
salary of Scott D. Peters, the Company’s Chief Executive
Officer and President, was increased to $600,000 per year from
$550,000 per year.
The base salary component is designed to constitute between 20%
and 50% of total annual compensation at target for the NEOs
based upon each individual’s position in the organization
and the Committee’s determination of each position’s
ability to directly impact the Company’s financial results.
Annual
Bonus Incentive Compensation
Amounts paid to NEOs under the annual bonus plan are included in
the column captioned “Bonus” in the Summary
Compensation Table below. In addition to earning base salaries,
each of the Company’s NEOs is eligible to receive an annual
cash bonus, the target amount of which is set by the individual
employment agreement with each NEO. The annual bonus incentive
of each NEO is determined based upon his or her position,
responsibility, qualifications and experience, and reflects
consideration of both external comparison to available market
data and internal comparison to other executive officers.
No NEO had a change in his or her annual bonus target incentive
compensation during the year ended December 31, 2007.
In 2007, the bonus plan with respect to those NEOs who were
executive officers of the legacy Grubb & Ellis Company
had a formulaic component based on achievement of specified
Company earnings before interest and taxes (“EBIT”)
and business unit/function EBIT goals and also a component based
on the achievement of personal goals and objectives designed to
enhance the overall performance of the Company. The bonus plan
of those NEOs, who were executive officers of the NNN, while
taking into account NNN’s earnings before interest, taxes,
depreciation and amortization (“EBITDA”), as well as
personal goals and objectives, was not formulaic, but rather,
more discretionary in nature. Beginning in 2008, the bonus plan
for all NEOs has been standardized and will be tied to the
specified targets based on the Company’s EBITDA as
discussed below.
The annual cash bonus plan target for NEOs is between 50% and
200% of base salary and is designed to constitute from 20% to
50% of an NEO’s total annual target compensation. The bonus
plan component is based on each individual’s role and
responsibilities in the company and the Committee’s
determination of each NEO’s ability to directly impact the
Company’s financial results.
The Compensation Committee reviews each NEO’s bonus plan
annually. Annual Company EBITDA targets are determined in
connection with the annual calendar-year based budget process. A
minimum threshold of 80% of Company EBITDA must be achieved
before any payment is awarded with respect to this component of
bonus compensation. At the end of each calendar year, the Chief
Executive Officer reviews the performance of each of the other
NEOs and certain other key employees against the financial
objectives and against their personal goals and objectives and
makes recommendations to the Compensation Committee for
payments on the annual cash bonus plan. The Compensation
Committee reviews the recommendations and forwards these to the
Board for final approval of payments under the plan.
The Compensation Committee and the full Board approved all bonus
payments made to the NEOs.
During 2007, the Compensation Committee revised the calendar
2007 bonus plans for the Grubb & Ellis legacy NEOs to
increase the percentage of bonus tied to the Company’s EBIT
performance in order to more closely link the annual bonus to
the Company’s overall financial performance. The chart
directly below captioned “Annual Bonus Incentive
Compensation” provides the details of the calendar 2006 and
calendar 2007 plans.
In addition to the annual bonus program, from time to time the
Board may establish one-time cash bonuses related to the
satisfactory performance of identified special projects. Upon
the closing of the Merger, Scott D. Peters, the Company’s
Chief Executive Officer and President received (i) a
special one-time transaction success fee of $1,000,000,
(ii) 528,000 shares of common stock of the Company
from Anthony W. Thompson, the former Chairman of the Board of
the Company, and (iii) the right to receive up to
$1,000,000 for a second residence in California, which right
Mr. Peters irrevocably waived in January, 2008. Such
528,000 shares of common stock received by Mr. Peters
from Mr. Thompson vest in equal, annual installments over
five years and are subject to Mr. Peters’ continuing
employment with the Company.
Annual
Bonus Incentive Compensation
Calendar 2007
Calendar 2006
% of Bonus Based Upon
% of Bonus Based Upon
Bonus
Business
Bonus
Business
Target as
Unit/
Personal
Target as
Unit/
Personal
% of Base
Company
Function
Goals and
% of Base
Company
Function
Goals and
Salary
EBIT
EBIT
Objectives
Salary
EBIT
EBIT
Objectives
Mark E. Rose
200
%
90
%
—
10
%
200
%
60
%
—
40
%
Former Chief Executive Officer
Scott D. Peters
200
%
—
—
—
—
—
—
—
Current Chief Executive Officer
Richard W. Pehlke
50
%(1)
90
%
—
10
%
—
—
—
—
Chief Financial Officer
Francene LaPoint
100
%
—
—
—
—
—
—
—
Executive Vice President,
Accounting and Finance
Chief Financial Officer, NNN
Andrea R. Biller
150
%
—
—
—
—
—
—
—
Executive Vice President, General Counsel and Secretary
Maureen A. Ehrenberg
80
%
30
%
60
%
10
%
80
%
30
%
60
%
10
%
Executive Vice President, and President Global Client Services
Jeffrey T. Hanson
100
%
—
—
—
—
—
—
—
Chief Investment Officer
(1)
Mr. Pehlke has a minimum guaranteed bonus of $125,000 for
calendar 2007, prorated based on his hire date (equal to
$110,577).
Stock-Based
Compensation and Incentives
The compensation associated with stock awards granted to NEOs is
included in the Summary Compensation Table and other tables
below (including the charts that show outstanding equity
awards). Equity grants to the Company’s NEOs have generally
been made at the time of the entering into of their individual
employment agreements and, except as provided by such employment
agreements and the June 27, 2007 grant of an aggregate of
532,400 restricted shares of common stock to various
executives of NNN, no new grants were made to NEOs during the
year ended December 31, 2007. The equity grants are
intended to align management with the long-term interests of the
Company’s stockholders and to have a retentive effect upon
the Company’s NEOs. The Compensation Committee and the
Board of Directors approve all equity grants to NEOs.
Pursuant to his employment agreement, Mr. Pehlke has an
annual equity performance based bonus plan (in addition to his
annual cash bonus plan) under which he may be granted restricted
shares valued at up to 65% of his base salary, which, if
awarded, would vest on the third anniversary of the date of
grant. This plan is covered in more detail in the section
entitled “Employment Contracts and Compensation
Arrangements — Richard W. Pehlke”.
Profit
Sharing Plan
NNN has established a profit sharing plan for its employees,
pursuant to which NNN provides matching contributions.
Generally, all employees are eligible to participate following
one year of service with NNN. Matching contributions are made in
NNN’s sole discretion. Participants’ interests in
their respective contribution account vests over 4 years,
with 0.0% vested in the first year of service, 25.0% in the
second year, 50.0% in the third year and 100.0% in the fourth
year.
Retirement
Plans
The amounts paid to the Company’s NEOs under the retirement
plan are included in the column captioned “All Other
Compensation” in the Summary Compensation Table directly
below. The Company have established and maintain a retirement
savings plan under Section 401(k) of the Internal Revenue
Code of 1986 (the “Code”) to cover the Company’s
eligible employees including the Company’s NEOs. The Code
allows eligible employees to defer a portion of their
compensation, within prescribed limits, on a tax deferred basis
through contributions to the 401(k) Plan. The Company’s
401(k) Plan is intended to constitute a qualified plan under
Section 401(k) of the Code and its associated trust is
intended to be exempt from federal income taxation under
Section 501(a) of the Code. The Company makes Company
matching contributions to the 401(k) Plan for the benefit of the
Company’s employees including the Company’s NEOs.
Personal
Benefits and Perquisites
The amounts paid to the Company’s NEOs for personal
benefits and perquisites are included in the column captioned
“All Other Compensation” in the Summary Compensation
Table below. Perquisites to which all of the Company’s NEOs
are entitled include health, dental, life insurance, long-term
disability, profit-sharing and a 401(k) savings plan, and 100%
of the premium cost of health insurance for certain NEOs is paid
for by the Company. In addition, Mr. Rose and
Ms. Ehrenberg, former NEOs, were entitled to reimbursement
for Supplemental Life Insurance premiums up to $2,500 per year,
reimbursement of up to $3,000 per year for additional long term
disability insurance, reimbursement for an annual physical up to
$500 per year and payment of club dues/memberships up to $3,000
per year. In addition, Mr. Rose was entitled to
reimbursement of additional club dues of $12,320 per year. Upon
the closing of the Merger, Scott D. Peters, the Company’s
Chief Executive Officer and President had the right to receive
up to $1,000,000 for a second residence in California, which
right Mr. Peters irrevocably waived in January, 2008.
Summary
Compensation Table
The following table sets forth certain information with respect
to compensation for the calendar years ended December 31,2007 and 2006 earned by or paid to the Company’s named
executive officers for such full calendar years (by either NNN
or legacy Grubb & Ellis, as applicable, prior to the
Merger, and by the Company subsequent to the Merger)
notwithstanding the Company’s consolidated financial
statement disclosure set forth in Item 8 of this Report,
and sets forth (i) with respect to calendar year ended
December 31, 2007, the results of operations (of which
compensation is a component) of NNN’s business for
the full twelve month period and the results of operations of
the legacy Grubb & Ellis business for the period
December 8, 2007 through December 31, 2007, and
(ii) with respect to calendar year ended December 31,2006, the results of operations of NNN business only.
Change in
Pension Value
And
Non-Equity
Nonqualified
Year
Option
Incentive Plan
Deferred
All other
Name and
Ended
Salary
Bonus
Stock
Awards
Compensation
Compensation
Compensation
Principal Position
December
($)
($)
Awards($)(5)
($)(6)
($)
Earnings
($)(3)(7)(8)
Total
Mark E. Rose
2007
$
527,600
$
—
$
1,583,344
$
633,638
$
62,900
—
$
2,345,589
(9)
$
5,153,071
Former Chief Executive Officer
2006
500,000
377,368
458,329
534,129
—
—
16,878
1,886,704
Scott D. Peters
2007
587,808
1,825,800
2,610,555
91,250
—
—
655,621
5,771,034
Current Chief Executive Officer
2006
611,250
1,125,900
(2)
1,834,669
81,345
977,260
4,630,424
Richard W. Pehlke(10)
2007
299,500
200,000
49,770
198,808
—
—
—
748,078
Executive Vice President, and Chief Financial Officer
2006
—
—
—
—
—
—
—
—
Francene LaPoint
2007
350,000
280,800
763,913
73,000
—
—
24,090
1,491,803
Executive Vice President, Accounting and Finance
2006
277,899
270,720
237,500
65,076
—
—
23,449
874,644
Andrea R. Biller
2007
400,000
451,000
1,286,413
73,000
—
—
592,134
2,802,547
Executive Vice President, General Counsel and Secretary
2006
391,674
501,200
(2)
411,667
65,076
—
—
72,834
1,442,451
Maureen A. Ehrenberg
2007
360,000
—
166,646
—
74,100
—
1,219,186
(9)
1,819,932
Executive Vice President, and President, Global Client Services
2006
360,000
247,326
166,680
—
—
—
2,650
776,656
Jeffrey T. Hanson
2007
350,000
500,350
3,410,352
45,625
—
—
425,106
4,731,433
Chief Investment Officer
2006
117,628
(1)
1,212,180
(4)
726,079
40,673
—
—
1,083
2,097,643
(1)
Mr. Hanson’s annual salary for fiscal 2006 was
$250,000. The $117,628 represents amounts paid or to be paid to
Mr. Hanson from July 29, 2006 (the date Mr. Hanson
joined GERI) through December 31, 2006.
(2)
Bonus amounts include bonuses of $100,000 earned in fiscal 2006
to each of Mr. Peters and Ms. Biller upon the receipt
by NNN from G REIT, a public non-traded REIT that NNN
sponsored, of net commissions aggregating $5 million or
more from the sale of G REIT properties pursuant to a plan
of liquidation approved by G REIT stockholders.
(3)
All other compensation also includes: (i) cash
distributions based on membership interests of $159,418 and
$50,000 earned by each of Mr. Peters and Ms. Biller
from Grubb & Ellis Apartment Management, LLC for each
of the calendar years ended December 31, 2007 and December
2006, respectively; and (ii) cash distributions based on
membership interests of $413,546 and $0 earned by each of
Messrs. Peters and Hanson and Ms. Biller from
Grubb & Ellis Healthcare Management, LLC for each of
the calendar years ended December 31, 2007 and December
2006, respectively.
(4)
Mr. Hanson was appointed GERI’s Managing Director,
Real Estate on July 29, 2006. His bonus amount included a
$750,000 sign-on bonus that was paid in September 2006. Amount
also included a special bonus paid to Mr. Hanson pursuant
to his employment agreement for being the procuring cause of at
least $25 million in equity from new sources, which equity
was received by GERI during the fiscal year, for real estate
investments sourced by GERI.
(5)
The amounts shown are the amounts of compensation cost related
to the grants of restricted stock, as well as the compensation
expense associated with the accelerated vesting of the
restricted stock at the Merger date, as described in Statement
of Financial Accounting Standards No. 123R, utilizing the
assumptions discussed in Note 23 to the consolidated
financial statements included in Item 8 of this Report.
(6)
The amounts shown are the amounts of compensation cost related
to the grants of stock options, as well as compensation expense
associated with the accelerated vesting of the stock options at
the Merger date, as described in Statement of Financial
Accounting Standards No. 123R, utilizing the assumptions
discussed in Note 23 to the consolidated financial
statements included in Item 8 of this Report.
The amounts shown include the Company’s incremental cost
for the provision to the named executive officers of certain
specified perquisites in fiscal 2007 and 2006, as follows:
Living
Travel
Tax Gross Up
Medical & Dental
Named Executive Officer
Year
Expenses
Expenses
Payment
Premiums
Total
Mark E. Rose
2007
$
—
$
—
$
—
$
—
$
—
2006
—
—
—
—
—
Scott D. Peters
2007
27,314
29,573
0
8,340
65,227
2006
24,557
31,376
853,668
1,043
910,644
Richard W. Pehlke
2007
—
—
—
—
—
2006
—
—
—
—
—
Francene LaPoint
2007
—
—
—
6,660
6,660
2006
—
—
—
833
833
Andrea R. Biller
2007
—
—
—
1,740
1,740
2006
—
—
—
218
218
Maureen A. Ehrenberg
2007
—
—
—
—
—
2006
—
—
—
—
—
Jeffrey T. Hanson
2007
—
—
—
8,340
8,340
2006
—
—
—
1,043
1,043
(8)
The amounts shown also include the following 401(k) matching
contributions made by the Company, income attributable to life
insurance coverage and contributions to the profit-sharing plan
in fiscal 2007 and 2006, as follows:
401(k) Plan
Profit-Sharing Plan
Company
Life Insurance
Company
Named Executive Officer
Year
Contributions
Coverage
Contributions
Total
Mark E. Rose
2007
$
2,250
$
2,700
$
—
$
4,950
2006
2,200
2,400
—
4,600
Scott D. Peters
2007
3,100
120
14,210
17,430
2006
—
116
16,500
16,616
Richard W. Pehlke
2007
—
—
—
—
2006
—
—
—
—
Francene LaPoint
2007
3,100
120
14,210
17,430
2006
6,000
116
16,500
22,616
Andrea R. Biller
2007
3,100
120
14,210
17,430
2006
6,000
116
16,500
22,616
Maureen A. Ehrenberg
2007
2,250
1,040
—
3,290
2006
2,200
450
—
2,650
Jeffrey T. Hanson
2007
3,100
120
—
3,220
2006
—
40
—
40
(9)
Includes payments made on termination of employment in
connection with a change of control, totaling $2,340,639 for
Mr. Rose and $1,215,896 for Ms. Ehrenberg, to be paid
over a
12-month
period.
(10)
Table does not include Donald D. Olinger, the Company’s SVP
and Chief Accounting Officer who provided services as the
interim Chief Financial Officer of the Company for the
approximately six week period from January 1, 2007
through February 14, 2007 prior to Mr. Pehlke joining
the Company and subsequent to the departure of
Mr. Pehlke’s predecessor.
The following table sets forth information regarding the grants
of plan-based awards made to its named executive officers for
the fiscal year ended December 31, 2007.
All Other
All Other
Option Awards:
Exercise or
Stock Awards:
Number of
Base Price
Grant Date Fair
Number of
Securities
of Option
Value of Stock
Grant
Shares of
Underlying
Awards
and Option
Name
Date
Stock or Units
Options(3)
($/Share)
Awards(4)
Mark E. Rose
3/8/07
71,158
(1)
—
$
10.54
$
750,000
Scott D. Peters
6/27/07
462,000
(1)
—
11.36
5,250,000
12/7/07
528,000
(2)
—
6.43
3,396,000
Richard W. Pehlke
2/15/07
—
25,000
11.75
198,808
Francene LaPoint
6/27/07
26,400
(1)
—
11.36
300,000
Andrea R. Biller
6/27/07
26,400
(1)
—
11.36
300,000
Maureen A. Ehrenberg
—
—
—
—
—
Jeffery T. Hanson
6/27/07
17,600
(1)
—
11.36
200,000
(1)
Amounts shown with respect to Messrs. Peters and Hanson and
Ms. LaPoint and Ms. Biller represent restricted stock,
with a grant date of June 27, 2007, issued under NNN’s
2006 Long Term Incentive Plan, that vest in three equal
installments on June 27, 2008, June 27, 2009 and
June 27, 2010, subject to continued service with the
Company. The stock award to Mr. Rose represents shares
issued by legacy Grubb & Ellis pursuant to his
employment agreement as Chief Executive Officer in March, 2005,
which shares became fully vested upon the Merger as a result of
change in control provisions related to the award.
(2)
Amount shown represents shares of common stock received by
Mr. Peters from Anthony W. Thompson on December 7,2007 and are subject to five year vesting and
Mr. Peters’ continued employment with the Company.
(3)
Amount shown represents a stock option award granted to
Mr. Pehlke in connection with his employment agreement with
the Company, which becomes exercisable in three equal
installments on the business day immediately preceding the
first, second and third anniversaries of the grant date,
generally subject to continued employment with the Company. The
options have a maximum term of ten years.
(4)
The grant date fair value of the shares of restricted stock and
stock options granted were computed in accordance with
SFAS No. 123R.
The following table sets forth summary information regarding the
outstanding equity awards held by the Company’s named
executive officers at December 31, 2007:
Option Awards
Stock Awards
Number of
Number of
Number of
Market Value
Securities
Securities
Shares or
of Shares
Underlying
Underlying
Units of
or Units
Unexercised
Unexercised
Option
Option
Stock that
of Stock That
Options
Options
Exercise
Expiration
Have Not
Have Not
Name
Exercisable
Unexercisable(1)
Price
Date
Vested
Vested(4)
Mark E. Rose
500,000
—
$
4
.70
12/11/2009
—
$
—
Scott D. Peters
29,333
14,667
11
.36
11/16/2016
462,000(2
)
5,250,000
528,000(3
)
3,396,000
Richard W. Pehlke
—
25,000
11
.75
2/15/2017
—
—
Francene LaPoint
23,467
11,733
11
.36
11/16/2016
26,400(2
)
300,000
Andrea R. Biller
23,467
11,733
11
.36
11/16/2016
26,400(2
)
300,000
Maureen A. Ehrenberg
137,022
—
9
.00(5
)
4/1/2008
—
—
Jeffery T. Hanson
14,667
7,333
11
.36
11/16/2016
17,600(2
)
200,000
(1)
Amounts shown represent options granted in fiscal year 2007 and
2006 under NNN’s 2006 Long Term Incentive Plan that vest
and become exercisable with respect to one-third of the
underlying shares of the Company’s common stock on each of
November 16, 2006, November 16, 2007 and
November 16, 2008, subject to the executive’s
continued employment with the Company, and have a maximum term
of ten-years.
(2)
Amounts shown represent restricted stock granted on
June 27, 2007 under NNN’s 2006 Long Term Incentive
Plan. The June 27, 2007 restricted stock vests in three
equal installments on June 27, 2008, June 27, 2009 and
June 27, 2010, subject to continued service with the
Company.
(3)
Represents shares of common stock received by Mr. Peters
from Anthony W. Thompson on December 7, 2007 and are
subject to five year vesting and continued employment with the
Company.
(4)
The grant date fair value of the shares of restricted stock
granted on June 27, 2007, as computed in accordance with
SFAS No. 123R and is reflected in the table, Grants of
Plan-Based Awards.
(5)
Amount represents the weighted average option exercise price for
multiple awards, all expiring on April 1, 2008.
Employment
Contracts and Compensation Arrangements
Scott D.
Peters
In November, 2006, Mr. Peters entered into an Executive
Employment Agreement with the Company pursuant to which
Mr. Peters serves as the Chief Executive Officer and
President of the Company. The Agreement provides for an annual
base salary of $550,000 per annum. His base salary was increased
to $600,000 per annum upon the closing of the Merger.
Mr. Peters is eligible to receive an annual discretionary
bonus of up to 200% of his base salary. The Executive Employment
Agreement has an initial term of three (3) years, and on
the final day of the original term, and on each anniversary
thereafter, the term of the Agreement is extended automatically
for an additional year unless the Company or Mr. Peters
provides at least one year’s written notice that the term
will not be extended. In connection with the entering into of
his Employment Agreement in November, 2006, Mr. Peters
received 154,000 shares of restricted stock and 44,000
stock options at an exercise price of $11.36 per share,
one-third of which options vest on the grant date, and the
remaining options vest in equal installments on the first and
second anniversary date of the option grant.
Mr. Peters is also enticed to participate in the
Company’s health and other benefit plans generally afforded
to executive employees and is reimbursed for reasonable travel,
entertainment and other reasonable
expenses incurred in connection with his duties. The Employment
Agreement contains confidentiality, non-competition, no raid,
non-solicitation, non-disparagement and indemnification
provisions.
In the event the Company terminates Mr. Peters’
employment for Cause (as defined in the Executive Employment
Agreement) or if he voluntarily resigns without Good Reason (as
defined in the Executive Employment Agreement), Mr. Peters
is entitled to accrued salary and any unreimbursed business
expenses. In the event that Mr. Peters’ employment
terminates because of the expiration of his term, death or
disability, the Company will pay an accrued salary, any
unreimbursed business expenses, and a prorated performance bonus
equal to the performance bonus (and in the case of termination
for reason of death or disability, equal to the maximum target)
that otherwise would have been payable to Mr. Peters in the
fiscal year in which the termination occurs had he continued
employment through the last day of such fiscal year, prorated
for the number of calendar months he was employed by the Company
in such fiscal year. The prorated performance bonus will be paid
within 60 days after Mr. Peters’ date of
termination, provided that he executes and delivers to the
Company a general release and is not in material breach of any
of the provisions of the Executive Employment Agreement.
In the event of termination of employment without Cause, or
voluntary resignation with Good Reason, the Company will pay any
accrued salary, any unreimbursed business expenses and a
severance benefit, in a lump sum cash payment, equal to
Mr. Peters’ annual salary plus the target bonus in the
year of the termination, the sum of which will be multiplied by
a “severance benefit factor.” The “severance
benefit factor” will be determined as follows: (a) if
the date of termination occurs during the original three year
employment term, the “severance benefit factor” will
be the greater of one, and the number of months from the date of
termination to the last day of the original three year
employment term, divided by 12, or (b) if the date of
termination is after the original three year employment term,
the “severance benefit factor” will equal one. Also,
all options become fully vested.
In the event of a termination by the Company without Cause at
any time within 90 days before, or 12 months after, a
Change in Control (as defined in the Executive Employment
Agreement), or in the event of resignation for Good Reason
within 12 months after a change in control, or if without
good reason during the period commencing six months after a
change in control and ending 12 months after a change in
control, then the Company will pay any accrued salary, any
unreimbursed business expenses, and a severance benefit. The
severance benefit will be in a lump sum cash payment, equal to
the annual salary plus the target bonus in the year of the
termination, the sum of which will be multiplied by three.
Mr. Peters will also receive 100% of the Company’s
paid health insurance coverage as provided immediately prior to
the termination. The health insurance coverage will continue for
two years following termination of employment, or until
Mr. Peters becomes covered under another employer’s
group health insurance plan, whichever comes first. Also,
Mr. Peters will become fully vested in his options. These
severance benefits upon a change of control will be paid
60 days after the date of termination, provided the
execution and delivery to the Company of a general release and
Mr. Peters is not in material breach of any of the
provisions of his employment agreement. Any payment and benefits
discussed in this paragraph regarding a termination associated
with a change in control will be in lieu of any payments and
benefits that would otherwise be awarded in an executive’s
termination.
If payments or other amounts become due to Mr. Peters under
his employment agreement or otherwise, and the excise tax
imposed by the Internal Revenue Code Section 4999 applies
to such payments, the Company is required to pay a gross up
payment in the amount of this excise tax plus the amount of
income, excise and other taxes due as a result of the gross up
payment. All determinations required to be made and the
assumptions to be utilized in arriving at such determinations,
with certain exceptions, will be made by the Company’s
independent certified public accountants serving immediately
prior to the change in control.
Potential
Payments upon Termination or Change in Control
Scott D. Peters
Involuntary
Not for
Involuntary
Resignation
Executive Payments
Voluntary
Early
Normal
Cause
for Cause
for Good
Change in
Upon Termination
Termination
Retirement
Retirement
Termination
Termination
Reason
Control
Death
Disability
Severance Payments
$
—
$
—
$
—
$
3,162,500
$
—
$
3,162,500
$
4,950,000
$
—
$
—
Bonus Incentive Compensation
—
—
—
—
—
—
—
—
—
Long Term Incentive Plan
—
—
—
—
—
—
—
—
—
Stock Options (unvested and accelerated)
—
—
—
—
—
—
—
—
—
Restricted Stock (unvested and accelerated)
—
—
—
8,646,000
—
8,646,000
8,646,000
—
—
Performance Shares (unvested and accelerated)
—
—
—
—
—
—
—
—
—
Benefit Continuation
—
—
—
2,086
—
2,086
2,086
—
—
Tax Gross-Up
—
—
—
—
—
968,996
—
—
Total Value
$
—
$
—
$
—
$
11,810,586
$
—
$
11,810,586
$
14,567,082
$
—
$
—
Mark E.
Rose
Upon the closing of the Merger on December 7, 2007, Mark E.
Rose resigned as Chief Executive Officer of the Company.
Because Mr. Rose’s resignation took place following
consummation of the Merger, a deemed Change of Control under his
employment agreement, Mr. Rose is entitled to receive
payment of two times his base salary and two times his
applicable bonus, paid ratably over 12 months in accordance
with the Company’s customary payroll practices.
Mr. Rose and the Company amended this provision of his
employment agreement such that the foregoing payments of base
salary and bonus would be paid in eight (8) equal
installments of one-twelfth (1/12) in January, February, July,
August, September, October, November and December of 2008 and
one installment of four-twelfths (4/12) in June, 2008. In
addition, upon consummation of the Merger, Mr. Rose’s
stock options became fully vested and he will have
24 months to exercise the unexercised options. The
Company’s payment of any amounts to Mr. Rose upon his
termination following the Merger was contingent upon
Mr. Rose executing a release in a form that has been
pre-negotiated by Mr. Rose and the Company, which
Mr. Rose has executed and delivered.
Prior to that time, pursuant to an employment agreement, which
became effective March 2005, Mr. Rose served as the
Company’s Chief Executive Officer and also served on the
Company’s Board of Directors, at an annual base salary of
$500,000. In addition, Mr. Rose was entitled to receive
target bonus compensation at a target level of at least two
times his base salary based upon annual performance goals to be
established by the Compensation Committee of the Company. At the
time of the commencement of his employment with the Company, the
Company paid Mr. Rose a sign-on bonus of $2,083,000 and he
received non-qualified stock options, exercisable at the then
current market price ($4.70 per share), to purchase up to
500,000 shares of the Company’s common stock.
Mr. Rose received on the effective date and on each of the
first and second anniversaries thereof, annual grants of
$750,000 worth of restricted shares of the Company’s common
stock. The first grant of 159,575 restricted shares of the
Company’s common stock was granted on March 8, 2005 at
a per share price of $4.70 (equal to the market price of the
Company’s common stock on the date immediately preceding
the grant date). The second grant of 64,158 restricted shares of
the Company’s common stock was granted on March 8,2006 at a per share price of $11.69 (equal to the market price
of the Company’s common stock on the date immediately
preceding the grant date). The third grant of 71,158, was
granted on March 8, 2007, at a per share price of $10.54
(equal to the market price of the Company’s common stock on
the date immediately preceding the grant date). Both the stock
options and all of the restricted shares were vested prior to
December 7, 2007 or became vested on December 7, 2007
as a result of a Change of Control of the Company following the
Merger. Mr. Rose was also entitled to participate in the
Company’s Long Term Incentive Compensation Plan at a target
of 65% of his base salary. Mr. Rose was also entitled to
participate in
the Company’s health and other benefit plans generally
afforded to executive employees and was reimbursed for
reasonable travel, entertainment and other reasonable expenses
incurred in connection with his duties.
Richard
W. Pehlke
Effective February 15, 2007, Mr. Pehlke and the
Company entered into a three-year employment agreement pursuant
to which Mr. Pehlke serves as the Company’s Executive
Vice President and Chief Financial Officer at an annual base
salary of $350,000. In addition, Mr. Pehlke is entitled to
receive target bonus cash compensation of up to 50% of his base
salary based upon annual performance goals to be established by
the Compensation Committee of the Company. Mr. Pehlke is
also eligible to receive a target annual performance based
equity bonus of 65% of his base salary based upon annual
performance goals to be established by the Compensation
Committee. The equity bonus is payable in restricted shares that
vest on the third anniversary of the date of the grant.
Mr. Pehlke was also granted stock options to purchase
25,000 shares of the Company’s common stock which have
a term of 10 years, are exercisable at $11.75 per share
(equal to the market price of the Company’s common stock on
the date immediately preceding the grant date) and vest ratably
over three years.
Mr. Pehlke is also entitled to participate in the
Company’s health and other benefit plans generally afforded
to executive employees and is reimbursed for reasonable travel,
entertainment and other reasonable expenses incurred in
connection with her duties. The employment agreement contains
confidentiality, non-competition, no raid, non-solicitation,
non-disparagement and indemnification provisions.
The employment agreement is terminable by the Company upon
Mr. Pehlke’s death or incapacity or for Cause (as
defined in the employment agreement), without any additional
compensation other than what has accrued to Mr. Pehlke as
of the date of any such termination, except that in the case of
death or incapacity, any unvested restricted shares
automatically vest.
In the event that Mr. Pehlke is terminated without Cause,
or if Mr. Pehlke terminates the agreement for Good Reason
(as defined in the employment agreement), Mr. Pehlke is
entitled to receive his annual base salary, payable in
accordance with the Company’s customary payroll practices,
for the balance of the term of the agreement or 24 months,
whichever is less (subject to the provisions of
Section 409A of the Internal Revenue Code of 1986, as
amended) and all then unvested options shall automatically vest.
The Company’s payment of any amounts to Mr. Pehlke
upon his termination without Cause or for Good Reason is
contingent upon him executing the Company’s then standard
form of release.
In addition, in the event that Mr. Pehlke is terminated
without Cause or resigns for Good Reason upon a Change in
Control (as defined in the employment agreement) or within six
months thereafter or three months prior to a Change of Control,
in contemplation thereof, Mr. Pehlke is entitled to receive
two times his base salary payable in accordance with the
Company’s customary payroll practices (subject to the
provisions of Section 409A of the Internal Revenue Code of
1986, as amended) plus an amount equal to 50% of his base salary
payable in cash on each of the next two immediately following
dates when similar annual cash bonus compensation is paid to
other executive officers of the Company (but in no event later
then March 15th of the calendar year following the
calendar year to which such bonus payment relates). In addition,
upon a Change in Control, all then unvested options and
restricted shares automatically vest. The Company’s payment
of any amounts to Mr. Pehlke upon his termination upon a
Change of Control is contingent upon his executing the
Company’s then standard form of release.
Potential
Payments upon Termination or Change in Control
Richard W. Pehlke
Involuntary
Not for
Involuntary
Resignation
Executive Payments
Voluntary
Early
Normal
Cause
for Cause
for Good
Change in
Upon Termination
Termination
Retirement
Retirement
Termination
Termination
Reason
Control
Death
Disability
Severance Payments
$
—
$
—
$
—
$
700,000
$
—
$
700,000
$
700,000
$
—
$
—
Bonus Incentive Compensation
—
—
—
—
—
—
$
350,000
—
—
Long Term Incentive Plan
—
—
—
—
—
—
—
—
—
Stock Options (unvested and accelerated)(1)
—
—
—
—
—
—
—
—
—
Restricted Stock (unvested and accelerated)
—
—
—
—
—
—
—
—
—
Performance Shares (unvested and accelerated)
—
—
—
—
—
—
—
—
—
Benefit Continuation
—
—
—
—
—
—
—
—
—
Tax Gross-Up
—
—
—
—
—
—
—
—
—
Total Value
$
—
$
—
$
—
$
700,000
$
—
$
700,000
$
1,050,000
$
—
$
—
(1)
Mr. Pehlke’s agreement provides for immediate vesting
of all stock options in the event of involuntary termination not
for cause, resignation for good reason, or in the event of
change in control; the option exercise price is $11.75 and the
closing price on the NYSE on December 31, 2007 was $6.41,
therefore, as of December 31, 2007, Mr. Pehlke’s
options were out of the money.
Andrea R.
Biller
In November 2006, Ms. Biller entered into an Executive
Employment Agreement with the Company pursuant to which
Ms. Biller serves as the Company’s General Counsel,
Executive Vice President and Secretary. The Agreement provides
for an annual base salary of $400,000 per annum. Ms. Biller
is eligible to receive an annual discretionary bonus of up to
150% of her base salary. The Executive Employment Agreement has
an initial term of three (3) years, and on the final day of
the original term, and on each anniversary thereafter, the term
of the Agreement is extended automatically for an additional
year unless the Company or Ms. Biller provides at least one
year’s written notice that the term will not be extended.
In connection with the entering into of her Employment Agreement
in November 2006, Ms. Biller received 114,400 shares
of restricted stock and 35,200 stock options at an exercise
price of $11.36 per share, one-third of which options vest on
the grant date, and the remaining options vest in equal
installments on the first and second anniversary date of the
option grant.
Ms. Biller is also enticed to participate in the
Company’s health and other benefit plans generally afforded
to executive employees and is reimbursed for reasonable travel,
entertainment and other reasonable expenses incurred in
connection with her duties. The Employment Agreement contains
confidentiality, non-competition, no raid, non-solicitation,
non-disparagement and indemnification provisions.
In the event the Company terminates Ms. Biller’s
employment for Cause (as defined in the Executive Employment
Agreement) or if she voluntarily resigns without Good Reason (as
defined in the Executive Employment Agreement), Ms. Biller
is entitled to accrued salary and any unreimbursed business
expenses. In the event that Ms. Biller’s employment
terminates because of the expiration of her term, death or
disability, the Company will pay an accrued salary, any
unreimbursed business expenses, and a prorated performance bonus
equal to the performance bonus (and in the case of termination
for reason of death or disability, equal to the maximum target)
that otherwise would have been payable to Ms. Biller in the
fiscal year in which the termination occurs had she continued
employment through the last day of such fiscal year, prorated
for the number of calendar months she was employed by the
Company in such fiscal year. The prorated performance bonus will
be paid within 60 days after Ms. Biller’s date of
termination, provided that she executes and delivers to the
Company a general release and is not in material breach of any
of the provisions of the Executive Employment Agreement.
In the event of termination of employment without Cause, or
voluntary resignation with Good Reason, the Company will pay any
accrued salary, any unreimbursed business expenses and a
severance benefit, in a lump sum cash payment, equal to
Ms. Biller’s annual salary plus the target bonus in
the year of the termination, the sum of which will be multiplied
by a “severance benefit factor.” The “severance
benefit factor” will be determined as follows: (a) if
the date of termination occurs during the original three year
employment term, the “severance benefit factor” will
be the greater of one, and the number of months from the date of
termination to the last day of the original three year
employment term, divided by 12, or (b) if the date of
termination is after the original three year employment term,
the “severance benefit factor” will equal one. Also,
all options become fully vested.
In the event of a termination by the Company without Cause at
any time within 90 days before, or 12 months after, a
Change in Control (as defined in the Executive Employment
Agreement), or in the event of resignation for Good Reason
within 12 months after a change in control, or if without
good reason during the period commencing six months after a
change in control and ending 12 months after a change in
control, then the Company will pay any accrued salary, any
unreimbursed business expenses, and a severance benefit. The
severance benefit will be in a lump sum cash payment, equal to
the annual salary plus the target bonus in the year of the
termination, the sum of which will be multiplied by three.
Ms. Biller will also receive 100% of the Company’s
paid health insurance coverage as provided immediately prior to
the termination. The health insurance coverage will continue for
two years following termination of employment, or until
Ms. Biller becomes covered under another employer’s
group health insurance plan, whichever comes first. Also,
Ms. Biller will become fully vested in her options and
restricted shares. These severance benefits upon a change of
control will be paid 60 days after the date of termination,
provided the execution and delivery to the Company of a general
release and Ms. Biller is not in material breach of any of
the provisions of her employment agreement. Any payment and
benefits discussed in this paragraph regarding a termination
associated with a change in control will be in lieu of any
payments and benefits that would otherwise be awarded in an
executive’s termination.
If payments or other amounts become due to Ms. Biller under
her employment agreement or otherwise, and the excise tax
imposed by the Internal Revenue Code Section 4999 applies
to such payments, the Company is required to pay a gross up
payment in the amount of this excise tax plus the amount of
income, excise and other taxes due as a result of the gross up
payment. All determinations required to be made and the
assumptions to be utilized in arriving at such determinations,
with certain exceptions, will be made by the Company’s
independent certified public accountants serving immediately
prior to the change in control.
Potential
Payments upon Termination or Change in Control
Andrea R. Biller
Involuntary
Not for
Involuntary
Resignation
Executive Payments
Voluntary
Early
Normal
Cause
for Cause
for Good
Change in
Upon Termination
Termination
Retirement
Retirement
Termination
Termination
Reason
Control
Death
Disability
Severance Payments
$
—
$
—
$
—
$
1,916,667
$
—
$
1,916,667
$
3,000,000
$
—
$
—
Bonus Incentive Compensation
—
—
—
—
—
—
—
—
—
Long Term Incentive Plan
—
—
—
—
—
—
—
—
—
Stock Options (unvested and accelerated)
—
—
—
—
—
—
—
—
—
Restricted Stock (unvested and accelerated)
—
—
—
300,000
—
300,000
300,000
—
—
Performance Shares (unvested and accelerated)
—
—
—
—
—
—
—
—
—
Benefit Continuation
—
—
—
436
—
436
436
—
—
Tax Gross-Up
—
—
—
—
—
—
1,343,817
—
—
Total Value
$
—
$
—
$
—
$
2,217,103
$
—
$
2,217,103
$
4,644,253
—
—
Francene
LaPoint
In November, 2006, Ms. LaPoint entered into an Executive
Employment Agreement to serve as NNN’s Chief Financial
Officer. Upon the closing of the Merger, Ms. LaPoint’s
title with the Company was changed to
Executive Vice President, Accounting and Finance. The Agreement
provides for an annual base salary of $350,000 per annum.
Ms. LaPoint is eligible to receive an annual discretionary
bonus of up to 100% of her base salary. The Executive Employment
Agreement has an initial term of three (3) years, and on
the final day of the original term, and on each anniversary
thereafter, the term of the Agreement is extended automatically
for an additional year unless the Company or Ms. LaPoint
provides at least one year’s written notice that the term
will not be extended. In connection with the entering into of
her Employment Agreement in November, 2006, Ms. LaPoint
received 66,000 shares of restricted stock and 35,200 stock
options at an exercise price of $11.36 per share, one-third of
which options vest on the grant date, and the remaining options
vest in equal installments on the first and second anniversary
date of the option grant.
Ms. LaPoint is also enticed to participate in the
Company’s health and other benefit plans generally afforded
to executive employees and is reimbursed for reasonable travel,
entertainment and other reasonable expenses incurred in
connection with her duties. The Employment Agreement contains
confidentiality, non-competition, no raid, non-solicitation,
non-disparagement and indemnification provisions.
In the event the Company terminates Ms. LaPoint’s
employment for Cause (as defined in the Executive Employment
Agreement) or if she voluntarily resigns without Good Reason (as
defined in the Executive Employment Agreement), Ms. LaPoint
is entitled to accrued salary and any unreimbursed business
expenses. In the event that Ms. LaPoint’s employment
terminates because of the expiration of her term, death or
disability, the Company will pay an accrued salary, any
unreimbursed business expenses, and a prorated performance bonus
equal to the performance bonus (and in the case of termination
for reason of death or disability, equal to the maximum target)
that otherwise would have been payable to Ms. LaPoint in
the fiscal year in which the termination occurs had she
continued employment through the last day of such fiscal year,
prorated for the number of calendar months she was employed by
the Company in such fiscal year. The prorated performance bonus
will be paid within 60 days after Ms. LaPoint’s
date of termination, provided that she executes and delivers to
the Company a general release and is not in material breach of
any of the provisions of the Executive Employment Agreement.
In the event of termination of employment without Cause, or
voluntary resignation with Good Reason, the Company will pay any
accrued salary, any unreimbursed business expenses and a
severance benefit, in a lump sum cash payment, equal to
Ms. LaPoint’s annual salary plus the target bonus in
the year of the termination, the sum of which will be multiplied
by a “severance benefit factor.” The “severance
benefit factor” will be determined as follows: (a) if
the date of termination occurs during the original three year
employment term, the “severance benefit factor” will
be the greater of one, and the number of months from the date of
termination to the last day of the original three year
employment term, divided by 12, or (b) if the date of
termination is after the original three year employment term,
the “severance benefit factor” will equal one. Also,
all options become fully vested.
In the event of a termination by the Company without Cause at
any time within 90 days before, or 12 months after, a
Change in Control (as defined in the Executive Employment
Agreement), or in the event of resignation for Good Reason
within 12 months after a change in control, or if without
good reason during the period commencing six months after a
change in control and ending 12 months after a change in
control, then the Company will pay any accrued salary, any
unreimbursed business expenses, and a severance benefit. The
severance benefit will be in a lump sum cash payment, equal to
the annual salary plus the target bonus in the year of the
termination, the sum of which will be multiplied by three.
Ms. LaPoint will also receive 100% of the Company’s
paid health insurance coverage as provided immediately prior to
the termination. The health insurance coverage will continue for
two years following termination of employment, or until
Ms. LaPoint becomes covered under another employer’s
group health insurance plan, whichever comes first. Also,
Ms. LaPoint will become fully vested in her options. These
severance benefits upon a change of control will be paid
60 days after the date of termination, provided the
execution and delivery to the Company of a general release and
Ms. LaPoint is not in material breach of any of the
provisions of her employment agreement. Any payment and benefits
discussed in this paragraph regarding a termination associated
with a change in control will be in lieu of any payments and
benefits that would otherwise be awarded in an executive’s
termination.
If payments or other amounts become due to Ms. LaPoint
under her employment agreement or otherwise, and the excise tax
imposed by the Internal Revenue Code Section 4999 applies
to such payments, the Company is required to pay a gross up
payment in the amount of this excise tax plus the amount of
income, excise and other taxes due as a result of the gross up
payment. All determinations required to be made and the
assumptions to be utilized in arriving at such determinations,
with certain exceptions, will be made by the Company’s
independent certified public accountants serving immediately
prior to the change in control.
Potential
Payments upon Termination or Change in Control
Francene LaPoint
Involuntary
Not for
Involuntary
Resignation
Executive Payments
Voluntary
Early
Normal
Cause
for Cause
for Good
Change in
Upon Termination
Termination
Retirement
Retirement
Termination
Termination
Reason
Control
Death
Disability
Severance Payments
$
—
$
—
$
—
$
1,341,667
$
—
$
1,341,667
$
2,100,000
$
—
$
—
Bonus Incentive Compensation
—
—
—
—
—
—
—
—
—
Long Term Incentive Plan
—
—
—
—
—
—
—
—
—
Stock Options (unvested and accelerated)
—
—
—
—
—
—
—
—
—
Restricted Stock (unvested and accelerated)
—
—
—
300,000
—
300,000
300,000
—
—
Performance Shares (unvested and accelerated)
—
—
—
—
—
—
—
—
—
Benefit Continuation
—
—
—
436
—
436
436
—
—
Tax Gross-Up
—
—
—
—
—
—
806,788
—
—
Total Value
$
—
$
—
$
—
$
1,642,103
$
—
$
1,642,103
$
3,207,244
$
—
$
—
Jeffrey
T. Hanson
In November, 2006, Mr. Hanson entered into an Executive
Employment Agreement with the Company pursuant to which
Mr. Hanson serves as the Company’s Chief Investment
Officer. The Agreement provides for an annual base salary of
$350,000 per annum. Mr. Hanson is eligible to receive an
annual discretionary bonus of up to 100% of his base salary. The
Executive Employment Agreement has an initial term of three
(3) years, and on the final day of the original term, and
on each anniversary thereafter, the term of the Agreement is
extended automatically for an additional year unless the Company
or Mr. Hanson provides at least one year’s written
notice that the term will not be extended. In connection with
the entering into of his Employment Agreement in November, 2006,
Mr. Hanson received 44,000 shares of restricted stock
and 22,000 stock options at an exercise price of $11.36 per
share, one-third of which options vest on the grant date, and
the remaining options vest in equal installments on the first
and second anniversary date of the option grant. Mr. Hanson
is entitled to receive a special bonus of $250,000 if, during
the applicable fiscal year, (x) Mr. Hanson is the
procuring cause of at least $25 million of equity from new
sources, which equity is actually received by the Company during
such fiscal year, for real estate investments sourced by the
Company, and (y) Mr. Hanson is employed by the Company
on the last day of such fiscal year.
Mr. Hanson is also enticed to participate in the
Company’s health and other benefit plans generally afforded
to executive employees and is reimbursed for reasonable travel,
entertainment and other reasonable expenses incurred in
connection with his duties. The Employment Agreement contains
confidentiality, non-competition, no raid, non-solicitation,
non-disparagement and indemnification provisions.
In the event the Company terminates Mr. Hanson’s
employment for Cause (as defined in the Executive Employment
Agreement) or if he voluntarily resigns without Good Reason (as
defined in the Executive Employment Agreement), Mr. Hanson
is entitled to accrued salary and any unreimbursed business
expenses. In the event that Mr. Hanson’s employment
terminates because of the expiration of his term, death or
disability, the Company will pay an accrued salary, any
unreimbursed business expenses, and a prorated performance bonus
equal to the performance bonus (and in the case of termination
for reason of death or disability, equal to the maximum target)
that otherwise would have been payable to Mr. Hanson in the
fiscal year in which the termination occurs had he continued
employment through the last day of such fiscal year,
prorated for the number of calendar months he was employed by
the Company in such fiscal year. The prorated performance bonus
will be paid within 60 days after Mr. Hanson’s
date of termination, provided that he executes and delivers to
the Company a general release and is not in material breach of
any of the provisions of the Executive Employment Agreement.
In the event of termination of employment without Cause, or
voluntary resignation with Good Reason, the Company will pay any
accrued salary, any unreimbursed business expenses and a
severance benefit, in a lump sum cash payment, equal to
Mr. Hanson’s annual salary plus the target bonus in
the year of the termination, the sum of which will be multiplied
by a “severance benefit factor.” The “severance
benefit factor” will be determined as follows: (a) if
the date of termination occurs during the original three year
employment term, the “severance benefit factor” will
be the greater of one, and the number of months from the date of
termination to the last day of the original three year
employment term, divided by 12, or (b) if the date of
termination is after the original three year employment term,
the “severance benefit factor” will equal one. Also,
all options become fully vested.
In the event of a termination by the Company without Cause at
any time within 90 days before, or 12 months after, a
Change in Control (as defined in the Executive Employment
Agreement), or in the event of resignation for Good Reason
within 12 months after a change in control, or if without
good reason during the period commencing six months after a
change in control and ending 12 months after a change in
control, then the Company will pay any accrued salary, any
unreimbursed business expenses, and a severance benefit. The
severance benefit will be in a lump sum cash payment, equal to
the annual salary plus the target bonus in the year of the
termination, the sum of which will be multiplied by three.
Mr. Hanson will also receive 100% of the Company’s
paid health insurance coverage as provided immediately prior to
the termination. The health insurance coverage will continue for
two years following termination of employment, or until
Mr. Hanson becomes covered under another employer’s
group health insurance plan, whichever comes first. Also,
Mr. Hanson will become fully vested in his options and
restricted shares. Mr. Hanson’s employment agreement
further provides for an additional severance benefit equal to
the lesser of (x) one percent of the amount of equity from
new sources not previously related to the Company or any of its
subsidiaries, for which Mr. Hanson is the procuring cause
in the Company’s fiscal year in which the date of
termination occurs, which equity is actually received by the
Company or any of its subsidiaries during such fiscal year, for
real estate investments sourced by the Company or any of its
subsidiaries, or (y) $250,000, if he is discharged by the
Company without Cause, or he voluntarily resigns for Good
Reason. The additional severance benefit to Mr. Hanson will
be in lieu of the $250,000 special bonus to Mr. Hanson in
respect of the fiscal year in which his termination of
employment occurs.
These severance benefits upon a change of control will be paid
60 days after the date of termination, provided the
execution and delivery to the Company of a general release and
Mr. Hanson is not in material breach of any of the
provisions of his employment agreement. Any payment and benefits
discussed in this paragraph regarding a termination associated
with a change in control will be in lieu of any payments and
benefits that would otherwise be awarded in an executive’s
termination.
If payments or other amounts become due to Mr. Hanson under
his employment agreement or otherwise, and the excise tax
imposed by the Internal Revenue Code Section 4999 applies
to such payments, the Company is required to pay a gross up
payment in the amount of this excise tax plus the amount of
income, excise and other taxes due as a result of the gross up
payment. All determinations required to be made and the
assumptions to be utilized in arriving at such determinations,
with certain exceptions, will be made by the Company’s
independent certified public accountants serving immediately
prior to the change in control.
Potential
Payments upon Termination or Change in Control
Jeffrey T. Hanson
Involuntary
Not for
Involuntary
Resignation
Executive Payments
Voluntary
Early
Normal
Cause
for Cause
for Good
Change in
Upon Termination
Termination
Retirement
Retirement
Termination
Termination
Reason
Control
Death
Disability
Severance Payments
$
—
$
—
$
—
$
1,341,667
$
—
$
1,341,667
$
2,100,000
$
—
$
—
Bonus Incentive Compensation
—
—
—
—
—
—
—
—
—
Long Term Incentive Plan
—
—
—
—
—
—
—
—
—
Stock Options (unvested and accelerated)
—
—
—
—
—
—
—
—
—
Restricted Stock (unvested and accelerated)
—
—
—
200,000
—
200,000
200,000
—
—
Performance Shares (unvested and accelerated)
—
—
—
—
—
—
—
—
—
Benefit Continuation
—
—
—
2,086
—
2,086
2,086
—
—
Tax Gross-Up
—
—
—
—
—
—
2,789,450
—
—
Total Value
$
—
$
—
$
—
$
1,543,753
$
—
$
1,543,753
$
5,091,536
$
—
$
—
Maureen
A. Ehrenberg
Ms. Ehrenberg resigned from the Company effective
December 31, 2007. In connection with the cessation of her
employment with the Company and in consideration for a release,
Ms. Ehrenberg will receive a total of $1,215,896 payable in
equal semi-monthly payments over the twelve months ended
December 31, 2008.
Prior to that time, pursuant to an employment agreement, which
became effective June 6, 2005, Ms. Ehrenberg served as
the Company’s Executive Vice President and as the President
of both Grubb & Ellis Management Services, Inc. and
the Company’s Global Client Services, at an annual base
salary of $360,000. In addition, Ms. Ehrenberg was entitled
to receive target bonus compensation of up to 80% of her base
salary based upon annual performance goals to be established by
the Compensation Committee of the Company. Ms. Ehrenberg
was also granted $500,000 worth of restricted shares of the
Company’s common stock, or 84,746 shares, at a per
share price of $5.90 (equal to the market price of the
Company’s common stock on the date immediately preceding
the grant date). All of the restricted shares vested on
December 7, 2007 as a result of a Change of Control of the
Company following the Merger. Ms. Ehrenberg was also
entitled to participate in the Company’s Long Term
Incentive Compensation Plan at a target of 65% of her base
salary. Ms. Ehrenberg was also entitled to participate in
the Company’s health and other benefit plans generally
afforded to executive employees and was reimbursed for
reasonable travel, entertainment and other reasonable expenses
incurred in connection with her duties.
Compensation
of Directors
Pursuant to the FPL Associates Compensation report obtained by
the Board of Directors in contemplation of the Merger,
directors’ compensation was further reviewed and revised in
December 2007.
Only individuals who serve as directors and are otherwise
unaffiliated with the Company (“Outside Directors”)
receive compensation for serving on the Board and on its
committees. Outside Directors are compensated for serving on the
Board with a combination of cash and equity based compensation
which includes annual grants of restricted stock, an annual
retainer fee, meeting fees and chairperson fees. Directors are
also reimbursed for out-of-pocket travel expenses incurred in
attending board and committee meetings.
Philosophy
The compensation program is designed to compensate Outside
Directors above $100,000 annually with approximately 45% paid in
cash and approximately 55% in restricted stock. In support of
the long term goals
of increasing stockholder value, Outside Directors are expected
to accumulate an equity position in the Company equal to
$250,000 over a five year period.
Prior to December, compensation for Outside Directors consisted
of a retainer of $40,000 per annum, a fee of $1,500 for each
meeting of the Board or one of its committees attended in person
and a fee of $1,000 for each meeting (up to six meetings) of the
Board or one of its committees attended telephonically. In
addition, the chairperson of the audit committee received a fee
at the rate of $10,000 per annum and the chairperson of each of
the Board’s other standing committees received a fee of
$5,000 per annum. The foregoing fees with respect to committee
attendance pertain only to standing committees of the Board and
do not pertain to any special or ad hoc committees, compensation
for which is determined on a
case-by-case
basis.
Pursuant to the FPL Associates Compensation report, Board
compensation was adjusted in December 2007 as follows:
(i) an annual retainer fee of $50,000 per annum;
(ii) a fee of $1,500 for each regular meeting of the board
of directors attended in person or telephonically; (iii) a
fee of $1,500 for each standing committee member of the board of
directors attended in person or telephonically; and
(iv) $60,000 worth of restricted shares of common stock
issued at the then current market price of the common stock, to
vest ratably in equal annual installments over three years,
except in the event of a change in control, in which event
vesting is accelerated. In addition, on March 12, 2007 the
Compensation Committee, in consultation with FPL Associates
Compensation, revised the compensation arrangements for the
non-executive Chairman of the Board to provide for an annual
aggregate retainer fee of $100,000, an aggregate of $140,000
worth of restricted stock per annum and an expense allowance of
$25,000 per annum. Outside directors are also required to commit
to an equity position in the Company over five years in the
amount equal to $250,000 worth of common stock which may include
annual restricted stock grants to the directors. The directors
are also to be reimbursed for lodging and travel expenses in
connection with attending meetings of the board.
Effective September 20, 2006, each of Rodger D. Young,
Robert J. McLaughlin, Anthony G. Antone and F. Joseph Moravec,
received their annual restricted stock grant of
5,446 shares of common stock which is based upon the
closing price of the Company’s common stock on
September 20, 2006, which was $9.18.
Effective November 16, 2006, each of Glenn L.
Carpenter, Harold H. Greene, Gary H. Hunt and
D. Fleet Wallace received a grant of 8,800 shares of
restricted stock from NNN.
Effective June 27, 2007 each of Glenn L. Carpenter, Harold H.
Greene, Gary H. Hunt and D. Fleet Wallace received a grant of
11,000 shares of restricted stock from NNN.
Effective September 20, 2007, each of Rodger D. Young,
Robert J. McLaughlin, Anthony G. Antone and F. Joseph Moravec
received their annual restricted stock grant of
5,291 shares of common stock which is based upon the
closing price of the Company’s common stock on
September 20, 2007, which was $9.45.
Effective December 10, 2007, each of the Company’s
outside directors appointed following the Merger, Glenn L.
Carpenter, Harold H. Greene, Gary H. Hunt, C. Michael Kojaian,
and D. Fleet Wallace received their initial, and each of the
Company’s then current outside directors, Rodger D. Young
and Robert J. McLaughlin, received their annual, restricted
stock grant of 8,996 shares of common stock which is based
upon the closing price of the Company’s common stock on
December 10, 2007, which was $6.67.
Represents annual retainers plus all meeting and committee
attendance fees earned by non-employee directors in 2007.
(2)
The amounts shown are the compensation costs recognized by the
Company in 2007 in accordance with SFAS No. 123R,
Share-Based Payment (“SFAS No. 123R).
Includes $66,666 in compensation expense each for
Messrs. Carpenter, Greene, Hunt and Wallace related to the
accelerated vesting of the restricted stock issued in November
2006 upon the closing of the Merger. Each of the outside
directors received a grant of 8,996 shares on
December 10, 2007 which vest in three equal increments on
each of the next three annual anniversary dates of the grant.
The grant date fair value of the 8,996 shares of restricted
stock was $60,000, as computed in accordance with
SFAS No. 123R, based on a market price of $6.67 per
share on the date of grant. In addition, Messrs. Carpenter,
Greene, Hunt and Wallace each received a grant of
11,000 shares of restricted stock on June 27, 2007,
which also vest in three equal increments on each of the next
three annual anniversary dates of the grant. The grant date fair
value of the 11,000 shares of restricted stock was $125,000
based on a value of $11.36 per share on the date of grant.
(3)
The following table shows the aggregate number of unvested stock
awards and option awards granted to non-employee directors and
outstanding as of December 31, 2007:
Stock Awards
Options Outstanding
Outstanding at
Director
at Fiscal Year End
Fiscal Year End
Glenn L. Carpenter
0
19,996
Harold H. Greene
0
19,996
C. Michael Kojaian
0
8,996
Gary H. Hunt
0
19,996
Robert J. McLaughlin
10,000
8,996
D. Fleet Wallace
0
19,996
Rodger D. Young
10,000
8,996
Stock
Ownership Policy for Outside Directors
On December 10, 2007, the Compensation Committee adopted a
new charter which, among other things, revised the stock
ownership policy for outside Directors initially adopted by the
Board in October 2005. Under the policy, Outside Directors are
required to accumulate an equity position in the Company over
five years in an amount equal to $250,000 worth of common stock
(the previous policy required an accumulation of $200,000 worth
of common stock over a five year period). Shares of common stock
acquired by Outside Directors pursuant to the restricted stock
grants can be applied toward this equity accumulation
requirement.
Compensation
Committee Interlocks and Insider Participation
The members of the Compensation Committee for the year ended
December 31, 2007, without giving effect to the Merger,
were Robert J. McLaughlin, Chair, and Rodger D. Young. Upon the
effectiveness of the Merger, Glenn L. Carpenter and Gary H. Hunt
joined the Compensation Committee, and Mr. Carpenter
replaced Mr. McLaughlin as Chairman of the Committee. In
February, 2008 when Mr. Carpenter became Chairman of the
Board, replacing Anthony W. Thompson, he resigned from the
Compensation Committee. Mr. Hunt became the Chairman of the
Compensation Committee and D. Fleet Wallace joined the
Compensation Committee. None of the current or former members of
the Compensation Committee is or was a current or former officer
or employee of the Company or any of its subsidiaries or had any
relationship requiring disclosure by the Company under any
paragraph of Item 404 of
Regulation S-K
of the SEC’s Rules and Regulations. During the year ended
December 31, 2007, none of the executive officers of the
Company served as a member of the board of directors or
compensation committee of any other company that had one or more
of its executive officers serving as a member of the
Company’s Board of Directors or Compensation Committee.
Compensation
Committee Report
The following Compensation Committee Report is not to be
deemed to be “soliciting material” or to be
“filed” with the SEC or subject to Regulation 14A
or 14C or to the liabilities of Section 18 of the Exchange
Act, except to the extent that the Company specifically requests
that such information be treated as soliciting material or
specifically incorporates it by reference into any filing under
the Securities Act of 1933, as amended (the “Securities
Act”) or the Exchange Act.
The Compensation Committee has reviewed and discussed with the
Company’s management the Compensation Discussion and
Analysis presented in this Annual Report. Based on such review
and discussion, the Compensation Committee has recommended to
the Board that the Compensation Discussion and Analysis be
included in this Annual Report.
The Compensation Committee
Gary H. Hunt, Chair
Robert J. McLaughlin
Rodger D. Young
D. Fleet Wallace
Item 12.
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
Equity
Compensation Plan Information
This information is included in Part II, Item 5, of
this Annual Report.
Stock
Ownership Table
The following table shows the share ownership as of
March 12, 2008 by persons known by the Company to be
beneficial holders of more than 5% of the Company’s
outstanding capital stock, directors, named executive officers,
and all current directors and executive officers as a group.
Unless otherwise noted, the
stock listed is common stock, and the persons listed have sole
voting and disposition powers over the shares held in their
names, subject to community property laws if applicable.
Amount and Nature of
Percent of
Beneficial Ownership
Class(1)
Persons affiliated with Kojaian Ventures, L.L.C.(2)
9,455,583
14.53
%
Anthony W. Thompson(3)
8,937,808
13.73
%
Wellington Management Company, LLP(4)
4,646,888
7.14
%
Executive Officers and Directors
Glenn L. Carpenter
37,400
(5)
*
Harold H. Greene
19,800
(5)
*
Gary H. Hunt
19,800
(5)
*
C. Michael Kojaian
12,516,109
(5)(6)
19.23
%
Robert J. McLaughlin
107,555
(5)(7)
*
Scott D. Peters
1,401,416
(8)
2.15
%
D. Fleet Wallace
19,800
(5)
*
Rodger D. Young
28,245
(5)(9)
*
Andrea R. Biller
326,077
(10)
*
Jeffrey Hanson
323,962
(11)
*
Francene LaPoint
115,867
(10)
*
Stanley J. Olander, Jr.
360,800
(12)
*
Robert H. Osbrink
84,278
(13)
*
Richard W. Pehlke
15,833
(14)
*
Dylan Taylor
0
(15)
—
Jacob Van Berkel
0
(16)
All Current Directors and Executive Officers as a Group
(16 persons)
15,376,942
(17)
23.62
%
*
Less than one percent.
(1)
The percentage of shares of capital stock shown for each person
in this column and in this footnote assumes that such person,
and no one else, has exercised any currently outstanding
warrants, options or convertible securities held by him or her.
(2)
Kojaian Ventures, L.L.C. is affiliated with both C. Michael
Kojaian, a director of the Company and Kojaian Holdings LLC (see
footnote 6 below). The address of Kojaian Ventures, L.L.C. is
39400 Woodward Ave., Suite 250, Bloomfield Hills,
Michigan48304.
(3)
Anthony Thompson is deemed to be the beneficial owner of
8,937,808 shares of Common Stock and includes:
(i) 7,367,502 shares held directly by Mr. Thompson;
(ii) 784,175 shares held by AWT Family, L.P., a
California limited partnership; and 786,131 shares of
common stock held by Cunningham Stafford, LLC, a Nevada limited
liability company. Mr. Thompson’s address is 1901 Main
St., Suite 108, Irvine, California92614.
(4)
Wellington Management Company, LLP (“Wellington”), in
its capacity as investment advisor, may be deemed to
beneficially own 4,646,888 shares of the Company which are
held of record by clients of Wellington. Wellington’s
address is 75 State Street, Boston, Massachusetts02109.
(5)
Beneficially owned shares do not include 2,999 shares of
restricted stock that vest on December 10, 2008,
2,999 shares of restricted stock that vest on
December 10, 2009 or 2,998 shares of restricted stock
that vest on December 10, 2010, all of these
8,996 shares are subject to certain terms and conditions
contained in each of those certain Restricted Stock Agreements
between the Company and Messrs. Carpenter, Greene, Hunt,
Kojaian, McLaughlin, Wallace and Young, respectively, dated
December 10, 2007.
(6)
Beneficially owned shares include 3,060,526 shares directly
held by by Kojaian Holdings LLC. C. Michael Kojaian, a
director of the Company, is affiliated with Kojaian Ventures,
L.L.C. and Kojaian
Holdings LLC. Pursuant to rules established by the SEC, the
foregoing parties may be deemed to be a “group,” as
defined in Section 13(d) of the Exchange Act, and
C. Michael Kojaian is deemed to have beneficial ownership
of the shares directly held by Kojaian Ventures, L.L.C. and the
shares directly held by Kojaian Holdings LLC.
(7)
Beneficially owned shares include 10,000 shares of common
stock issuable upon exercise of fully vested outstanding options.
(8)
Beneficially owned shares include 29,333 shares of common
stock issuable upon exercise of fully vested outstanding
options. Beneficially owned shares do not include
14,667 shares of Company common stock issuable upon
exercise of outstanding options which do not vest until
November 16, 2008 subject to Mr. Peters’
continued employment with the Company.
(9)
Beneficially owned shares include 10,000 shares of common
stock issuable upon exercise of fully vested outstanding options.
(10)
Beneficially owned shares include 23,467 shares of common
stock issuable upon exercise of fully vested outstanding
options. Beneficially owned shares do not include
11,733 shares of the Company’s common stock issuable
upon the exercise of options which will vest on
November 16, 2008 subject to continued employment with the
Company.
(11)
Beneficially owned shares include 14,667 shares of common
stock issuable upon exercise of fully vested outstanding
options. Beneficially owned shares do not include
7,333 shares of the Company’s common stock issuable
upon the exercise of options which will vest on
November 16, 2008 subject to Mr. Hanson’s
continued employment with the Company.
(12)
Stanley J. Olander, Jr. directly owns 8,800 shares of the
Company’s common stock and indirectly owns
352,000 shares of Company common stock owned of record by
ROC Advisors, LLC of which Mr. Olander is one of three
members and is the managing member.
(13)
Beneficially owned shares do not include 25,000 shares of
restricted stock that vest on January 24, 2009,
25,000 shares of restricted stock that vest on
January 24, 2010 or 25,000 shares of restricted stock
that vest on January 24, 2011, all of these
75,000 shares are subject to certain terms and conditions
contained in that certain Restricted Stock Agreement between the
Company and Mr. Osbrink dated January 24, 2008.
However, beneficially do include 15,000 shares of Company
common stock is issuable upon exercise of fully vested
outstanding options.
(14)
Beneficially owned shares include 8,333 shares of common
stock issuable upon exercise of fully vested outstanding
options. Beneficially owned shares do not include
8,333 shares of Company common stock issuable upon exercise
of outstanding options which do not vest until February 15,2009 nor do they include 8,334 shares of Company common
stock issuable upon exercise of outstanding options which do not
vest until February 15, 2010. Nor do beneficially owned
shares include 25,000 shares of restricted stock that vest
on January 24, 2009, 25,000 shares of restricted stock
that vest on January 24, 2010 or 25,000 shares of
restricted stock that vest on January 24, 2011, all of
these 75,000 shares are subject to certain terms and
conditions contained in that certain Restricted Stock Agreement
between the Company and Mr. Pehlke dated January 24,2008.
(15)
Beneficially owned shares do not include 13,333 shares of
restricted stock that vest on January 24, 2009,
13,333 shares of restricted stock that vest on
January 24, 2010 or 13,334 shares of restricted stock
that vest on January 24, 2011, all of these
40,000 shares are subject to certain terms and conditions
of the Company’s 2006 Omnibus Equity Plan.
(16)
Beneficially owned shares do not include 17,600 shares of
the Company’s restricted stock which vest in equal 33 1/3
portions on each first business day after December 4, 2008,
2009 and 2010. Nor do beneficially owned shares include
80,000 shares of Company restricted stock that were awarded
to Mr. Van Berkel pursuant to the Company’s 2006
Omnibus Equity Plan which will vest in equal
331/3
portions on each first business day after January 24, 2009,
2010, and 2011.
(17)
Beneficially owned shares include the following shares of common
stock issuable upon exercise of outstanding options which are
exercisable at February 15, 2008 or within ninety days
thereafter under the Company’s various stock option plans:
Mr. McLaughlin — 10,000 shares,
Mr. Peters — 29,333 shares,
Mr. Young — 10,000 shares,
Ms. Biller — 23,467 shares,
Ms. LaPoint — 23,467 shares,
Mr. Hanson — 14,667 shares,
Mr. Osbrink — 15,000 shares,
Mr. Pehlke — 8,333 shares, and all current
directors and executive officers as a group —
134,267 shares.
Item 13.
Certain
Relationships and Related Transactions, and Director
Independence
Related
Party Transaction Review Policy
The Company recognizes that transactions between the Company and
any of its directors, officers or principal stockholders or an
immediate family member of any director, executive officer or
principal stockholder can present potential or actual conflicts
of interest and create the appearance that Company decisions are
based on considerations other than the best interests of the
Company and its stockholders. The Company also recognizes,
however, that there may be situations in which such transactions
may be in, or may not be inconsistent with, the best interests
of the Company.
The review and approval of related party transactions are
governed by the Code of Business Conduct and Ethics. The Code of
Business Conduct and Ethics is a part of the Company’s
Employee Handbook, a copy of which is distributed to each of the
Company’s employees at the time that they begin working for
the Company, and the Company’s Salespersons Manual, a copy
of which is distributed to each of the Company’s brokerage
professionals at the time that they begin working for the
Company. The Code of Business Conduct and Ethics is also
available on the Company’s website at www.grubb-ellis.com.
In addition, within 60 days after he or she begins working
for the Company and once per year thereafter, the Company
requires that each employee and brokerage professional to
complete an on-line “Business Ethics” training class
and certify to the Company that he or she has read and
understands the Code of Business Conduct and Ethics and is not
aware of any violation of the Code of Business Conduct and
Ethics that he or she has not reported to management.
In order to ensure that related party transactions are fair to
the Company and no worse than could have been obtained through
“arms-length” negotiations with unrelated parties,
such transactions are monitored by the Company’s management
and regularly reviewed by the Audit Committee, which
independently evaluates the benefit of such transactions to the
Company’s stockholders. Pursuant to the Audit
Committee’s charter, on a quarterly basis, management
provides the Audit Committee with information regarding related
party transactions for review and discussion by the Audit
Committee and, if appropriate, the Board of Directors. The Audit
Committee, in its discretion, may approve, ratify, rescind or
take other action with respect to a related party transaction
or, if necessary or appropriate, recommend that the Board of
Directors approve, ratify, rescind or take other action with
respect to a related party transaction.
In addition, each director and executive officer annually
delivers to the Company a questionnaire that includes, among
other things, a request for information relating to any
transactions in which both the director, executive officer, or
their respective family members, and the Company participates,
and in which the director, executive officer, or such family
member, has a material interest.
Related
Party Transactions
The following are descriptions of certain transactions since the
beginning of 2007 in which the Company is a participant and in
which any of the Company’s directors, executive officers,
principal stockholders or any immediate family member of any
director, executive officer or principal stockholder has or may
have a direct or indirect material interest.
Grubb &
Ellis Realty Advisors, Inc.
The Company currently owns 5,667,719 shares, or
approximately 19%, of the issued and outstanding common stock of
GERA, a special purpose acquisition company organized by the
Company to acquire one or more United States commercial real
estate properties
and/or
assets. C. Michael Kojaian, a director of the Company, and
Kojaian Ventures, LLC, an entity with which Mr. Kojaian is
affiliated and in which Mr. Kojaian has a substantial
economic interest, collectively own approximately 6.4% of
the outstanding common stock of GERA. Mr. Kojaian is also
the Chairman of the Board and Chief Executive Officer of GERA.
Mark Rose, the
former Chief Executive Officer of the Company, is also a
director of GERA and Richard W. Pehlke, the Chief Financial
Officer of the Company, is also the Chief Executive Officer of
GERA.
As consideration for serving as initial directors to GERA,
during fiscal 2006, the Company transferred 41,670 shares
of GERA’s common stock from the Company’s initial
investment to each of the initial directors of GERA, including
Messrs. Kojaian and Rose.
Pursuant to an agreement with Deutsche Bank Securities Inc., the
Company agreed to purchase, during the period commencing
May 3, 2006 and ending on June 28, 2006, to the extent
available in the public marketplace, up to $3.5 million of
the warrants issued in connection with GERA’s initial
public offering (the “IPO”) if the public price per
warrant was $0.70 or less. The Company agreed to purchase such
warrants pursuant to an agreement in accordance with the
guidelines specified by
Rule 10b5-1
under the Exchange Act, through an independent broker-dealer
registered under Section 15 of the Exchange Act that did
not participate in the IPO. In addition, the Company further
agreed that any such warrants purchased by it would not be sold
or transferred until the completion of a business combination by
GERA. On June 28, 2006, the Company agreed to a
60-day
extension of this agreement, through August 27, 2006.
Pursuant to such agreement, as extended, the Company purchased
an aggregate of approximately 4.6 million warrants of GERA
for an aggregate purchase price of approximately
$2.2 million, or approximately $0.47 per warrant, excluding
commissions of approximately $186,000.
The Company has agreed that, through the consummation of an
initial business combination or liquidation by GERA, the Company
will make available to GERA office space, utilities and
secretarial support for general and administrative purposes as
GERA may require from time to time. GERA has agreed to pay the
Company $7,500 per month for these services. During 2007, Realty
Advisors paid the Company $90,000 for such services.
At the time of the IPO, GERA entered into a Master Agreement for
Services (“MSA”) with the Company, whereby the Company
will serve as the exclusive agent with respect to commercial
real estate brokerage and consulting services relating to real
property acquisitions, dispositions as well as agency leasing.
The initial term of the MSA is five years and is cancelable
based on certain conditions as defined.
Additionally, at the time of the IPO, GERA entered into a
Property Management Agreement (“PMA”) with the
Company’s wholly owned subsidiary, Grubb & Ellis
Management Services (“GEMS”), whereby GEMS will serve
as sole exclusive managing agent for all real property acquired.
Under the PMA, GEMS is entitled to a monthly management fee
equal to the greater of (a) three percent of a
property’s monthly gross cash receipts from the operations
of the property, and (b) a minimum monthly fee to be
determined by mutual agreement based upon then current market
prices and terms for services for comparable projects. In
addition, GERA is required to reimburse GEMS for salaries and
other expenses paid or incurred by GEMS that are directly
related to managing the asset or assets. The initial term of the
PMA is 12 months from the date of the consummation of a
business combination and will be automatically renewed for
successive terms, each with a duration of one year unless
otherwise terminated in accordance with its terms. Either party
can terminate with 60 days notice.
Finally, at the time of the IPO, GERA entered into a Master
Agreement for Project Management Services with the Company. The
project management agreement contains a
60-day
cancellation provision by either party. For each project under
the project management agreement, the Company will receive a fee
equal to five percent of the total project costs.
On June 18, 2007, the Company entered into, along with its
wholly owned subsidiary, GERA Property Acquisition, LLC, a
Membership Interest Purchase Agreement (the “Purchase
Agreement”) with GERA which contemplated the transfer of
the three (3) commercial office properties from the Company
to GERA and, if consummated, would constitute GERA’s
business combination. Pursuant to the Purchase Agreement, the
Company was to sell the properties to GERA, on a “cost
neutral basis,” reimbursement for the actual costs and
expenses paid by the Company with respect to the purchase of the
properties and imputed interest on cash advanced by the Company
with respect to the properties.
Under the terms of the Purchase Agreement, the Purchase
Agreement was subject to termination under certain
circumstances, including but not limited to if GERA failed to
obtain the requisite stockholder consents required under the
laws of the State of Delaware and Realty Advisors’ charter
to approve the transactions contemplated by the Purchase
Agreement.
Effective January 25, 2008, the Company entered into a
letter agreement (the “Letter Agreement”) with GERA
pursuant to which the Company agreed, subject to and
simultaneously upon the closing of the Acquisition Agreement,
that GERA would have the right to redeem an aggregate of
4,395,788 shares of common stock, par value $.0001 per
share, of GERA currently owned by the Company (the
“Redemption”). As noted above, the Company presently
owns 5,667,719 shares of common stock of GERA, which
represents approximately 19% of the issued and outstanding
shares of GERA. The per share purchase price of each share that
would be redeemed is the par value thereof, which would result
in an aggregate purchase price with respect to the Redemption of
$439.58. Subsequent to the Redemption, the Company would still
own 1,271,931 shares of common stock of GERA, which would
represent 5% of the then issued and outstanding shares of GERA.
On February 28, 2008, at a special meeting of the
stockholders of GERA held to vote on, among other things, the
proposed transaction with the Company, GERA failed to obtain the
requisite consents of its stockholders to approve its proposed
business combination (i.e. the transactions contemplated by the
Purchase Agreement). Specifically, of the 23,958,334 shares
of GERA common stock eligible to vote with respect to the
proposed transaction, stockholders holding an aggregate of
22,695,082 shares voted on the transaction. Of those
stockholders voting, 17,144,944 shares were cast against
the proposed business combination, and the holders of all such
17,144,944 shares also elected to convert their shares into
a pro rata share of GERA’s trust account.
4,860,127 shares voted in favor of the proposed business
combination, and the remaining shares did not vote with respect
to the proposed transaction.
As a result thereof, GERA, in accordance with
Section 8.1(f) of the Purchase Agreement, advised the
Company in a letter effective February 28, 2008, that it
was terminating the Purchase Agreement in accordance with its
terms.
As a result of its failure to obtain the requisite stockholder
approvals, GERA is unable to effect a business combination
within the proscribed deadline of March 3, 2008 in
accordance with its charter. Consequently, GERA filed a proxy
statement with the SEC on March 11, 2008 with respect to a
special meeting of its stockholders to vote on the dissolution
and liquidation of GERA. The Company will write-off in the first
quarter of 2008 its investment in GERA of approximately
$5.6 million, including its stock and warrant purchases,
operating advances and third party costs. The Company will also
pay any third-party legal, accounting, printing and other costs
(other than monies to be paid to stockholders of GERA on
liquidation) associated with the dissolution and liquidation of
GERA. In addition, the various exclusive service agreements that
the Company had previously entered into with GERA for
transaction services, property and facilities management, and
project management, will no longer be of any force or effect.
The Company presently intends to market the three commercial
properties so as to effect their sale on or before
September 30, 2008, as required under the terms of its
credit facility.
Other
Related Party Transactions
A director of the Company, C. Michael Kojaian, is affiliated
with and has a substantial economic interest in Kojaian
Management Corporation and its various affiliated portfolio
companies (collectively, “KMC”). KMC is engaged in the
business of investing in and managing real property both for its
own account and for third parties. During the 2007 calendar
year, KMC paid the Company and its subsidiaries the following
approximate amounts in connection with real estate services
rendered: $9,447,000 for management services, which include
reimbursed salaries, wages and benefits of $3,971,000; $797,000
in real estate sale and leasing commissions; and $68,000 for
other real estate and business services. The Company also paid
KMC approximately $3,088,000, which reflected fees paid by
KMC’s asset management clients for asset management
services performed by KMC, but for which the Company billed the
clients.
The Company believes that the fees and commissions paid to and
by the Company as described above were comparable to those that
would have been paid to or received from unaffiliated third
parties in connection with similar transactions.
In August 2002, the Company entered into an office lease with a
landlord related to KMC, providing for an annual average base
rent of $365,400 over the ten-year term of the lease.
As of August 28, 2006, the Company entered into a written
agreement with 1up Design Studios, Inc. (“1up”), of
which Ryan Osbrink, the son of Robert H. Osbrink, Executive Vice
President and President, Transaction Services of the Company, is
a principal shareholder, to procure graphic design and
consulting services on assignments provided by brokerage
professionals
and/or
employees of the Company. The term of the agreement was for a
period beginning September 1, 2006 ending on
August 31, 2007 and was terminable by either party upon
60 days prior notice. The Agreement provided that the
Company would pay 1up a monthly retainer of $25,000, from which
1up would deduct the cost of its design services. The pricing
for 1up’s design services was fixed pursuant to a price
schedule attached as an exhibit to the agreement. In addition,
at the inception of the agreement, the Company sold certain
computer hardware and software to 1up for a price of $6,500
which was the approximate net book value of such items. The
written agreement with 1up was terminated effective as of
March 1, 2007 at the request of the Audit Committee which
believed that, although the agreement did not violate the
Company’s related party transaction policy, termination of
the agreement was appropriate in order to avoid any appearance
of impropriety that might result from the agreement to pay 1up a
fixed monthly retainer. While the Company is no longer obligated
to pay the monthly retainer to 1up, the Company has continued to
use 1up to provide design and consulting services on an ad hoc
basis. During the 2007 fiscal year, 1up was paid approximately
$239,000 in fees for its services. The Company believes that
amounts paid to 1up for services are comparable to the amounts
that the Company would have paid to unaffiliated, third parties.
GERI owns a 50.0% managing member interest in Grubb &
Ellis Apartment REIT Advisor, LLC. Grubb & Ellis
Apartment Management LLC owns a 25.0% equity interest in
Grubb & Ellis Apartment REIT Advisor, LLC and each of
Mr. Peters and Ms. Biller received an equity interest
of 18.0% of Grubb & Ellis Apartment Management, LLC.
GERI owns a 75.0% managing member interest in Grubb &
Ellis Healthcare REIT Advisor, LLC. Grubb & Ellis
Healthcare Management, LLC owns a 25.0% equity interest in
Grubb & Ellis Healthcare REIT Advisor, LLC and each of
Mr. Peters, Ms. Biller and Jeffery T. Hanson received
an equity interest of 18.0% of Grubb & Ellis
Healthcare Management, LLC.
Anthony W. Thompson, former Chairman of the Company and NNN, and
a substantial stockholder of the Company, as a special member,
is entitled to receive up to $175,000 annually in compensation
from each of Grubb & Ellis Apartment Management, LLC
and Grubb & Ellis Healthcare Management, LLC.
The grants of these membership interests in Grubb &
Ellis Apartment Management, LLC and Grubb & Ellis
Healthcare Management, LLC to certain executives are being
accounted for by the Company as a profit sharing arrangement.
Compensation expense is recorded by the Company when the
likelihood of payment is probable and the amount of such payment
is estimable, which generally coincides with Grubb &
Ellis Apartment REIT Advisor, LLC and Grubb & Ellis
Healthcare REIT Advisor, LLC recording its revenue. Compensation
expense related to this profit sharing arrangement associated
with Grubb & Ellis Apartment Management, LLC includes
cash distributions based on membership interests of $175,000 and
$22,000 earned by Mr. Thompson and $159,418 and $50,000
earned by each of Mr. Peters and Ms. Biller from
Grubb & Ellis Apartment Management, LLC for each of
the calendar years ended December 31, 2007 and 2006,
respectively. No cash distributions were paid in 2005.
Compensation expense related to this profit sharing arrangement
associated with Grubb & Ellis Healthcare Management,
LLC includes cash distributions based on membership interests of
$175,000 earned by Mr. Thompson and $413,546 earned by each
of Messrs. Peters and Hanson and Ms. Biller from
Grubb & Ellis Healthcare Management, LLC for the
calendar year ended December 31, 2007. No cash
distributions were paid in 2006 or 2005.
As of December 31, 2007 and 2006, the remaining 64.0% and
46.0%, respectively, equity interest in Grubb & Ellis
Apartment Management, LLC and the remaining 46.0% equity
interest in Grubb & Ellis Healthcare Management, LLC
were owned by GERI; however, the Partnership agreements require
that any allocable earnings attributable to the GERI’s
ownership interests be paid out as performance bonuses to
Company employees. As such, Grubb & Ellis Apartment
Management, LLC incurred $492,000, $182,000 and $0 for the years
ended December 31, 2007, 2006 and 2005, respectively, and
Grubb & Ellis Healthcare Management, LLC incurred
$882,000, $0 and $0 for the years ended December 31, 2007,
2006 and 2005, respectively, to other Company employees, which
was included in compensation expense in the consolidated
statement of operations.
In connection with the SEC investigation, to the extent that the
Company pays the SEC an amount in excess of $1.0 million in
connection with any settlement or other resolution of this
matter, Mr. Thompson has agreed to forfeit to the Company
up to 1,064,800 shares of its common stock. In connection
with this arrangement, NNN has entered into an escrow agreement
with Mr. Thompson and an independent escrow agent, pursuant
to which the escrow agent holds 1,064,800 shares of the
Company’s common stock that were otherwise assumable to
Mr. Thompson in connection with the NNN formation
transactions to secure Mr. Thompson’s obligations to
the Company. Mr. Thompson’s liability under this
arrangement will not exceed the shares in the escrow. The
Company cannot make any assurance as to the value of the shares
at the time of any claim under this agreement.
On September 20, 2006, the Company awarded Mr. Peters
a bonus of $2.1 million, which was payable in
178,957 shares of the Company’s common stock,
representing a value of $1.3 million and a cash tax
gross-up
payment of $854,000.
G REIT, Inc. had agreed to pay Mr. Peters and
Ms. Biller, retention bonuses in connection with its
stockholder approved liquidation of $50,000 and $25,000,
respectively, upon the filing of each of G REIT’s
annual and quarterly reports with the SEC during the period of
the liquidation process, beginning with the annual report for
the year ending December 31, 2005. These retention bonuses
were agreed to by the independent directors of G REIT and
approved by the stockholders of G REIT in connection with
G REIT’s stockholder approved liquidation. As of each
of December 31, 2007 and December 31, 2006,
Mr. Peters and Ms. Biller have received retention
bonuses of $200,000 and $100,000 from G REIT, respectively.
On January 28, 2008, G REIT’s remaining assets
and liabilities were transferred to G REIT Liquidating
Trust. Effective January 30, 2008, and March 4, 2008,
respectively, Mr. Peters and Ms. Biller irrevocably
waived their rights to receive all future retention bonuses from
G REIT Liquidating Trust. Additionally, Mr. Peters and
Ms. Biller, each were entitled to a performance-based bonus
of $100,000 upon the receipt by GERI of net commissions
aggregating $5,000,000 or more from the sale of G REIT
properties. As of December 31, 2007, Mr. Peters and
Ms. Biller have received their performance-based bonuses of
$100,000 each from GERI.
T REIT, Inc. had paid performance bonuses in connection with its
shareholder approved liquidation to Ms. Biller of $25,000
in August 2005 and $35,000 in March 2006. On July 20, 2007,
T REIT’s remaining assets and liabilities were transferred
to T REIT Liquidating Trust.
The Company’s directors and officers, as well as officers,
managers and employees of the Company’s subsidiaries, have
purchased, and may continue to purchase, interests in offerings
made by the Company’s programs at a discount. The purchase
price for these interests reflects the fact that selling
commissions and marketing allowances will not be paid in
connection with these sales. The net proceeds to the Company
from these sales made net of commissions will be substantially
the same as the net proceeds received from other sales.
Mr. Thompson has routinely provided personal guarantees to
various lending institutions that provided financing for the
acquisition of many properties by the Company’s programs.
These guarantees cover certain covenant payments, environmental
and hazardous substance indemnification and indemnification for
any liability arising from the SEC investigation of Triple Net
Properties. In connection with the formation transactions, the
Company indemnified Mr. Thompson for amounts he may be
required to pay under all of these guarantees to which Triple
Net Properties, Realty or Capital Corp. is an obligor to the
extent such indemnification would not require the Company to
book additional liabilities on the Company’s balance sheet.
In September 2007, NNN acquired Cunningham Lending Group LLC
(“Cunningham”), a company that was wholly-owned by
Mr. Thompson, for $255,000 in cash. Prior to the
acquisition, Cunningham made unsecured loans to some of the
properties under management by GERI. The loans, which bear
interest at rates ranging from 8.0% to 12.0% per annum are
reflected in advances to related parties on the Company’s
balance sheet and are serviced by the cash flows from the
programs. In accordance with FIN No. 46R, the Company
consolidated Cunningham in its financial statements beginning in
2005.
The Company has made advances totaling $1.0 million and
$3.3 million as of December 31, 2007 and
December 31, 2006, respectively to Colony Canyon, a
property 30.0% owned by Mr. Thompson. The advances bear
interest at 10.0% per annum and are required to be repaid within
one year (although the repayments can and have been extended
from time to time).
NNN was organized in September 2006 to acquire each of Triple
Net Properties, Realty, and Capital Corp, to bring the
businesses conducted by those companies under one corporate
umbrella. On November 30, 2006, NNN completed a
$160.0 million private placement of common stock to
institutional investors and certain accredited investors with
16 million shares of its common stock sold in the offering
at $10.00 per share. Net proceeds from the offering were
$146.0 million. Triple Net Properties was the accounting
acquirer of Realty and Capital Corp.
Independence
of Directors
The Board has determined that seven of its eight current
directors, Messrs. Carpenter, Greene, Hunt, Kojaian,
McLaughlin, Wallace and Young are independent.
For purposes of determining the independence of its directors,
the Board applies the following criteria:
No
Material Relationship
The director must not have any material relationship with the
Company. In making this determination, the Board considers all
relevant facts and circumstances, including commercial,
charitable and familial relationships that exist, either
directly or indirectly, between the director and the Company.
Employment
The director must not have been an employee of the Company at
any time during the past three years. In addition, a member of
the director’s immediate family (including the
director’s spouse; parents; children; siblings; mothers-,
fathers-, brothers-, sisters-, sons- and
daughters-in-law;
and anyone who shares the director’s home, other than
household employees) must not have been an executive officer of
the Company in the prior three years.
Other
Compensation
The director or an immediate family member must not have
received more than $100,000 per year in direct compensation from
the Company, other than in the form of director fees, pension or
other forms of deferred compensation during the past three years.
Auditor
Affiliation
The director must not be a current partner or employee of the
Company’s internal or external auditor. An immediate family
member of the director must not be a current partner of the
Company’s internal or external auditor, or an employee of
such auditor who participates in the auditor’s audit,
assurance or tax compliance (but not tax planning) practice. In
addition, the director or an immediate family member must not
have been within the last three years a partner or employee of
the Company’s internal or external auditor who personally
worked on the Company’s audit.
During the past three years, the director or an immediate family
member must not have been employed as an executive officer by
another entity where one of the Company’s current executive
officers served at the same time on the compensation committee.
Business
Transactions
The director must not be an employee of another entity that,
during any one of the past three years, received payments from
the Company, or made payments to the Company, for property or
services that exceed the greater of $1 million or 2% of the
other entity’s annual consolidated gross revenues. In
addition, a member of the director’s immediate family must
not have been an executive officer of another entity that,
during any one of the past three years, received payments from
the Company, or made payments to the Company, for property or
services that exceed the greater of $1.0 million or 2% of
the other entity’s annual consolidated gross revenues.
Item 14.
Principal
Accountant Fees and Services
Ernst & Young, independent public accountants, began
serving as the Company’s auditors from December 10,2007. Ernst & Young also served as the legacy
Grubb & Ellis’ auditors from January 1, 2007
to December 7, 2007 and for the year ended
December 31, 2006. Ernst & Young billed the
Company and the legacy Grubb & Ellis the fees and
costs set forth below for services rendered during the years
ended December 31, 2007 and 2006, respectively.
2007
2006
Audit Fees(1)
Audit of consolidated financial statements
$
652,250
$
270,375
Audit of internal control over financial reporting
324,450
28,000
Timely quarterly reviews
47,750
45,750
SEC filings, including comfort letters, consents and comment
letters
236,000
176,100
Total Audit Fees
1,260,450
520,225
Audit Related Fees(2)
Employee benefit plans
25,500
17,000
Audits in connection with acquisitions and other accounting
consultations
318,804
37,500
Due diligence services on pending merger
161,306
—
SAS No. 70 attestation report
85,000
—
Total Audit-Related Fees
590,610
54,500
Tax Fees(2)
Tax return preparation
69,500
66,000
Tax planning
—
12,500
Total Tax Fees
69,500
78,500
Total Fees
$
1,920,560
$
653,225
(1)
Includes fees and expenses related to the year-end audit and
interim reviews, notwithstanding when the fees and expenses were
billed or when the services were rendered.
(2)
Includes fees and expenses for services rendered from January
through December of the year, notwithstanding when the fees and
expenses were billed.
All audit and non-audit services have been pre-approved by the
Audit Committee.
Deloitte & Touche, independent public accountants,
served as NNN’s auditors for the period from
January 1, 2007 to December 7, 2007 and for the year
ended December 31, 2006. Deloitte & Touche billed
NNN the fees and costs set forth below for services rendered
during the years ended December 31, 2007 and 2006,
respectively.
2007
2006
Audit Fees(1)
Audit of consolidated financial statements
$
881,297
$
803,769
Timely quarterly reviews
756,970
80,219
SEC filings, including comfort letters, consents and comment
letters
—
760,023
Total Audit Fees
1,638,267
1,644,011
Audit Related Fees(2)
Audits in connection with acquisitions and other accounting
consultations
373,996
43,240
Due diligence services on pending merger
19,798
—
Total Audit-Related Fees
393,794
43,240
Tax Fees(2)
Tax return preparation
61,850
—
Total Tax Fees
61,850
—
Total Fees
$
2,093,911
$
1,687,251
(1)
Includes fees and expenses related to the year-end audit and
interim reviews, notwithstanding when the fees and expenses were
billed or when the services were rendered.
(2)
Includes fees and expenses for services rendered from January
through December of the year, notwithstanding when the fees and
expenses were billed.
Certificate of Amendment to the Amended and Restated Certificate
of Incorporation of Grubb & Ellis Company as filed with the
Delaware Secretary of State on December 7, 2007,
incorporated herein by reference to Exhibit 3.1 to the
Registrant’s Current Report on
Form 8-K
filed on December 13, 2007.
Certificate of Retirement with Respect to 8,894 Shares of
Series A Senior Convertible Preferred Stock,
128,266 Shares of Series B Senior Convertible Preferred
Stock, and 19,767 Shares of Junior Convertible Preferred
Stock of Grubb & Ellis Company, filed with the Delaware
Secretary State on January 22, 1997, incorporated herein by
reference to Exhibit 3.4 to the Registrant’s Quarterly
Report on
Form 10-Q
filed on February 13, 1997.
Amendment to the Amended and Restated By-laws of the Registrant,
effective as of December 7, 2007, incorporated herein by
reference to Exhibit 3.2 to Registrant’s Current
Report on
Form 8-K
filed on December 13, 2007.
3.8
Amendment to the Amended and Restated By-laws of the Registrant,
effective as of January 25, 2008, incorporated herein by
reference to Exhibit 3.1 to Registrant’s Current
Report on
Form 8-K
filed on January 31, 2008.
3.9
Amended and Restated Certificate of Designations, Number, Voting
Powers, Preferences and Rights of Series A Preferred Stock
of Grubb & Ellis Company, as filed with the Secretary of
State of Delaware on September 13, 2002, incorporated
herein by reference to Exhibit 3.8 to the Registrant’s
Annual Report on
Form 10-K
filed on October 15, 2002.
3.10
Certificate of Designations, Number Voting Posers, Preferences
and Rights of Series A-1 Preferred Stock of Grubb &
Ellis Company, as filed with the Secretary of State of Delaware
on January 4, 2005, incorporated herein by reference to
Exhibit 2 to the Registrant’s Current Report on Form
8-K filed on January 6, 2005.
Certificate of Designations, Number, Voting Powers, Preferences
and Rights of
Series A-1
Preferred Stock of Grubb & Ellis Company, as filed with the
Secretary of State of Delaware on January 4, 2005,
incorporated herein by reference to Exhibit 2 to the
Registrant’s Current Report on
Form 8-K
filed on January 6, 2005.
(4) Instruments Defining the Rights of Security Holders,
including Indentures.
Second Amended and Restated Credit Agreement, dated as of
December 7, 2007, among the Registrant, certain of its
subsidiaries (the “Guarantors”), the
“Lender” (as defined therein), Deutsche Bank
Securities, Inc., as syndication agent, sole book-running
manager and sole lead arranger, and Deutsche Bank Trust Company
Americas, as initial issuing bank, swing line bank and
administrative agent, incorporated herein by reference to
Exhibit 10.1 to Registrant’s Current Report on
Form 8-K
filed on December 13, 2007.
Mortgage, Security Agreement, Assignment of Rents and Fixture
Filing between GERA 6400 Shafer LLC to Wachovia Bank,
National Association dated as of June 15, 2007,
incorporated herein by reference to Exhibit 10.2 to the
Registrant’s Current Report on
Form 8-K
filed on June 19, 2007.
4.5
Open-end Mortgage, Security Agreement, Assignment of Rents and
Fixture Filing between GERA Danbury LLC to Wachovia Bank,
National Association dated as of June 15, 2007,
incorporated herein by reference to Exhibit 10.3 to the
Registrant’s Current Report on
Form 8-K
filed on June 19, 2007.
On an individual basis, instruments other than Exhibits listed
above under Exhibit 4 defining the rights of holders of
long-term debt of the Registrant and its consolidated
subsidiaries and partnerships do not exceed ten percent of total
consolidated assets and are, therefore, omitted; however, the
Company will furnish supplementally to the Commission any such
omitted instrument upon request.
Grubb & Ellis Company 2006 Omnibus Equity Plan
effective as of November 9, 2006, incorporated herein by
reference to Appendix A to the Registrant’s Proxy
Statement for the 2006 Annual Meeting of Stockholders filed on
October 10, 2006.
10.8
Purchase and Sale Agreement between Abrams Office Center Ltd and
GERA Property Acquisition LLC, a wholly-owned subsidiary of the
Registrant, dated as of October 24, 2006, incorporated
herein by reference to Exhibit 99.1 to the
Registrant’s Current Report on
Form 8-K
filed on October 30, 2006.
Letter Agreement between Abrams Office Centre, Ltd. and GERA
Property Acquisition LLC, a wholly owned subsidiary of the
Registrant, dated December 29, 2006, incorporated herein by
reference to Exhibit 99.1 to the Registrant’s Current
Report on
Form 8-K
filed January 5, 2007.
10.13
Letter Agreement between Abrams Office Centre, Ltd. and GERA
Property Acquisition LLC, a wholly owned subsidiary of the
Registrant, dated December 29, 2006, incorporated herein by
reference to Exhibit 99.2 to the Registrant’s Current
Report on
Form 8-K
filed January 5, 2007.
10.14
Letter Agreement between Abrams Office Centre, Ltd. and GERA
Property Acquisition LLC, a wholly owned subsidiary of the
Registrant, dated January 4, 2007, incorporated herein by
reference to Exhibit 99.3 to the Registrant’s Current
Report on
Form 8-K
filed January 5, 2007.
10.15
Letter Agreement between Abrams Office Centre, Ltd. and GERA
Property Acquisition LLC, a wholly owned subsidiary of the
Registrant, dated January 19, 2007, incorporated herein by
reference to Exhibit 99.1 to the Registrant’s Current
Report on
Form 8-K
filed January 25, 2007.
Employment Agreement between Richard W. Pehlke and the
Registrant, as of February 9, 2007, incorporated herein by
reference to Exhibit 99.1 to the Registrant’s Current
Report on
Form 8-K
filed on February 15, 2007.
Letter Agreement between Danbury Buildings Co., L.P., Danbury
Buildings, Inc. and GERA Property Acquisition LLC, a wholly
owned subsidiary of the Registrant, dated March 16, 2007,
incorporated herein by reference to Exhibit 99.1 to the
Registrant’s Current Report on
Form 8-K
filed on March 21, 2007.
10.20
Amendment to Purchase and Sale Agreement between Danbury
Buildings, Inc. and Danbury Buildings Co., L.P. and GERA
Property Acquisition LLC, a wholly owned subsidiary of the
Registrant, dated February 20, 2007, incorporated herein by
reference to Exhibit 99.1 to the Registrant’s Current
Report on
Form 8-K
filed on May 3, 2007.
10.21
Letter Amendment to Purchase and Sale Agreement between Danbury
Buildings, Inc. and Danbury Buildings Co., L.P. and GERA
Property Acquisition LLC, a wholly owned subsidiary of the
Registrant, dated as of April 30, 2007, incorporated herein
by reference to Exhibit 99.2 to the Registrant’s
Current Report on
Form 8-K
filed on May 3, 2007.
10.22
Form of Voting Agreement between Registrant and certain
stockholders or NNN Realty Advisors, Inc., incorporated herein
by reference to Exhibit 10.1 to the Registrant’s
Current Report on
Form 8-K
filed on May 23, 2007.
Form of Voting Agreement between NNN Realty Advisors, Inc. and
certain stockholders of the Registrant, incorporated herein by
reference to Exhibit 10.2 to the Registrant’s Current
Report on
Form 8-K
filed on May 23, 2007.
10.24
Form of Escrow Agreement between NNN Realty Advisors, Inc.,
Wilmington Trust Company and the Registrant, incorporated
herein by reference to Exhibit 10.3 to the
Registrant’s Current Report on
Form 8-K
filed on May 23, 2007.
10.25
Deed of Trust, Security Agreement, Assignment of Rents and
Fixture Filing by and among GERA Abrams Centre LLC, Rebecca S.
Conrad, as Trustee for the benefit of Wachovia Bank, National
Association, dated as of June 15, 2007 incorporated herein
by reference to Exhibit 10.1 to the Registrant’s
Current Report on
Form 8-K
filed on June 19, 2007.
10.26*†
Employment Agreement between NNN Realty Advisors, Inc. and Scott
D. Peters
10.27*†
Employment Agreement between NNN Realty Advisors, Inc. and
Andrea R. Biller
10.28*†
Employment Agreement between NNN Realty Advisors, Inc. and
Francene LaPoint
10.29*†
Employment Agreement between NNN Realty Advisors, Inc. and
Jeffrey T. Hanson
10.30†
Indemnification Agreement dated as of October 23, 2006
between Anthony W. Thompson and NNN Realty Advisors, Inc.
10.31†
Indemnification and Escrow Agreement by and among Escrow Agent,
NNN Realty Advisors, Inc., Anthony W. Thompson, Louis J. Rogers
and Jeffrey T. Hanson, together with Certificate as to
Authorized Signatures.
Form of Subordination, Non-Disturbance and Attornment Agreement,
between Aurora Medical Group, Inc. and PNC Bank, National
Association dated as of December 21, 2007, incorporated
herein by reference to Exhibit 10.4 to the
Registrant’s Current Report on
Form 8-K
filed on December 28, 2007.
Promissory Note for $32,300,000 senior loan of NNN Eastern
Wisconsin Medical Portfolio, LLC to the order of PNC Bank,
National Association, dated December 21, 2007, incorporated
herein by reference to Exhibit 10.7 to the
Registrant’s Current Report on
Form 8-K
filed on December 28, 2007.
10.39
Promissory Note for $3,400,000 mezzanine loan by NNN Eastern
Wisconsin Medical Portfolio, LLC to the order of PNC Bank,
National Association, dated December 21, 2007,
Mortgage, Security Agreement, Assignment of Leases and Rents and
Fixture Filing by NNN Eastern Wisconsin Medical Portfolio, LLC
in favor of PNC Bank, National Association, dated
December 21, 2007, incorporated herein by reference to
Exhibit 10.9 to the Registrant’s Current Report on
Form 8-K
filed on December 28, 2007.
10.41*†
Form of Indemnification Agreement executed by Andrea R. Biller,
Glenn L. Carpenter, Howard H. Greene, Jeffrey T. Hanson, Gary
H. Hunt, C. Michael Kojaian, Francene LaPoint, Robert J.
McLaughlin, Robert H. Osbrink, Richard W. Pehlke, Scott D.
Peters, Dylan Taylor, Jack Van Berkel, D. Fleet Wallace and
Rodger D. Young.
Letter from Deloitte & Touche LLP to the Securities and
Exchange Commission, dated December 14, 2007, incorporated
herein by reference to Exhibit 16.1 to the
Registrant’s Current Report on
Form 8-K
filed on December 14, 2007.
Pursuant to the requirements of Section 13 or 15
(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Grubb & Ellis Company
(Registrant)
/s/ Scott
D.
Peters
Scott
D. PetersChief Executive Officer and Director(Principal
Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature
Title
Date
/s/ Scott
D. Peters
Scott
D. Peters
Chief Executive Officer and Director
(Principal Executive Officer)
Certificate of Amendment to the Amended and Restated Certificate
of Incorporation of Grubb & Ellis Company as filed
with the Delaware Secretary of State on December 7, 2007,
incorporated herein by reference to Exhibit 3.1 to the
Registrant’s Current Report on Form
8-K filed on
December 13, 2007.
Certificate of Retirement with Respect to 8,894 Shares of
Series A Senior Convertible Preferred Stock,
128,266 Shares of Series B Senior Convertible
Preferred Stock, and 19,767 Shares of Junior Convertible
Preferred Stock of Grubb & Ellis Company, filed with
the Delaware Secretary State on January 22, 1997,
incorporated herein by reference to Exhibit 3.4 to the
Registrant’s Quarterly Report on Form
10-Q filed
on February 13, 1997.
Amendment to the Amended and Restated By-laws of the Registrant,
effective as of December 7, 2007, incorporated herein by
reference to Exhibit 3.2 to Registrant’s Current
Report on
Form 8-K
filed on December 13, 2007.
3.8
Amendment to the Amended and Restated By-laws of the Registrant,
effective as of January 25, 2008, incorporated herein by
reference to Exhibit 3.1 to Registrant’s Current
Report on
Form 8-K
filed on January 31, 2008.
3.9
Amended and Restated Certificate of Designations, Number, Voting
Powers, Preferences and Rights of Series A Preferred Stock
of Grubb & Ellis Company, as filed with the Secretary
of State of Delaware on September 13, 2002, incorporated
herein by reference to Exhibit 3.8 to the Registrant’s
Annual Report on
Form 10-K
filed on October 15, 2002.
3.10
Certificate of Designations, Number Voting Posers, Preferences
and Rights of
Series A-1
Preferred Stock of Grubb & Ellis Company, as filed
with the Secretary of State of Delaware on January 4, 2005,
incorporated herein by reference to Exhibit 2 to the
Registrant’s Current Report on
Form 8-K
filed on January 6, 2005.
Certificate of Designations, Number, Voting Powers, Preferences
and Rights of
Series A-1
Preferred Stock of Grubb & Ellis Company, as filed
with the Secretary of State of Delaware on January 4, 2005,
incorporated herein by reference to Exhibit 2 to the
Registrant’s Current Report on
Form 8-K
filed on January 6, 2005.
(4)
Instruments Defining the Rights of Security Holders,
including Indentures.
Second Amended and Restated Credit Agreement, dated as of
December 7, 2007, among the Registrant, certain of its
subsidiaries (the “Guarantors”), the
“Lender” (as defined therein), Deutsche Bank
Securities, Inc., as syndication agent, sole book-running
manager and sole lead arranger, and Deutsche Bank
Trust Company Americas, as initial issuing bank, swing line
bank and administrative agent, incorporated herein by reference
to Exhibit 10.1 to Registrant’s Current Report on Form
8-K filed on
December 13, 2007.
Mortgage, Security Agreement, Assignment of Rents and Fixture
Filing between GERA 6400 Shafer LLC to Wachovia Bank, National
Association dated as of June 15, 2007, incorporated herein
by reference to Exhibit 10.2 to the Registrant’s
Current Report on
Form 8-K
filed on June 19, 2007.
4.5
Open-end Mortgage, Security Agreement, Assignment of Rents and
Fixture Filing between GERA Danbury LLC to Wachovia Bank,
National Association dated as of June 15, 2007,
incorporated herein by reference to Exhibit 10.3 to the
Registrant’s Current Report on
Form 8-K
filed on June 19, 2007.
On an individual basis, instruments other than Exhibits listed
above under Exhibit 4 defining the rights of holders of
long-term debt of the Registrant and its consolidated
subsidiaries and partnerships do not exceed ten percent of total
consolidated assets and are, therefore, omitted; however, the
Company will furnish supplementally to the Commission any such
omitted instrument upon request.
Grubb & Ellis Company 2006 Omnibus Equity Plan
effective as of November 9, 2006, incorporated herein by
reference to Appendix A to the Registrant’s Proxy
Statement for the 2006 Annual Meeting of Stockholders filed on
October 10, 2006.
10.8
Purchase and Sale Agreement between Abrams Office Center Ltd and
GERA Property Acquisition LLC, a wholly-owned subsidiary of the
Registrant, dated as of October 24, 2006, incorporated herein by
reference to Exhibit 99.1 to the Registrant’s Current
Report on
Form 8-K
filed on October 30, 2006.
Letter Agreement between Abrams Office Centre, Ltd. and GERA
Property Acquisition LLC, a wholly owned subsidiary of the
Registrant, dated December 29, 2006, incorporated herein by
reference to Exhibit 99.1 to the Registrant’s Current
Report on
Form 8-K
filed January 5, 2007.
10.13
Letter Agreement between Abrams Office Centre, Ltd. and GERA
Property Acquisition LLC, a wholly owned subsidiary of the
Registrant, dated December 29, 2006, incorporated herein by
reference to Exhibit 99.2 to the Registrant’s Current
Report on
Form 8-K
filed January 5, 2007.
10.14
Letter Agreement between Abrams Office Centre, Ltd. and GERA
Property Acquisition LLC, a wholly owned subsidiary of the
Registrant, dated January 4, 2007, incorporated herein by
reference to Exhibit 99.3 to the Registrant’s Current
Report on
Form 8-K
filed January 5, 2007.
10.15
Letter Agreement between Abrams Office Centre, Ltd. and GERA
Property Acquisition LLC, a wholly owned subsidiary of the
Registrant, dated January 19, 2007, incorporated herein by
reference to Exhibit 99.1 to the Registrant’s Current
Report on
Form 8-K
filed January 25, 2007.
Employment Agreement between Richard W. Pehlke and the
Registrant, as of February 9, 2007, incorporated herein by
reference to Exhibit 99.1 to the Registrant’s Current
Report on
Form 8-K
filed on February 15, 2007.
Letter Agreement between Danbury Buildings Co., L.P., Danbury
Buildings, Inc. and GERA Property Acquisition LLC, a wholly
owned subsidiary of the Registrant, dated March 16, 2007,
incorporated herein by reference to Exhibit 99.1 to the
Registrant’s Current Report on
Form 8-K
filed on March 21, 2007.
10.20
Amendment to Purchase and Sale Agreement between Danbury
Buildings, Inc. and Danbury Buildings Co., L.P. and GERA
Property Acquisition LLC, a wholly owned subsidiary of the
Registrant, dated February 20, 2007, incorporated herein by
reference to Exhibit 99.1 to the Registrant’s Current
Report on
Form 8-K
filed on May 3, 2007.
10.21
Letter Amendment to Purchase and Sale Agreement between Danbury
Buildings, Inc. and Danbury Buildings Co., L.P. and GERA
Property Acquisition LLC, a wholly owned subsidiary of the
Registrant, dated as of April 30, 2007, incorporated herein
by reference to Exhibit 99.2 to the Registrant’s
Current Report on
Form 8-K
filed on May 3, 2007.
10.22
Form of Voting Agreement between Registrant and certain
stockholders or NNN Realty Advisors, Inc., incorporated herein
by reference to Exhibit 10.1 to the Registrant’s
Current Report on
Form 8-K
filed on May 23, 2007.
10.23
Form of Voting Agreement between NNN Realty Advisors, Inc. and
certain stockholders of the Registrant, incorporated herein by
reference to Exhibit 10.2 to the Registrant’s Current
Report on
Form 8-K
filed on May 23, 2007.
10.24
Form of Escrow Agreement between NNN Realty Advisors, Inc.,
Wilmington Trust Company and the Registrant, incorporated herein
by reference to Exhibit 10.3 to the Registrant’s
Current Report on
Form 8-K
filed on May 23, 2007.
10.25
Deed of Trust, Security Agreement, Assignment of Rents and
Fixture Filing by and among GERA Abrams Centre LLC, Rebecca S.
Conrad, as Trustee for the benefit of Wachovia Bank, National
Association, dated as of June 15, 2007 incorporated herein
by reference to Exhibit 10.1 to the Registrant’s
Current Report on Form
8-K filed on
June 19, 2007.
10.26*†
Employment Agreement between NNN Realty Advisors, Inc. and Scott
D. Peters
10.27*†
Employment Agreement between NNN Realty Advisors, Inc. and
Andrea R. Biller
10.28*†
Employment Agreement between NNN Realty Advisors, Inc. and
Francene LaPoint
10.29*†
Employment Agreement between NNN Realty Advisors, Inc. and
Jeffrey T. Hanson
10.30†
Indemnification Agreement dated as of October 23, 2006
between Anthony W. Thompson and NNN Realty Advisors, Inc.
10.31†
Indemnification and Escrow Agreement by and among Escrow Agent,
NNN Realty Advisors, Inc., Anthony W. Thompson, Louis J. Rogers
and Jeffrey T. Hanson, together with Certificate as to
Authorized Signatures.
Form of Subordination, Non-Disturbance and Attornment Agreement,
between Aurora Medical Group, Inc. and PNC Bank, National
Association dated as of December 21, 2007, incorporated
herein by reference to Exhibit 10.4 to the
Registrant’s Current Report on
Form 8-K
filed on December 28, 2007.
Promissory Note for $32,300,000 senior loan of NNN Eastern
Wisconsin Medical Portfolio, LLC to the order of PNC Bank,
National Association, dated December 21, 2007, incorporated
herein by reference to Exhibit 10.7 to the
Registrant’s Current Report on
Form 8-K
filed on December 28, 2007.
10.39
Promissory Note for $3,400,000 mezzanine loan by NNN Eastern
Wisconsin Medical Portfolio, LLC to the order of PNC Bank,
National Association, dated December 21, 2007, incorporated
herein by reference to Exhibit 10.8 to the
Registrant’s Current Report on
Form 8-K
filed on December 28, 2007.
10.40
Mortgage, Security Agreement, Assignment of Leases and Rents and
Fixture Filing by NNN Eastern Wisconsin Medical Portfolio, LLC
in favor of PNC Bank, National Association, dated
December 21, 2007, incorporated herein by reference to
Exhibit 10.9 to the Registrant’s Current Report on
Form 8-K
filed on December 28, 2007.
10.41*†
Form of Indemnification Agreement executed by Andrea R. Biller,
Glenn L. Carpenter, Howard H. Greene, Jeffrey T. Hanson, Gary H.
Hunt, C. Michael Kojaian, Francene LaPoint, Robert J.
McLaughlin, Robert H. Osbrink, Richard W. Pehlke, Scott D.
Peters, Dylan Taylor, Jack Van Berkel, D. Fleet Wallace and
Rodger D. Young.
Letter from Deloitte & Touche LLP to the Securities and
Exchange Commission, dated December 14, 2007, incorporated
herein by reference to Exhibit 16.1 to the
Registrant’s Current Report on
Form 8-K
filed on December 14, 2007.